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The Problem with Picking Stocks

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Last week, I excitedly wrote about my new stock play: Twitter. For those who have been following Twitter (pun not intended, but kind of intended), this has turned out to be a fantastic way to lose money in a short period of time.

I knew in picking individual stocks, I was taking on significant risk. What I didn't realize is that the lock-up period for Twitter was coming in a few days. The lock-up period is when insiders at the company, who might have paid pennies a share get to sell at the current stock price. Buy shares at a few pennies and sell at $35 is a fantastic way to make money. Unfortunately, it creates more supply and price goes down.

I should have done this research as I did when buying Facebook. I didn't. The egg on my face is well-deserved. I still believe it is a very good company and I intend to hold onto it for a long, long time so I used the opportunity buy some more and dollar cost average a better price for myself.

Even the Experts Don't Get it Right

While I was try to figure out which hat goes best with egg-face, I got the June issue of Kiplinger's Personal Finance. (Side Thought: Why do magazines always seem to live a month in the future?) The issue has an article about when to sell a stock. The advice boils down to, sell when the stock no longer meets your objectives.

Sounds good in theory, but one of their examples has blown up in their face since the magazine went to press. They say that if you love growth stocks and fell in love with Apple, you should unload it. They used the price of Apple on April 4th of $532. The last week of April saw Apple jump more than 10% to go above $585.

People invest because they want to make money. If you got to specific or cutesy about focusing on Apple's growth, you missed the value. That laser focus would have stopped you from reaching your main objective... make money.

In fairness, Kiplinger's does mention that Apple's "bruised shares may attract bargain hunters", so they've hedged themselves well.

Final Thoughts

You really have to know what you are getting into when you pick individual stocks. I knew the risks. On the other hand, over the past 18 months, I've done quite well. Perhaps this has lead me to have a false confidence in my ability to recognize good value. I openly admit that my dog could have picked good stocks in this market.

In any case, all individual stock picking is done with a small percentage of my overall portfolio. So even when I wear my egg face, it is a very small egg, and the rest of me is smiling.

Posted on May 8, 2014.

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3 Responses to “The Problem with Picking Stocks”

  1. Brent says:

    If I made a dollar for every stupid investing mistake I’ve made I wouldn’t need to invest anymore. Thanks for the lockout date tip as that is a new one to me. Another good one to avoid holding a stock (if you have a short-term horizon) is the earnings date. Yes, a stock could jump massively higher, but it can just as easily take a nose dive. If you are doing any type of swing trading or options trading, do your homework and see when earnings will be announced.

  2. PF Stock says:

    Hi Lazy Man: A couple of rules that I had come to follow over the years are not to consider buying a stock with negative EPS, and to only buy when the stock is already in an uptrend. Of course, this greatly limits the number of stocks that I will even consider.

    On selling, my advice is to sell BEFORE the stock no longer meets your objectives. I’ve been accused of always selling too soon, but there are many instances when I wished I had sold too soon rather than too late.

    I hope that helps.
    PF Stock

  3. Gladyourestillblogging says:

    Glad you’re still blogging after May 5th! I like your blog. So much I never knew about money…

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