In the last twenty years, the west has witnessed two dramatic stock market crashes – the ‘dot com’ bubble and
These events were distressing at the time, however they now provide ripe fodder for showing us terrible
reasons to invest.
1. Investing In Something When Its Rising In Value
Investing should always involve some form of research. Ideally, an investor should be able to identify why the value of a company will rise. Investments made without research are not investments – they are speculation.
When saw this during the 2000s with the trend of buying several properties and leveraging up. Ireland today is littered with the bones of ambitious businessmen who took out four loans to finance projects worth over ten times their annual salary. They saw housing prices rising and invested everything they had.
But rising prices do not mean a winner.
Rising prices are also problematic, because they signal that others are aware of the asset. Going against the crowd is very important – some of the most successful investors of the twentieth century had a contrarian investment style.
2. Everyone Else Is Getting In On It
This is common thing you see with people mistake. Investing in something because its hot is a terrible reason to invest in anything.
The most famous example of this is the “South Sea Bubble” during the eighteenth century, in which the value of the South Sea Company soared. Issac Newton famously invested in it. He pulled his money out, but re-invested at the top of the market. When the market crashed, his holding was soon worth nothing. He famously said,
“I can calculate the motion of heavenly bodies, but not the madness of men”
A more recent example of this was Enron during the early 1990s. Enron was an energy company which became the darling of wall street. During the 1990s, Enron’s value on wall street soared and you were deemed an idiot of you steered clear. The issue was with Enron was that no one actually understood how Enron earned money. It turned out they were using a creative book-keeping technique which allowed you to pull money out of thin air.
The desire for more doesn’t change. The greed that drove Isaac Newton during the eighteenth century still exists today. As an investor, you need t avoid heavy losses. Investors who refuse to buy into the ‘next big thing’ often look foolish in the short-term, but wiser in the long-term.
You should always make careful considerations when you are buying a company. If you are not patient enough for this, you should invest in a lazy stock portfolio.