Investing in the stock market is a great opportunity to make passive income. But it is possible to lose money in the stock market. When I was a beginner, I was clueless how the market works.
Experience is probably your most important thing into being successful in investing in stocks. Like everything in life, you just naturally get better doing it again and again.
Let me share the things I wish I know before investing in stocks. And hopefully you can get some value from this article.
1. Getting Rich from Stocks takes time… but it pays off
When I was starting, I thought I could earn a million dollars in a year or two. After a couple of months, I realized that it is just impossible.
Less than 5 percent of day traders became successful in trading stocks. I tried day trading and I’m one of the 95 percent.
The best approach is long term investing. It is much lower risk compared to day trading and is a proven way to invest.
It takes money to earn money. A 10 percent income is a decent return from stocks in a year. A $1,000 capital can return $100 from stocks at a 10 percent return. But a $100,000 capital can return $10,000 at a 10 percent return.
But over the long run, investing pays off. A $1,000 investment a month for 20 years will be $464,000 at 6 percent returns. That same capital for 20 years but a return of 10 percent will be $766,000. That 4 percent difference amounts to $302,000.
2. Stocks are unpredictable in the short term
Stocks could go up or down in the short term. Great companies can go down in the short term. But over the long run, investing in great companies at a fair price pays off.
When I was starting, I thought that I could only invest when the market will be up and not invest when the market will be down. The sad reality is I have no idea when the market will go up or down.
Facebook is a great example. It has an IPO price of $38 per share. After 6 months, it became $20 per share. At that time, it might seem a horrible investments. Today, Facebook is now worth more than $200 per share.
Of course, not every stock is like Facebook, but it shows that stocks are unpredictable in the short term.
Nobody can time the market. Sure, there might be a person that could profit by timing the market. After all, lottery winners exists. But for the vast majority of people, long term investing is the way to go.
It would be wonderful if a person knows what will happen in stocks next year, or when will the market crash. But the reality is that anything can happen in the short term.
In any year, there is a 33.7% chance that the market will go down. Also, there is a 66.3% chance that the market will go up. (Data in the last 90 years.)
Over the long term, the market has returned an average of 10 percent per year.
3. Making mistake in the stock market is inevitable
Warren Buffet made a lot of mistakes in his investing life. One of those mistakes was made on Kraft Heinz that he admitted he made a mistake. And over decades of investing, he made some bad investments.
Despite all of his bad investments, he is arguably the greatest investor of all time. He made a lot of great investments in his life more than his mistakes.
The key is to learn from mistakes and move on. Not every investments will be a success.
When I was a beginner, I felt horrible when one of my stocks go down. The reality of investing in stocks is that
After investing in 10 stocks, not all of those is going to be a success. There might be one or two of those that will not go up. The key is to have the majority of investments to be successful.
Beginners are more prone to make mistakes in the stock market. That’s why I recommend to start with little money.
4. Diversify, but not over diversify
When I was getting started, I thought it makes sense to put all of my money in one stock. After all, I truly believe in that one stock.
Whenever the stock go down, I felt like it is going to go down more so I sold. At the end of the day, I lost money by just investing in one stock as I change stocks often and ended up buying high and selling low.
It is just riskier not diversifying. At the same time, there is a thing called over diversification.
There is a right diversification in stocks. It is hard to keep up investing in 50 stocks. Researching all 50 stocks takes a lot of time. Also, a 100 percent income from one stock can only bring 2 percent on the portfolio.
At the same time, investing in only one stock exposes to a lot of risk.
In my opinion, 5 to 10 stocks is more than enough. Also, it makes sense to put more money on the stock you believe the most and less cash to a stock that is riskier.
5. Always have some cash on the side
When I was starting, I invested all of my cash in stocks. After all, if you can earn 10 percent, why not invest everything.
There is one thing I did not recognized. The stock market is unpredictable. When stocks go down, stocks became cheaper. I am not able to buy any stocks at a wonder price at that time since I have no cash on the side.
Be greedy when others are fearful, be fearful when others are greedy.
– Warren Buffet
It is always an opportunity when the stock market go down. Having cash on the side can give you an opportunity to buy stocks at a discount. I was not able to do that when I was a beginner.
Also, there are usually one or two market corrections (10 percent down) in a year.
Having cash on the side also allows you to not be forced at selling stocks. When stocks go down and we need the money, we might be forced to sell stocks at a cheap price.
6. Patience is key to investing
Patience goes a long way. Stocks can go anywhere after a month or two. But in the long term, it is easier to predict. Great companies that is growing revenue and profits is usually a great investment at a fair price.
It just takes time for a company to grow. Nobody knew that Amazon exists 20 years ago. And on 1999, Amazon only has a revenue of $1.68 billion. Today, they have sales of over $300 billion and still growing.
No company can grow overnight. Companies takes time to grow.
Also, investing is like planting a tree. A tree can not grow overnight.
7. Checking the balance sheet before investing
When I was a beginner, I just look at the price of stocks before investing and taken for granted the balance sheet. Checking the balance sheet is important.
And it is very simple. Just look at assets and liabilities. Assets should be less than liabilities. If total assets is less than total liabilities, it is a red flag.
The balance sheet is important for long term investors. After all, a company can only became bankrupt when they can’t pay off their liabilities (debt).
Companies that have good balance sheet is generally more secure.
There was a stock that I invested in and I’m clueless on why it is going down. I sold off after looking at the balance sheet. The company has a lot more debt than it’s assets and is at risk at going bankrupt.
I takes less than 1 minute to have a simple look at a balance sheet. It could make a difference down the road.
8. There are different kinds of Stocks, Investing in stocks is not just one thing
There are 2,800 stocks listed in NYSE alone. Every stock has their own opportunities and threats. There is just a lot of opportunities in stocks.
Every stock gives different returns on investments. They have their own risks and rewards.
The great thing is that you only have to pick 5 to 10 of those stocks and believe in them. You do not need to learn all about them but just choose the business you understand. And buy them at their fair price.
9. Stock market can be gambling
I was confused if putting money in stocks is gambling or not. After a couple of years investing, I have some opinion on this one.
I think looking only at the price of a stock and hoping it goes up in the short term is gambling. There is more on a stock than it’s price.
At the most basic level, stocks are a portion of a business. In my opinion, focusing in the short term and hoping a stock goes up is gambling.
On the other hand, I think investing in stocks for the long term is not gambling. After all, it takes money to start a business. And starting a business is not a guaranteed success.
I think the right approach to investing is to treat stocks as business. When you invest in stocks, think of it as investing in businesses.
No business is guaranteed to succeed and the purpose of most businesses is to make money. Stocks are businesses.
10. You can lose money from Stocks
Investing in stocks is not a guaranteed way to make money. On the short term, there is a 50/50 chance to make money.
No business is guaranteed to succeed and stocks are businesses.
The most money you can lose is the amount you invested. But the most money you can make is basically unlimited.
On the other hand, the opposite of investing in stocks is short selling. The maximum to make in short selling is 100 percent (when the company goes bankrupt). While the most money a person can lose in short selling is unlimited.
For the most part, you can make money in any stock. If you believe it is going down, you can short it. But shorting in stocks is much riskier than buying a stock.
11. Bad performance in the short term does not mean a bad investor
One month performance does not mean much. Any stock can go up or down in the short term. A great company can go down in the short term.
Long term investing can be judged over a 3 year span since stocks are unpredictable in the short term.
Also, beginners in stocks are more prone to make mistakes. In the first year of investing, it is important to start with little money, build good habits, and lower expectations.
12. Anyone can Invest
You do not have to be an expert to start investing. Quite frankly, knowledge in investing is essential nowadays since you can only get around 2 percent in a savings account.
Also, 95 percent of mutual funds under perform the market after fees. Investing in stocks really pays off in the long run.
The best move you can make is to start investing. And it’s advisable to start with little money and try to be comfortable investing in the market. After a year or two, you can just naturally get better investing in stocks.
13. Stock Price does not mean anything, a $1,000 stock is not more expensive than a $100 stock
A higher stock price does not necessarily mean a stock is more expensive. A stock can split into two or three anytime. And a stock split will not affect a business in any way.
The most simple way to price a stock is P/E ratio and P/S ratio. A stock with higher ratio means it is more expensive. A more expensive stock means investors are expecting more growth into the company.
And it is the simplest way to value a stock. The stock price only makes sense when you compare it to its past performance.
14. Penny stocks do not work
Investing only in penny stocks does not work. Sure, one in a million of penny stocks ended up being a success. But the vast of majority of penny stocks was just not a good place to invest, especially for beginners.
Penny stocks seems attractive. After all, it only trades for less than $1 a share and could multiply by 50 or 100 in the future. The thing is that it is very rare for a penny stocks to succeed.
Personally, I chose 8 penny stocks about 2 years ago and invest $10 on each of those. Here is my current returns.
- I lost at least 70 percent on 6 of those stocks
- Gained 9 percent on 1 out of 8 stocks
- Gained 24 percent on another 1 stock
Overall, I lost 50 percent on penny stocks ($40). On the same period, S&P 500 has returned more than 20 percent.
I wondered why that is the case. And found out that:
- Penny stocks are not required to file documents with SEC. (listed on pink sheets)
- Lack of buyers and sellers
- Shares can trade at penny stocks even if there is no business at all
Since it is not required to file to SEC to have penny stocks, numbers are easily manipulated. There is no credibility on information about a penny stock.
15. Less than 5 percent became successful at day trading
The life of a day trading seems cool and fun. But only a few people became successful at doing it. In fact, one could argue that only less than 1 percent became successful at day trading.
Yes, day trading can make you lots of money. But, it takes a lot of your emotional energy. Also, it takes around 8 hours a day or more in day trading. The worst part is, even you do all that work, there is a lot of risk that only less than 5 percent of people actually succeeds day trading.
Long term investing is the way to go for most people. It is buy and forget strategy. When you are a beginner, I suggest to try to invest $500 in each investment strategy.
After a couple of months, you can figure out what strategy actually works for you.
