Investing 101 for Newbies

Contribution by: Troy

Are you interested in investing and wealth management? Sorry to break it to you, but the world of investing is a lot harder today than it was 30 years ago. With a whole lot of quants (math geniuses) doing computer trading and a much more complex world, investing just keeps getting harder and harder.

Now for the good news. For those of you who can wade through all the muck, the profits to be made have never been greater. As volatility increases, more skillful investors have more chances to make ever greater returns. So if your new to investing and one day want to be a kick-ass investor, this is the post for you.

Here is some investment advice for y’all newbies out there.

 

Avoid Mutual Funds

 

(This is just my opinion – I’m sure others will have their own.) As you transition from a USA 401(k)/ Canadian Registered Retirement Plan (RRSP ) to your own brokerage account, I suggest you stay clear of mutual funds. In the past, I worked for one of those small-time retail customer banks. Essentially, we peddled mutual funds to all our clients without actually believing in any of the BS we sold. Mutual funds have two problems:

1. Most of the fund managers are terrible.
2. They charge you excessive fees (DSC) if you plan to sell your mutual funds ahead of time (they lock you in for years).

Think of it this way. If a mutual fund manager was any good, would he be running a mutual fund and be making $100,000 a year? Of course not! He’d start his own hedge fund and make millions of dollars a year. Sorry, but mutual fund managers aren’t exactly looking out for the common good – they care about #1, and how much #1 can make each year. All the guys who can’t make a penny in their life are stuck peddling lack of capabilities (in the form of mutual funds) to retail clients because they can’t make more money themselves.

In addition, mutual funds lock you in for years and years. If you think that the market is going to fall, then too bad. The fund is gonna hit you with fees (which are pretty hefty). These fees are known as DSC, which can range from hundreds of dollars to thousands.

Instead, I suggest you invest in stocks and other financial products yourself  – they have none of the disadvantages associated with mutual funds. Stay clear of mutual funds and stay clear of former guys like me who peddle mutual funds.

 

Stick With the Simpler Markets

 

I know that as a new investor, you’ll be enticed to words such as “make 100% a year in options!” The reality is, 100% a year in options isn’t unlikely. A lot of the pros can actually make 100% a year in options. BUT, keep in mind that these are the pros. These are the veterans who have been doing this for decades.

Complex markets such as options (and to a lesser extent, currencies) are very dangerous if you’re a new investor. If you don’t know what you’re doing, you will literally lose every single penny (thanks to the way options expiry day). Even though I’ve been investing for 5 years (it’s my job), I still don’t touch options. Way out of my league, and if this is your second month investing, not happening.

Stick with simpler markets such as stocks, and stick with industries that you know. When investing (and in life in general), you have to stick with your unfair advantage. What is your unfair advantage? The industry that you’re familiar with, possibly because you work in that industry.

 

Forget the Financial Statements

 

When you’re investing in a stock, it’s probably because you expect the company to grow. Forget the financial statements – half of them are lies.

My dad works worked in the accounting industry (he left after hating the ethics of the place). His defacto job description? To create false financial statements. Now in the accounting industry, you never lie, because once you get caught you’re in serious trouble. What you do is tell half-truths (because that’s technically not lying). That way,

1. No one can ever say you did anything illegal, because you didn’t print fake numbers.
2. If someone finds a discrepancy, they can’t blame it on you because technically, you didn’t lie.

Nowadays, that is what all financial statements are about. Half-truths. The company will show you what they want to show you. That’s why most financial statements are absolutely useless – you won’t get the secrets of a company from them.

Instead, what you should be focusing on is the company’s product line. Understand the company from the ground up. How strong are it’s competitors? How good are it’s products – are they industry leaders or industry laggers? How innovative is the company – does it set the industry standards, or does it have to always play catch-up? This is stuff that you don’t find from reading a financial statement but from doing field work.

 

How to Handle Losses

 

Now this is the most important part for new investors, because investment losses are emotionally and financially devastating.

Too many investors come into this industry expecting to make money right off the bat. Reality check, guys. Not gonna happen. It didn’t happen to me in my first year. But what’s more important is how you handle those losses, particularly your first loss. Like a newborn baby, your first loss will forever impact your investment psychology and how you invest in the future.

1. First of all, realize that losses are a completely normal thing. Above all, do not panic. Instead, be optimistic. Realize that behind every loss, behind every mistake, lies a hidden jewel. Find that jewel, and you will become a better investor.
2. When you make that first loss, the first thing you should do is stop. Sit back. Relax. You lost your “virginity”.
3. Now think back to what you did. Where did you make a mistake? Was it in your analysis?
4. Learn from your mistake – how can I prevent a similar thing from happening again next time?
5. What you have to do now is regain your confidence. A loss is more emotionally damaging because it messes up your psyche – you lose confidence in your capabilities. What you should be doing right now is to wait for the best opportunity possible so that the next investment is almost a guaranteed winner. With your confidence back, everything will be better.

If you’re more of an advanced investor or trader, feel free to check out my blog at Bad Ass Currency Trading where I talk about currencies and national issues (which pertain to currencies). I hope you enjoyed reading this post, and all the best in your future investment endeavors!

Editor’s Note:

We put all of our faith in our advisors hands yet we have no idea what we are investing in and that’s not a smart way to invest your money. Whether you use an advisor like us or not you wouldn’t hand over cash for a product at the store if you had no idea what it was or what it did, would you? Live and learn, that’s what we’re doing.

Whether you are from Canada or the USA it’s important to do your research if even just the basics before handing over you money to a financial advisor or taking on your own personal investing ventures. Still, I always encourage everyone to personally find someone you trust, a professional, to give you the answers you need, straight up. Just because someone says not to do something, know the facts.

Investing for dummies, that’s where I want to begin just like I did with blogging when I read blogging for dummies even if that means networking with those that are living it, doing it and succeeding. By reading you build up knowledge so you have your own investment guide that you build your experience and education from.

We all have to start somewhere and learn from the bottom up. This is a great way for me to learn about basic investments and how to invest from the beginning especially why investment diversification is important. Investing as a newbie can be scary so getting educated is something that I plan to do to ease my uncertainties.

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Photo: freedigitalphotos. net/Stuart Miles

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