Ten rules for new investors
Novice investors are similar to teenagers who take their fathers car secretly, before taking any driving lessons and obtaining their driving license. They first learn to average down on their investments before coming across the concept of stop loss. They buy and sell on information and not because they have studied a moving average or a balance sheet.
There have not been informed, neither acknowledge that the market is tough and relentless. Nobody has yet to instill in them a mindset that differentiates an investor from a gambler. Because for the gambler it is a question of time before he loses.
Rule 1
It is better to lose at the beginning
It doesn’t matter on what criteria you choose the stock title that you like. Whether it is from technical analysis, or using studying quarterly financials, or reading a horoscope. All of these have one thing in common. They demand respect to market forces. The market is like a fire. If you are close enough you get warm; otherwise if you get too close, you will get burnt.
If at first you are successful, beginner’s luck that is the worst thing that can happen to you. You will come believe that money comes easily, that you are very talented, or a market guru. Until you have a rough landing.
Rule 2
Accept your losses
Accept losses. It’s part of the game. If a trade does not work out, you should stop out. Then proceed to the next investment instead of trying to get your money back. Thinking that it is impossible to loose, because your idea was great, it is not only stupid and selfish. It is disastrous.
Some follow an irrational belief that when their position is losing, it does not matter. Losses are not real but just paper losses. Real losses are only materialized when selling.
There is no better way to destroy yourself. The recent experience of the then powerful Greek banks, leaves no room for doubt.
Rule 3
Knowledge is power
When I hear investors emphasizing the word hope, as in the phrase “I hope the stock I have bought will start going up so I can breakeven “, I nod my head with contempt.
Do not “hope” for anything. Hope is a feeling. In the stock market nobody ever wins when acting on emotion. Hope and prayer are excellent for religion, not for the stock market. Work and knowledge will make you win, not hope.
When I am asked what is the most important element that someone needs to win in the stock market, and I reply that it is studying, they usually look at me as if I am some kind of old-fashioned teacher who asks too much in this busy world we live in.
You do not have time? Give your money to someone else to manage.
You do not understand how to read a balance sheet? Ask for help.
Some are doing research and analysis on a daily basis. They dedicate countless hours in studying.
Is it possible to compete in running with someone who trains daily?
Rule 4
Do not rely on confidential information
We’ve all heard the “confidential” information. We all want to believe it, because we all want to get money quickly and effortlessly.
Information is like a casino. You may get lucky once or twice. But the longer you trust this information, the chances to fail increase geometrically . It sounds cynical, but that’s what practice has shown.
Study hard. There is no other way. Anyone who says that money can be easily won from the stock market, is either naive or scammer. The only place where success comes before work, is in the dictionary.
Rule 5
Be patient
You should not play all in. Do not invest all the money you have.
First because you might need some money for something that might come up and second because in order to invest larger amounts of money, you have to be psychologically prepared for greater volatility. This preparation can only be acquired after years of trading.
The stock market always offers opportunities. The good thing is that if you miss an opportunity, it does not cost you anything. There is, of course, the opportunity cost according to economists, but you do not lose money.
Rule 6
Those who are irrelevant lose
In Wall Street say «bulls make money, bears make money, pigs get slaughtered». In free translation: when markets rise you can make money, when they fall you can win money, but in all circumstances amateurs will lose.
Markets are made in order to get money from the ignorant and to distribute it to those who are skilled.
Rule 7
The general evaluation of the market
Experience has shown that in every moment there are available overvalued, fairly valued and undervalued stocks. Not all shares must be valued in accordance with the general price level of the overall market.
Nevertheless, there is value in understanding the current valuation of the overall market. It warns prudent investors of the opportunities and difficulties that he might face.
Rule 8
Good company does not mean good share
The whole philosophy and thinking is different when buying an entire company and when you buy some of its shares. It does not make sense to buy expensive shares of a company just because it is well-known.
The most important thing is the timing when someone buys or sells. A company that has losses, and most people have gone away from it, might be best time to buy. It is possible that at that very moment the company releases an innovative product making it profitable again.
Rule 9
The composition of the portfolio
We do not put all your eggs in one basket. This is perhaps the oldest investment advice ever. This does not alter either the time value of, or the reality this piece of advice: that investors often ignore it, until it is too late.
Rule 10
Partnerships and social environment
Invest in products that you understand. Collaborate with people you can trust and who have a successful background. Anyone who says he can predict the stock market with certainty, it is not worth your trust that is the only thing that is for sure. Who can take a weatherman seriously who predicts that in 10 days and 5 hours, the temperature will be 20.4 Celsius?
While it is a good feeling, to trust your investment advisor, it is still risky to resign from any responsibility for the progress of your portfolio. Investors often do not ask questions until there is something wrong. Perhaps then it’s too late. Your money might already have been lost.
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