Wednesday, August 5, 2015

Lessons of an Investing Addict Part 1: The Groundwork of an Investor

I've discussed in previous posts that keeping a tight budget is very important in reaching your financial goals.  A Google search will turn up hundreds of articles providing ideas on how to trim your budget and an entire blog community exists full of participants trying to outdo one another on who can live in the most frugal manner.  I think that is a little extreme.

Instead, I want income growth to be the main driver of my financial independence.  I tend to focus much of my free time and energy on stock investments and I will outline my strategy here.  Disclaimer:  I also mentioned in a previous post that I don't necessarily agree with Jim Cramer's overall investment philosophy, but from his book "Real Money", I wholeheartedly agree with his concept of dedicating a minimum of 1 hour per week per stock to research. 
If you do not have the time to do proper research and keep up with your stocks, you should choose one of the three following options:  get out of the market, pay someone else to manage your money for you, or invest in index funds where some, but not all, of the research can be eliminated.

The first step is to read all you can.  I highly recommend some of the classics to get your feet wet and begin to build a strong foundation for you to work from.  I recommend "The Intelligent Investor" by Benjamin Graham and "One Up On Wall Street" by Peter Lynch.  Graham's classic is dry, but if don't learn anything from it, it's your own fault.  In fact, one of the most valuable lessons I gained from it was the realization of how little I knew!  Mr. Lynch's book is a much more enjoyable read and probably much easier to relate to.  It focuses on awareness in every day life for your own financial benefit.  Philip Fisher's "Common Stocks and Uncommon Profits" can give you a sense of the work that needs to go into picking quality stocks.  Check out my "Great Reading" page for additional recommendations.

Next, I recommend reading up on the macro economic environment to start to build a feel for economic cycles.  Seeking Alpha is a great site where contributors provide investing opinions and analysis on everything from stocks, options, currencies, commodities, etc.  Yahoo Finance is well known for its stock message boards.  Type in the symbol of the stock you're interested in and click on the "message board" to see what all the latest chatter is about from fellow amateur investors.  Just a word of caution:  You should personally verify anything you read on one of their boards.  Other sites like Bloomberg and even MSN Money can fill you in on the daily headlines.

All of this may come across as boring, but it is a necessary initial step to familiarize yourself with the inner workings of the market.  Don't just skim through what you read - really dig into it.  The purpose isn't to memorize every minute detail; the purpose is to form a sense for different investment strategies.  Try to zero in on a strategy that fits your personality.  Value?  Growth?  Index funds?  Options?  Try to decide if you want to be a speculator, a trader, or an investor.  Identifying oneself with one of these three characterizations will subconsciously force you to play within the respective "rules" of your chosen term.  If you are unfamiliar with the differences between the three, take a look here.

At this point, throw a little money - enough to make you care, but not enough to break the bank - at a few stocks in your brokerage account.  There's no other way to learn!  I use Scottrade and Sharebuiler (Capital One), but there are a number of discount brokerages, each with it's own quirks.  Try your strategy out, but don't forget to keep researching!!!  Don't beat yourself up if you lose money and don't let it go to your head if you make money.  However, always write down a lesson you learn from each position - especially the losing ones.  This needs to be a true "post mortem", forcing you to reflect on your mistakes so you can avoid them in the future.  You can go a step further and make a checklist of traps you've learned that you need to avoid.  Before any purchase, run down your checklist to ensure you haven't overlooked any of these traps. 

I will discuss in more detail the intricacies of different strategies and nuances I've picked up along the way in future posts.  This step should take you a minimum of a few months to gain a sense of familiarity with the markets.  You are now starting down the path of growing your income! Good luck and have fun! . . . but don't be too hard on yourself in this initial step.

12 comments:

  1. Hey DP,

    I like the idea of using income growth as a driver for financial freedom. I don't think getting above average returns in the market is the path for me, but if you've got the skills more power to you. How long have you been investing?

    -TBD

    ReplyDelete
    Replies
    1. Hi Dragon,

      Thanks for the read. I have been involved in stocks since around 2005, but the first 4-5 years, I guess I would have considered myself a trader. I took a step back and really dug into successful money managers and transitioned into a long term investor. I've had some success within the last couple of years - but I definitely paid for that education.

      Anyway, I hope to diversify into a few different streams of income and not rely solely on stock capital gains, but that is all a work in progress.

      Keep up the good work on your site!

      -DP

      Delete
  2. DP,

    An excellent key point you made here is that we should not just skim the material, but also really try to understand its meaning.

    People that jump from one strategy to another such as index funds, value funds, dividend investing, bonds, cash, and call/put options without knowing their long term strategy, will certainly learn some hard lessons with their money.

    Bryan

    Jumping into excoit

    ReplyDelete
    Replies
    1. I've read that strategy-hopping is the bane of most investor's existence. People tend to focus on short term gains. A long term buy and hold strategy would work great for most people, but if they don't see the results they want in a month or 3 months or 6 months, they change strategies. Not good.

      Look at many of the world's top investors and traders. Many of them have extremely different strategies. There is more than one way to skin a cat - but you have to stick to the one you choose or you will suffer the consequences.

      Delete
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