A lot of people consider trading or investing as a game and you can hear a lot of people say “I play on the stock market”. That’s so wrong. Investing with real money (moreover your money) is serious stuff and that’s why it should be taken with great consideration and discipline. What is more important on the stock market than knowledge in my opinion, is discipline. I would split the discipline-knowledge skill set as 80%-20%. Discipline requires to abide by some rules and advice (by people that you trust). These are the ones that i consider most important:
1. Always invest the amount that you are ready to lose. Investing in stocks, bonds, commodities etc is a highly risky business. If someone tells you that this stock is sure thing – walk away. Each company, currency etc can go to zero in 1 day. When things get nasty, you can’t even sell – they stop the trading and eventually tell you something like “We don’t know how we allowed that to happen.” Remember Enron?
2. Don’t look at your investments every day – big distraction. If you need to see how much money you made or lost yesterday, you could not do it more wrong.
3. Set goals and follow them. If you did your homework and are looking for a 20% return on an investment, sell it when it gets to 20% – don’t wait for it to make you 30%. Same with losses- set stop losses.
4. You compete with one of the smartest people and the best technology on the planet. Face it – you can’t beat them with knowledge or algorithms that you found. You can beat them with patience and discipline. Most people trade super-often and try to catch the trend. You can’t do that in the long run. It is a lose game for you. However, if you did your homework and keep your investments long enough, that will pay out. If your holding period is shorter than 3-5 years, you are not an investor but a speculator.
5. Technical analysis is good only in two moments of time – when to enter and when to exit an investment. Technical analysis can’t predict prices and trends in the long run, no matter what they tell you.
6. Don’t trust analysts. As i said above, you compete alone against one of the smartest people on the planet and all of them want you to lose. It is zero sum game – if one loses, another one wins. So it is mathematically impossible for everyone to win. If anybody out there knows that stock X is going up, he wont share it with the public but make all the money in the world. Don’t be fooled by shiny hedge fund managers – 99% of them lose money for their clients.
7. Investing is super simple – don’t bother study long formulas etc. Most of the time, what you have to figure out are fundamentals, demand-supply balance, management/leadership (if you invest in stocks) skills, politics (forex and bonds), common trends. Those things drive prices in the long run and no, you don’t need special education to figure them out.
8. If you make 20% return over 10 years, that’s huge success – you are doing better than 99% of the crowd. Most people think that to be super investor, you have to make 100% an year. Wrong, nobody on this planet does that over the long run.
9. Stay in your area of competence. Don’t invest in insurance stocks if you don’t know anything about insurance business, if you are not super smart in politics – stay away from forex. Simple as that.
10. If you win, you attribute it to yourself , if you lose – you blame other factors. Avoid that. It is all your fault. One more point here – don’t look back and blame yourself that you didn’t spot the next killer stock earlier. Early investors in killer stocks didn’t know that the stock will skyrocket. They just invest in a 1000 stocks and 2 of them turn out to be so successful that pay out for the others.
11. If you are not prepared for at least 30% drop in the price, don’t use margins. Otherwise, you will learn what a margin call is faster than you think.
12. As with everything, history repeats itself. Study the financial balloons and crisis for the last 200-300 years (what caused them, what happened etc.) and you will know better what is going to happen than 99% of the ivy league educated folks out there.
13. Last but not least – be a contrarian – only then you have a chance to win (even though not for sure, but at least you have a chance). Be greedy when others are fearful and fearful when others are greedy. And if you don’t trust me – remember who said that. A rule of thumb here is – if you hear your waiter advise you on stocks, it is probably a good time to sell. Sounds simple but that is probably the hardest of all.