4 Dangerous Stock Market Beliefs that You Should Avoid

Stock market sayings can be popular because they’re easy to remember. But, some stock market phrases can be downright dangerous to commit to memory. Peter Lynch, a well-known fund manager, has a few to share.

As a brief background, Lynch was the manager of the U.S. based Fidelity Magellan Fund from 1977 to 1990. In those 13 years, he clocked annual returns of 29%. In his bestselling investing book One Up on Wall Street, Lynch shared four silly (and dangerous) things people say about stock prices.

“If it’s gone down this much already, it can’t go much lower”  – click here

“If it’s gone this high already, how can it possibly go higher” – click here

“It’s only $3 per share: what can I lose?”

After introducing the statement just above, Lynch went on to write:

“How many times have you heard people say this? Maybe you’ve said it yourself. You come across some stock that sells for $3 a share, and already you’re thinking, “it’s a lot safer than buying a $50 stock.”

There is at least one instance in Singapore’s stock market in which this line of dangerous thinking has taken root.

Take the beleaguered Blumont Group Ltd (SGX: A33) as an example. At its height in 2013, the mineral and energy investment firm’s shares traded as high as S$2.45 apiece. The problem was that Blumont Group also had an astronomical trailing price to earnings ratio of around 500 near its peak. When the tide turned, Blumont’s share price fell apart in a matter of days.

As of April last year, Blumont’s shares were exchanging hands at S$0.01 each.

A casual observer looking at Blumont back in April 2015 might think that the stock is “cheap” and cannot go lower anymore since the price of each share is just all of one cent. But it turns out, cheap can always get cheaper. As of yesterday, Blumont Group’s shares traded at a price of S$0.002, or 80% lower than where they were in April 2015. The company has recorded losses since 2013.

“When it rebounds to $10, I will sell” 

Here is Lynch giving more colour on the statement:

“In my experience, no downtrodden stock ever returns to the level at which you’ve decided to sell. In fact, the minute you say, “if it gets back to $10, I’ll sell,” you’ve probably doomed the stock to several years of teetering around just below $9.75 before it keels over to $4, on its ways to falling flat on its face at $1.

This whole painful process may take a decade, and all the while you’re tolerating an investment you don’t even like, and only because some inner voice tells you to get $10 for it.”

I have written about this phenomenon before. For every losing stock that an investor owns, they can be guilty of trying to “get back to even” before the investment is sold.

The crux of the problem, of course, is that the arbitrary target price to sell ($10 in this case) is based on the stock price the investor had paid. Hard as it can be, our chances of getting it right is better served when we focus on the performance of the business behind the stock ticker rather than the stock price.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.