Beginners Article 6: 25 Things You Need To Know
25 Things You Need to Know
Avoid the bad stocks. 50% of making money from the stock market is not picking the best stocks, it’s from keeping away from the bad ones. Spread your time between finding good stocks and identifying bad ones.
Pick out the weeds. Then you are left with the flowers. If you pick and sell all the flowers and you get left with nothing but weeds. Pick the weeds. If you can pick the weed while it’s small you avoid long term damage to your garden. Take losses not profits. Let the flowers bloom.
Index returns are a fantasy. Index returns are heavily marketed as an expectation, but they are a fantasy. The accumulation indices that compound dividends are even more fantastic. The index perfectly compounds dividends, costlessly replenishes the bad stocks with good stocks, pays no dealing costs, has no rent, no staff, water coolers, or management fees, and is not therefore a reality.
Don’t rely on diversification. A diversified portfolio of 20 stocks you ignore is riskier than a portfolio with one stock you know everything about.
Don’t buy a portfolio, buy stocks. One day your portfolio will miraculously appear. Focus on stocks.
You cannot do it the Warren Buffett Way. Otherwise everyone would be doing it. The concept that you can emulate Warren Buffett has cost investors more than it has ever made them. No one has ever managed to replicate Warren Buffett’s performance. The concept that you can is the biggest draw card the equity market has and it is a lie. We all keep buying the dream.
Only the unexpected moves a share price. You will make more money guessing what everyone doesn’t know about a stock than you will ever make finding out what everyone knows about a stock. The unexpected moves share prices, not the consensus. That’s where the money is. Expect the unexpectable.
The market doesn’t crash up. The market falls three times as fast as it rises because losses have three times the emotional impact of a gain. Fear is a bigger driver than confidence and “It takes five minutes to be fearful, but you can’t get confident in five minutes”. Stock markets rise slowly and fall quickly. You have to react quickly to losses. In a bull market you have time. In a bear market you don’t.
Swim with the tide. In a Bull Market the core virtue is “Participation”. In a Bear Market the core virtue is “Non-Participation”.
Don’t catch the knife. There is only one thing a falling share price tells you and it’s not “Buy me!”.
IPOs. The golden rule of IPOs is that if it’s any good you won’t get offered it. If you get offered it…you don’t want it.
Be willing to sell. An inability to sell is the biggest weaknesses of an amateur investor.
Focus on the money. A lot of people ruin their investment results with misplaced sentiments like loyalty to management, favourite stocks, irrational likes and dislikes. Emotional bias simply weakens your chance of success. This is a clinical game of making money. Forget the rest.
Inside information doesn’t help. A man who had professionally traded all his life once said “If I had never been given any inside information…I would be a million pounds better off than I am today”.
Gurus aren’t Gurus. Go to any rain forest, discover any tribe and you will find them huddling under some concept of God and his creed. It is a human need to be able to answer the unanswerable questions and we do it by deifying someone or something. In our search for answers to the stock market’s unanswerable questions we credit our commentators with vastly more powers than they could possibly deserve or possess.
Greed is dangerous. The biggest killer of them all. Approaching the stock market with greed is like running onto a battlefield in bright orange. You will get hit.
Leverage is even more dangerous. The mechanism of greed. Leverage is marketed one way. But it works both ways. You lose much faster as well. That means it only works some of the time and not all the time. It only works when you are right. You cannot habitually use leverage to “invest”, only to trade and trade at the right time not all the time. That’s a big ask for someone with a day job.
Laziness is a killer. The nucleus of many of the market’s very large and public losses. There has been more money lost through laziness than effort. Putting your future in the hands of financial products you haven’t taken the time to understand (OPES, Storm Financial, etc), ‘investing’ without investigating (aka gambling) or relying on someone else’s grand declaration rather than taking responsibility yourself are all recipes for disaster. Let’s get this straight. There is no easy route to riches in the stock market, there is no free lunch, so participation without effort is not enough.
There’s only one effortless way to get rich. That is to be born rich. The problem with that is that you only get one shot at it and people far less capable than yourself always seem to succeed at it.
Expand your circle of friends. Get out and amongst other investors. You need objectivity. Surround yourself with likeminded people and make the most of them.
Always pay attention. The market is a battlefield. Gone are the days you could buy nothing but “blue chips” and make money. You’ve got to assess your position regularly.
Have a plan. It’s no good having some willy half-cooked idea of how you’re going to do things. You need details. A timeframe, goals, research tools, risk management, money management. Written down. If you don’t give it the effort it deserves you won’t get the results you desire.
Read a lot. Trading skills are an easily accessible commodity and you don’t need some slow moving over-priced seminar to get them. Get to the library. There are more investing education books in the world than you could read in a lifetime, and for anyone interested it becomes a ravenous hobby.
Keep perspective. Your relationship, your job and where you live are all far more important than the stock market. Get one of those wrong and they all go wrong. The stock market is not life. It is a side issue. The biggest financial decisions you will make in your life have nothing to do with the stock market. Getting married, getting divorced, having kids, investing in your home and committing to your career or your business. These are the biggest financial decisions you’ll ever make. Focus on those. The stock market is not the priority.
Enjoy it. If it’s not your thing don’t do it. You’ll never succeed trading out of necessity. Best you wait for the next bull market.