Ask This Question Every Time You Want to Buy a Stock
Here’s how to tell if you are a gambler or a trader and how to guard against foolish buys.
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Every day I watch traders make buys that make me wince. It isn’t that they are wrong. In this business, everyone is wrong a lot, and I am no exception. What bothers me is the reasoning, or lack thereof, behind the buy. Ask why they bought this stock and the answer is some version of “it looked ready to go” or “it was up nicely today.” That isn’t a sufficient reason to risk precious capital. It is hope dressed up as a trade.
The most common mistake that I see, which is also the most costly, is a lack of selectivity. Traders buy too much, too often, with too little thought. The explanation is simple. Many people who trade stocks aren’t traders at all. They are gamblers who happen to be using the stock market as their casino.
The Gambling Mentality
The gambling mentality is easy to spot. There is a craving for a constant flow of action. Sitting on cash feels like missing out. A slow day with few trades feels like a wasted day. So the gambler goes looking for something, anything, to do, and the stock market is always happy to provide an opportunity to lose money.
Two examples show up all the time. The first is the stock that has been in a long, grinding downtrend for months and then has one good day. The buyer declares that the bottom is in and they jump in so they won’t miss out on a ride straight back up. Maybe it will, but one green day after months of red is not evidence of anything. Stocks in long downtrends have plenty of bounces along the way, and those bounces are what trap buyers and keep the downtrend going. Holders who have been waiting for a chance to get out are glad to hand their shares to anyone who wants them.
The second situation is the stock that is doing nothing at all. It is flat, there is no news, and there is no catalyst anywhere on the calendar. There is just some random movement that is wrongfully viewed as meaningful. The buyer thinks it is cheap, or that it is due so they jump in. Stocks are never due. A stock with no catalyst and no buying interest can stay dead far longer than you can stay patient, and your capital sits there while better opportunities go by.
They Know Better and Do It Anyway
None of this is a secret. Most traders who lose money can tell you what they should be doing. They aren’t dumb. They know a stock doesn’t turn around because of one good day, and they know a stock with no catalyst is dead money. They fail anyway because of emotion. They can’t control the impulse to act. The fear of missing a move and the itch that comes from sitting in cash while everyone else seems to be making money overwhelm good judgment, and too often the impulse wins.
Short-term trading isn’t all that hard in theory. There are many effective strategies. The hard part is doing the same sensible thing over and over when every impulse pulls you somewhere else. The skill is not in knowing what to do. The skill is in not doing the wrong thing when you are bored and the screen is full of temptation.
One Question Before Every Buy
To short circuit these emotions I ask myself one question before I buy. This forces a pause between the impulse and the action. That question is why does this stock have a good chance of moving in my favor? Is there a solid reason to buy this stock or am I just looking for something to do?
The question of why I want to buy this particular stock can be broken down into several pieces. The first is, what are market conditions? A good stock in a bad market is swimming against the current. When the indexes are under pressure and breadth is poor, even strong setups tend to fail. That doesn’t mean you can never buy in a weak market, but it should raise the bar and shrink your pool of candidates. This is exactly why I have been so cautious lately. The current market is punishing poor selectivity, and a marginal buy that would have been bailed out six months ago just sits there and bleeds now.
The second issue is, what is the catalyst? Something has to make other people want to buy the stock after you do. That might be earnings, a data readout, a product launch, a shift in sentiment, or money rotating into a sector. If you can’t name what is going to attract buyers, you are relying on hope and luck.
Why now? A stock can have a great story and still go nowhere for six months. What makes this the moment to commit capital rather than next month or never?
And the hardest one to answer honestly is whether or not I am just bored and want to do something. I have asked myself that question many times, and the answer has been yes more often than I care to admit. When the honest answer is yes, the best trade is no trade.
What Waiting Actually Buys You
The reason to run every buy through those questions is not just to avoid bad trades, though it does that. It is that patience is what gives you the capital and the clarity to act when an edge finally shows up.
The gambler is always busy chasing mediocre positions, so when an opportunity finally arrives, he has no cash and no attention left for it. The trader who sat on his hands through the boring stretch has both. The waiting is not passive. It sets up the buys that matter most to the bottom line. The discipline to skip fifty marginal trades is what lets you be aggressive on the one that counts.
Ask yourself if you are chasing action because you like the thrill of putting money at risk or are you patiently waiting for an edge. The gambler needs to be in the market to feel alive. The trader needs a solid reason. In the long run, a good reason for a trade will always beat the thirst for action.
At the time of publication, DePorre had no position in any security mentioned .
