Tips to sur­vive as an in­vestor

Here are 20 tips that will help you sur­vive as an in­vestor

Money Magazine Australia - - CONTENTS - Mar­cus Padley is a stock­bro­ker with MTIS Pty Ltd and the au­thor of the daily share­mar­ket news­let­ter Mar­cus To­day. For a free trial go to mar­cus­to­

1 Fifty per­cent of mak­ing money from the stock­mar­ket is not pick­ing the best stocks; it’s avoid­ing the bad stocks. So why does ev­ery­one spend 100% of the time find­ing the good stocks?

2 Pick all the weeds and you are left with the flow­ers. Pick all the flow­ers and you get left with the weeds. Pick the weeds. A small weed is the best weed. Take losses, not prof­its.

3 In­dex re­turns are a fan­tasy. They are heav­ily mar­keted as an ex­pec­ta­tion but they are a fan­tasy and the ac­cu­mu­la­tion in­dices that com­pound div­i­dends are even more fan­tas­tic. No won­der your fund man­ager un­der­per­forms. The in­dex per­fectly com­pounds div­i­dends, cost­lessly re­plen­ishes the bad stocks with good stocks, pays no deal­ing costs, has no rent, no staff, wa­ter cool­ers or man­age­ment fees, and is not there­fore a re­al­ity. I am amazed we all al­low our­selves to be bench­marked to it. It is hard to beat. And the re­lent­less snip­ing from the side­lines that fund man­agers are id­iots be­cause they all un­der­per­form the mar­ket is not a re­flec­tion of the man­ager’s in­com­pe­tence but the speaker’s ig­no­rance.

4 Don’t bother pre­dict­ing any­thing. Bear mar­kets start and bull mar­kets end when the mar­ket says so and it will only be­come ob­vi­ous in hind­sight. Best you go with the trend un­til it ends and re­act when it does, rather than pre­dict the begin­nings and ends, which is called guess­ing.

5 If you have a mort­gage, ev­ery dol­lar you lose goes on your debt and you pay in­ter­est on it, pos­si­bly for 20 years. On that ba­sis, with in­ter­est rates at 5% for the next 20 years (gen­er­ous as­sump­tion), ev­ery dol­lar you lose costs you $2.50 and ev­ery dol­lar you pay off is worth over twice as much as it costs. Get on the right side of com­pound­ing.

6 Don’t buy a port­fo­lio, buy stocks, and one day your port­fo­lio will mirac­u­lously reap­pear. Fo­cus on stocks, not fi­nan­cial mar­ket­ing about diver­si­fi­ca­tion. The only rea­son pro­fes­sion­als tell you to di­ver­sify is so that you can’t sue them.

7 Only the un­ex­pected moves a share price. You will make more money guess­ing what ev­ery­one doesn’t know about a stock than you will ever make find­ing out what ev­ery­one knows about a stock.

8 A diver­si­fied port­fo­lio of 20 stocks you ignore is more risky than a port­fo­lio with one stock you know ev­ery­thing about.

9 You can­not do it “the War­ren Buf­fett way” or there would be a fund man­ager do­ing it, we would all be in­vested and we’d all be bil­lion­aires. War­ren Buf­fett is not re­al­ity. War­ren Buf­fett is a mar­ket­ing tool for peo­ple who can’t sell their own prod­ucts on their own mer­its.

10 The mar­ket never crashes up. It falls three times as fast as it rises be­cause losses have three times the emo­tional im­pact of a gain. Fear is a big­ger driver than con­fi­dence and “it takes five min­utes to be fear­ful but you can’t get con­fi­dent in five min­utes”. Stock­mar­kets rise slowly and fall quickly. You have to re­act quickly to losses. In a bull mar­ket you have time. In a bear mar­ket you don’t.

11 An old one: if you ever find your­self stand­ing up and punch­ing the air in de­light, it means “sell”.

12 Catch­ing the knife. There is only one thing a fall­ing share price tells you and it’s not “buy me!”

13 Swim with the tide. In a bull mar­ket the core virtue is “par­tic­i­pa­tion”. In a bear mar­ket the core virtue is “non-par­tic­i­pa­tion”.

14 So­phis­ti­cated in­vestors: in a bull mar­ket you are a so­phis­ti­cated in­vestor when your ac­coun­tant con­firms you are. It takes a bear mar­ket to find out whether you are.

15 Watch the crowd, feed the crowd, ma­nip­u­late the crowd but don’t be the crowd. Bear mar­kets end when the head­lines are ter­ri­ble. Bull mar­kets end when the head­lines are eu­phoric.

16 The three big­gest weak­nesses of an am­a­teur in­vestor: not sell­ing, not sell­ing, not sell­ing.

17 The other weak­nesses of the am­a­teur in­vestor: not car­ing, not watch­ing, blam­ing other peo­ple, cru­sad­ing, be­ing emo­tional, car­ing about the pur­chase price, be­ing long term, be­ing short term, mak­ing grand dec­la­ra­tions about the fu­ture, wast­ing time on macro ru­mi­na­tion, rush­ing, both­er­ing to run a diver­si­fied port­fo­lio you could buy for $19.99, quot­ing War­ren Buf­fett and think­ing you sound clever.

18 The only ef­fort­less way to get rich is be born rich. But you only get one shot at it and peo­ple far less ca­pa­ble than you al­ways seem to suc­ceed at it.

19 The sec­ond best way to get rich – but it re­quires a lit­tle more ef­fort

– is to marry rich. The best advice my par­ents never gave me: if faced with two equally at­trac­tive po­ten­tial mat­ing part­ners for life, marry the rich one.

20 Be nice to your chil­dren. They will be the first gen­er­a­tion of in­vestors who have no rec­ol­lec­tion of the 2008 fi­nan­cial cri­sis and the next gen­er­a­tion ca­pa­ble of a bout of ir­ra­tional ex­u­ber­ance. It will be th­ese del­i­cate lit­tle cherubs who even­tu­ally pay top dol­lar for your as­sets.

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