Investing is a daunting task. The learning curve is steep and emotional.
The lessons learned from things you shouldn't do come very quickly, but the good lessons take a lot longer.
10 quick tips about share market investing
- Choosing a stockbroker
Stockbrokers aren't limited to people you meet with in person. Sure, you can choose to meet a full-service stockbroker in person, who will take you step-by-step through the investing process, or opt for a 'discount' broker. A discount or online broker is a digital platform which connects one of your bank accounts to your brokerage account which then accesses the sharemarket. After funding your brokerage account, you simply click 'buy' or 'sell' on the shares you want to own.
Usually, discount brokers are cheaper and more convenient than full-service brokers, but it is a matter of preference. I use a discount broker because cost was the most important factor when I began buying shares.
- Know the difference between companies, shares, and stocks
Shares are the same thing as stocks and equities. But the important part is this: shares are simply part-ownership of a company. For example, if you buy one Telstra Corporation Ltd (ASX: TLS) share, you are a part-owner. You may only own one-millionth (or less!) of the entire company, but you are an owner.
- Invest long term, avoid 'trading'
If you think of the 'stock market' as a 'business market' it's easy to see why investing is a long-term pursuit.
'Trading' is the opposite of investing. It focuses on short-term price movements and involves the study of charts and prior share prices. It has nothing to do with a company's fundamentals.
I've never known anyone to make money consistently from trading.
- Listen to others
My biggest mistake was not heeding the advice of others. I don't mean taking investing tips from your friend's uncle at a BBQ. But get your hands on (often free) material from respected Australian or international investors. Most Australian fund managers issue quarterly or monthly reports to the public. Sometimes, they contain some their latest stock ideas!
- Know your limits and use them to your advantage
If you build houses, work in a hospital or shop at Kmart two times a week, you probably know more about these industries than I — or any analyst — ever will. Peter Lynch, an extremely successful investor from the United States, believed these experiences gave people like you an advantage over the 'professionals'.
However, as with every company you own, it's important to know exactly how it makes money (e.g. what products/services it offers) and the outlook.
Moreover, you need to know your limits. For example, if you don't understand the production, uses and market for uranium — don't buy a uranium producer! Of course, you should always be looking to extend your circle of competence, but know your limits.
- Shares WILL crash
Get ready for a share market crash. It's coming. No one knows when, but it'll be here before you've had a chance to react. So prepare yourself mentally. And keep cash for living expenses (say, six months' worth) so you don't have to sell your shares at a loss to raise money.
Remember, 1%, 2% or 5% daily falls are not 'crashes'.
- Share portfolios look like their owners
They say pets look like their owners. The same can be said of investors, and the shares included in their portfolio.
So before you buy a share, and periodically after that, ask yourself: 'What does my share portfolio say about me?' Does my portfolio actually reflect my expectations for the future? And 'how does the share I'd like to buy fit with my existing holdings?
- Document your trades
Grab yourself a diary or create a spreadsheet. Use it to document your buys and sells and the reason why you made the trade. It may sound trivial because your brokerage account will keep and send you a record of all trades. However, in an age of on-demand services, slowing up the process and documenting your decisions keeps you accountable to yourself.
- Two Warren Buffett rules to live by
Warren Buffett is the legendary investor of our time, and he's very quotable. But if your memory palace only has space for two, make them these:
#1: "An investor should act as though he had a lifetime decision card with just twenty punches on it." If you could make only 20 investments in your lifetime — make them good!
#2: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." We're investing long term. Think of this as a 'Buffett test' for how comfortable you are holding shares in the company for the next market cycle.
Of course, it's impossible to know exactly what will happen in the next 10 years, so ask yourself: "Do the managers of this company have talent, passion, integrity and — importantly — are they invested in the company as I am?" If you have confidence in the management team to do what's in your best interests, it eliminates so much of the uncertainty. We must also consider the risks, including industry developments.
- Track your performance so you know when to call it quits
Every six months or annually, calculate your returns. Have your returns exceeded the market? Most professional investors fail to beat the market, so if you don't beat the market in your first few years, don't be disheartened. However, if you find yourself being fed up with the time commitments required to conduct thorough research, or you are consistently performing poorly, consider your options.
That doesn't mean selling everything and never coming back to the share market. Instead, you may invest in a low-cost index fund (which simply tracks the market's return), use the services of a reputable fund manager or sign up for an investment service. Each has their pros and cons.
