I came into a chunk of money and began tiptoeing into the stock market last summer. Prior to that, I had only felt safe in mutual funds.
Delighted at the number of organizations and publications offering free information about the markets—in person, online and by phone—I took advantage of every possible chance to learn more. In truth, I became obsessed with the topic, consuming stock coverage and investing tutorials when I really should have been doing other things.
By August, I felt ready to begin what I’ll term “my individual stock market tutorial.” I invested about $100 each in companies ranging from Canadian mining firms to high-tech, biotech and consumer retail concerns. Here’s what I learned.
No need for champagne. There’s nothing like the giddy feeling of watching a stock’s value rise. I experienced this high the first day of trading. The thought of making money by doing… well, nothing, really… was a thrill, to say the least. The effect persisted over time: On days when my portfolio was up, I felt strong and confident. When the portfolio screen showed massive amounts of red, my emotions took a downward turn. Which leads me to my next point…
Don’t get carried away…by the thrill of victory or the agony of defeat. As they say, emotional investing is the worst kind of investing. Investing on the tail of extreme emotion can prove catastrophic.
Seek professional help. Whether it is an in-person adviser, an investing website, a series of print publications, or an expert friend or family member, get yourself some guidance on stocks, industries, forecasts, etc. Examine recommendations, but pursue your own due diligence before risking your money. Even armed with stock tips from a leading expert, it’s still your responsibility to…
Research, Research, Research. There’s no substitute for information. In addition to learning about market movement generally, get all the data you can about the company and its industry, its financials. Get a grasp of basic statistics. Look at price history; pore over charts.
I was so eager to “jump into the pool” of stock investing, I did not do much investigating. Consequently, based on a recommendation, I slapped $300 into AMD…only to find that the company’s fortunes appeared to be foundering.
Always read what the stock’s cheerleaders have to say. And read what the skeptics have to say. Find a macro view. Seek a micro view. Do virtual trading: You’ll feel smug when your choices do well—and relieved there’s no real money involved when they perform poorly. In short, investigate all you can before investing your money. But on the other hand…
It’s all a game, kind of like predicting success using baseball stats, March Madness brackets or racehorse pedigree. You can analyze charts, probe into fundamentals, canvass analyst sentiment—all ’til the cows come home. In the end, you can still lose money on what looks like a sure thing. They say market behavior is really human behavior. And people are full of surprises.
Get off the beaten path. Sure, it’s fun to hold high-priced, high recognition stocks like Netflix, Tesla, and Google. You’ll read about them in the papers, hear about them online, and you can compare notes with your friends. But stay alert for lesser-known buys as well. My two best performers during my test run—UBNT and AFFX—are small-cap tech and biotech companies, respectively. UBNT is now becoming much more well known, its average volume (and press coverage) growing accordingly.
Know when to hold ’em. We are a country of doers, but with stocks—as with raising children—at times, it’s best to do nothing. Monitor the situation, check in regularly, and see how things develop. A stock which appears at first to be a disappointment may surprise you after a positive earnings report or an upward analyst revision. In some cases, however, you will have to just let it go.
Learn to let go. This applies both to losses you suffer and to stocks that rise sharply just after you’ve lost patience and sold them. You can tie yourself in knots thinking about the woulda, coulda, shoulda. But it will do you no good.
Become a better global citizen. If investing does nothing else for you, it will promote a healthier respect for what’s going on outside the United Sates. Getting into international stocks sounds glamorous, but you’ll need to keep up with political, economic, social and even meteorological happenings abroad. You might put money in a solar concern, for example, only to find that shipping delays due to weather put a damper on profits for the upcoming quarter, driving the stock price downward.
Respect earnings season. Earnings reporting can be the best thing that every happened to you—or a total disaster. For example, AMD’s October earnings report was good… but the price dropped 15 percent the next trading day anyway. Affymetrix’ January 2014 report disappointed analysts, and the price plummeted accordingly. On the other hand, on an earnings beat in February, Tesla shot up by 15 percent… and continued rising!
Cultivate patience. It pays—literally. This principle applies whether you are deciding to buy, sell or hold.
A particularly poignant example—well, almost painful, actually… came in September 2013. Emboldened by my relative success, I had put $1,000 into Ubiquiti Networks [UBNT] in late August. The stock had danced around my buying price for almost a month. It was slightly up or slightly down, but never really made a big move. Convinced this stagnating stock was wasting my time, I determined to sell it on a Monday.
That Monday, September 23, the price plummeted to more than 16 percent below my purchase price. Scared witless, I sold at a $100-plus loss. Three days later, the stock closed just above my purchase price. And less than 30 days later, UBNT was up nearly 30 percent from my purchase price—and more than 50 percent from the day I sold. Ouch!
Give props to your geometry teacher. I always preferred algebra and calculus, but now, I’m glad I at least paid attention in class. Analyzing stock charts includes concepts that relate to triangle patterns, believe it or not.
Beware the end of the month. Some or all of your stocks might suffer some depression at the end of the month, as folks seek to take profits before closing the books for that month. This principle comes into play—sometimes more intensely—at the end of the year.
Diversify. If you’ve heard it once, you’ve heard it a thousand times. Because adverse events will affect all or most companies in a sector, it’s foolhardy to overweight your portfolio with, for example, retail stocks. Spread the risk around, giving yourself a fighting chance at least to balance gains and losses. And don’t neglect geographic diversification. As it happened, on days when my American stocks were in a slump, my Canadian mining stocks gave me hope, their smiling, encouraging green the only points of positive light on my screen.
Prepare to lose some. You’ll hear it from friends and read it time and again, but it’s true: You’re bound to lose some money, even if you invest only $100. A stock can drop because of changing economic conditions, material shortages, natural disasters, legal action, executive scandal… you name it. Ideally, those losses will be offset by gains in your other holdings. But don’t sweat reasonable losses. Inform yourself and amp up your game, then be prepared for the inevitable reversals.
Enjoy the ride. I found investing is a lot like life. You win some, you lose some. You have to take risks even as you apply the knowledge you have. You can’t let your emotions run the show, but you can’t abandon your instincts altogether.
Tomorrow is another day. Take your lumps. Protect yourself. And always, always, watch your bottom line.
Daphne O’Neal is currently long AFFX.