Investor's Business Daily, May 29th, 2007
Becoming a successful investor requires plenty of skill and practice. But you can read 1,000 books and trade 1,000 stocks and still struggle to make headway if you let one thing get in your way ego.
Learning how to put your ego aside is crucial if you want to make money in the stock market. To do that, you must be willing to admit your mistakes.
Admitting you're wrong isn't something many people are used to doing in everyday life. By taking the blame, some people may fear reprisal from a boss, friend or loved one.
But when investing, you only have to answer to yourself. Failing to acknowledge when you've gone wrong can lead to big losses for your portfolio.
Worse, you'll likely make the same mistake again in the future.
One potentially costly mistake: Buying a stock that hasn't formed a proper base.
Those who tried to buy shares of Sohu.com SOHU in the fall of 2003 paid the price for that error.
The China-based provider of Web search, wireless and gaming services was a huge winner from mid-2002 to the summer of 2003.
That hot streak extended to many other China-related stocks, from raw materials providers to fellow dot-coms such as Sina SINA and NetEase.com NTES.
Sohu's stock broke out of a steep, seven-week base in October 2002, just after the Nasdaq marked the bottom of the nasty bear market (point 1).
Sohu blasted higher over the next few weeks. It started pulling back to its 10-week moving average in November 2002. That yielded another buy chance a few weeks later (point 2).
The stock then fell into a fresh, eight-week consolidation starting in January '03.
That yielded a powerful breakout in late March (point 3), just as the Nasdaq followed through on a new rally.
Investors who saw the market follow-through, the huge demand for Chinese stocks in general and Sohu's own steep ascent had to be enticed by this point. But the stock quickly became extended from a proper buy point.
Sohu peaked in July '03, then started dropping. This may have seemed like a possible prelude to a breakout.
But the stock never formed a proper base. Sohu ran into heavy selling after its top (point 4) and never paused to form a handle.
After edging higher, the stock reversed and plunged 21% during the week ended Sept. 26 (point 5).
After waiting this long to buy in, some investors may have stubbornly tried to prove they were right. That decision would have proved costly. Sohu dived 61% from its peak over the next 81/2 months.
If you miss a stock that goes on to big gains, don't make the problem worse by chasing it when you shouldn't. In a bull market, there will be plenty of other buy chances.
