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My development logbook

Investment Survival Note 4 - Pitfalls for the Inexperienced

For any beginners in the stock market, they should try to gain experience by trading in the active , listed stocks. The beginners should learn to control their emotions through this exercise. After this they can start to choose a particular subset of the market to focus on and trade exclusively. The idea that someone can trade equity, bond, IPO, OTC and other exotic products equally well all at the same time is absurd. In today’s world the advantage of specialization is already evident. The same holds true in capital preservation.

The main advantages of investing in leader stocks are the following: The transaction fee is usually cheaper, and it is possible to monitor the stock performance daily.

Beginners should avoid IPO because the prices are usually mispriced on the high side. Even if the IPO price is lower than fair value of the underlying, it will immediately lead to over-subscription. The amount allocated will be so small that it is hardly profitable.

Secondly beginners should avoid buying shares directly from broker/dealer. We can hardly expect the salesman to be unbiased when they try to sell you their holdings.

One should also avoid secondary distribution because of the lack of price transparency.

Lastly, simply avoid the promoter, the penny stock and stock with romantic titles.

I believes many “investors” in Hong Kong will dispute this.

Quick link to The Battle for Investment Survival by Gerald M. Loeb