It seems once you have achieved a certain level of success in life and gained a global reputation and following, you can fall into the trap of allowing your ego to be larger than your knowledge base. You often see this with influencers positioning themselves as experts in fields and industries in which they are clearly out of their depth.
If you have not bulletproofed yourself from this behaviour through the proper education, you leave yourself vulnerable.
Below is a recent tweet from Tesla Inc TSLA CEO Elon Musk. I will explain why listening to this advice will turn your stock portfolio into a constant source of stress and disappointment.
Let's start with the opening line.
'Since I've been asked a lot:'
Musk is a highly successful entrepreneur, not a stock market investor. The skills he has developed may be transferable from business to business, but they are not transferable to the stock market. Investing requires a whole different skill set that Musk does not have based on this tweet.
The fact that he claims to be asked a lot about what stocks to invest in shows how disconnected his followers are and how financial illiteracy, a pandemic that gets little mainstream media attention, is a genuine issue.
Musk deserves admiration for what he has achieved but not at the expense of your own success. If you want inspiration on starting, growing and exiting a business, then Musk is the perfect source. Yet there are far better-qualified individuals to seek guidance on picking the right stocks for your portfolio.
Let's look at the next sentence.
'Buy stock in several companies that make products and services that 'you' believe in.'
One of the first rules of investing is to ignore opinions and beliefs, including your own. Your views bring attachment, which brings emotions, which brings a hornets' nest of problems such as over-risking and not knowing when to let go of the asset when it clearly is not performing.
As a mentor, I regularly get an insight into people's portfolios. When I question why a particular stock is STILL in there and why it is showing so much loss, the answers are frequently the same.
- I KNOW it will go back up.
- I BELIEVE in the company.
- I LOVE the products.
This has a knock-on effect of stress and sleepless nights and, in the worst-case scenario, spirals entirely out of control. It stems from a lack of process.
It is fascinating how resistant people are to changing their approach even when their system is failing or underperforming.
The correct way to pick stocks is first to have a neutral approach; in other words, do not allow the brand name to have any impact on your decision and instead focus on:
- How the asset has performed in the past.
- How the asset is performing right now.
- How the asset is likely to perform in the future.
The simplest way to gain all of this information in a snapshot is by using technical analysis (a flashy word for using charts), particularly on the higher time frames (monthly, weekly and daily).
This form of research focuses you on the stock's performance while simultaneously blocking out all the noise.
If the asset has performed well in the past, you instantly have the odds in your favor of a profit going forward. If it fails, risk management and exit management come into their own as part of your process.
Let's move on.
Only sell if you think products and services are trending worse. Don't panic when the market does.
Yes, don't panic when the market does. The only good bit of advice in this tweet. A successful investor goes against the herd mentality. Where people are selling, we look to buy and vice versa. Timing and patience play into this essential investor skill that is often overlooked with a preference instead for chasing quick riches. Slow and steady wins the day and exponentially when you embrace compounding.
The first part of the sentence again encourages you to "think," bringing your beliefs into the process. The best way to sell a stock is when the stock price is not performing. By allowing your beliefs to guide your decision, you will exit good stocks too early and hold onto bad stocks far longer than you should. It is one of the primary reasons so many struggle with investing. As the saying goes, cut your losers short and let your winners run.
The best way to do this is to let the price dictate and never make predictions based on your beliefs and opinions.
Now for the final part of Musk's tweet.
This will serve you well in the long term.
It won't. The chances of this advice serving you well long-term are slim pickings, as the foundation of this advice is based on emotion. A more profitable approach is to pick stocks where you remain neutral and allow the stock's performance to guide you. This is what the most prolific investors and traders have done for decades.
There is no getting away from the fact that we live in the time of The Influencer. You just need to be wise in how much you allow them to affect your decisions as, ultimately, when the time comes, you are accountable for your choices.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.