Care enough about your portfolio to practice, practice, practice.
Small investors are a mess. Too many of us want to have a portfolio that looks clean and tidy, but we don’t want to be bothered to practice learning the skills it’ll take. Why not? I just left the Texas High School State Swim Championships, where my kids both swam with the best of the best. Do you know how they got there? Would it surprise you if I told you that it wasn’t walking around saying, “I think I can swim a really fast time this meet?”
Of course it wouldn’t surprise you. People who don’t care don’t read financial blogs, do they? You’re ready to rock!
Since they were 7 years old, my kids have been in the water practicing for this last weekend. Sure, at the time they were just looking to get through the next meet, but because they’re seniors in high school, there’s a big chance that neither will go beyond the speeds they swam in the pool this weekend ever again. All of that work culminated in this last chance at the pool. My daughter swam her fastest time ever and my son swam in 2nd fastest times in all of his 4 events. Practice didn’t make perfect. Perfect practice made perfect. Lots of hours of perfect practice.
What does this have to do with stocks?
When I see failing investors, it’s often because they want success in the moment. Because anyone can buy a stock, it looks easy, doesn’t it? Who can’t pick the next big winner?
Watching pros trade and then observing Main Street trade you begin to understand the difference. The pro takes a ton more time and care when picking than just asking the dude next to him at work what’s rockin’ for him!
You too can become a better stock picker if you take the time to learn identifiers of a reliable investment. You can pull the trigger on your investments in a better way once you’ve picked the stock.
5 stock buying tips to practice today to become a better investor:
1) Practice comparing stocks in a category and read the annual report. I actually love to read the message at the beginning of annual reports. Why? I get a feeling for the business and their focus. You’ll learn who the competitors are, what the product does, and what their concerns are.
Several years ago I happened to be reading the annual reports of GE and a casino back-to-back. Jack Welch, then CEO of GE, wrote about how the company needed to improve on all fronts. He wrote about how empowering their workforce was the #1 goal of the company. He also wrote that someone asked him about the end customer, and why that wasn’t his focus. He said that if he focused on his people, they’d do a better job with customers, and everyone would win. The casino? They talked about the current economic climate and how it was difficult to do anything when people weren’t gambling. They focused on regulatory changes and travel costs. Guess which one won my hard earned money that day?
Don’t stop at the fluff messages written by PR people, though. Take one statistic each week and become familiar with it. Start with PE ratio, then Price-to-Book. Learn to compare revenue and earnings numbers. Dive into insider trades (not the illegal variety…stick with watching what the “big wigs” at the company are purchasing).
2) Learn to make watch lists, and watch them. When I created my first watch lists, they were WAY too long and unorganized. I learned through my experience, though. Good stock picking is about creating crude systems and then working your system to improve.
3) Buy stocks at the market, and avoid the open. How egotistical is it to think that a stock that’s been rocketing (those are the ones you should focus on, by the way), will turn around and reverse course just long enough to descend to YOUR CHOSEN SPOT and then turn around again and shoot to the moon? How omniscient do you think you are?
A key part in realizing the danger of the market is in knowing that you are a little itty-bitty part of a much bigger financial market that you cannot possibly understand. As much as CNBC and Fox Business try to tell you “why” the stock market moved, they have no clue. If you understand that you have no idea where the market is going to go tomorrow you’ll do two things better: 1) you’ll buy stocks you really like on an up-trend, and 2) you’ll pay a hell of a lot more attention to your downside risk.
4) Buy an option. One time, write a covered call. We’ve written about how these work already. If you haven’t done it yet, what are you waiting for? Sure, you may lose a dollar or two, but what’s the price of education? You’ll never know how it works REALLY until you REALLY do it. Jump in and sell a covered call. It’s the least risky option available.
5) When you screw up (and you will), don’t think “I’m never doing that again.” Sadly, that’s the message most investors receive when markets turn against them. This is the market teaching you a lesson! Use the lesson! Don’t go off and mess up some other area where you’re clueless!
Photo: Jim Bahn
What “Golden Rules” do you practice when investing outside of “buy and hold?” Put your 5 Stock Buying Tips out there so others can learn!
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