With the GameStop short squeeze making onto the BBC 10 O’Clock news there can be little doubt there will be renewed interest from many people previously uninterested in the stock market. Ian Cowie talked in an article recently about a friend ringing him up wanting to know about the markets – but not the “technical stuff”.
Many will see the stock market as a get rich quick scheme where everything goes up. The rise of “stonks” and meme stocks and financial influencers on TikTok will encourage this thinking. Yet investing requires effort, patience, knowledge and emotional control. Even after a decade of investing in UK shares, I still make mistakes – often with alarming frequency. That’s why I recently chatted to four investors/traders who were kind enough to share their advice with me for new investors. I also received a checklist from riddler, which is at the end of this article. It’s well worth looking at.
Three pieces of advice for new investors
First, I spoke to Tripura Mudumbai who has been investing actively for six years. This was his advice to new investors.
“Three pieces of advice I would give my younger self, starting as a new investor:
1) Start saving early. Instead of saving after expenses, one needs to take away 20-30% of earnings as savings and learn to live with the remaining amount.
2) Preservation of capital is very important. Don’t put your money in a speculative investment. Although this may give instant pleasure, in most cases, one loses the entire capital. When you lose your shirt, you stand naked and it could lead to shunning the market.
“3) Learn from others and build a network. Read as many books as you can and join forums like Mello events. You don’t need to reinvent the wheel.”
I like this advice a lot and would urge all new investors to get at least a basic understanding of how the stock market works. I’ll be developing a series of beginner guides shortly so please do keep checking back to this blog for support, or contact me on Twitter if you have questions.
Focus on price
Moving back to the advice I also spoke to a trader – Benny Trades – on Twitter. He’s been trading for five years and had the following to share:
“Our end goal is to make money, at one rate or another. I think we can all agree on that. Ultimately, therefore, your only concern is price. Price defines your risk:reward and price defines your break even. Price defines your profit or your loss. Fundamentals define nothing in terms of your end goal. If Apple’s EPS grows 32.3% this year, that has absolutely no direct impact on your end goal. The share price’s reaction has the impact.
“I don’t bother with any information other than (1) what sector is performing best? (2) which share in that sector is performing best? (3) what is a good entry/exit point? Price will either pay me, or I’ll lose a few %.”
For me this is important if you want to get into trading and is a different approach to mine. But to Tripura’s point, it’s all about learning from other people. At the end of the day, price is very important, regardless of whether you hold a stock for hours or for years.
Given nearly all new investors will act like traders and move in and out of stocks quickly, I know I did, then this is a useful framing. Remember it’s about making money not about loving a share, or becoming attached to a company. To make returns you should remain detached from the asset and focus on risk:reward as Benny points out.
Advice from my third experienced investor
I also spoke to an investor with 27 years’ experience of investing who asked not to be named.
His first bit of advice to new investors was similar to Tripura’s “Read a lot before committing money to the market.”
He then pointed out that: “Investors’ best friends in the market are time in the market and diversification and there is a relationship between risk and reward for example High Risk/High Reward.”
Crucially he added: “Do not listen to tips, do your own research (DYOR). Understand that making mistakes is part and parcel of investing and every day in the market is a school day and a learning experience. No one knows everything. New investors should use the KIS principle, keep It simple.”
He also advised to practically do this that investors can use an index tracker, otherwise known as an ETF. “That just tracks the market and no stock picking is involved and it has low charges. The advantages of index trackers are that it has a large margin of safety and can be used as a pound cost averaging strategy.
“The other option for new investors is to buy a managed fund where you pay a professional fund manager and he or she picks the best shares that might do well on your behalf. Although, this is a slightly more expensive option and can be confusing as a lot of fund managers underperform the stock market and the choice of funds is large.
“Once the new investor gets more experienced and comfortable with market ups and downs, they can if they wish, buy single company shares.”
I also include below the checklist which was kindly shared with me by riddler, after I approached him for this article. He’s an investor with thirteen years of investing experience.
Checklist for picking trades
- Check the financial health by looking into AT LEAST 2 years of accounts and look for cash burn, cash, liabilities, losses, debt etc. Then compare that to the current market cap. Make sure you are keeping notes for many months BEFORE you buy so that you fully understand the past and the potential future.
- Check the board of directors (BOD), their salary, their holdings, their experience.
- Check their products and revenues, try to ensure that their products are mandatory/ needed versus discretionary and liable to being axed by purchasers.
- Check the 3mth,12mth and 2yr chart.
- Read the news and social media to see if their products are in a bullish or bearish cycle.
- Buy into the stock in a number of tranches over a number of days or weeks to mitigate volatility, IF you intend to hold for more than a short amount of time.
- Ask fellow investors about their good and bad experience with the company, seek out contrary views.
- You must take responsibility for EVERY decision you make.
- Have sensible targets in mind that you are comfortable with, NEVER be dissuaded or persuaded by others.
- Realise that making mistakes and getting things wrong are natural and we can only ever deal with “known Knowns”. Mistakes are your personal road to becoming better.
This is really sensible and useful and much of it applies to a buy and hold approach to investing as well as to shorter-term trading.
There you are then. This is the advice I’ve collated from four experienced investors, which I hope will be helpful for new investors. I’ve written on Medium about how to get started in investing, so my advice can be found there.
All in all, there are few concrete rights and wrongs when it comes to investing. Learning from others is essential, as is doing research, as these investors have pointed out. I’d say you often get out what you put in, meaning if you blindly pick shares without thinking about why then you increase your chances of losing money. Hard work, riding your luck, being sensibly brave (if that’s not an oxymoron) and learning from mistakes, all to me, help increase your chances of ‘winning’.
To round off then I wish all investors, both new and experienced a fun and profitable journey. And I hope this article has been of use.
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N.B. All the investors in this article have given their advice for free and I’m very thankful to them for that.