Stock Trading Lesson – Spot The Problems

Over the years several of my friends have come to me for my help in getting them started with investing in the stock markets. No matter how much money I make them in the beginning, they all fall prone to fear and greed, lose their money, and give up. It’s a four step process I have come to know well:

Step 1) They follow me and make $$$.
Step 2) The money comes so easy they think they can do it on their own. They start picking things to invest in with no buy, or exit strategy (a strategy for disaster).
Step 3) They eventually let fear and greed (an investors worst enemies) control them and lose 20% to 40% of their money.
Step 4) They then call me and tell me they give up because you can’t make money in the market.

The friend I have been helping lately started 2 years ago and made money both years on what I taught him (he has completed Step 1).

Now he was telling me today, he can’t learn anything more from me and wants to move on to Step 2. So I congratulated him and support his decision. Curious, I asked him what his trading strategy will be. Here is his plan:

  • Rule 1) Buy mutual funds only.
  • Rule 2) Buy only 3 or 4 star funds.
  • Rule 3) Check for great past performance recorded and has good present performance in the YTD %.
  • Rule 4) Never sell for a loss. If the fund drops right away, hold it until it goes back above the purchase price, no matter how long that may take.

That’s his whole strategy for buying and selling his next trade. He still has a lot to learn and may be in for an expensive stock trading lesson.

See if you can spot what’s wrong with it, and post your comments below. Once done commenting, you can click here to read my analysis in part two of this stock trading lesson and why I believe he is headed for Step 3 if he doesn’t follow my advice..

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