Note: Never start without knowing these few important lessons learned, real life experience not available elsewhere
Investing in stocks can be very daunting, especially if it’s your first attempt to put in your hard earned money into a volatile market. I was once drawn into curiosity to grow my money faster than average and willing to take some risk, but soon got burnt and took a painful financial loss. It took me years of attempts, analysis & studies to figure out how the stock market works & making my first “bucket of gold”, here are some important tips that financial experts will never tell you:
1) Difference between Day Trading & Value Investing
We had probably watched some “Wall Street” movies or stories about some genius trader who was able to speculate and predict the stock movement a few hours beforehand, & nail it to make millions every single day.
These fiction may have gotten into our heads without us noticing, but the reality is the exact opposite. If such genius exists then he or she should be the richest and most famous stock investor that the world has ever known by now.
And yet, the world’s top successful investors such as Warren Buffet, Benjamin Graham, Peter Lynch & Ray Dahlio never build up their wealth through speculating, they do Value Investing.
So what’s the difference between these two?
Trading & speculating are like organized gambling, a game of black jack whereby you can have a single choice to either draw or pass, that’s just about it.
There are many self proclaimed ways to speculate the outcome of stock movement, but in the end it’s only down to a 50/50 possibility, just like flipping coins. Statistic studies have shown that out of 100 participants in a coin flipping contest, less than 1% will be able to have all ten coins flip correctly, taking away all the money from the losers.
As a result, these winners will be caught up in the winning streak and continue to flip coins for the next consecutive days. Less than 0.1% of the final winners will then eventually win amongst others, and they end up boasting about their strategy as well as what marvelous insight they bring to the market of coin flipping.
Researchers and writers may have taken their tactics into account and started a seminar about how you can flip your coin to success.
Value Investing on the other hand takes in depth consideration about the evolution of businesses from past history & future opportunities projection. In other words, understanding why companies do well in the past, and what are the exact driving factors that will allow the business to be sustainable and expandable.
Thanks to the coin flipping group that helps fluctuate the market, value investors tend to seek to buy great profitable stocks for less than its real business value, the underlying idea of paying something far less than its actual worth, just like how housewives purchase groceries for a good bargain.
Learning about the idea of value investing over the years has finally given me the knowledge to know what is the most important info I know that others investors or markets do not?
2) Type of Emotions that Makes People Lose Money in Shares
It took me several failure attempts to adjust my mindset and emotion, even after knowing the tactics of value Investing. These are the 2 common emotions that will make even the most experienced investors lose money.
FOLO – Fear Of Losing Out
This is one common emotion that will drive humans to make decisions that goes against the common logic and rational, because it’s in our nature to fix our inner dissatisfaction in life, our need to fit in the social circle, our desire for status which has not met.
- One of my ex-school mates has managed to make some big bucks investing in company A, i am going to do the same too….
- Everyone is talking about Company A being the next trillion dollar company, some has already started to see positive income in their account, they say there is still opportunity to enter now….
- Last week, I heard the news that the company X that launches electric cars share price rockets up 3 times higher, perhaps i could also ride the wave if i buy now….
- What if the price continues to rise, despite it never drops below its intrinsic business value for the past few years?
- I am not going to miss out on another great opportunity while my peers have already gained a huge profit riding that wave.
- My junior lady colleague bought a new BMW from trading shares, how could I have missed this when I have more experience and exposure in the market? I am going to place the next bet…
Thanks to gossip and social media, we can be easily trapped into the need to be happier than others, neglecting our own goal and pursuing something that may cost us heavily at the end.
So the lessons I’ve learned here is that, in order to remove the “herd mentality” and stop being manipulated by gossip, trends and news that will drive us to make bad decisions, we have to overcome ENVY and stop paying attention to how others are doing. Rather, stay focused on your own financial goals without being sidetracked.
3) Focus your investment rather than diversification
We had all heard financial experts advise to diversify your portfolio, but they themselves never agree with this common strategy. Why?
This is because if the person does not have any special financial skills or in depth knowledge to evaluate a stock accurately, then advising them to focus their investment could be a disaster. Therefore, in general, it is safe to say that “never place all the eggs in one basket” would be the best advice.
However, the truth is that over diversification will nullify your ROI, averaging out the losses and wins.
3 wins + 3 losses = 0
It will basically take forever for low to mid income earners to ever amount to anything, and you will continue to stay average.
In order to focus, it is vital to learn everything about value investing & how to read business financial reports, which gives us the unfair advantage to seek for hidden gems, mitigate risk and turn any odds into our favor.
4) Understanding between Price & Value
Beginners & even some seasoned investors I know get confused about these 2 parameters.
Let’s just say a cup of Starbucks coffee normally cost $4.00, compared to an ordinary coffee that cost $1.50 per cup.
Based on price, starbucks is more expensive.
But if you are able to discover a promotional price of $2.50 per cup with free upsize, then the value of this starbucks is greater than the ordinary cup of coffee despite the price is higher.
In a business world perspective, that means you can buy $2.50 per cup and sell it $4.50 somewhere else, which allows you to gain a profit. For extra $1.00 paid compared to ordinary coffee gives you back $2.00 in return.
But if we choose price over value, purchasing the $1.50 coffee will get you zero return.
Price = How much it cost
Value = How much you can get
Great investors are the ones who know the intrinsic value of a stock and how to find them regardless of market situation.
5) Why must we plan and choose the right time to sell?
Good investors know when to buy, a great investor knows when to sell.
One of my biggest mistakes i’ve made was not willing to let go, despite that i did not set a goal for every stock investment. Businesses are always fire fighting, with new competitions and never ending consumer demand for the better. Many matured companies may come to a saturation point, whereby the price is overvalued and future growth is stagnant. There are always risks in business regardless of how well they can sustain.
As an investor, it is our duty to protect the investment which also means to exit when time is right. Setting up a goal to exit is as vital and investing in it.
6) Bonus: The Most Important Lessons of All!!
In conclusion, never buy share without knowing what you are up against, that’s a warning sign for financial suicide.
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