“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
Warren Buffett
Have you ever bought a hot stock, planning to sell it in a short time with a significant gain?
Do not lie. You did it.
When we listen to financial news or when we get a suggestion from a friend who is an expert, it is quite normal to get excited about a stock. Very often, our mind pushes us to action and we buy.
And in many cases the price of that stock begins to drop.
No, you are not unlucky. That’s normal.
A hot stock is often bought in the very wrong moment: after a nice good price run. That’s the moment in which our brain fools us, because it projects in the future the same recent positive trend.
What can we do to avoid that?
Just take a seat, grab a cup of coffee and try to be rational.
First of all, you have to be aware that there is a very high probability that the stock price will fall after you buy it – I am not aware of any worldclass investor who was able to buy stocks exactly at a price minimum point, so how can you be better?
Your best approach is to really avoid any “hot suggestion” and do your homework, which is to analyse any interesting stock by understanding the underlying business and its potential value, to see if it is cheap enough to buy or not. Value vs price, remember?
If you then decide to buy, then do it for the long run. Are you willing to keep that stock in your portfolio for the next 10 years?
To reinforce the quality of your decision you should also think of a no-sale rule and stick to it; my proposal is that when you buy a stock you should oblige yourself to avoid selling it at least for the next 2 years (unless the investment thesis changes, of course).
It sounds difficult, but it really helps.
Wise Value Investing 