Lessons learned and noob mistakes after one year investing in stocks
First thing is first, let me tell you that since I started investing, the overall revenue of my shares portfolio is -0.5%. It is not a great loss, but is a good indicative that I still have a lot to learn.
About a year and a half ago, I was starting to hate myself every time I checked my bank account with my hard earned money static, without it generating any kind of profit. I decided then to put my money in an investment fund. This was great, my money was starting to give me some small profits, and when the market was going down, I wasn’t losing that much. Despite this, I was feeling as I was not in control of my money. I wasn’t responsible for my investment strategy, and therefore my profits; and I couldn’t reduce my exposition to stocks in the face of a bear market. It was then when, a year ago, I decided to buy my first stocks.
What I bring you here today is a compilation of all the lessons I have learned (and the mistakes I have made) after actively investing in stocks for a year. I will accompany every lesson with the brief experience that made me realise it. I hope they allow noob investors to avoid my stupid, but in the other hand common, mistakes.
Lesson 1: Do not trust and let you be influenced by financial analysts and news.
I am going to start with the Mother Of All Mistakes (MOAM), which is “do not trust and let yourself be influenced by financial analysts and economic news”. Do not buy/sell stocks according to someone else’s opinion, period. I have made this mistake several times for the past year, buying stocks financial firms “suggested” you to buy, and selling when technical analysts, or the news, thought their bullish trend was over.
A good example of this was what happened to me with the first stocks I bought from companies XXX an YYY (I am not going to use real company names in this post, as I don’t want to influence you myself. Let’s leave company names for future posts). I bought shares from these companies because analysts thought they had great potential and not because I believed in them or their business. I kept these values for about three months with good results (XXX: +9%; YYY: +15%), when I read an article in an economic newspaper warning that the bullish trend from YYY was coming to an end. A -1.25% fall of YYY’s price the next day got me frightened so I sold YYY with a +13% revenue. Seems like a great deal, right? Not at all. YYY’s price has kept rising up to a 98% since the day I bought. See the mistake here?
And you may be wondering, and what about XXX? Glad you asked. I used some of the money from the sale of YYY to buy some more shares of XXX, as financial analyst thought it still had a 30% potential left. A few weeks after, the price of XXX felt a 40% after a profit warning. Six months later the stock has kept going down up to a 55%. Lesson learned.
Lesson 2: Be patient and do not be too impulsive…
… unless your target are speculative and short-term investments, in which case forget the “patient” part. My experience with YYY is a great example of why you should be patient and not too impulsive. I sold YYY impulsively after reading an isolated news, and checking the next day results. If I had bought the stock because I really believed in the company, I should have waited to see the real behaviour of the price the following days before I made the decision to sell.
Lesson 3: Every stock’s price tend to its average value
And in my short experience this has been always true. Mr. Market is a really volatile guy, and he keeps waving stock prices up and down every day. I remember when I bought stocks from ZZZ. It was a company I really liked. In the first two months since my purchase it got a reasonable +9%. One day, it had an amazing daily result closing with a 11% increase, without any special event or news to justify it. Apparently investors were feeling pretty optimistic. The following weeks were not as marvellous, and the price of ZZZ started falling systematically between a 1% and a 2% every day, until it returned to +11% since my purchase. I decided then to sell before it kept falling more. But what was the real average price for the stock, around the +9% or the +20% it reached after that marvellous 11% day?
Apparently the +20%. As it was a company I really liked, I kept checking its price periodically. After one more month since my sale, the price started rising again, closing with daily results of up to a 7% sometimes. Patience, and my inability of analysing the real value of a stock (or a company) made me sell too soon (again).
Lesson 4: Forget about automatic buying/selling orders…
… once again, unless you are the day-trading short-term kind of investor. This may be a pretty unpopular suggestion, but my experience is that automatic buying/selling orders maximise your losses and minimise your gains. If you aim for the long run, and you really believe in the companies you buy, automatic orders will make you buy and sell whenever Mr.Market and its volatility wants, and not when YOU want.
To illustrate this lesson I am going to share a pretty recent experience. I had in my portfolio a Spanish company, SPP, that was giving me pretty bad results for the past months. I programmed a selling order if the stock went down below a certain level (not a stop loss order, just an ordinary selling order). After two days of really bad news in Spain, all the IBEX35 (the Spanish index) systematically went down, forcing SPP below my selling threshold without me noticing it. The next day after my sale the market rebounded and everything started rising again. If I hadn’t programmed this order I could have benefitted from this rebound, confirming that the fall was because of the pessimism around the bad news in the country, and allowing me to sell the stock at a higher price.
In conclusion: Justify all your decisions when you interact with Mr. Market
In short, all these lessons translate to the following: “buy an sell stocks justifying every decision, having clear reasons before you buy and sell. Analyse the companies you purchase, have a clear target for the value, be patient, and do not be influenced by the volatility of the market, the sensationalism of economic news, and the over-simplification of financial analysts.”
Let me finish this post adding that I am a strong advocate of long-term and value investments, therefore, if you are the short-term speculative type of investor you may not completely agree with my approaches, and that’s OK, as I think a lot of money can also be earned through day trading and short-term investments, however, it is not the investment profile that better suits me.
In the following posts of this series, I will share some of my company analyses (which I use to justify my investments), and investment strategies hoping they will help your own strategy (and why not, seeking some feedback from you allowing me to perfect them).
