Market Lessons They Don't Teach You in Business School
A few years ago, I began my journey as an investor. I transferred over some of my savings over to Questrade; an online broker to start investing in the stock market.
Lesson # 1: Beating the S&P 500 is a long term game
The goal of investing is simple – you want to beat the rate offered by your savings account and the rate of return of the S&P 500 (or the overall market). If you’re below you’re wasting your time because you could’ve parked your capital in a low cost index fund. Always compare your own portfolio performance to these two benchmark figures.
Am I beating the interest rate and Am I outperforming the S&P 500? are two questions that should be at the back of your mind. When you start investing, it is easy to get caught up in short term gains. It is possible a stock shoots up 10-100% in one day. However, that growth is NEVER sustainable. It is important to see your growth on a year over year basis rather then day-day. I remember one year, in 5 months my portfolio grew by 30% however by the year end it dropped back to 10%. Always focus on long-term growth. Growth of 5% right off the bat is great but 10% per year for life is even better.
Lesson # 2: Look at all the factors:
When picking a stock do your research. What are the highs and lows? Do they pay a dividend? What products do they sell? What are the future growth opportunities? The point here is not to select a stock just because it’s cheap or pays a dividend. Choose a stock based on its merits – sometimes when a stock’s cheap there is a reason – find it and then see if its still worth your capital. One of the worst trades I ever made was with Google when I initiated a large position days before earnings thinking the stock would skyrocket. What do you know – earnings were terrible and the stock tanked.
Lesson # 3: K.I.S.S – Keep it Simple Stupid
A wise man once said “I only invest in companies that I understand”. When you first start investing (if you haven’t already) you will notice there are so many options to choose from in the market. So many companies are listed across numerous industries. In addition, each week new companies are listed opening up new opportunities. However, as investors we are capped because of capital and we have to make choices. I cannot stress this enough – choose companies you understand. People around you will be pitching you so many ideas hey you should invest in gold, Jordan’s are the new trend and will be throwing ideas left, right and centre. Invest in a company you know and that you believe can grow and provide good gains down the road. If it takes you 1 hour to understand what the main product is I would stay away.
Lesson # 4: Timing the market is a fool’s game
NOBODY and I mean NOBODY can time the market. Over my time as an investor I have held through some “major events” and have learnt to ignore the noise and just focus on my strategy capitalizing on dips in the markets and diluting my average buying price. When I started I spent time agonizing over events such as the Greece crisis, Scotland referendum and others and how it would impact my portfolio. “Do I liquidate and take a loss and should I sell” often crossed my mind. However, in the end the majority of these events lasted a few weeks and then dissipated. Many investors wait for the “next crash” to make their moves hoping for the day that may never arrive. History has showed that the majority of the time the market ends up gaining in the long run and those that “timed” the market end up with smaller returns down the road.
If you think you’re great at timing the market try the game and let me know how you did in the comments.
Lesson # 5: Penny Foolish, Dollar Wise:
Small costs add up. You may think commission for trading doesn’t add up but believe me it does. I remember in my 1st year of trading – I had almost a hundred trades. Now I was lucky, my broker only charged 4.95$ per trade but I know brokers that charge 9.95$ – 11.95$ per trade. I recall once my friend told me you need to make 10 dollars on a stock to gain a profit and I realized I had to generate that to cover my commission. Always remember the costs associated with trading as those costs can cause you to have negative returns for the year. If you are someone that likes investing in mutual funds or ETFS – many of times the difference in performance will come down to the management fees.
Disclaimer: All of the above information is my own personal opinion. Please do your research before choosing stocks.