Long story short, knowledge is key when you wish to be a successful stock market investor. Of course, you need at least basic knowledge of evaluation methods but that is not exactly what I'm talking about.
I bet you would never walk into a restaurant for the first time and then buy the business 1 minute later. However, some investors act like that with stocks. They see it's the biggest intraday gainer... and they buy some shares. They see an uptrend in its 3-month chart... and they buy shares. They hear the story of the friend of their coworker's sister that made money with a stock last week... and they buy shares. Please don't do that.
You should invest in what you know. Read a company's annual reports, news articles, its website, research reports, etc. Basically read everything you can find. Make sure that you know everything that there's to know about it. Then, if you still like it, buy it. If you can't understand its products, don't buy. If you don't trust its management, don't buy. If you don't understand some things on its balance sheet or feel that it is not giving you the "whole picture", don't buy.
I chose to write this because the events of the last few weeks made me realise that some investors must not know their companies well enough. We have seen irrational selling in some stocks that made me think "These people are selling great companies because Lehman is in trouble? Company X has nothing to do with Lehman! Company X is unfairly punished because investors don't understand what it does and what factors affect its performance". Also, we're learning now that Lehman, AIG, Merrill and many others had some serious unknown problems. Key word here is unknown. Investors didn't know their exposure to the subprime mess and gambled that they would be fine. Turns out, they shouldn't have invested in stuff they didn't know.
Please, invest in what you know.
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