Introduction

This section deals with general investment tips (do’s) and common mistakes (don’ts) made by traders and investors that should be avoided at all costs. It is constantly being expanded, newer contributions are marked accordingly. Check back again and again!

Selling too early

Shares that are doing well are often sold too early. This misses the opportunity for further price gains. Of course, the temptation is great to pocket profits and play it safe. But remember one thing: you have done well so far, you know where you stand. If you sell the shares, you will have cash, but what will you do with it? Will you find another share that performs as well? The chances are probably worse, and you would have preferred to keep the old shares (you only realize this in retrospect).

So if there is no real reason to realize your profit, why not keep it? Of course, if rumors about the company suddenly emerge, the share price starts to stutter (so-called churning), and your gut feeling tells you that the share is probably close to its apex, then sell. But don’t be annoyed later when the price magically jumps higher after you sell.

If you make a decision, stick to it and stand by it, because even the greatest professional investor will never find the optimal entry or exit from a share. But never act in haste/panic or on a whim just because you have a gut feeling. I think gut instinct is important (many professional traders disagree), but never act on it alone. In addition to a gut feeling, you also need a good dose of facts or at least solid evidence to make a decision.

Buy the Dip

This is often referred to as “bottom fishing”. This involves buying shares after they have fallen sharply, e.g. after poor quarterly figures or other bad news. It is a risky strategy and should only be used with experience, but it can make large profits in a short time.

It is important to buy only when the share price has stabilized. Under no circumstances should you buy when the share is in free fall and you have the feeling that a rebound is about to start and the price will shoot back up (so-called “catching the falling knife”). This almost never works.

Bottom fishing is about buying a stock that has suffered considerable losses. What is important is a consolidation phase (e.g. an important technical support line) in which the price holds up and it can be assumed that there will be no further setbacks.

Our earnings database offers you important support here. Can you see which companies behave according to quarterly figures? Do they plummet and recover quickly (often within a day = intraday)? Or do they stay down for a longer period of time, or in the worst case, do they fall continuously over a longer period of time until they find a bottom weeks later? Analyze the database and draw your own conclusions.

I have noticed that technology stocks or large pharmaceutical companies such as Pfizer, Abbott or Merck (not to be confused with smaller biotech companies) fall quickly and sharply after disappointing news, but often recover just as quickly, although this is only a subjective observation. Other stocks with slow cycles and stable business models do not fall as sharply, but the share price remains depressed for a long time and may even fall further. Observation is required here.

Once again: “Buy the dip” is a risky strategy and should be used in a considered, targeted and measured manner. You need strong nerves to be able to bear losses. Make sure you apply consistent risk management and set a minimum price at which you can sell again if necessary, should the downward trend unfortunately continue. Then you were unlucky, it happens.

Keeping an eye on the big picture

Sometimes it’s not so much which shares you buy, but the timing that makes the difference. And when it comes to timing, you should never lose sight of the overall market situation.

You should always have the following questions in mind:

• Where is the market? What are analysts saying about the Dow Jones and the S&P500 (broader equity index)? You can also consult the Russell 2000, which contains even more stocks and mainly includes smaller companies.
• What is the economic outlook? There are countless statistics and data that you can obtain free of charge. If you know where, you can form your own opinion.
• Is an upward/downward price correction foreseeable?
• What are the volumes like? Is there a lot of trading or is it quiet?
• What is the volatility like? The VIX is a guide, but you should look deeper because the VIX is also used for market manipulation
• What is the beta factor? The beta factor of a company can be determined on financial portals. It tells you how the share price is moving compared to the market as a whole. A factor of less than 1 means that it is a rather sluggish, defensive value. If the value is significantly above 1, it is volatile and shows that considerable fluctuations are possible. A negative value, on the other hand, indicates anti-cyclical behavior, i.e. contrary to the prevailing market trend.
• What about quarterly figures for the company and the sector? If you are interested in Merck, for example, you may want to take a look at competitors in the pharmaceutical sector and the market’s reaction to their quarterly figures. Are pharmaceutical stocks currently in demand or are they being avoided? Sector comparisons can help here.
• How has the company you are interested in performed in recent quarters? What are the forecasts? How is the company rated by analysts?
• What is the political situation? Is unrest imminent? Are there any decisions coming soon that could affect the sector? If the US FDA cracks down on smokers, as it has been doing for some time, are tobacco companies the right choice?
• Are you diversified enough, or are you buying a stock in a sector where you are already heavily exposed?
• Are dividends due soon? Are the business figures coming out soon?

You should be aware of this and more if you want to buy (or sell).
As a subscriber, we offer you extensive material and information that can support you. Everyone has different goals, we show you how to find and achieve your path and goals.
That’s why we give you countless tips and hints to help you keep an overview and strike at the right moment. Once again: finding the right share is not that difficult, but finding the right time is!

Buy something you understand

Many professional traders trade the same stocks over and over again. “Rinse and repeat” is one such term. This means buy low, sell high, wait for the price to fall again, and the same game all over again! Why do you do this? Quite simply. Such investors know the companies in which they hold shares like the back of their hand, they have good connections within the company and to industry experts, they know insider information and will give you the company’s balance sheet almost figure by figure if they have to. They know how the share reacts and have got a “feel” for it, so to speak.

You should learn from these professionals and proceed in a similar way. Don’t buy something you don’t know anything about. If you want a share, find out as much as you can about the company and then make a decision. After all, you don’t buy a car blindly.

Never invest in obscure investments or completely exotic structured products if you don’t really understand them. Always read the small print, especially with special constructs such as CFDs, reverse barrier convertibles (RBCs) etc., the dog is always buried in the details. And these details are usually to your detriment, you can be sure of that. Just because a website presents something in glossy, polished form with crisp colors and diagrams doesn’t necessarily mean it’s true, no matter how respectable it may look and sound. And if you don’t know what the company AbbVie, for example, does or manufactures, then don’t buy any shares in it. For your information: AbbVie is a pharmaceutical company.

Diversification – but the right way!

Diversification is an investment tactic that is praised by many. But if implemented incorrectly, it can have exactly the opposite effect to what was intended. Diversification means splitting your portfolio into different stocks or investments in general. It is risky to invest all your money in just one share, as everyone can see. But over-diversification is just as wrong as under-diversification, because it gives the illusion of security that is not really there.

To understand diversification, you also need to know the concept of sectors. Every company on the stock market belongs to a sector and an industry. There are financials, tech companies, industrial companies, energy companies and so on. There are funds that invest in sectors and move huge amounts of money.

Well, if a major company, for example JPMorgan in the banking sector, presents poor quarterly figures, this usually drags down the entire sector, including the other banks (you could almost say a kind of “clan liability”). What we are seeing here is the shedding of shares for cash or large investors shifting their money into other stocks or sectors. This is known as sector rotation. This happens all the time, sometimes very markedly, sometimes barely perceptible. But this process takes place continuously, sometimes several times within a day!

So if an entire sector falls and you have placed a large proportion of your investments in this sector, your portfolio will fall far more than the stock market. To avoid this, you should diversify. Below is an illustration of how the main sectors normally behave during the economic cycle.