Never Invest In Individual Stocks
Influenced by internal and macro (external) factors, a stock’s price can be tugged in opposite directions. With multiple factors to consider, an investor will have difficulty predicting which will triumph over the other and what the future price will be.
Because financial reports don’t reveal all the internal details about a company, it is nearly impossible for an outsider to comprehend growth prospects and management strength. Given the “unclassified” information that management selected, you’ll be blindly investing in individual stocks.
Also, there’s a risk that the stock you bought will go bankrupt. Because this does not apply to entire indexes as they can never fall to zero, you can average in and hold until you make money.
….. Also, Don’t Invest In Penny Stocks
Successful investing is all about calculating the odds of your investment working out. With penny stocks, you can’t calculate anything! The whole premise behind investing in a penny stock is that your investment can increase 1000% overnight, which we all know is not possible. Investing in penny stocks is synonymous with gambling.
Be Cautious About Shorting
To quote Hedgehogging, “shorts aren’t for the faint-hearted”. In it, an investor, The Prince of Darkness, shorted a casino stock which subsequently shot up, forcing him to liquidate at a large loss. Ironically, the stock tanked after he covered and had he been able to hold onto his short, would have made out like a bandit.
The moral of this story is that shorting, especially shorting individual stocks, is dangerous. Without accurate timing, an investor can be dead right but still lose money. An unprofitable long position can be held until it turns profitable, but an unprofitable short can be forced to liquidate due to margin requirements.
As a result, I believe that shorting should not be attempted unless you’re highly experienced and use quick stop losses.
Be Satisfied With a Good Return
Not satisfied with good return-on-investments, many investors hold onto their positions and hope to squeak out another couple of percentage points. According to Reminisces of a Stock Operator “the last eighth is always the most expensive eight.” A lot of money is lost by investors who try to squeeze a little more money from their positions. As a result, they deviate from their original plan and overextend their positions.
You Must read, Then Actually Invest, & Then Read Again, & Your Understanding of What You Read Will Deepen
Investors who don’t want to learn anything want to dive right into the markets. Others are so scared that they do nothing but read about how to invest without actually investing themselves. Here’s the correct path to take.
- Read as much as you can. It’s cheaper to learn from the mistakes of others than to repeat those same mistakes. There will be things in your readings that you won’t understand, but that’s ok. That’s why you need to actually invest with real money.
- Invest. Test out everything you’ve learned from your books. Only by actually investing can you truly experience the thoughts and emotions of a true investor, and only then can you test out whether your theories work in reality or not.
- Reread what you’ve read before. You’ll find a lot of new wisdom in your previous books because now, you can really understand what the books are talking about (relating your investment experience to those of the author).