“Nature never deceives us; it is we who deceive ourselves.” – Rousseau (Émile, 1762)

Peter Lynch was the most successful fund manager in the world from 1977 to 1990, when he ran the Fidelity Magellan Fund. The fund grew from $20 million to $14 billion in assets under his leadership, and he walked out on top. Just before he retired, he wrote a best-selling book titled “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market.”

And he has probably bought and sold more stocks than anyone else on the planet. I can’t think of anyone more qualified to make a list of the 10 silliest (and most dangerous) things people say to justify their bad stock-market decisions.

So, without further ado, here’s a quick look at Peter’s list — along with my comments on each one:

1. “If it’s gone down this much already, it can’t go much lower.”

I know that you’ve said this to yourself in the last few years. You said it on Lucent. On Cisco. Sun. AOL. Enron. WorldCom. How many times does an investor have to say this before he learns that it makes no sense? Outside of zero, there is no rule for how low a stock can go. The best advice I can give here: If you catch yourself saying this, it’s time to get out.

2. “You can always tell when a stock’s hit bottom.”

Nobody knows when a stock will bottom — so don’t try to guess it. Instead of trying to catch a falling knife, it’s much safer to let the knife hit the ground … and let it wiggle around a bit to be sure … and then pick it up.

3. “If it’s gone this high already, how can it possibly go higher?”

If you want to make 10 times your money, you can’t sell before the stock goes up 10 times. But nearly all investors do sell the big winners early because of this faulty logic. The only way to make real money in stocks is by letting them go higher — by not taking a profit early. It’s hard to do. But you’ve got to let your profits ride.

4. “It’s only $3 a share; what can I lose?”

What can you lose? You can lose 100%. Whether a stock is $3 or $50, if it falls to zero, it’s a 100% loss. If it falls to 50 cents, it’s not much better. Three bucks is no guarantee of a bargain. Resist the urge; it’s dangerous. You can still lose it all.

5. “Eventually, they always come back.”

I’m hearing this a lot these days. It’s as if WorldCom, Enron, Global Crossing, and all the dot-coms were some kind of fluke. Fact is, they don’t always come back. If you catch yourself saying this about one of your stocks, it may well be time to get rid of it. Make sure you’re using your trailing-stop-loss strategy here. (See Message #573, “An Important Rule of Lasting Wealth: Don’t Lose Money.”)

6. “It’s always darkest before the dawn.”

For 20 years, gold has done nothing but fall in price. But every year, somebody is saying “It’s always darkest before the dawn.” As Peter Lynch says, “Sometimes it’s darkest before the dawn, but then again, other times it’s always darkest before it’s pitch-black.” If you’re saying this — and you really believe it — please be absolutely certain that you’re not just rationalizing a bad decision.

7. “When it rebounds, I’ll sell.”

I’ve heard this phrase hundreds of times. Yet, I’ve never seen anyone follow his own advice here. When the stock rebounds, they decide there’s nothing wrong with it and they keep it. If it never rebounds, they keep it. The reason people do this is that they don’t like to admit they’re wrong. So, somehow, by holding a losing stock instead of selling it, there’s still a chance that they’ll be right on this loser. Usually, they’re not. If you find yourself in this boat, your best bet is most likely to sell immediately.

8. “What, me worry? Conservative stocks don’t fluctuate much.”

There isn’t a stock on the planet that you can afford to ignore. And as we’ve learned during the stock-market shellacking of the last two years, even blue chips can get clobbered. This phrase justifies the decision to not pay attention to your investments. That’s a bad idea. It’s your money. It’s worth a little attention.

9. “It’s taking too long for anything to ever happen.”

I hear this phrase all the time. Investors want action. But think about this: A 12% annual return is about 1% a month. That’s a great return, but there’s no action. You don’t need action. Be patient. Lynch says it takes remarkable patience to hold on to a stock that everyone else seems to ignore. Most of the money he makes on a stock, he says, is in the third or fourth year of owning it.

10. “Look at all the money I lost because I didn’t buy it!”

Lynch says this thinking “leads people to try to play catch-up by buying stocks they shouldn’t buy, if only to protect themselves from ‘losing’ more than they’ve already ‘lost.’ This usually results in real losses.” Have you made any of these statements — or statements like these — in the past year?

Always remember: In the long run, it is much easier — and ultimately less painful — to correct a bad decision quickly than it is to continue searching for emotional justification as your portfolio continues to shrink.

Steve Sjuggerud

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