This is a guest post by Troy enjoy!
When I was a kid, I had (and still do have) great parents who talked about a lot of interesting things, especially around the dinner table. Driving to school with dad was a real treat, as he’d teach me about all sorts of things, such as What is the Difference Between Protestants and Puritans in Elizabethan times and How is Standard Deviation Calculated. At the dinner table, my parents would often talk about their finances to my siblings and I. Thus, at a young age I came to know a little bit about finance and investing.
I opened my brokerage account as soon as I legally could – the day I turned 18. For others, 18 signified important things – the rite of passage into being adult, the ability to sign your own papers, etc. For me, it meant (finally) the ability to invest my own money. In that first year, I made 4 deadly mistakes that effectively painted me as a Newbie. In reality,I made a lot more than just 4 mistakes – the ones listed below are just the most financially painful errors. At least I didn’t make the mistake of using a simulation trading account.
I was too giddy
Like most just-turned-18 adults, patience wasn’t exactly one of my best virtues. I was so excited about opening my brokerage account that I wanted to invest as soon as possible. Within 2 days, I read a couple of financial articles and placed my first buy order for Nike stock (I’m a big fan of sports). Within 9 months, that stock had fallen more than 50%. I was crushed, both financially and emotionally.
The lesson to all you new investors out there – don’t invest ASAP. Learn as much as you can before you start to invest – had I read books about investing and learned as much as I could from great investors like Warren Buffett, I could have avoided a seriously painful financial mistake. Only patient investors can be successful investors.
My stupid broker
Back in the day when full time brokers could still find employment, I had what many would call a “churn ’em and burn ’em” broker. Actually, he wasn’t really a bad broker, and nor was he a bad guy. He was just doing his job, which is what all brokers do to make a living – generate commissions. Within days of opening my account, my broker dialed me up and gave me a recommendation to buy a certain stock whose name I don’t even remember. He presented me with some financial “research” that he had done, and gave me one of the standard lines all brokers employ. “This is a sure thing. The secret to making money in today’s market is to buy….” Although at the time I didn’t have a degree in anything, I sure had a PhD in Ignorance. Being stupid and inexperienced, I followed my broker’s recommendation. Needless to say, I wasn’t too happy by the time he called me a week later with another stock recommendation.
The message to all new investors here – never, ever trust your broker. I had to learn this the hard way. Brokers have a conflict of interest with their investors – investors want to make money, while brokers just want to make commissions. Thus, brokers often recommend buys and sells that make absolutely no sense for investors – they’re purely for the sake of generating commissions. Brokers will pressure you into buying and selling as much as possible. Oppositely, Warren Buffett said that he made the most money by “being right and sitting tight”, which is the Devil’s Creed for brokers.
Sure enough, I soon transitioned into a “self service” online brokerage. Cheaper commissions, and no annoying brokers calling me up at 1 a.m. with the “next big thing”. Even if I lost money, at least I could get a good night’s sleep.
I spent a lot of money
Despite being raised in a frugal family, my introduction to investing was anything but frugal. I spent thousands on investment DVD’s, seminars, and became the marketer’s dream “customer” (more like victim) for “trading models that will generate 80% per year!” On the other hand, I did subscribe newsletters that were written by some serious analysts and thinkers, some of which I still keep today. Now you’re probably wondering, what’s the problem with that?
Out of the approximately $4000 that I spent, only $300 of that was actually useful. Some of the knowledge that I bought was just pure BS, but a lot of it was actually good information. Unfortunately, a lot of the information didn’t work for me, the same way I cannot teach you my investment style because YOU are not ME. What worked for a lot of these other successful investors whose seminars I attended didn’t work for me (although it sure worked for them). In other words, I had lost $3700 before I had even placed my first investment order!
The lesson here – don’t start investing with a lot of overhead. When you first start investing, you haven’t a clue as to who you are, what you can do, and what investment style fits you. Instead of wasting thousands of dollars on things that won’t be of any use to you anyways, read investment articles online! It’s free!
I was discretionary
When I first started investing, I was a pure discretionary investor. I’d read some financial reports, take a look at the stock’s price pattern, do a bit of mental math and then decide to buy or sell the stock. In other words, I didn’t have rigorous analysis and most of my investment decisions were based purely upon gut feeling. As I’ve already mentioned, my first year investing wasn’t very profitable.
Case in point – as a serious investor, you must have a rigorous, step by step, methodological approach to making investment decisions. Otherwise, you’re just making gut decisions, which based on my personal experience has a less than 50% accuracy rate.