Without question, given that all three major indexes ended in the red for 2018, there’s not a lot of faith in the market. For 2018, the Dow Jones Industrial Average fell 5.6%, the S&P 500 Index dropped 6.2%, while the Nasdaq Composite shed 3.9%. These results signify the market’s worst performance since the Great Recession of 2008.
Investors are understandably wary about repeating last year’s mistakes, particularly those made in the second half of 2018 that wiped out all of the gains made in the first half of the year. It’s misplaced energy, however, to think we can avoid every potential risk. And while it might be safer (or, at least more prudent) to wait for the “all clear” signal to jump back in to stocks, investors would be falling prey to a major stock market mistake: Fear. Thus, missing out on many solid buying opportunities. As such, here are two key investment mistakes investors should avoid for a successful 2019.
Mistake No. 1 – Catching a falling knife: buying too soon
Warren Buffett once said, “price is what you pay, value is what you get.” Understanding the difference between the two has helped me avoid getting cut by falling knives. Investors who are putting together a long-term portfolio should seek to understand why a stock is falling and the likelihood that the price — despite a current decline of, say, 20% — can continue to fall.
Sure, buying, say, Amazon (AMZN) at $1,500 after it has fallen from $2,050 is a sound strategy. Aside from the fact Amazon — despite its size — is still growing annual revenues at 30%, the stock currently trades 30% below its consensus price target.
That that logic is not the same for a stock like, say, General Electric (GE), which is on its third CEO in two years and has recently cut its dividend 90% to preserve cash. GE stock traded as high as $19 in January 2018. And with each $1 decline and 10% drop, the industrial conglomerate was seen by many as “too cheap to ignore.” The stock ended 2018 at $7.57. Not only it GE drop out of the Dow 30 during 2018, it ended the year with a decline of 56%, while serving as an important reminder that things can always get worse.
Mistake No. 2 – Missing a windfall: selling too early
There’s a saying, “No one ever went broke by taking a profit.” That may be true to some degree. But selling your winners too soon can lead to broken portfolios, particularly in 2019. Inevitably, investors are going to be trigger happy this year. At least, much more than usual. This is because of the pain and the increased pessimism resulted from how 2018 ended. There will be several market rallies throughout the year. But they’ll likely be short-lived because investors will be more focused on recovering last year’s losses, than banking on this year’s gains.
The majestic rise of AMD (AMD) and Nvidia (NVDA), which posted respective gains of 320% and 260% in 2016, were perfect examples. Some investors outsmarted themselves by racing to be the first to sell once the YTD gains reached 20%, 40% or 50%. I see a lot similarities with 2019. I’m not suggesting that either AMD or Nvidia will produce the same level of gains as they did in 2016. But I do see the market overreaction that occurred in the second half of 2018 as a means to overreact to the upside for several beaten down high-flyers. Investors should recognize that, as long as business fundamentals are intact, they shouldn’t rush to sell.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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