Care enough about your portfolio to practice, practice, practice.
Small investors are a mess. Too many of us want to have a portfolio that looks clean and tidy, but we don’t want to be bothered to practice learning the skills it’ll take. Why not? I just left the Texas High School State Swim Championships, where my kids both swam with the best of the best. Do you know how they got there? Would it surprise you if I told you that it wasn’t walking around saying, “I think I can swim a really fast time this meet?”
Of course it wouldn’t surprise you. People who don’t care don’t read financial blogs, do they? You’re ready to rock!
Since they were 7 years old, my kids have been in the water practicing for this last weekend. Sure, at the time they were just looking to get through the next meet, but because they’re seniors in high school, there’s a big chance that neither will go beyond the speeds they swam in the pool this weekend ever again. All of that work culminated in this last chance at the pool. My daughter swam her fastest time ever and my son swam in 2nd fastest times in all of his 4 events. Practice didn’t make perfect. Perfect practice made perfect. Lots of hours of perfect practice.
What does this have to do with stocks?
When I see failing investors, it’s often because they want success in the moment. Because anyone can buy a stock, it looks easy, doesn’t it? Who can’t pick the next big winner?
Watching pros trade and then observing Main Street trade you begin to understand the difference. The pro takes a ton more time and care when picking than just asking the dude next to him at work what’s rockin’ for him!
You too can become a better stock picker if you take the time to learn identifiers of a reliable investment. You can pull the trigger on your investments in a better way once you’ve picked the stock.
5 stock buying tips to practice today to become a better investor:
1) Practice comparing stocks in a category and read the annual report. I actually love to read the message at the beginning of annual reports. Why? I get a feeling for the business and their focus. You’ll learn who the competitors are, what the product does, and what their concerns are.
Several years ago I happened to be reading the annual reports of GE and a casino back-to-back. Jack Welch, then CEO of GE, wrote about how the company needed to improve on all fronts. He wrote about how empowering their workforce was the #1 goal of the company. He also wrote that someone asked him about the end customer, and why that wasn’t his focus. He said that if he focused on his people, they’d do a better job with customers, and everyone would win. The casino? They talked about the current economic climate and how it was difficult to do anything when people weren’t gambling. They focused on regulatory changes and travel costs. Guess which one won my hard earned money that day?
Don’t stop at the fluff messages written by PR people, though. Take one statistic each week and become familiar with it. Start with PE ratio, then Price-to-Book. Learn to compare revenue and earnings numbers. Dive into insider trades (not the illegal variety…stick with watching what the “big wigs” at the company are purchasing).
2) Learn to make watch lists, and watch them. When I created my first watch lists, they were WAY too long and unorganized. I learned through my experience, though. Good stock picking is about creating crude systems and then working your system to improve.
3) Buy stocks at the market, and avoid the open. How egotistical is it to think that a stock that’s been rocketing (those are the ones you should focus on, by the way), will turn around and reverse course just long enough to descend to YOUR CHOSEN SPOT and then turn around again and shoot to the moon? How omniscient do you think you are?
A key part in realizing the danger of the market is in knowing that you are a little itty-bitty part of a much bigger financial market that you cannot possibly understand. As much as CNBC and Fox Business try to tell you “why” the stock market moved, they have no clue. If you understand that you have no idea where the market is going to go tomorrow you’ll do two things better: 1) you’ll buy stocks you really like on an up-trend, and 2) you’ll pay a hell of a lot more attention to your downside risk.
4) Buy an option. One time, write a covered call. We’ve written about how these work already. If you haven’t done it yet, what are you waiting for? Sure, you may lose a dollar or two, but what’s the price of education? You’ll never know how it works REALLY until you REALLY do it. Jump in and sell a covered call. It’s the least risky option available.
5) When you screw up (and you will), don’t think “I’m never doing that again.” Sadly, that’s the message most investors receive when markets turn against them. This is the market teaching you a lesson! Use the lesson! Don’t go off and mess up some other area where you’re clueless!
Photo: Jim Bahn
What “Golden Rules” do you practice when investing outside of “buy and hold?” Put your 5 Stock Buying Tips out there so others can learn!
I use GoogleFinance to create a watchlist. Its relatively small consistingly of the two stocks I currently own, my mutual funds, a couple of stocks I would eventually like to buy and a couple of ETFs I would also like to buy.
I like that you keep your aim small. For awhile, I had 50 stocks on my “to buy” list. Even though I was working with millions of dollars, it was cumbersome. I couldn’t watch all those positions.
Interesting tips.
It’s hard to see stocks as an investment anymore when most “analysts” say that you can’t buy and hold stocks for the long term anymore.
If that’s the case why buy at all?
In 1998 I kept hearing the rules had changed, Darnell. In 2000 we learned they hadn’t. In 2006 I heard the rules had changed around real estate. In 2008 we learned they hadn’t. Now people are saying that buy and hold is dead. The rules haven’t changed. We’re just waiting for the other shoe.
Buy and hold is not dead. It is a good idea to have a long term strategy, but there is nothing wrong with stock picking. I t is a great way to learn about how markets work. There tends to be more sentiment than analysis when it comes to the market. Know your downside risk. Volatility is part of investing.
Amen on the “sentiment to analysis.” After nearly 20 years of investing, it’s funny how much I discount sentiment vs. how much I used to totally trade on it. My results are far better now then they were when I’d fall in love with certain stocks.
Glad to see I am not the only Annual Report geek out there. 😉 I love stock screeners as it helps my analytical mind reign in my thoughts so I can focus on a select few that I know that I should be focusing on in order to see if I really should be investing in them. I love #5, I hate making mistakes, especially when it comes to my portfolio. When it does happen, I look at what I did wrong and allow it to be the learning exercise it should and needs to be.
Excellent. I’ll be doing a post soon on stock screeners here as well, to help people clean up their watch list and focus on the right firms.
#5 is the big one for me. I am an active, mostly technical trader so it’s quite easy to keep a record of my mistakes – and I do. I keep them close and review them often.
A lot of traders/investors make a mistake and review it briefly only to then set it aside. They justify never looking at it again by saying that it doesn’t help to dwell in the past or something similar. But the honest truth is that they don’t really want to face their mistakes. They want them out of sight and out of mind because they’re painful and it’s easier to avoid them than deal with them directly.
An excellent trader taught me years ago that this is an ineffective approach if you don’t want that mistake to repeat. He kept all of his mistakes in chart form, printed out with notes added, and in a series of binders. He even posted the most egregious ones to the wall of his trading room. They were a constant reminder to learn, improve, and avoid doing silly things when he should know better. Time was reserved at least every couple weeks to review the mistakes and write a series of “Best Practices” that would avoid many of them in the future.
The Best Practices were quite interesting though. Even though they were based on the errors he had made they weren’t negative at all. They weren’t about beating himself up for having done A, B and C wrong but instead focused on how he would like to act in similar situations in the future to have more positive outcomes. After seeing all of this there was little doubt in my mind as to why he had seen such long term investing success.
Whenever I’m at a dinner party, work, or social gathering there is always one knucklehead who finds out I have a blog or a passion for finances. As people proceed to ask me what I think about the market and where it’s going (as if I had a crystal ball) this knucklehead attempts to challenge my “wisdom” usually with a headline from yahoo finance or CNBC. The first question I ask is “do you trade individual stocks yourself”, followed up by “what is the last annual report you read?” Needless to say this typically results in the knucklehead removing his foot from his mouth.
I used to get this all the time when I would tell people I was a professional forex trader. Without fail they would ask, “where do you think the US dollar will be in three months?”, “is the Canadian dollar going to get to parity soon?”, or some other variant.
My answer was always that I have no idea and that I didn’t need to know. I just follow the market.
Nobody was ever satisfied with this answer. Apparently if you can’t read the future then what good are you? Haha.
That’s a great perspective, Cody. The best learning I had as an advisor? Realize that I’m not omniscient and I shouldn’t I try to be.
I’m hoping to take a small chunk of money and experiment to get a feel for the markets and how it all works as well. I’m a hands on learner. I can read hypotheses all day, but until I’m in it, I’ll never truly understand how it all works. Thanks for the simple breakdown 🙂
I always buy and sell at the market, I learned that lesson early on when I missed good buys or sells buy a few cents. The other thing I always do is analyze a stock against it’s competitors to more likely against it’s industry or sector. That gives me a good idea as to where that particular issue stands for the metric I’m looking at.
Swimming is definitely not something you can just do. Genetics play a part, but I don’t really miss those cold 5 am swims before school and the three hour practices after. I’ve never been so tired in all my life.
A lot of people think you can just get a hot top and you’ll become rich. The truth is that investing takes a lot of work to be good at. There is research and skills that must be learned and it takes practice.
For a newbie stock investor like me, tip 5 is really helpful. I’m pretty much a perfectionist so feeling like I might fail (esp. with money) is pretty terrifying. I know there will be bumps along that way, but not giving up is the key to success.
Good tips! My portfolio have stocks and mutual funds. I have a mix to avoid some of the volatility of the market and diversify my portfolio. I think investing is similar to almost everything we do , practice does make the results better.
While I generally like steady investments in index funds, I think there can be opportunities to cash in other times. One thing I’ve observed is that there seem to be overreactions to big “events”.
For example, when the tragic tsunami hit Japan, the Nikkei plummeted quickly. Soon after, I wrote about how this might be a good time to invest in Japan, due to potential overreaction in the markets. Sure enough, within a month, the market bounced back. That overreaction would have been a good time to buy. Of course, despite my writing that post, I never actually bought any stock in that situation. Lost opportunity (and an example of how an idea without action has diminished value).
Another example is the credit downgrade. The markets didn’t respond well, but things sure bounced back. Again, overreactions equated to a buying opportunity.
Thanks for the comment, TTMK! Funny…I actually purchased the Japan ETF during the downturn and made a few dollars. I also bought Bank of America when they were garnering a ton of negative press. Don’t hate me, but I also bought BP during the Gulf crisis. You’re right on: those are easy, easy wins for an investor.
I agree Joe, a lot of guess work goes on when people try to sum up market reactions. How many times do we get a complete opposite reaction to the one expected by the pro’s to a set of economic data or news. If it were that easy we’d all be millionaires and everyone would be making the right calls.
I have a stock watch list on my home page at work and I glance at it a few times a day, as well as look at some more of the detail on Google Finance. I definitely have found it useful looking at some of the biggest stocks in a single industry and comparing them, seeing how they perform as a whole and individually.
Good tips! I do have a stock watch list, but I’m a little out of practice following it since I’m not invested much right now. I’m focused on paying off the house, but I’ll get back on that horse again soon!
This is great! I appreciated these tips! I’m at that point of comparing and keeping track. As a newbie, I’ve found this to be key! Thanks again for the great into!
I’m not a trader and never want to be, so I’m glad you think buy and hold is alive and well.
I think people saying it’s dead haven’t been around long enough, Marie.
Great tips.
Put’s didn’t really make sense until I sold a couple. Now I have a much better feel for them.
I would add, write down an investment plan. Or at least some guidelines that you’re going to follow. What will be your cutoffs for buy not not?
Love it. It was the same for me with puts. Funny how owning just one makes it sink in quickly, though, huh?
Congrats to your kids. That is quite an achievement.
I certainly am not one to give investment advice on individual stocks, but I like to look at companies that do things and make products that I like or use. Walt Disney has been a good one this year.
Hey! Disney is in my portfolio, too! You’re right: it’s been a great year. Based on the numbers, next year should be good, too, with some good films and theme park improvements wrapping up. Sadly, anything can happen, though, right?
Really nice and excellent stock market tips. Do not choose a stock based on the profits made by it. Observe the cash flow of the company to know the loses too.