For the last several years, many have been buying just about any stock when the price drops. This can work well in a market that is trending up, but when the market trends down, this approach is disastrous. They buy when it goes down. The stock goes down afterwards. They buy again and the stock goes down even more. This happens several times and when they don't see any gains, they let their emotions win out. They sell out at a loss because they envision that their capital is going down the drain. These folks are reacting emotionally and with a very cursory understanding of their stocks (They only know that it went down in market price.).
Buying stocks when they go down can be a great strategy, but it must be done while controlling emotions AND with extensive knowledge about the stock's fundamentals (financials), markets, strategies, and trends. Stock investing is complex, and NO STRATEGY works all the time. If you want simple, buy a lottery ticket! You'll get the average return of a lottery ticket - nothing.
I posted recently about a book by Howard Marks, "The Most Important Thing". One of his "Most Important Things" is second level thinking. This is essentially determining if a stock is a buy from many different vantages. First level thinking is really simplistic, and anyone can do it. In fact, many do do it. An example is someone buys a stock on the premise that just because the market price of an investment dropped that they should buy it. They look at nothing else! First level thinking is dangerous to your financial health and wealth.
Many people don't want to do the extensive work required in second level thinking in their investments. They want the great returns with very little effort. While it can happen, such an approach is usually the exception versus the norm. Most of those folks shrink their wealth or totally lose it. Don't do it. A lazy investment style is most times not successful. If you want to be lazy, buy an index fund that the annual fees are only a few percent of one percent. You'll get a little less than the market average after the small fees.
Everyone starts investing with very little knowledge of the investment markets. This is the same for everyone. The important point is to start learning as much as possible with each investment. There will be failures. That is the norm. The key is to learn from those failures, adjustment your approach and engage in continuous learning. Some people will just quit when they fail. They will never achieve a sufficient portfolio value to retire on. You just can't get there saving for 30 years at low CD rates or bank account rates.
Some of the most famous investors who are in their 70's, 80's and 90's will tell people about their first experiences with stocks. Buffett, Munger, Lynch, Neff, etc., etc. will tell people how their first investments were disasters. It's as common as falling off a bicycle. Those who succeed, get right back on that bicycle and make the necessary adjustments.
So, start your education today. Ask lots of questions. Gather information. Don't just give your money to someone else and expect that they will give you fantastic returns. While not everyone in the investment world is like the infamous Bernie Madoff, many of investment professionals will have the primary focus of building their wealth versus your wealth.
Be smart, be well-read, be aware and be successful
“I like to say, “Experience is what you got when you didn’t get what you wanted.”
― Howard Marks, The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor
