Advice to a New Investor

by Darwin on January 31, 2013

Nothing gets a new investor more excited than reading glorious stories of great market picks, turning $50,000 into $1 Million and day trading in your pajamas for a living.  I don’t mean to be a downer, but a pragmatist.  Here are my learnings I felt worth sharing:

  • Fees/Expenses Matter More Than Most Other Factors – As a starting investor, we all dream about hitting the 20-bagger.  You know, the old Microsoft at $1, or Apple back when it was on the verge of bankruptcy?  Well, that’s all well and good, but the likelihood of you identifying a stock like that, buying at the right time and then holding it for 10 or more years is exceedingly low.  In chasing opportunities like that, you may well be spending hundreds, or even thousands of dollars a year in trading fees.  Likewise, chasing hot mutual fund returns with high fees based on past performance is a loser’s game as well.  Over long periods of time, you’re much better off just focusing on low fees.  That could be low cost ETFs instead of mutual funds and stock trading or limiting your number of individual stock trades each year and also using a low cost online broker.  Fees matter!  Most of the “selection” doesn’t so much, as it’s pretty random and markets are surprisingly efficient.
  • Diversification is Not for Old Farts – I used to abhor diversification, figuring if you own enough stocks in enough different sectors, you’re just diversifying yourself into “average” returns.  If that’s your goal, then why even both individual investing?  You might as well just buy an S&P500 index ETF like SPY.  Well, there’s nothing wrong with that.  But I’d take it even further and look for diversification of asset classes (own some commodities, bonds, REITs, etc.) as well.  I can’t tell you the number of times I’ve held a “can’t lose” stock only to see it plummet (Apple as a recent example).  The same can happen with entire asset classes like when stocks slid during the financial collapse, Treasuries rallied.  It’s good to have a few asset classes handy so you can liquidate winners and buy losers when the markets panic.  Or, if you’re more passive, you can just sit back and enjoy at least some portions of your total holdings moving in the right direction.  You never know when you’re going to need those funds!
  • Ignore the Noise, Experts are Usually Wrong – CNBC can be your worst enemy.  They bring on these so-called experts and they present the most compelling, believable thesis for a particular investment such that it seems like a no-lose proposition.  It makes total sense!  I’ll admit it, I’ve bought stocks based on recommendations and compelling investment themes I’ve seen on their shows.  But they don’t work out any better than a monkey throwing darts at a business section of a newspaper with ticker symbols.  While you might get some ideas or even a sense of what stocks “everyone” is talking about, you might actually want to be more apt to avoid common themes, rather than throw money at them.
  • Markets Don’t Do What They “Should” – Markets do absurd things.  They behave in a manner which seems so irrational that it’s maddening.  They do things that make you say people are just being stupid; it’s sometimes as if massive amounts of trades have conspired against common sense and decency.  And then they revert back.  We saw this with everything from the dotcom bubble to euphoria over Apple (which I called the months ago) to the social media craze.  Personally, unless you plan on being a momentum trader and can watch for signs of a bubble deflating and exit quickly, it’s probably best to ignore hot sectors altogether.

I’m sorry, I can’t honestly provide you “hot stock tips” and tell you what to do.  If I did, it would be disingenuous.  What I did do, was warn you and share lessons learned over close to 2 decades of individual retail investing.

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