These stock investing tips focus on the successful investor’s mindset, attitude and behavior.
Reminiscing from my failed experiments in investing, I realize now that I fell victim to two types of emotions: Arrogance (I thought I knew what I was doing), and Excitement (I believed I was going to solve my financial problems with a couple of master strokes). Instead, more than 20 years ago, I lost my life savings. That is a lesson I never forgot and hope that nobody else has to learn the hard way.
Different Ways To Invest: Where Do You Put Your Money?
In the high school where I teach, business students are busy working their online brokerage accounts, playing the stock market game by “investing” thousands of dollars in stocks of their choice. In many cases, these humble students have done better than many of the so-called expert financial gurus. They of course did their homework on all the companies they selected, learning about P/E, dividends, ROI and cash reserves.
For those who want to get educated about the stock market and investing or trading, there are many free resources you can get by tuning into investment communities or discount brokerages.
To become successful with stock investing or stock trading, you need two things: education and experience. You’ll also need to understand your own risk profile and investing goals so that you can create an investment plan and take on a strategy that will resonate with you.
Image from wonderwebby
Most people will not take the time to really analyze the trends and historical records of the businesses they invest in. A few will be happy to put their hard-earned money in index funds, so called because they “..track various asset classes rather than trying to pick the winners in each.” Their risk is minimal and their returns coincide with the markets. And then we have the hedge funds: “One problem with hedge funds is that they appeal to all the wrong instincts. They are for the privileged. Investors need to have a minimum net worth to qualify.” You’ll want to know where you stand and how your portfolio will participate in the investment landscape.
Simple Stock Market Tips For Beginners
In these difficult economic times, many “burned” investors who lost 50% of their capital in, for example, 401Ks and/or stocks, want to recoup their losses by taking high risks. If you are planning to return to the market or want to begin a new relationship with a discount broker, then you should follow these common sense rules:
Image from wonderwebby
Rule #1 Balance Risk and Reward. “Rome was not built in a day,” says Fari Hamzei in his book “Master Traders.” Successful investors spend a lot of time studying trends and recent news regarding specific areas of the economy. They will, like Warren Buffet, avoid gambling on hunches and they will put their money into a stock, ETF or mutual fund only after a very careful analysis. Even so, their balance remains on a general upward trend despite the fact that they get “burned” from time to time.
Rule #2 Stay Humble. As I mentioned above, I was sure I had the winning ticket when a prestigious company announced the emission of a new set of shares, something akin to Google’s initial offering. I could hardly contain my excitement; even my spouse wanted to celebrate ahead of time. Not long after, the market crashed taking with it my investment, which quickly eroded into one tenth of its initial value (instead of turning into the ten bagger I was sure it would be).
Rule #3 Be Cautious About High Risk Investments. It bears repeating: if you are convinced about making a high risk investment, make sure you use only capital you can afford to lose. Usually this means between 1% and 10% of your monetary assets (preferably 5% or lower). Yes, this is a good time to take such risks, as financial experts have indicated that the economy may be on the rebound and many valuable shares are currently underpriced. For small amounts of money, you can make an exception to Rule #1: for example, my nephew invested in General Motors when the stock was at almost nothing: $0.30. He then sold it a few months later for $1.00, a nifty profit indeed. Risky? Yes, a bankrupt business is hardly recommendable; but it was GM, an American icon, and he had a strong hunch that the government would not abandon it.
Rule #4 If You Fall, Get Up. So you had some crashes and lost some money; but more importantly, what did you learn? That’s called experience, friends, and there is no substitute for it. Apply your hard-earned lessons and go make a buck or two. In the long run, as you already know, the market (with the help of a diversified investment portfolio) will give you the best rewards.
All the above is of course, for the younger generation; if you are over 50, like me, play it safe and stick to index funds and municipal bonds. You won’t be getting outrageous returns but at least you’ll sleep well at night and you’ll have a more stable portfolio. The young ones can afford to lose some money; they’ll have a lifetime to compensate and build on their experiences. Heck someone among them may even turn into the next Warren Buffet!
Copyright © 2009 The Digerati Life. All Rights Reserved.
{ 15 comments… read them below or add one }
“Balance risk and reward” is solid advice. That is what intelligent investing is all about.
The problem with doing this is that most of those cited as “experts” come from The Stock-Selling Industry and The Stock-Selling Industry obtains a huge financial reward for confusing us about how to balance risk and reward. When stocks are insanely overpriced, the way to keep your risk profile roughly constant is to sell stocks. How often do you hear John Bogle telling you to sell stocks? Never, right? That’s the problem.
We need sources of information on how to invest effectively that do not have big financial ties to The Stock Selling Industry. I would like to see lots of blogs formed that aim to tell people the straight story about balancing risk and reward, not the Passive Investing story. I have been researching this for a long time and what my research tells me is that the thing that makes stocks risky is buying them at insanely high prices. There has never been a time in the historical record when those who ignored price did well in the long term and there has never been a time in the historical record when those who lowered their stock allocations at times of insanely high prices did poorly in the long term.
Common-sense investing is where it’s at. But The Stock Selling Industry is not going to promote common-sense investing until lots of middle-class investors insist that they do so.
Rob
I have yet to dive into individual stocks for my lack of knowledge and risk. To me it’s like basically gambling, and would rather do so on sports than stocks. that’s why right now I invest in a mutual fund that is more diversified and safer. Even if I don’t know the specific stocks involved, I know it’s more safe than individual stocks which would cause me stress.
I’m enjoying reading these guides from all over the PFosphere at the moment. I am coming closer to debt freedom (2 months to go by my calculations), so where then to put my money beyond then, is a key decision.
It’s handy to learn from others’ past mistakes so that perhaps, I can avoid the same errors of judgment.
Thank you!
When it comes to investing, there is no substitute for acquiring a firm financial education. However, this is not formally taught in schools. For the most part, the investor is either ‘smart and intelligent’ or has to do the hard work to acquire this knowledge.
Buffett’s simple rule 1 on investing is “Never lose money”. His rule 2 is “Remember Rule 1”.
There is a relationship between risk and reward. The implication is that you cannot expect a higher reward without taking a higher risk. This is generally true. However, the smarter investors seek investments with high rewards with low risks.
I had a very similar experience to you, thinking I was going to make bundles of money in a few simple investments, and ending up losing over $5,000 in a few short months. My big problem was that I was missing your tip #2. I didn’t have any humility, or patience for that matter. I think your tips are all very sound. This is a great start for beginners in the market.
Stay humble 🙂 that’s nice, I like that advice.
I have never advocated individual stock trading for anyone for the simple reason that unless you are in the business of managing investments (and no, stockbrokers don’t count), it’s difficult to beat the best mutual fund managers or even the indices. What everyone should become an expert in is understanding their risk exposures and emotions when it comes to money invested.
Often, investors starting out will attempt to trade stocks while ignoring the fact that they have inadequate insurance coverage or a less than healthy emergency fund. These factors typically are not addressed by asset allocation tools provided by investment companies, and it leaves investors exposed to a higher degree of risk. In addition, one’s attitude towards losses while investing is difficult to understand or project until one experiences a tough market with a ‘significant’ amount of money on the line. I say significant because the number is different for everyone.
If memory serves, one of Murphy’s Laws is that before you can do something, you have to do something else first. In the case of investing, it’s imperative to have appropriate insurance coverage and a meaty emergency fund. If you have these items out of the way, you can truly ‘invest with confidence’ because you eliminate risk factors that commonly take an investment program off track.
You can also become somewhat comfortable with the market first by creating a “test” portfolio over at Google Finance. Think of it like fantasy football – you don’t really invest in the stocks but it allows you to see if your on the right track before you really dive in financially.
The best tip I can give newbies is to NOT buy anything now! The market is just too expensive.
Great article,
I especially like #4 because it applies to not only the stock market, but to all areas of life. In life we have to keep learning and moving if we want to get anywhere.
#3 is a great tip: high risk trades should be approached with caution. I had a similar experience with FRE I bought it when it was at $.35. Now it is almost at $2 a great trade, but I went into it prepared to lose everything I put in.
To Financial Samurai: I hope that when you said “anything”, you didn’t mean every investment opportunity out there. There are still profitable investments out there. Maybe not in stocks especially if you don’t know how to play it. The stock market is too risky right now. I personally think that you shouldn’t start trading stocks until you have about $5000 to $10,000 to risk.
true! and based on experience as well, investing is a risk. Not knowing if you would get back on the money you invested in. It is also part of the up and down scenario of our lives, but if we invest it right, as stated in the following rules, then we may also gain, maybe not just enough, but maybe even more. it is truly a risk worth taking, because even if we fall, we still learn from it, we still wont walk out empty handed.
Always invest with money you can afford to lose. Many people take the little money that they have and hope that by some luck the market god’s are going to favor them and give them bucket load of returns. It doesn’t work this way. When i started investing in the stock market, I lost money for a solid year. I put that experience down to learning. It was a tough pill to swallow, but it was the best experience i ever had. Now I make double sure that i know what I’m doing before i invest.
I’m finally now enjoying success with trading stocks. Quiet frankly, it’s the mental aspect of investing that is the trick to being successful.
I am very happy with trading stocks. I have earned a lot of money.