Plenty of people can give us advice when it comes to investing in the stock market. We should start from the premise that when someone gives a piece of investment advice or guidance, it is usually a personal opinion, so we couldn’t say they are wrong or that they are right. What is clear is that the person is giving the advice because it has worked for them.
Lately I’ve seen some advice going around that, rather than advising, clouds reality (in my personal opinion at least), because I don’t think it makes much sense. If someone takes it literally, they could come to see as normal something that is anything but normal. Let’s take apart some of these sayings that a beginner shouldn’t listen to (and nor should an active investor).
1. To win in the stock market, you first have to lose.
That’s the equivalent of saying that to learn to drive, you first have to have an accident.
In the stock market you can win or you can lose; everybody knows that. But saying that before you win you’ll have to lose, that losing is part of learning… well… I’m sorry, but losing only teaches you how to lose. It’s true that you’ll learn from the mistake you made so as not to make it again. However, if your first investment made a loss, what happened is that you made a mistake even before you invested, because you probably weren’t ready to invest or you got your analysis wrong when choosing the stock.
And I’ll say it again: with or without experience, anyone can make a bad investment and lose money. Investing is a profession, a game, an art… in which you keep improving and keep learning all the time. So if you start out losing, you can win later. If you start out winning, you can win even more later.
2. Don’t make money, manage risk.
The other day I was talking to someone who teaches future traders. I’ll never understand that kind of philosophy: he told me that during the first 12 months it is considered a success if a trader’s return is zero; in other words, not losing money, even without making any, is already a success.
Add to this another conversation I had some time ago with an investor who told me that before making money in the stock market he lost €20,000, and that this was very good for his learning, and I sometimes think we’re not talking about the same thing. I believe we both learned the same, and one of us didn’t lose €20,000; what’s more, I couldn’t afford to lose that money.
A fundamental principle of investing: lower risk, lower return; higher risk, higher return. So what is the point of managing risk without aiming for a high return?
3. Set yourself a daily profit target.
Literally, this amounts to saying: “Play the slot machines, go to the casino every day, and one day you’ll win.”
First of all, as we have said many times, the stock market (the markets) isn’t suitable for playing every day. Setting yourself a daily profit target means making lots of trades throughout the day. That brings nothing but risk.
a) Although every investor likes to make money in the short term, we have to bear in mind that it won’t always be possible, and we’ll have to hold the stock for the long term or sell it at a loss. If you sell at a loss several times, in your next trades you’ll no longer be fighting for the financial target you set, but to recover the shortfall from your target (just like compulsive gamblers).
b) A fundamental principle of stock market investing: the more trades you make, the greater the risk of losses. Clearly this is not the traders’ philosophy, but we come back to the same old dilemma: very few traders make a living from trading.
Before investing in the stock market, you need to be sure that you know what you are going to do, where you are going to invest, why you are going to invest in that company, the risks of that company, the risk in the markets at that moment, and so on. One thing is certain: you can prepare yourself perfectly in theory, but much of the learning won’t come until you feel the pressure of making a decision knowing that it will put part of your capital at risk.
Many courses and seminars teach investors most of the technical aspects of investing, but they tend to forget to explain that psychology is 50% of investing.
Further reading
- Investing in the stock market: for beginners
- Old-school investing vs the modern investment method
- Serious mistakes when investing in the stock market
- 3 investment strategies for a volatile market
- Falling stocks: sell, buy or hold?
Featured image: Pierre André Leclercq, CC BY 4.0, via Wikimedia Commons.
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