What I’ve learned in 6 months about the stock market - Part 1
I’ve been following Tesla for the last 5 or 6 years but it was not until December 2019 that I saw it as an investment opportunity and became interested in the stock market, all thanks to a youtube video recommendation. I spent two weeks watching several youtube channels which went in-depth on Tesla, its technology and financials, and I became convinced because of the arguments and what I knew about the different industries involved that it was an amazing investment opportunity.
I chose a platform and decided to invest a little bit each month, in order to learn, practice and hopefully make that money grow. This practical learning was complemented with reading books, joining online communities, a lot of youtube content and some of my master’s degree subjects such as Financial and Managerial Accounting or Capital Markets and Corporate Finance. Here you have some of my learnings, I hope you find them useful.
This is the first part of the article where I will be covering the basics and more psychological learnings, the second part will be released in a week or so after this part and will dive in the stock market itself.
Basics
There are many ways to invest: there is not just one-way for investing, there are many of them, and there is an increasing number of financial instruments which creates new strategies. You could invest by focusing on the long-term, on dividends, trading frequently, bonds, cryptocurrencies, indexes, penny stocks, etc. Each one of them has its pros and cons, but generally, the riskier it is, you should expect higher returns and loses.
Choose which one is more appropriate for you: depending on your financial and tax situation or many personality traits you should choose an investment method that works for you, one that won’t keep you awake at night. You also have the possibility of not investing and that is fine too, you can use your money however you see fit.
The platform is very important: according to your chosen strategy, or combination of them, you must decide where you will operate. The fintech industry has made it very simple and there are many easy-to-use and almost free apps such as Robinhood, for example. But you have to select the one which minimises fees and it is more convenient considering your requirements.
Even if you start small you are learning for the future: apps such as Robinhood offer fractional shares, which allows you to start investing even with 1 dollar, which makes it accessible to everybody. If you know anything about compound interest you know that the earlier you start your gains will be significantly bigger, so the earlier you start the better. It is also beneficial because you will make most errors at the start when there is little money on the line.
Just invest what you are comfortable with: you have to be aware that you may lose a great percentage of the money investing or even the whole amount depending on the financial instrument you are buying. I would not recommend gambling your life saving on the new hot stock that does not stop rising and the moment and everybody knows about. As Peter Lynch writes in his great book One Up on Wall Street: “Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.”
Money can work for you: the average return on S&P 500 (500 biggest companies in the US) for the last 90 years is around 9.8% which means that if your great grandfather had invested 1000$ in 1930 it would have grown into 4,510,353.80$ which is not bad. Your money loses value each year because of inflation, which is primarily caused by governments and central banks manipulating the money supply and economy, those 1000$ in 1930 would have lost 15 times its value if not invested.
Focus on what you understand: you will be able to assess better stocks or other financial instruments that are in industries that you know about, if you know nothing about mines or biotechnology it would be better for you to invest elsewhere. But don’t worry, there are plenty of companies in industries you know, like retail, streaming, entertainment, tech, etc.
Search for all perspectives: for every stock, there are analyst making bull (good) and bear (bad) cases and both sides have valid points that you should consider. Don’t focus on just one side of the story because you won’t be able to see the company’s whole picture.
Be aware of what is going on around you: like I said previously, there are many companies you know about, maybe you have been using Netflix or Spotify for several years and you loved their products. For example, if you had invested in Netflix or Apple three years ago you could have doubled your money. Pay attention to the products you use and buy, or to the restaurant you like and is growing like crazy, there are many opportunities there.
Do your due diligence: before investing in a company you should expend a couple of days (at least) researching it, its market, products, growth, finances and competition. If you don’t do this you are not investing, you are gambling.
Know thyself
Use reason, not feelings: this is one of the most difficult parts of investing, leaving the feelings at the door. You have to do your research before each investment, never enter into panic mode, assess the situation, be calm and do as you wish but try it to act coming from facts not feelings.
Paper gains are not real: the number you are seeing in the app is not real money until you close your position, take it into account. In the after-hour market, some big news could appear and your stock could lose a great percentage of the value.
Be honest with yourself: the market is not going to react as you want, a company is not going to perform great this quarter because you really want them to do. You have to work with the information you have, with the financial statements of the company and your knowledge of the industry. It did not matter that I really liked Windows Phone, there were not enough users to sustain and grow the OS in the long-run, and Google and Apple dominated the smartphone market regardless of my feelings.
Learn to accept the failures: sometimes your investment doesn’t work out, it is fine, you may be better off selling the position at a loss and invest it in a more promising stock. There is no need to keep a stock just because you don’t want to “lose money”, that happened to me with Uber, I had it at -20% for four months while my Tesla shares rose like 400%, it would have been better for me to accept the failure earlier.
Have your own opinion: most people around you, will have their opinion based on what mainstream media wants them to believe, you need to do your own research, don’t rely on others to tell you what to think. This advice is applicable for many areas of our lives but for stock investment especially, big hedge funds and companies have a big influence on the media and by controlling the information you control people, therefore, the stock market (to a certain degree).
When the stock market goes down is when you may find the biggest bargains: when a big crash happens, it is not panic time, it is thinking time, you have to reassess your positions because new opportunities appear or will appear in the near future. In a crisis there are many bargains, you just have to look for them.
There are many opportunities, don’t worry: if you have just lost a great investment opportunity, don’t you worry, there are many like those coming, but be ready for the next one, learn and research in order to be able to spot the next +800% in a year like Tesla or the next Amazon, Netflix or Shopify.
It is kind of addicting: when you start you will be checking your account balance and stocks constantly, it had happened to me and all my friends, it is normal, but don’t spend more time than necessary just watching, you are better off researching and learning.