Lessons From Northern Rock

What's the biggest mistake that private investors have made in the last year
or so?

Yes - you guessed it - buying Northern Rock^©!

Many thousands bought it, sensing a bargain and private investors kept on
buying it all the way down.

A solicitor that I had to go to a few months ago told me he'd just bought
his first share. "Oh yes," I said, "which one?"

"Northern Rock," he replied. "I bought it at 8 quid - what a bargain - it's
fallen 4 quid! It'll go back to 12!"

"But it's about six quid now," I said.

"Don't worry, Mr Burns," he replied tapping his finger on his head
knowingly. "I'm about to buy some more, what a great time to buy!"

I decided not to say anything - but I wonder how he feels now and whether he
got out eventually?

Why did PIs buy it? Well, because they felt, as my solicitor did - that it
was a "bargain".

The mistake? Well, buying it without any research just because it had gone
down a lot and not setting a stop loss to get out. A 10% stop loss would
have worked wonders here and at least would have got PIs out without too
much damage.

As it is, thousands of "bargain hunters" blew their money when it became
suspended.

The lesson? If you're buying a share that's come down a long way it's best
to be cautious. Don't buy too many and set a 10-15% stop loss. If you're
right and it recovers you can buy more if it climbs back up.

In fact I got an e-mail the other day from someone who asked me why I didn't
buy banks.  Erm, well take a look at the charts. A lot of people are buying
them now because they think they are "bargains". But are they? I'm not so
sure. However my view on them is: why bother? They're impossible to value
and who knows what will happen next with rights issues and the credit
crunch?

I don't want the stress of holding a bank - for now and for the foreseeable
future!