How to be a good amateur stock investor
I know being a beginner stock investor is tough. I still vividly remember that I was so clueless and anxious, when I was starting to invest in stocks 3 years ago. I frequently pointlessly bought and sold some stocks every day. I heard them from friends or saw them on some forums without much knowledge about them. I kept watching fast-changing stock prices tens of times during trading time. I repeatedly calculated accurately my earnings and losses for every stock I had touched. I was hungry about any relevant or irrelevant information from many sources. I thought I worked hard to do my best and I should make money through it. However, the reality was my effort was in vain and I was actually losing money. Luckily I got a direction and found my way to do stock investing, before I had possibly accumulated some big loss.
I bet many stock investors have gone through that phase. Here I want to share some helpful general points from my past experience about how to be a good amateur stock investor. I hope these advices can help a beginner stock investor go through the tough beginning phase faster and more smoothly
First of all, acquire a comprehensive basic knowledge about the stock market. You can read some books, go through SEC’s website or join investment forums like Seekingalpha, Morningstar and xueqiu.com. It’s like playing a game. You can’t win if you don’t know the rules very well.
The next step is to find a way to measure your investment return and stick to it. You need to measure your return so that you can compare it with some basic return rate, like bank deposit and bond interest rates, or the returns of some index funds. Then you know whether it’s worth your time to invest stocks and you can set your goals accordingly. Another point of knowing your returns is that it can help you better plan your personal or household finances. Because once you have accumulated enough return records, you can more accurately predict how your assets will grow in the future.
Measuring your investment return is not as easy as it sounds. Imagine that cash flows out of and into your stock accounts dozens of times each year. I have been using IRR, which stands for internal return rate(Google it if you don’t know about it). It precisely tells you how much profit you make annually, on average, for every dollar you’ve invested. Using IRR, you can compare your overall return directly with any bank deposit interest rate. I recommend that you keep all your records in Excel so that you can use Excel’s existing function to calculate your IRR.
After learning the rules and figuring out how you’ll measure your progress toward your goal, you need to define your strategy. Again, it’s just like playing a game. To be successful, you need to find a strategy that gets you to your goal, then you need to stick to it and and keep improving. There are thousands of stocks, funds, ETFs and other securities in the market. Your choices are almost unlimited. However, that also means you have unlimited ways to lose money. Having a clear strategy, even a not-so-good one, is much better than buying and selling stocks willy-nilly.
Before choosing a strategy, read some books about successful investors to learn what their strategies are and whether those strategies would be suitable for you. Of course, you can also come up with a strategy on your own. Regardless, I believe the best strategy for you will match your personality and risk tolerance level. For example, some strategies come with a high risk and a high return. They may not be executed well by risk-averse investors. Some strategies need great patience for waiting and holding. They may not be liked by impulsive people. Pick the most suitable one for you instead of the most profitable one you have learned or heard.
I use a relatively passive and conservative strategy, because I’m a risk-averse person. That strategy prevents me from spending too much time or taking too much risk. It has given me a very satisfying return so far.
Here’s my strategy in a nutshell. I treat stock investing like a hobby instead of a part-time job. I enjoying doing research about companies, reading their financial statements and doing other related activities. I surely don’t have an interest in all companies and I never force myself to investigate any company not interesting to me.
I don’t constantly, proactively search for good investment opportunities like a fund manager. It’s too time and energy consuming. I skim some online forums or blogs from time to time to see what people are talking about. I try to learn what is happening by reading financial news regularly. I pay attention to products or services that I you use in your everyday life. When I see some seemingly good opportunity from the sources above, I assess it first and see whether it’s worth an in-depth research. If so, I will do a research as comprehensive and deep as I can by reading related financial statements and Googling the news, including old ones, about the company.
Once I decide to buy the stock, I always make a plan according to some indicator. Usually I’ll wait for a long time before I do anything with it. This strategy matches my risk aversion.
Your general strategy should inform your plans for each stock you buy. After having a general strategy, you need a plan for any stock you have decided to buy in. When you do decide to buy into a stock you have picked through your strategy, have a concrete plan for what you’re going to do with it. Your plan should, at minimum, tell what conditions will motivate you to buy it, what will signal you should hold onto it, and at what point you’ll finally sell to realize your profit. These conditions can be any financial indicator, the stock price or even just how much time has passed since you bought. (Though stock prices may not be a good indicator.) Either way, having a concrete plan is much better than lacking one.
Here is the last tip I want to share: never sell a stock just because you need the cash. This is the worst reason you could ever sell a stock. First of all, that usually breaks your strategy and plans. If it happens frequently, your strategy and plans actually make no sense, because they are not executed well enough and your effort making them is in vain. Secondly, stock prices fluctuate constantly, unpredictably and sometimes hugely. It’s possible you might have to sell a stock at a price near its bottom. It would be very painful for you to sell at such a low price knowing that it should have a much higher value. Like bargain-hunting real estate investors picking up foreclosed homes for cheap, many good investors are searching for stocks that the owners are forced to sell cheap. To avoid this bad situation, you should always keep enough of your wealth in cash or cash equivalents to cover foreseeable future spending. You should also consider this when you are making your investment plan.