So, what type of investor are you? One who is content with an occasional flyer hoping for a profit. Perhaps you are one who will make a single play, feeling so sure of yourself that you fail to take precautions. These type of investors frequently go broke.
Then there is the long term investor, one who knows how to buy at the right time but is not a good seller. Greed can come into play as he/she looks to expand their fortune. I once had a client who had wisely purchased a high tech company back in 1998. He bought 2500 of this companies stock when it was priced around $20 a share and he put it into his retirement account. The stock appreciated to over $100 by March of 2000, he ignored advice to sell when the uptrend was broken and the market was showing signs of weakness. This was his only stock in his retirement account and after repeated warnings he chose to hold on to his position. The stock price later dropped to under $2 a share and his $250,000 retirement account had dwindled to under $5000.
There are other investors that are looking to make a living out of trading stocks. I use the word trading because there is a need to utilize certain tools to accomplish the goal of earning a profit. There are ways to find an entry point and to track your investment. The more you study the market the more you will gain, just as a surgeon who becomes more proficient by performing many operations.
There are day traders, but I will choose to look beyond that breed of investor. This site is about helping people make rational decisions about their investments not trading stocks by the minute.
The reality is that much has changed in the brokerage business. Most of the business is conducted by a computer. The broker ask some questions to understand the clients risk tolerance. They then key this into the computer and the computer provides a asset allocation model making recommendations of what mutual funds to own. The broker will re balance the account a couple of times a year.
My guess is that most of you have investment accounts with some investment company, be it large or small. You receive advice from your financial consultant as to which stocks to buy and when to sell since they are the experts. It’s almost funny how the experts are always so late, whether it is buying into a stock and exiting the market. An “expert” is one who waits until the fundamentals improve before making a recommendation, when often the smart money is buying way ahead of the experts. The “experts” also wait for the fundamentals to deteriorate before moving out of stocks, when the smart money has been out for some time.
I worked for a number of large brokerage houses in my career. They all had recommended lists of companies that could be purchased for your account. If they put out a sell recommendation on a stock that was held by many of their clients, all hell would break loose. And many of these recommended companies used the brokerage house as their investment banker. Kind of a “catch-22” for the brokerage house, putting out a sell recommendation could damage their relationship with the company.
John Carney Senior Editor for CNBC on May 30, 2013 wrote:
“It’s been ten years since prosecutors announced a $1.4 billion settlement with the Wall Street’s biggest investment banks and two individual stock analysts over accusations that the firms and analysts had duped investors to curry favor with corporate clients. Under the terms of the settlement, twelve investment banks agreed to separate their securities analysis from their investment banking business.
One of the key reforms put in place in the settlement was the bar on basing the compensation of stock analysts on their contribution to investment banking revenue.
Four researchers—Lawrence Brown of Temple University, Andrew Call of Arizona State University, Michael B. Clement of the University of Texas at Austin and Nathan Y. Sharp of Texas A&M University—surveyed 365 sell-side analysts to see how the business of stock analysis is conducted these days. Startlingly, they found that 44 percent of the analysts indicated that their success at generating underwriting business or trading commissions is “very important” to their compensation.
Only 20 percent indicated that underwriting and commissions were “not important” to their compensation. Which means that another 36 percent said these things—supposedly walled off ten years ago—were somewhat important. That’s a total of 80 percent who said that generating underwriting business and trading commissions play some role in their compensation.”
Experts are not always what they say they are!