4 Things You Must Know Before You Go It Alone Investing
I spent my life investing in stocks.
In both my professional and personal lives, investing has always been very lucrative for me. I’m never going to tell you that you can’t make a fortune from trading or investing. That wouldn’t be true.
What I will tell you though, is that I’ve also lost a lot from investing—many millions, in fact.
That usually surprises people. It’s difficult to imagine someone with my knowledge and background, who is obviously not bankrupt (and has never been bankrupt), having lost so much money.
But what’s important is that when you add up the balance sheet of winners and losers, my winners have made more than my losers. That’s all. Nothing fancy.
I’ve made more good decisions than not.
So, although I’ve lost a lot of money, I’ve made a lot more.
And yes, you can do the same.
But before you go and place all your money down on investment and pour all your hard-earned money into the stock market, I want you to know four crucial things:
1. Treat the stock market or any financial market with respect.
I lost money, and I am an expert. I know what I am doing, and my losses would amount to more than most people make in a lifetime.
Every time I hear someone say, ‘it’s easy to make money’ or ‘they have it all worked out’ or something similar, I would place a bet that this person is just a short distance away from losing everything.
People like that are only every one whisker away from being reminded that they ‘don’t know everything’ and, in reality, probably know very little.
That’s why I often say the best thing that can happen to you with investing is to lose money. Not too much, but enough to be very painful on your first trade. It will wake you up before it’s too late.
I’ve seen the stock market bring giants to their knees—literally and figurately.
Please, treat the stock market with respect.
2. Don’t trade on margin.
“The market can stay irrational longer than you can stay solvent” is a quote from John Maynard Keynes, one of the most respected economists in history, and probably one of the sharpest minds in 20th-century finance.
What is less well known is that he took to trading in August of 1919.
Given his in-depth knowledge of currency markets, Keynes decided to trade currencies including the U.S. dollar, the French franc, the Italian lira, the Indian rupee, the German mark, and the Dutch florin.
Unfortunately, Keynes made two mistakes.
Big mistakes, and ones that I don’t want you to make.
His first mistake was that his positions were made on margin. Margin means borrowed money—he borrowed money to invest.
Keynes had positions of £40,000 with just £4,000 of his own money. The result is that even the smallest movements in the currency or stock market would have a dramatic impact on his profits and, most importantly, losses.
The market moved against him. The market went in a direction that Keynes felt was irrational and made no sense given the fundamentals of the countries involved.
And Keynes was right. But he was also wrong.
Because, long term, fundamentals can be meaningless in short and even medium-term speculation.
The market turned against Keynes, and he lost everything. He was bailed out by a well-known (at the time) banker, and he managed to claw his way back.
Most don’t get the second opportunity.
And this is where Keynes coined the term ‘The market can stay irrational longer than you can stay solvent’.
It’s an absolute fact. It doesn’t matter how ‘correct’ you think you are; it doesn’t even matter if you are 100% correct.
3. Don’t invest what you can’t afford to lose
What I mean by this is don’t place money in investments that you will need in a short to medium timeframe.
My minimum investment horizon for placing money on the stock market is 10 years. I consider that money gone; I will not and cannot touch it.
It works wonderfully.
The reason I do this is that it helps me treat my investments with objectivity. I look at the investments with a critical view, asking: Is it working?
Recently, I had a position that went down by 50%.
That’s right—I had lost 50% of the value of my trade in one week. But, believe it or not, I was fine.
I asked myself, do I still believe in this trade? Has anything happened to change my mind? Is the company still working? Yes, yes, and yes.
Not only did I hold my position, but I placed more money into it. Today, it’s back past its highs!
Now imagine if the same thing happened, but I could not afford to lose money. What if I needed that money back quickly?
It would have been entirely different.
Why? Because when you lose the money you need, your emotions will completely overwhelm you.
And believe me, you will be overwhelmed. You won’t be able to sleep. People will talk to you, and you won’t even hear them. You will just be thinking about your losing investment.
4. Invest in what you know.
When I first entered Wall Street in the early 90s, the big investor name wasn’t Warren Buffet; it was a man called Peter Lynch.
Heard of him? Maybe not, but he is a great guy and super smart.
Lynch was wary of complex investment stories; he preferred stocks that were easy to understand.
Some of Lynch’s best ideas came from walking through grocery stores, malls, and local retail zones. He spoke with family and friends rather than experts.
He reasoned that with consumer spending driving two-thirds of the U.S. economy, products and services desired by most consumers would be good investments too.
He was right.
When Peter Lynch started to head the now-famous Magellan Fund in Boston, USA, it had only $18 million in assets.
By the time he resigned in 1990, the Magellan Fund had $14 billion in assets and over 1,000 positions. The fund grew by an astonishing 29.2% during this time.
I believe it is the best performing 20-year run by a fund ever. Amazing!
Is this knowledge enough to make fantastic investments? Of course not, but it’s a great start. You must know a lot more about the company itself, which can require a lot of time and research.
- Be respectful of the stock market—over-confidence leads to loss.
- Don’t trade on margin—if you can’t afford the investment, don’t invest.
- Don’t invest what you can’t afford to lose—treat invested money as lost, it will help you ask the big questions.
- Invest in what you know—success stories show that the better you (or your advisor) knows your stock, the more money you will make in the long-term.
There you have it, four must knows before you take your first step into investing for your future.
If you take these on board, your journey into the lucrative world of investing will be much safer and more profitable.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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Who is Paul Atherton, That Wall Street Guy?
An ex-Wall Street advisor who worked with major players in the global financial industry for over 30 years, Paul’s mission is to help regular people reclaim their wealth and financial security.
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