Allan Sloan, as I’ve mentioned, is one of my favorite financial columnists. He’s funny, he’s clear and he majors in common sense. His latest column in Fortune reminds investors of the three rules they should follow to avoid losing great sums of money in the stock market. They are rules as old as the market itself and the hardest to follow, harder than “Thou Shalt Not Covet.”(Three Lessons for Apple’s Shareholders” by Allan Sloan, Fortune, 2/25/13, pg. 40).
His first commandment is: “Thou Shalt Not Run with the Herd, Lest Ye be Trampled.” This lesson I learned from my stockbroker. In my early days, I often called him to suggest a hot stock I’d read about in one magazine or another. He’d listen patiently then sigh. “Caroline, if everyone knows about it, it’s already oversold and overpriced.” In time, I learned to appreciate his wisdom.
Sloan’s second commandment is as difficult to follow as the first: “Thou Shalt Not Fall in Love with a Stock.” I’m guilty of this sin, too. Once I bought a hot bio technology stock with more promise than a track record. My broker advised against it but I didn’t listen. I bought at $3.00 a share and watched it bounce up to $70 during the dot com boom. When it fell back to $40, I bought more, thinking I was getting a bargain. I own the stock today at $1.58 per share.
The third commandment is: “Thou Shalt Not Believe in the Infallibility of a CEO.” Chief Executive Officers are like stock pundits. When the market is going up, they look good. When the market is going down, they look like the rest of us, fallible. Usually when a stock’s value drops, there are calls for the CEO’s head. Sometimes there’s justification for it. Much of the time the market is in a trend, as it was 2008-2010. Few, if anyone, could have performed well then, not even the Sage of Omaha, Warren Buffett. CEO’s are important but if they’re selling widgets in a wadget world, no one can perform a miracle.
Of course the Golden Rule of Investing everyone knows. The wonder is so few follow it: “Buy Low and Sell high.”
(Allan Sloan courtesy of money.cnn.com)