The 5 Most Dangerous Words in Investing

Not long ago, Warren Buffett popularized the notion that the five most dangerous words in business might be: "Everybody else is doing it."

Indeed, that phrase has been a rationalization for poor choices regarding the repricing of stock options at many companies. Such repricing practices have landed a number of CEOs in enough trouble to lose their jobs. Executives at Apple (NASDAQ:AAPL), Dell (NASDAQ:DELL), and KB Home (NYSE:KBH), among many others, have been caught up in the scandal.

That got me to thinking about what the five most dangerous words for an investor or potential investor might be. Without further ado, here's a whole lot of danger, counting down from least most dangerous five-word phrase to the absolute most dangerous one.

3. "This time, it is different."
A classic. Any Google search will rapidly provide you with innumerable declarations that these are the five most dangerous words in investing. Indeed, during the Nasdaq bubble years of 1997 to 2000, people justified their purchases of dodgy operations with sky-high P/Es -- or no P/Es at all -- because the stories were compelling and because "This time, it is different."

As in the nascent days of airlines and automakers, the early days of the Internet produced lots and lots of companies, and many of them faltered -- many after raising sizable chunks of money. Obviously, there were also big winners -- Yahoo! (NASDAQ:YHOO) and Amazon.com among them -- but the businesses that survived had a lot more going for them than a mere idea. The same forces that drove almost all early players in cars and airplanes out of business did the same to sketchy online operations -- the ones that figured the Internet was the next big thing (it was) and that every early entrant to the Internet would someday make money (they didn't).

2. "I'll sell when I'm even."
Tests of investors show that we experience twice as much pain from a financial loss as we do pleasure from an identical-sized gain. This is one of the reasons that investors hold on to stocks they should sell -- and know they should sell -- in an attempt to avoid experiencing the pain of selling a loser.

Potential tax issues aside, the reason to hold a stock has nothing to do with the amount you spent to get it in the first place. When you have a stock that you no longer believe in, you should get rid of it as soon as you have a better place to put the money. It's a mistake to hold a stock with the simple hope that once it gets back to even -- whenever that may be -- you can sell it without feeling any pain.

Consider, again, investors who bought into the market near the top of the Nasdaq bubble in 2000. Investors in stocks such as Nokia (NYSE:NOK) or Oracle (NASDAQ:ORCL) saw their holdings decline 10%, then 20%, then 50%, and all the way down (in some cases) to 90%. For those investors, waiting for breakeven was the kiss of death. At the points where such investors could rightly have concluded they weren't going to get back to even anytime soon, they sold at the bottom.

When you know you don't want to own a stock for the long term and you've lost money in it, don't compound your problems by holding on merely to avoid selling at a loss.

And now, No. 1 in The Five Most Dangerous Words in Investing:

1. "I can get started later."
Aieeee! Certainly, the most costly thing in saving and investing is to never get started on it at all. The power of compounding is so overwhelmingly persuasive that the best time to start your investing program is yesterday, or several years ago. Barring access to the time machine that would allow you to go with the best day to start investing, "today" comes in as a close second-best.

There are dozens of ways to show how much more money you end up with if you can merely achieve the market's average annual rate of returns while keeping your money invested for decades. Even if the market's long-run return rate is about 10%, and you can beat it by just two percentage points through shrewd stock picking, at the end of 30 years, you just might end up a millionaire with a simple $4,000 IRA investment. But it does take that length of time.

Simply put, to enjoy the later years of your life and your retirement, you need to get started sooner rather than later, and you need a plan for how to get to where you want to be. Research shows that one of the biggest predictors of retirement success is the presence of a plan.

Don't have a retirement plan? If the answer's "no," then today's your lucky day. Beginning Oct. 8, the Rule Your Retirement team will take subscribers through the eight-lesson "How to Plan the Perfect Retirement" online seminar. Reserve your seat by signing up for a 30-day free trial to Rule Your Retirement.

Whether you join us or not, remember, that for any investor, it's truly the amount of time in the market that's the greatest determinant of how much money you'll end up with to enjoy in your retirement.

This article was first published Nov. 22, 2006. It has been updated.

Bill Barker does not own any of the stocks mentioned in this article. Dell, Yahoo!, and Amazon.com are Motley Fool Stock Advisor recommendations. Dell is also an Inside Value pick. The Fool has a disclosure policy.