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Don't Blame Wall Street if You Can't Hit the "Sell" Button

Jan. 07, 2011 9:14 AM ET
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Many pundits talk about the significance of the first week of January in the markets. The old saying goes, "How goes the first week of January, goes the rest of the year for the markets."

There is statistical data that does show some truth to this adage, but at the end of the day, it's still just one week of the long market year. Tech stocks have been flying this week, but you can't argue a touch of the euphoria is likely tied to the CES show in Las Vegas that began Thursday (as well as the recent Qualcomm (QCOM) deal to buy Atheros Communications (ATHR)). All the latest and greatest tech gadgets are on display this week, and the momentum crowd is buzzing with optimism.

Optimism is a good thing, and for investors it doesn't hurt to start feeling better about where things are today, as opposed to the low spirits many felt when the banking system was imploding a couple years ago. Now, that doesn't mean to go crazy buying as many stocks as possible right this minute, but for some investors, there needs to be a time to get over the "Wall Street is rigged and no one can make money in the markets" mentality.

I've been analyzing the markets for a long time, so I'm certainly not naive enough to think that there aren't "insiders" out there that use underhanded means to profit immensely. But at the same time, nothing is preventing investors from making money, too.

I sometimes hear from readers who aren't fans of when we begin recommending a dividend stock that's already had a nice move to the upside. I understand the trepidation, but investors need to realize the nature of the markets -- stocks that have outperformed tend to continue to outperform, while those that have lagged behind tend to continue to do so.

Unfortunately for some investors, getting burned sometimes means never getting back into a particular name ever again. You can see extreme cases of this phenomenon in momentum stocks and commodity plays. A couple of summers back we saw oil prices spike to over $140 a barrel, and pundits were calling for $200 as retail investors kept buying every uptick with little buying discipline. When oil began to correct, many sat there and did nothing, when all that was needed was simply to click "Sell" and take the small hit on your investment.

Instead, small losses turned into big losses -- and those who got burned instantly blamed Wall Street. I'm not going to sit here and try to defend Wall Street, but it is up to you the investor to take responsibility, and just as importantly, to take action when things reverse and go against you. Oil subsequently dropped all the way back to the $40/barrel range and pretty much bottomed there. It has since climbed back to $90/barrel. Many investors that lost money during oil's plummet from all-time highs are unlikely to ever go back into oil. But is that smart investing? Certainly not.

I fear this cycle could replay itself soon with gold, as retail investors have been embracing the yellow metal in droves. If you own gold, what will you do if we see a pullback? Will you sell and blame Wall Street, and resolve to never get back into gold again?

I bring this up because I have been nervous about the composition of investors that own gold at this moment. There could be a shakeout coming, but in the long run, gold should still have a place in your portfolio. In fact, we will take a closer look ourselves at dividend-paying gold-mining plays if we do see pullbacks soon.

My point is that being permanently bullish or bearish in any sector or stock is not a smart investment strategy. Please remember that!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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