OLD Sayings
Explained In Plain Language
OLD Sayings Can Ring True
Old sayings are valuable because they are old. They have stood the test of time and have held their meaning. Old sayings are favorites at cocktail parties and give the speaker an aura of experience, knowledge and respectability like nothing else. They are also great learning tools for retaining some of the basic ideas of investing.
Buy Low, Sell High
No kidding. This is the essence of stock trading and the most quoted of all old sayings. Sell High, Buy Low works for short sellers the same way. Short sellers make money if a stock goes down.
A dead cat bounce
This means that even a dead cat will bounce a bit if it falls off the fence. In stock trading terms it means, don’t get encouraged if a stock goes up a little after a very hard fall. It could be dead and soon to trade at $0 per share.
Don’t grab a falling knife
Don’t buy a stock that is falling rapidly in price because you think its getting cheap. The momentum alone from a rapid fall in price can many times make the stock even cheaper. Wait for a base to form if you think the selling has been overdone. Waiting for the daily trading volume to pick up before buying is another caution that should be considered.
Trees don’t grow to the sky
In 1999 and early 2000 you would have thought this old saying was just plain wrong. The Nasdaq was near 5,000 with predictions of 6,000 coming any day. So this old saying is so true. A stock price will not go up forever.
No one ever went broke taking profits
This is what you say to yourself if you sell a stock and make a nice profit. But, the stock keeps going even higher and you feel bad and hate yourself. Lighten up! You made a profit, be happy.
Sell in May and stay away
This is not a bad strategy for a passive investor that doesn’t have much time to spend with his portfolio. Over many years it has been shown that the best months for the stock market are November through April. So if you sell your stocks in May and stay away until October to buy back into the market you will realize a bigger gain than if you held stocks all year long. The worst month for the stock market is September and many times the low of the year is set in October.
Don’t fight the Fed
This means that you shouldn’t overweight your portfolio with stocks when the United States Federal Reserve is hiking interest rates. Higher interest rates make money itself cost more. They also tend to slow the overall economy. Neither is very good for stock prices, in general. However, when the Fed is nearing the end of a raising cycle it has been shown to be a good time to load up on stocks and sell your bonds.
The Trend is your Friend
Issac Newton said that a moving object will remain in motion until something stops it. A market in an uptrend is a friendly place to own stocks. The lesson to be learned is that you shouldn’t sell because of small drops in your stock price. Lighten up, ride the trend. How stocks trade in the last hour of trading (3:00 to 4:00PM Eastern) is a good indicator of a trend changing. CNBC, the stock market channel, calls this the most important hour of trading. Many times if the market finishes on the high of the day, the following day the market will be higher as well. If the market finishes on the low of the day, look out below tomorrow morning.
Buy Term and Invest the Rest
This actually has to do with life insurance but it makes a lot of sense. In a nutshell term life insurance costs about one-half what whole life insurance costs. So buy term insurance and invest the difference into the stock market. When its time for your beneficiaries to collect they get the policies death benefit, plus what you invested in the market. A whole life policy only pays the death benefit, the insurance company keeps the so-called “cash value”. Really!
The Only Free Lunch is Diversification
Over time it has been shown that a well diversified portfolio of stocks that is spread across many different industries is the best assurance of growth. It's also the Wall Street way of saying "Don't put all your eggs in one basket". A mix of financial, energy, technology, consumer staples, raw materials and some bonds is a common way to spread the risk. Five per cent of the portfolio invested in gold or gold stocks is also popular. Gold protects against the price of your cash going down if the dollar should fall against foreign currencies. Gold is priced in U.S. dollars just like crude oil.
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