About six weeks ago I received a rather impertinent email from a reader complaining that they had bought Dicker Data Ltd (ASX: DDR) shares for around $5.50 only for the shares to quickly fall to $5 to leave the holder upset at their paper or realised losses.
The emailer not only complained that myself and another writer, James Mickleboro, had previously wrote that Dicker Data shares were worth buying, but also demanded another article explaining why the shares had fallen in the week since the reader purchased the shares.
The IT hardware distribution company had released no news over the period which the emailer complained about, so I explained to them that the shares moved in price every day largely on changing sentiment.
I also suggested I still expected the shares would do reasonably well over the long term.
I must admit I was totally wrong about that though.
The shares have actually done exceptionally well over the short term to rise about 40% in 6 weeks from $5 to a record high $7 today.
As such there's a couple of classic share market lessons for private investors to learn from these kind of wild price swings on no news.
First, is that it's all but impossible to buy a share at the bottom of its short term price range. Share prices move every minute so you're all but certain to be 'underwater' on your investment at some point if you obsessively watch screens or price movements.
Second, shares that are less liquid like Dicker Data may move around in price a fair bit every day. If you buy less liquid shares you must be able to stomach more volatility when a 5% swing in any one day is not that uncommon.
Third, not everyone is suited to share market investing.
One of the most basic principles of successful investing for the last 100 years is not letting your investments' price movements control your own behaviour or emotions. Make the market your servant, not your master! You must control your own emotions methodically to control your investment returns by making rational investment decisions based on valuations and a medium-term outlook.
As such using stop losses is not a good idea unless you're a day trader or like losing money.
Fourth, we encourage readers to take responsibility for their own investment decisions — it will likely serve you better over the long-term.
Everyone will make bad decisions and lose money in the share market on some investments. Risk in one sense is the price of generating higher returns.
Fifth, if you're new to the share market it might be worth buying a low-fee index fund such as the Betashares ETF (ASX: NDQ) to start out with, or to stick to the less volatile blue-chip end of the share market with small amounts to begin with.
