Investing Like a Pro: 3 Pointers You Can Start Today
You know the whole point of investing is to grow your money. You also know you have to get your money working for you so that you can experience the financial independence you dream of. While you will probably never achieve Warren Buffet investment status, you can earn a significant return on your investments by investing like a pro.
Here are some tips.
Don’t over trade.
A lot of amateur investors go in and out of stock or commodities way too much.
Number one rule: don’t over trade.
Add to your winners and dump your losers.
When you find a company that you’ve invested in and it starts to go up in value and starts to make a lot of traction, a lot of times people tend to take profits or sell out their positions way too early. I strongly advise people not to do that.
In fact, if a company is doing well, you should add to your position. Add to the number of shares that you purchased and add to your investment in that particular stock. Don’t sell out. On the flip side, there are a lot of people who hold onto their losers way too long. Let’s say they buy a stock, it starts to gain some, then it’s down 10 percent — they hang on. Now say it’s down 20 percent. Not only do they hang on, they think “well it’s cheaper than what I bought so I’m going to buy more.”
That’s a terrible way to do investing.
If a company is down 20 percent, it’s not doing well. You need to get out. I use the analogy of a sinking boat. When a boat is sinking you don’t try to add more people to it, you have to take people off. For whatever reason, a lot of people like to average down. Averaging down is the dumbest investment move I’ve ever seen.
Don’t do it.
Once you’ve decided that this is the stock that you want to buy, have conviction in your trade. Again, it goes back to the first rule, don’t over trade. You want to stick with your thesis to your investment. Now, once the market has given you feedback and you’ve hit your triggers as to when to get out, or it’s giving you feedback that you’re wrong, that’s part of your conviction. On the other hand, if you’re bullish and the feedback is positive then you want to double down on it when it’s moving in your direction.
The pros always use risk management. What this means is that you don’t want to get burned on one or two positions or hang on for too long. Specifically that means using stop-losses.
What is a stop loss? Stop loss is an automatic trigger to get out of a position when there’s a certain amount of loss. Hence the word, stop loss. It takes the emotion out of a trade and it does it automatically for you. There’s a mathematical reason for this. Say you have a stop loss of 5 percent out of the position. On your next trade all you need is 6 or 7 percent to get back to even money. If you have a stop loss of 10 percent, then you need to make up the difference on your next trade of about 13 to 14 percent.
In an extreme case, if you lose 50 percent on a trade, you need to make 100 percent return on your next trade just to break even. Hence, the reason for a stop loss. By having small losers, it’s easier to recover. If you have a large loser, it’s near impossible to come back.
The biggest takeaway: there are so many resources available out there for you to educate yourself on investing. You don’t need to wait for the future to start becoming knowledgeable. Even if you only have a small amount to invest, you can begin the process by familiarizing yourself with some basic terms and concepts.