I’m younger than most people into stocks, as such, there seems to be a demographic boom of sorts of my friends wondering about getting started. I have brainstormed, regarding 18 valuable concepts. Some are obvious, some are not. All seem simple, most are not.
1. Market Causality is Fickle
Stocks anticipate good news, and bad news. So, if you’re buying something, because of some event in the near future, the market may or may not have all the upside/downside calculated into the stock already. This is sometimes referred to as sentiment. It’s the reason a company can release record profits and the stock fall, or the flip side is, if a company doesn’t lose as much money as the street expected it will go up. This applies to all sorts of news.
2. The Present Value Of Money
Stocks are the present value of the cash flows associated with them. If the cash flows change or are expected to change, the stock moves. This means that target prices are dumb, and investors need to decide for themselves, if the current market price, is a fair price to buy or sell at.
3. Investments are relative
If investment A is likely to return 10%, while investment B is just as likely to return 20%, investment A will fall in value, the yield on it will rise as people sell it, and the yield on B will fall as people buy it. This is the main reason stocks movement is correlated. Equilibrium is constantly chased.
4. Greater Fool Theory & Time: Why Stocks Go Up
Two reasons stocks appreciate in value: 1. People bid up the price, essentially a supply & demand problem for a finite number of a certain stock. 2. Time slips by and the present value of the growing cash flow that the company generates increases as well as produces a yield on equity. Both of these have a reciprocal for why stocks go down.
5. Trends are Trump
A good business plan will fail if trends are not on the side of the investor. A bad business plan can succeed if the trends are on its side. Basically, trends are the wind that can either power the sail, or rock the canoe
6. Stocks are Shares
You own the good times and the bad times associated with a company, after you purchase stock. Deal with it. Become a client if you’re not already. Refer a friend if appropriate. Check in on the company however you can, get creative. You now own parts of that business, a business you want to see do well. This advice, is just so that you get into it, and have fun.
7. Markets always over-react
Only thing guaranteed on Wall-Street. Both directions. The market will stay irrational longer than you can stay rational.
8. Value vs Growth
Understand the difference, and risk associated with them. Value stocks are generally safer, with lower yields, while growth stocks are riskier and more volatile.
9. Reports: Read Them
Companies write reports for reasons. Read them all, if possible. 100 times better than internet forums.
10. Luck & Profit have zero correlation
Anybody who calls the market a ‘gamble’ couldn’t be more wrong, or stupid. Luck has nothing to do with profits, I suppose with the exception of factors driving you towards the purchase or sale. I’m talking about, people who “hope” their stock will go up, or maybe they will get “lucky” with this one. Luck is to casinos what intelligence is to the capital markets.
11. Analysts are just “doing their job”
There is little incentive for them to do stick their neck out, the majority run with the heard, and do their job so that they can go home when they are done. There are good ones, and bad ones. Dumb ones, and smart ones. Just like any other employee.
12. Options are tools, not toys
Just like everything else, they can be used as an indicator of the future, as well as are available if needed. Investors should understand them, at the least, and use them when appropriate like tools – not toys. Leverage is a double edged sword, and time pushes that sword against your neck if you’re long plain vanilla.
13. Cash flows Statements & Balance Sheets: Use them
These are the history of the company, the stuff behind the scenes, that most retail doesn’t understand. Learn about them on your own, and use the companies’ numbers if possible, because the quality of free data often reflects the price of the data.
14. Diversify, it’s fun
And you’ll go insane with paper draw downs if you hold only one or two stocks. You’ll make less irrational emotion based decisions if you do.
15. Technical Analysis = Emotions of Wall Street
Many dorks all around the world have spent allot of time perfecting some fancy mathematical models to prove that emotions effect wall street. I’m in the camp that believes news and fundamentals will trump technical analysis, and thus, put very little emphasis on using it. While it’s true, the technical analysis seems to work, it’s not smart to scale it’s application as well as time consuming to apply with short term trading strategies.
16. Nothing ‘keeps on going up or down’ for no reason
If you ever find yourself saying “I think it’s going to keep going up/down”, and you have no reason why, you’re being silly. You’re under informed, you should do more homework. I recommend 26 hours per day.
17. Law of Large Numbers
Big things move slower. Realize what the market capitalization of a company is no exception to this rule.
18. Due Diligence is for Under Performers
If you see a stock running at all time highs, and upon a 30 – 60 minute inspection you want to buy, do it. Buy a little. Then, read up, learn more, follow the company and add or sell if appropriate.