Stock Market 101 Part 5
Welcome to Part 5 and final take for this Stock Market 101! I’m very happy for you that you have read all the previous parts of this guide and if you didn’t, I would recommend you to take the time to do it :). Every journey starts with a first small step!
I have being able to provide you with a 101 of what the stock market is, what to look in a stock and a series of tools to use when deciding when to buy or sell a stock.
On this part we will talk about your investing mindset and this is very important because we are dealing with money, hard earned money that we want to see grow and multiply, and why not, finally achieve financial freedom!. If you haven’t read the previous parts, you can access them here: Part 1, Part 2, Part 3 and Part 4
Almost every time someone ask me about the stock market, they see me like “This guy has nerves of steels” or like I am some kind of lunatic that is burning his money away! This is heavily influenced by the lack of knowledge on how to invest and of course the stock market crash of 2008 where people lost everything (by not having a strategy).
I’m not going to lie to you, it would be very irresponsible to tell you that you will never loose money on the stock market, heck, even the best sport teams lose games! But what I do want to tell you is that by having a strategy BEFORE buying any stock will prevent you from losing large portions of money and/or your sanity on the process.
Lessons I’ve learned while Investing
1 – There’s no place for your ego in the stock market. You will have times where you spent hours researching a stock, following the trend and waiting for the perfect entry point and when you finally pull the trigger the stock takes a nosedive. You will be left wondering why this happen, that you don’t understand if you did your own research the stock is now doing the complete opposite.
When this kinds of things happens, there a lot of possible scenarios happenings, maybe the company forced their financials books to look real good and someone found out about it, or maybe the overall market is going down and since every 3 of 4 stocks follow the stock market, your stock is also going negative. Maybe a financial reporter did some bad press on the company and uninformed investors are selling the stock like there is no tomorrow.
My point is, no matter how much research you did, things might not go the way you expect it. Don’t fight the stock! You don’t have to prove no one wrong! and trust me when I say to you, the stock market doesn’t care about you! Accept the fact that this investment went wrong and take your losses quick before they get out of control! And I know, you might feel disappointed or ashamed of this, but I will gladly take a 7% loss to a 25%. Yes, you read that correct, I took a 25% loss on a stock because I didn’t want to admit that I was wrong
2 – Never chase a stock. There will be times when you will see a news report or someone will talk to you about a stock that had crazy returns recently, and unless those returns happened yesterday and its not an absurd amount (anything above 5% should be treated with caution) you will be probably already too late for it.
FOMO or Fear Of Missing Out will kick you real hard, “Hey, I also want a piece of this pie”, if this thought cross your mind please do the following: Unplug your computer and take a walk around your block or to the park, this will clear your mind and prevent you from making decisions that you will later regret.
You have to realize that there are 2 types of investors, long time investors and traders or short time investors. Short time investors when they have a stock that has recently have good returns, they will want to claim their profit and will begin selling a lot of shares dropping the price. If you bought the stock on the way up then now you are holding a bag! You now have a very annoying red on your portfolio because you were eager to ride the wave.
Let the dust clear and make an informed decision, if it was a good opportunity then the stock will continue to go up and you will have time to buy it and have a better return when the time is right.
3 – Don’t go against the trend. Lets not confuse this with “Follow the herd!”. You might be waiting for the perfect opportunity to buy a stock and you see that the price is below your target price to buy it, but overall, the stock is going down and down for the past days/weeks/months, and you might be wondering “It’s a discount sales!, This stock will NEVER be this slow, what a bargain!”.
Well, when a stock is going constantly down and the overall market is going up, then you should start thinking “What is wrong with this stock” instead of “Shut up and take my money!”. You will be surprised to know that the answer to “How low can this stock go” is $0.
The odds of buying the stock at the lowest point or selling it at highest are really slim and you shouldn’t even think of trying to achieve this feat. If the stock is going down then patiently wait for it to change the trend, wait until its start going constantly up, a clear trend, and only then buy it. I prefer buying a stock that has gone up 5% or more from its bottom than trying to catch a falling knife and loose my money on it
4 – Understand what the company does. It’s very common to hear from people “I Own shares of ABC Inc.” and when you ask then why, the answer is “Because its going up!”, Those peoples are in for a fun ride (sarcasm). If you can’t explain to a 5 year old what the company does and how it makes money in less than 1 minute without loosing his attention then you shouldn’t own the stock, no buts!…
If you don’t understand or at least know what a company does and how it makes money, then you will not be able to tell why the stock is going up or down, you will be at the mercy of the stock and this is a fast ticket to losing money. As a matter of fact, I don’t own Mining Stocks because not all of those companies make money from mining and I fail to understand were the money is coming from.
5 – Don’t diversify or over diversify for the sake of it. It’s a TERRIBLE idea to put all of your eggs in one basket, but is also true that is a terrible idea to spread them over a 100 baskets “just be safe”. The idea of diversifying your portfolio its because if one or some of your stocks are going down, the other will pickup the slack and make you money while the other ones are recovering.
I’ve seen investors believing that they are diversified holding 5 stock on the technology sector (Facebook, Google, Netflix, etc.), this investors are NOT diversified. Stocks in a sector tend to follow the trend of the sector, so if by any chance the Technology sector is down, you can bet that at least 3 of 4 Technology stocks are down or in the case of this investors, their whole portfolio.
Over diversification is also bad for you. You should only hold as many stocks as you can easily follow, its really hard paying attention each week to what are your 20 or 50 stocks doing, you will quickly go crazy and probably sell them at the wrong time.
Diversification goes hand on hand with your portfolio size, If you have $5,000 portfolio, maybe hold 2 to 5 stocks, if you have a $50,000 portfolio maybe hold 10 stocks, if you have over a $100,000 portfolio (congratulations!) don’t hold more than 20 stocks! Investors with big accounts don’t hold that many stocks and neither should you!
6 – You don’t have to be fully invested. We retail investors unlike big financial institutions have the luxury of not being fully invested, this means that sometimes the best investment decision you can make is to have your portfolio with just cash and no stocks or a combination of it. Money Managers are forced to make a lot of trade and being fully invested to show their bosses that they are working hard and making money for their customer (while charging them a ton of money on fees) and guess what, when the stock market crashes and goes full bear mode, this financial institution are fully invested losing money, but no their money, YOUR MONEY! They will still make money from your fees.
By not being fully invested you can wait for the perfect opportunity to show up and buy the stock when is right, another benefit of not being fully invested is that if the market is going down, you can sell a portion of your stocks, protect your profits and protect your wealth while the market keeps going down
7 – Don’t get discouraged or give up. I still remember when I had my second big loss in the stock market and the sinking feeling in my stomach, I got emotional and made bad decisions that end up costing more money. I went home that night speechless, I couldn’t talk about it with my family… How this happened to me?. I made a series of bad decisions (I didn’t have rules at that time) and I was pumped in “wishful thoughts” about my stocks.
What happened after that was liberating, I realized that I’ve failed, but not only that, I analyzed WHY I failed and what should I do next time to not make the same mistake, I read as many Stock Market Investing books that I could find and watch as many videos as I could to learn and get better. Failure is nothing else that another step in your journey and this failures will give you knowledge, will make you stronger and will lead you to success.
Don’t be afraid of failure – it will only lead you to greatness. No one who is successful reached that status without failing.
Please give yourself a pat in the back or a self high-five!!! By reading this Stock Market 101 guide you have taken the first steps in your Stock Market Investing journey. I’m very excited for you! and I’m also very humble that you are here reading my guide.
I encourage you to write a couple lines in the comment section to let me know what did you learn from this 101 and how can I make this better for all of us!!