The 10 Most Dangerous Things People Say About Stocks: A Trader’s Reality Check
August 23, 2024
Trading Strategies with Bob Iaccino
*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.
Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session.
The 10 Most Dangerous Things People Say About Stocks: A Trader’s Reality Check
I want to dive into something that's really important for all retail traders out there. It’s Peter Lynch’s list of the “10 Most Dangerous Things People Say About Stocks.” You might’ve heard it referred to as the “10 Dumbest Things,” but Lynch’s team thought that sounded too harsh. Regardless, these insights are crucial for avoiding common pitfalls in trading.
So, who’s Peter Lynch? If you don’t know, Lynch is a legendary American investor who managed the Magellan Fund at Fidelity Investments. During his tenure, the fund averaged a staggering 29.2% annual return. Lynch’s track record speaks for itself—he’s a major figure in the world of investing. To me, he’s even better than Warren Buffett because he focused on buying stocks directly, rather than complex financial instruments.
Alright, let’s break down these dangerous sayings and see why they can lead you astray.
1. “If it’s gone down this much already, it can’t get any lower.”
This is a classic trap. Just because a stock has dropped significantly doesn’t mean it won’t keep falling. Statistically, stocks that decline often continue to do so before any potential rebound. The key here is setting your risk parameters before you even get into a trade. If the stock drops further but you’ve managed your risk, you’ve done well. You’re prepared to trade another day, regardless of the outcome.
2. “If it’s gone this high already, how can it possibly go higher?”
Don’t be fooled into thinking that a high price means a stock can’t go higher. Stocks that are trending upwards often keep going. That’s why setting targets and using trailing stops are essential. They help you stay in the trade while locking in gains, rather than getting out prematurely because you think it’s peaked.
3. “Eventually, they always come back.”
This saying can be dangerous. Not every stock will bounce back to its previous highs. Take Lehman Brothers or General Motors, for example. Some stocks can hit zero and never recover. Always remember that stocks can—and do—fail, and not every one will make a comeback.
4. “It’s at $3. How much can I lose?”
Here’s the deal: the price of the stock doesn’t tell the whole story. If you buy 1,000 shares at $3, you’re risking $3,000, not just $3. Stocks priced under $5 often have a higher chance of becoming worthless, so always consider the total amount you’re risking, not just the share price.
5. “It’s always darkest before the dawn.”
This saying implies that things will get better after a period of decline, but in reality, they might get worse. Holding onto a stock in the hope that things will turn around can lead to significant losses. Assess the situation based on facts, not hopeful clichés.
6. “When it rebounds to $10, I’ll sell.”
Hoping for a stock to return to a specific price before selling is a recipe for trouble. If a stock has dropped below your buy price, follow your predetermined exit strategy. Don’t get caught in the trap of waiting for a rebound that may never come.
7. “I don’t have to worry. I own conservative stocks.”
Even so-called conservative stocks can collapse. Remember Lehman Brothers or General Motors—they were once considered safe investments. Conservative doesn’t mean invincible, so keep a close eye on all your investments, regardless of their perceived stability.
8. “Look at all the money I lost because I didn’t buy.”
Missing an investment opportunity doesn’t mean you’ve lost money. You haven’t lost anything if you didn’t make the trade in the first place. Focus on making informed decisions and following your strategy, not on regrets over missed opportunities.
9. “Stock is going up. I must be correct. It’s going down. I must be wrong.”
Your success as a trader shouldn’t be tied to a stock’s performance. You’re right if you follow your process, regardless of whether the stock goes up or down. A profitable trade is a win within your process, and a losing trade is just part of the game if you stuck to your plan.
10. “Avoid long shots.”
Here’s my take: Long shots can be fun, but only if you manage the risk properly. Don’t throw a lot of money into high-risk bets. Instead, make sure you understand and control the risk involved. If you’re betting on something unlikely to succeed, keep your stakes small and manageable.
Wrap-Up
Peter Lynch’s insights are a goldmine for traders. By avoiding these dangerous sayings and sticking to sound risk management practices, you can make better-informed decisions and avoid common pitfalls. Remember, trading is about managing risk and following your process, not just chasing after high returns.
Disclaimer
Live Sessions (hereafter referred to as the “Content”) are produced by TradeZero. The Content may include the views and opinions of TradeZero and a third-party participant, Bob Iaccino. Bob Iaccino is compensated by TradeZero for participating in the Content. Mr. Iaccino’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero is not responsible for and neither affirms nor endorses any of Mr. Iaccino’s views or opinions expressed in the Content. TradeZero makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.
Trading securities can involve high risk and potential loss of funds. Furthermore, trading on margin is for experienced investors and traders only as the amount you may lose can be greater than your initial investment. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. Options trading is not suitable for all investors as it can involve risk that may expose investors to significant losses. Please read the Characteristics and Risk of Standardized Options, also known as the options disclosure document (ODD) at https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document before deciding to engage in options trading.
TradeZero provides self-directed brokerage accounts to customers through its operating affiliates: TradeZero America, Inc. a United States broker dealer, registered with the Securities and Exchange Commission (SEC) and member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation(SIPC); TradeZero, Inc., a Bahamian broker dealer, registered with the Securities Commission of the Bahamas; and TradeZero Canada Securities ULC, a Canadian broker dealer, member firm of the Canadian Investment Regulatory Organization (CIRO) and member of the Canadian Investor Protection Fund (CIPF).