Daily Gains Letter

Investor Beware: Don’t Fall for This Old Myth

By for Daily Gains Letter | Mar 15, 2013

There’s a myth among investors that by looking at the broader stock market—such as the key stock indices—and only focusing on it, investors can significantly improve their returns. In other words, the overall market condition can be the best way to improve your returns. You don’t necessarily have to waste your energy to research one company; just look at where the overall market is headed.

While there may be some validity to the argument, looking at the broader market doesn’t really tell you much about a certain company that you might be invested in or want to invest in.

No doubt, a certain stock might follow the general direction of the market on any given day when there isn’t a lot of news about the company, but on the other days, it can be totally different. For instance, events such as earnings releases and investors’ meetings can cause fluctuation in stock prices.

Take a look at the stock chart below of the S&P 500 index from 2009 to today.

dl_03152013-image002Chart courtesy of www.StockCharts.com

The most-quoted index when it comes to the U.S. stock markets, the S&P 500 has gone up significantly since 2009. In early 2009, the S&P 500 dropped below 700. Since then, it has more than doubled!

Now, let me ask this question: with the S&P 500 more than doubling over the last few years, did every company show similar returns? To say the least, no. The key stock indices only give a general overview of the markets; they don’t provide a precise picture of each company. Referring back to the chart above, over the time in which the S&P 500 more than doubled, there were some companies that did much better than the index, and there were others which didn’t do as well.

Focusing and learning more about the companies you own or are looking to own can help to provide you with a better return. The reason for this is that when you focus on the company, you know what to be aware of and what to expect. If you just look at the broader market, you just don’t see it.

In addition, you can protect yourself from bigger losses in the future if things turn sour for the company.

One of the most well-known stock investors of today, Warren Buffett, said, “Risk comes from not knowing what you are doing.” (Source: BrainyQuote web site, last accessed March 14, 2013.) The implication behind this is very simple: knowing what you’re doing reduces risk and protects you from potential losses.

Investing isn’t easy; it goes without saying. When an investor focuses on a company, it can take significant time to thoroughly research it. A few of the things investors should look at when assessing a company include: the company’s growth rate, assets, liabilities, and management team. In addition, investors should evaluate the company’s competitive advantage over other firms in the same industry.

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