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This is the first of a series of articles designed to protect you, the new investor.
These articles will treat the often intimidating subjects of finding a broker, opening an account and preparing yourself to start your own investment portfolio.
Ill begin by telling you about Old Joe. Its the story of you and me and countless other investors who enter the world of investing for the wrong reasons, without discipline and without knowledge. If you can avoid the path of Joe, youll be far ahead of many of your peers.
After Joes tale, youll be better prepared for the next steps in your investment journey, which will be discussed in following articles:
- determining your own course
- picking a broker
- opening an account
Old Joe lives on Milwaukees South Side. If you know Milwaukee, youll know that this is an area settled early on by Polish families. Its filled with Catholic churches, taverns, and hard-working individuals such as Joe. Joe and his wife April married 50 years ago, just after he landed a job at the plant where his father had worked. Joe labored hard and saved his money in the neighborhood savings and loan until they could buy a house. They lived simply Joe and April rarely traveled, rarely went out to eat (April learned to cook from her mother), and Joe paid cash for a 10 year-old Olds which he washed and shined every warm weekend. Each paycheck went first towards the mortgage, then towards the life insurance premium and finally into the savings and loan. They began a college fund for the kids and began saving for retirement when they were still in their 30s. Joe pays his bills on time, never gets in trouble with the law, votes in every election and plays cards every week down at the church hall. His only vice is a weekly beer or two at the local tavern. Joe is happy with life, loves his family dearly and is respected by the neighbors. One day, Joes neighbor, Harry, leaned over the back fence and whispered, Joe I gotta tell you about the killing I made in the stock market. Joe, while vaguely aware that the market had been going up recently, replied Naw, I dont wanna hear about it. I keep my money in the savings and loan. Its safe there. I work too hard to play the market.
The following week, April came home from her club and informed Joe that several of the ladies husbands had made quite a bit of money by investing in mutual funds. Again, Naw thats not for us I work too hard for our money. Later in the week, Joes barber leaned over and whispered, Joe youre a good guy — lemme tell you about a stock tip I got from my doctor. Again, Naw, not interested. Well by this time the newspapers were full of excited breathless articles about the hot market, and finally, Joe began to bend a little. He began to hope that the market would continue up to demonstrate its strength. He went back to his barber and said, Tell me about that tip from your doctor. Is it too late to get in?
Well, to make the story short, Joe opened a brokerage account and put a lot of his hard- earned money into the market.
Joe was entering the Fear, Hope, Greed cycle. At first he was afraid to invest (read gamble) his money in the market. Then he began to hope that maybe the market would keep going up and maybe hed get into it a little, and finally, greed won out and he jumped in with both feet.
Now, as all stocks and markets eventually do, things began to change. The market succumbed to profit taking, and Joes stock began to go down. Well, now Joes back into Fear, Hope and Greed. Hes fearful about the money hes losing, hes hoping that he wont lose any more, and is greedy holding on to his stock in hopes that itll come back. You can guess what happened: Joe rode his position all the way down, until one day he couldnt stand it any more and he sold out for a hefty loss.
Ever since that day, Joe has complained that the market is rigged and that only the big guys can make money in it at the expense of the little guy.
If you can envision the market as a cycle, a giant wave, you see that Joe waited to get in until the market was generating feverish excitement and was near its peak (Greed). Joe held on (hope) as the market cycled down, as all markets do, and sold out near the bottom (Fear).
This sounds so foolish, and of course youre thinking, Thatll never happen to me, but it might. It happens to the best, including those big guys It happens to me and itll happen to you. Because none of us is free from our emotions, fear and greed being among the greatest.
In subsequent articles, Ill give you some thoughts on developing a discipline and some knowledge, before you ever put a dime into the markets. If you dont have discipline, youll indeed travel the same path as old Joe.
STOP and THINK,
Bill Cantrell
These articles were written by William H. Cantrell, a registered representative of First Midwest Securities, Inc., for educational purposes and do not necessarily reflect the opinion of First Midwest Securities, Inc.