If you’ve been paying attention to Wall Street, you would realize that if you had invested money in the market ten years ago, you would be sitting pretty right now.
In fact, the stock market has been setting record after record. It’s as if any monkey could make a killing on the stock market just by doing the same things everybody else is doing.
That’s right. If you were to invest in the simple Dow Jones Industrial Average Index, you would be making money. That’s how simple and almost predictable the stock market has become.
Given this background, it’s very easy to think that you just need to watch financial news shows and pay attention to the advice of the professional managers they have on.
It’s very comforting to believe that if you just pay attention to the advice these professional fund managers give, that you will get the same results that the rest of the people are getting.
Here’s the problem. This is the worst way to learn about investing in stocks.
Please understand that there’s a big difference between knowing what to do and being around the block for some time, and learning.
Unfortunately, a lot of people think that the best way to do anything is to just jump in with both feet. Let me tell you, this is a sure-fire recipe for financial disaster.
If you want to do things right, you have to have the basic foundational knowledge of whatever that thing is. This is pretty straightforward. In fact, I would say that this is common sense.
Unfortunately, when people get all excited about putting money away so they can have a comfortable retirement, a lot of common sense goes out the window. It’s very easy to get in over your head when it comes to hype.
Believe me, when it comes to the stock market and everything else related to it, there’s a tremendous amount of hype, exaggeration, and yes, marketing.
Why do you think these “financial experts” get on TV in the first place? What is their motivation for spending their precious professional time being interviewed by one financial TV show after another?
Believe me, it has nothing to do with becoming the next Mother Teresa, and has everything to do with making money.
Now, I’m not saying that the advice of these people are completely bunk, bogus and worthless, but let’s pay attention to the concept of averages.
You have to understand that for an average number to appear, there has to be a low end and a high end. The average is the middle.
And unfortunately, if you were to watch a lot of these so-called financial experts, it’s very easy to get in on the hype. It’s very easy to buy stocks that are heavily hyped.
But here’s the problem. The stock market in the United States is fairly free. This means that there are lots of ways to make money.
One way to make money off stocks is, of course, to buy low and sell high. This is called buying long.
Well, for every long player on the market, there are people who are thinking that the stock is not a long play. In other words, if I thought that a stock is going to go up and I act on that impulse by buying those shares, there may be other people who would think that the stock is actually going to go in the opposite direction.
They are under the impression that, for whatever reason, that stock is overly valued and it’s only a matter of time until it begins to crash.
Well, the market is set up so that people who do not share my sentiment can bet against me. This is called short trading. They would borrow the shares and sell it while it has a high price in the hopes that if the stock crashes, they can buy it back.
How do they make money? Well, they borrow the shares to sell it and those funds are reserved. When they buy back the stock in the same account, they unlock the difference between the initial high price and the final low price. That’s how short traders make money.
Here’s the problem: when a stock gets hyped by experts or conventional wisdom, there is going to be downward pressure on that stock coming from short sellers. This is how the game is played. This is how people make money when a stock is going up, and how they profit when it goes down. There are always two sides to a trade.
Unfortunately, if you are trying to figure out how to start to invest in stocks, blindly following the advice of so-called experts on financial news shows as well as personal finance advice shows on cable, mainstream TV or even the internet, can be a one-way ticket to financial hardship. Talk about learning your lessons the worst way possible.
Make no mistake, there are a lot of hard lessons out there. Unfortunately, a lot of people just stumble into it because they’re so excited.
I can’t blame them for being excited because there are a lot of stories of people who started out with a couple of thousand dollars and ended up making hundreds of thousands of dollars. But here’s the problem: there is such a thing as survivor bias.
What is survivor bias? Well, when you come across a group of people who are talking about successful stock trades, chances are, you’ll only be talking to people who actually were successful in their trades. In other words, these are people who survived the process, made a profit, and lived to tell about it.
They’re survivors of the game. That’s why they’re in that group. That’s why they’re excited. That’s why people who listen to them are also excited about the stock trading process.
So far so good, right? Well, here’s the problem: what’s missing?
It doesn’t take a rocket scientist or a brain surgeon to figure the answer out. The missing ingredient, of course, are the people who traded and lost.
These are not the survivors. Instead, they got killed financially. They made the wrong move or they made trade after trade, and before they knew it, they’re gone. What happened to them?
Well, they’re not part of the discussion. All you see are the people who have survived the process and made money. How accurate do you think that picture is?
Until and unless you factor in those who tried their hand at making money in the stock market and failed, then you’re not going to get a realistic picture.
I don’t mean to discourage you. I’m not saying that just because there are a lot of people who fail for every person who succeeded that this justifies you quitting. I’m not saying that at all. That’s not my point.
The point is, you have to look at the whole context of stock trading. Just as people who make money on the stock market can teach you a thing or two about successful trading, people who tried and failed can teach a lot of lessons as well.
The Danger of Emotional Investing
If there’s any one lesson stock trading failures or people who didn’t make it can teach you, the first key lesson should be about emotions.
Now, there’s nothing wrong with being passionate. There’s nothing wrong with excitement as a concept. But if you get so excited to the point that you don’t even bother doing your due diligence, you probably are going to suffer from a hard landing.
Again, this doesn’t take any kind of rocket science background to figure this out. How come? Well, you’re not looking at the big picture.
You’re not looking at the numbers you should be considering. You’re not balancing the advantages from the disadvantages. Chances are, you probably don’t even have a realistic impression of all the risks involved.
If you were to put all these factors together, then it’s not a surprise that you will come up short. Maybe you should have gotten out of the stock at a certain time but you were clueless to that.
Believe me, there is no shortage of stocks that do really well in the short term, but if you don’t get out of them at a certain point, you end up in a worse position than when you started. There are stocks that have a very short and volatile shelf life as far as appreciation and growth are concerned.
Unfortunately, you don’t see any of this when you are suffering from the survivor bias. All you see are the self-proclaimed experts or industry leaders talking about stocks that they’ve bought and have made a lot of money.
What they’re not telling you is when they got out. What they are not telling you is what kind of factors led them to get out. But they will tell you gladly the factors that got them to buy the stock in the first place.
Unfortunately, if you’re trying to figure out how to invest in stocks, you have to have the whole picture.
The Best Way to Learn How to Invest in Stocks
The best way to get your feet wet when it comes to the stock market is to focus on the fundamentals. In other words, you need to learn how to size up companies in terms of the value they bring to the table.
Now, don’t get excited. I understand that there is such a thing as technical trading. I know that momentum trading exists and makes a lot of people a lot of money. I’m not in any way, shape or form disparaging or discounting them.
But if you really want to get into the stock trading game the right way, it’s a good idea to start with the basics. It’s a good idea to look at how are stocks valued.
Now, you know and I know, as well as everybody else, that what people say is often different from what they do. Welcome to the human psychology.
People talk a big game about the fundamentals of a stock as well as its underlying core business growth and projections. Investors and analysts and other industry experts talk about these all the time, but when you look at what they actually do, they actually invest in growth stocks that don’t have all the pieces in place.
But here’s the thing: you can’t just go straight to that type of investing. You also have to cut your teeth on proper investing by paying attention to the fundamentals and then slowly scaling up to more speculative plays. This is part of paying your dues. This is part of knowing the game.
Let me put it this way, if you’re just starting out at playing basketball, it’s probably not a good idea to just copy Michael Jordan’s moves. While you may get there eventually, it’s probably a better idea to just take care of the basics first.
Learn how to dribble, learn how to do a layup, learn how to change up your pace as you do a charge to the paint. These are basics.
But the good thing about basics is that it’s like learning how to play the guitar. Once you get a few simple chords down and you master them, it’s very easy to layer on more complicated arrangements.
The same applies to stocks. Once you learn how to zero in on certain financial details and how you can project them or make sensible predictions from them, you can then start taking more calculated risks.
I understand why people make really speculative moves later on in their career. They know the basics, so they know exactly what they’re getting into. They know the upsides and they have a realistic idea of the risks that they would undertake to collect on the payoff that they have their eyes set on.
Unfortunately, most people who are just trying to figure out the stock market don’t have this information. Instead, they’re just focused on an outcome.
Well, here’s the problem. When you’re just focusing on an outcome, you’re basically just hoping and wishing for something nice to happen in the future. What does that sound like? Well, that’s not much different from just rolling the dice and hoping for the best.
But last time I checked, taking a shot in the dark and crossing your fingers is not exactly a winning strategy. You’re just hoping to get lucky. You’re not doing anything more strategic than simply gambling. There’s really no thinking involved.
Unfortunately, that’s exactly what you’ll get into when you have a talking head on some sort of financial advice show telling you to buy Stock A and avoid Stock B. You get all excited in the hype about the stock that you forget the context.
As I have mentioned earlier, there are lots of people that will be betting against that stock. This is not a straight shot from Point A to Point B.
Even if you were to get a really good and accurate piece of stock advice, there’s no telling how long that stock will continue to resist downward pressure. Eventually, the downward pressure will catch up to it and you may end up losing a significant amount of value. Do you see how this works?
So, focus on the fundamentals first. Worry less about running a marathon and focus more on putting one foot in front of the other.
I know it’s basic, I know it’s almost pedestrian and might even seem like common sense, but let’s get real here. When you get overly excited about anything, especially an investment opportunity, common sense is the first thing to go out the window. You know it, I know it, everybody knows it.
I understand that you want to make a lot of money in the stock market. I understand that you want to make a killing, but do yourself a tremendous favor by learning the basics first. Look at the numbers, pay attention to what you should look for, and learn how to prioritize risk as well as opportunity factors.
Once you have done this heavy lifting and you’ve paid your dues and have the results to show for it, then you can scale up to more speculative stocks. That’s how you play the game. Otherwise, there’s a high risk that you will end up losing your shirt. Believe me, this happens all the time.
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