Top tips for sharemarket beginners
Investors, like most people, in their personal and business lives, will inevitably say, “I wish someone had told me that before I started.” Whether they listened is another story.
Here is some advice on the essential steps that beginner share investors should take on their journey to success.
Adopt realistic expectations. Happiness is expectations met, so expect something normal, not extraordinary. Don’t expect to make easy money, there’s no such thing. A good goal is to end the year with the same amount of money you started with, plus an education. That’s success and you’ll be happy. Set out to make $1 million and you’ll be sad.
Don’t do it out of necessity. Investment is a hands-on game – a fantastic, intellectual, exciting pursuit that has to be enjoyed, not suffered. You can treat it as a hobby or a necessary evil, depending on how you approach it, but I guarantee that if you don’t enjoy it or don’t want to do it, your chances of success are heavily diminished.
Accept the risks. In the past four and a half years the market has fallen 54.5 per cent, risen 60.7 per cent, fallen 25.2 per cent, risen 13.2 per cent and is still down 22.9 per cent from its high eight years ago. That volatility means many of the old approaches no longer work and the set-and-forget investor has been given a very bloody nose and left disappointed, disillusioned and confused. You have to learn to manage the risk and be vigilant and disciplined.
The good news is that it’s a stimulating education and your mastery will be measured in dollars.
Be humble. For every successful investor there is a failed one. View it as a battlefield, a war fought with experience and education. When you first step onto the battlefield you are an easy target. When it comes to money, nobody on the other side of that screen cares about you – just about winning the war, and 99.9 per cent of them are more heavily armed.
Respect the competition, start small, start slow and start on paper even. You have to get some experience and education in order to survive, because the moment you turn that screen on, the tentacles of competitive capitalism are going to reach for your pockets.
Keep your hands in your pockets. Beginners get picked off by somebody selling them something that doesn’t work and they don’t need. During consistent growth in share prices, everything works, no matter how deficient. A rising sharemarket will even float black-box theories, mail order DVD courses and products wrapped up as education.
And there is an inverse relationship between cost and value. Some of the best products, software or guidance are cheap or free. Don’t buy anything, yet. There is no Holy Grail technique you can access with a credit card.
Develop your own intellectual property. There are many investment approaches and you will develop your own depending on your personal circumstances and experiences of success and failure when using them. Your goal over time is to develop your own intellectual property about how to invest, not adopt someone else’s.
Focus on developing and improving your own methods because there is no silver bullet. You that will be in charge in the long term, so develop your skills and abilities. Expect your assumptions and techniques to change. Develop the activities that work and break the habits that don’t.
Don’t buy into long-term investment as the only approach. Investment is not about buying the right stock, but about narrowing the odds in your favour while remaining open-minded about possible failure. Set-and-forget investing is so 1990s. Ever since the GFC and the trillions of dollars of printed money that followed, the market has become a dangerous place.
There is no room for arrogance, pride or prejudice. Be open-minded about every possibility, including the market or stock going down the day after you invest. No one has a monopoly on success so keep your eyes open to things not going away.
Which stock you buy might be 20 per cent of the game, the other 80 per cent is knowing what to do post-purchase, and it can be learnt. It’s not effortless but it’s not hard, and if you can’t be bothered you probably shouldn’t be in the market at all.
Pay attention. In the market battlefield you have to assess your investments regularly, if not daily. That’s the job.
Plan. It’s no good having some willy-nilly idea of how you do things. You need details: timeframes, goals, research tools, risk management, money management. Written down. I can hear you turning off, but you need to do it, to know what you are going to do under more than one scenario.
Learn how to sell. The Achilles heel of a long-term investor. Develop a stop-loss strategy. It’s not hard and they even work on really long-term positions, to guard against major events such as a GFC, for instance.
Read a lot. Trading skills are a commodity that is easily accessible and you don’t need an over-priced seminar to get them. It’s all open-source these days and for anyone interested it becomes a ravenous hobby.
Software. You are going to need some. A spreadsheet package is a minimum for monitoring your positions, stop-losses and performance. And high-class charting software such as Omnitrader.
Focus on the money. Many people ruin their investment results with misplaced sentiments like loyalty to management, favourite stocks, and irrational likes and dislikes. Emotional bias simply weakens your chance of success. This is a clinical game of making money and there’s is no place for emotion.
Expand your circle of friends. Get out among other investors. You need objectivity. There are a lot of people out there who know more than you do and are better at making money than you are. Start with the Australian Investors Association, a not-for-profit collection of investors only too willing to share.
Enjoy it. You have to, and hopefully you will.
ASX Sharemarket Game is a great way to learn about buying and selling shares, without using real money.