Zero-sum play: remember that in the stock markets, for every winner, there is a loser (Photo courtesy of Pixabay)
The recent Gamestop phenomenon has sparked exclamations, disbelief and a surge of interest across generations in investing.
Looking at a few thousand financial media reports, we see both new and well-established stock trading apps promoting stock trading as commission-free, easier, and fun.
Slogans, such as “invest and chill”, “you are in control”, “investing, no manual required”, “you have to invest and any other”, etc., also seek to define new ways of thinking about the financial future. .
Call it what you want: the lure of getting rich, the relief from the boredom of Covid, the sincere intention to learn how to invest, the camaraderie of like-minded trader-player groups, bringing this back which was considered too difficult to “easy for anyone”, the freedom (and maybe the thrill) to do it yourself by investing!
So here are some tips and some sobering facts. Isn’t there always?
For a complete analysis on DIY investing, please see step 14, of the Bermuda Islander Financial Planning Primer Book One: The dawn of a new beginning – available Monday February 15, 2021, www.royalgazette.com/bermuda-islander/
1. You will need to open an investment account with a local brokerage or bank company. Pay attention to this process.
2. You may be given a long contract – read it carefully. A basic brokerage account can also include a request to open a margin account where you can buy investments on margin (leverage).
3. Margin account. Understand what he is doing; it can amplify your wins, and guess what, amplifies your losses, triggering a margin call – which you may not be able to satisfy!
4. Have a plan, putting all your trades (and your money) on one stock – because its value continues to rise is not a plan.
5. Buy small positions, say $ 1,000 per stock pick, or even less. Companies offer “stock pieces” for high one-price stocks.
6. Diversify. Lordy, have some sort of diversification in your plan. Roaring Kitty is said to have lost $ 48 million (from an initial investment of $ 50,000 from Gamestop). For the life of me, I can’t understand why he didn’t sell this gain for a realized profit – rather than a bragging about profits only on paper. See my article last week, The Gamestop Phenomenom re: Realized vs. Unrealized Gains.
7. Avoid the herd mentality. Don’t go with the crowd no matter how popular you want to be.
8. Set a profit, a loss and a time limit on each position. Example: If it is a share of a good company, keep it. On the flip side, a pure momentum trade, set a profit exit, say 30 percent in a month – sell! Thirty percent times 12, that’s a 360 percent gain in one year. You develop your own trading strategy.
9. Sell short. Never, ever, get naked – in common investing parlance – defined as not owning the stock short or not having the cash to support the short-selling strategy of stocks.
10. Do not give in to greed by coveting huge gains. Just because a stock is doing well doesn’t mean you should buy more – suddenly you can find all of your money tied up in a few stocks (or just one). Now it’s an emotional roller coaster.
11. Don’t like any stocks, mutuals, hedges or any other security. It is not a person, nor a human in any way. Emotional decisions are usually not rational.
12. Do enough research on each position to understand how it reacts in volatile markets. Finviz – Financial Visualization has one or more excellent market maps https://finviz.com/map.ashx?t=sec_all
which shows hues ranging from dark green to red, with bright red indicating more volatility and price fluctuations in a stock. You can also use Yahoo Finance and put together a five-year chart for any stock that will show historical price movements quite vividly.
13. Buy stocks of companies you know and whose products you regularly use. Learn how to earn, as Peter Lynch says. Chasing unfamiliar penny stocks and other short-term games is not for the faint-hearted, newbie, or budget-conscious.
14. Read Bloomberg every day. Research comment you don’t understand. You will go down the road!
15. Don’t be tempted by website and media advertisements to trade currencies, options and other “get-rich-quick” incentives.
16. Be careful – at least once a week or more – unless you are a day trader. Consider joining an alert-type service (or downloading it yourself) that will alert you if your locations change.
17. Calculate your actual rate of return and watch your fees. Brokerage commissions, turnover fees, mutual fund fees, entry and exit charges all take a portion of your actual profit.
18. If you are invested abroad, or if you live in a taxable country, be aware of the tax impact on your rate of return, for example capital gains, tax on dividends, taxes. short term gains are subject to higher taxes than capital etc.
19. Don’t even think about trading on your workday – this type of activity is not tolerated and is considered a dismissal offense in today’s heavily guarded remote employment field.
20. Be skeptical of anyone touting how spectacularly successful they have been. No one wants to admit a loss – and if they do, you know it was a zinger.
21. It is always wise to remember that investing is a zero sum game. For every winner, someone is a loser. You won’t win all the time, but you want to land on the winning side consistently.
22. Look closely at the quantitative analysis of the Dalbar graph of investor behavior in Step 14 – since 1988, the average stock market return has been 10 percent per year. But investors in equity funds only earned 4.1% per year. See, it’s your brain’s fault.
Now, after reading this, if you are feeling exhausted or prefer to garden or plan your next trip, you know your homework takes a different slant.
Rather than looking for good stocks to buy, consider focusing on building a relationship with an experienced and licensed investment professional.
CNBC: “You make big financial mistakes – and it’s your brain’s fault,” Ric Edelman, Aug 1, 2019, https://tinyurl.com/y25ze95f
Disclaimer. This article is for informational purposes only, should not be used, and is not intended as personal investment advice.
• Martha Harris Myron, CPA JSM, originally from Bermuda, is an author, international financial consultant for Olderhood Group Bermuda and financial columnist for The Royal Gazette, Bermuda. Contact [email protected] All proceeds from these articles are donated by the Royal Gazette to The Salvation Army, Bermuda