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Avoid The Whack-A-Mole Approach To Investing

13 May 2008 3 Comments

A 20-something investor is typically an investor with a small amount of money to invest, an excitement regarding the possibility of earning some nice returns and a lack of a strong vision or strategy. This can be a dangerous combination and lead to what I call the “Whack-A-Mole” approach to investing. Let’s discuss further the signs of a “Whack-A-Mole” investor and find some ways to avoid falling into into this habit.

What is the “Whack-A-Mole” Approach To Investing?

The Whack-A-Mole game is the game where the little animals pop up and you hit them with the mallet as they pop up. “Whack-A-Mole” investors are investors that do not have a clear strategy guiding their investment decisions; instead, they buy stocks as they pop up in front of their face.

A new investor who is soaking up everything they can about as many stocks as possible can easily fall into this style. For example, John Doe has a couple thousand dollars he is looking to invest. He is new to investing so he is reading as many articles about as many stocks as he can. He reads an article about Company X, and the article tells him why he should own the stock. John thinks to himself that the article is pretty convincing, so he puts his money into Company X. A couple days later, he reads another article regarding Company Y and why it is poised for huge growth. Not wanting to miss out on the action, he sells his stock in Company X and puts it into Company Y. This continues until John either loses his money or changes his strategy.

Why You Want to Avoid This

It is extremely tough to gain any returns with such over-trading. Not only are you not making clear decisions with strong reasons, you are killing your return with the trading costs incurred. In my post analyzing my Apple trades, you will see a clear example of the ill effects of over trading.

Young Investors Are Susceptible To The “Whack-A-Mole”

Young investors typically have only a small chunk of money to invest which can lead to the investor trying to maximize any gains by putting their entire chunk into one stock. While this may or may not work, it will definitely lead to the “Whack-A-Mole” if not careful. Always wanting to find the best stock with the highest gain, you will be tempted to move your money out of this one position into a “better” position.

A Better Approach

If you have limited funds to invest, you may want to wait to invest the money in stocks until you have 5-10 thousand dollars. When you get to that amount, you will find it easier to invest in a few strong positions that have long term potential. If you want to get in the game, put your money into an index fund that will track the overall market. Add to that position until you build your desired sum of money to begin buying individual equities.

If you have a significant chunk of money to invest already, then I recommend reading my 20s Money Retirement Plan to see the structure of a portfolio that we recommend here. If you still have a tendency to fall into the “Whack-A-Mole” approach, you can implement the following strategies into your investment decisions to keep yourself in check:

  • When you think you found a stock you want to buy, do not buy it. Instead, do twice as much homework researching the stock. If you like the stock a couple days later, then buy it.
  • Focus more on buying opportunities as opposed to the actual stocks. If you find a company you love  and want to own, but also a stock that is overpriced. Exercise patience, keep an eye on the stock, and wait for a pullback. Then, pull the trigger. By then you will know even more about the company and will have an even better informed decision.

Remember, the “Whack-A-Mole” investment approach is bad!  Now you know what to look for, so take a look at your recent trading history and ask yourself if you fall into this category.  If so, there is no better time than now to change your strategy.

3 Comments »

  • How To Invest In Stocks said:

    Hi,
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  • Good Stock To Invest In said:

    HI,
    This a wonderful information for the smaller inverters. This will guide how to invest in there early days of investment. Thank you for the information.