You’ve probably heard before that you should begin investing when your young, because you have more years ahead of you so that your money can compound for a longer time and you’ll be way better off financially in the long run. That’s absolutely true, but there’s also a less known reason for why you should begin investing at a young age. Now if you have kids, then I suggest that you give them a little bit of money to invest on their own.
Typical reason we’ve all heard about – you have more years for your investment nest egg to grow.
Let’s start off with comparing two people.
Joe begins investing at age 35 with $1000 and with an average 10% year over year return, he has $10,830 by the time he’s 60.
Tom begins investing at the age of 15 also with $1000 and with an average 10% year over year return, he has $72,890 by the time he’s 60.
This is quite logical. The earlier you begin investing your savings or funds, the more time your money has to compound and grow.
The little known reason – you’re making mistakes and learning with a smaller amount of money.
Continue reading Why You Should Start Investing at a Young Age.
Let me start off with stating a fact. The stock market (and all markets for that matter) were, are, and always will be a zero sum game. This means that for every dollar made in the stock market, someone else loses a dollar. So what does this mean for you? It means that your enemies in the market are trying to steal money away from you. Only by learning what not to do will you know what to do will you know what to do. So here are 7 common investment mistakes that a lot of investors make.
- Believing and looking for tips.
- Using leverage.
- Buying into a bubble near the top, knowing it’s a bubble, and hoping to make some money before the bubble pops.
- Buying individual stocks.
- Buying penny stocks.
- Shorting the markets.
#1 – Believing and Looking for Tips.
Ever been online and seen those ads that say “sign up for our stock tip newsletter and find out about stocks that will make you rich Rich RICH”? Have you ever asked your friends or colleagues “what stock should I invest in”?
Let me give you an eye opener; never ask a question like that again. Ever. By asking for a tip, it just proves your ignorance. Ignorance in the stock market simply means that you WILL lose money.
Continue reading Common Investment Mistakes
What’s the worst thing that can happen to a stock? Uncertainty within the company, and about the company. There was a post recently on Business Insider explaining what is causing Apple’s bad performance this year.
To sum up that post, there is a lot of uncertainty within Apple, and about Apple. Managers in Apple are afraid of what’s to come. Will they be fired, promoted, or what? Once Steve Jobs leaves, there’s bound to be a lot of reshuffling within the company. Also, people aren’t even sure if Steve Job’s is leaving or not. This is what’s causing all the uncertainty. Managers and workers are uncertain about the future, because Steve is keeping everyone in the dark about his situation. Managers no longer are focused on product development, which can explain why the the iPhone 5 didn’t come out.
Investors are afraid of uncertainty. Either tell them the end is near, or tell them that everything is good. Don’t keep them in the dark about what’s going on within the company. Uncertainty causes the stock to slowly slide down, but with big swings in the stock price. Investors aren’t afraid of failure or success as much as they are afraid of uncertainty.
This may shock you because all the so called “experts” are touting about safe diversified portfolio. Now let me break that illusion, and tell you why you’ll make better investments returns if you put all your eggs in one or two baskets.
Let me start off with a story.
Once upon a time, in a land far, far away, there lived Investor Joe. Joe was one of those people who’s portfolio had 10-30 stocks. Then there was Investor Tom. Tom would never diversify his portfolio; he always owned 1 or 2 stocks.
Because Joe had diversified his portfolio, he never had the time to really analyze and pay attention to any one of those stocks. He believed that his diversified portfolio would be protected from the eventual downturn.
Tom, on the other hand, selected his portfolio with great care. Because he only had positions in 1 or 2 stocks, he had the time to spend on detailed analysis of the company he was investing in.
So these are their results. When the stock market as a whole went up, Joe’s returns matched the market’s gains. Tom, on the other hand, beat the market. However, during that year, there had been times when Tom’s portfolio performed far worse than the market. The Dow Jones had returned 12%, and Joe’s portfolio had returned 12%. Tom, on the other hand, his portfolio returned a volatile 8 – 23%.
Then comes the eventual downturn. Joe thought his diversified portfolio would protect him. That’s the stupidest assumption I’ve ever heard. His portfolio’s decline matched the market’s decline. And since he never had the time to analyze which stocks were good and which were bad, he couldn’t sell the bad ones and hold onto the good.
Tom, on the other hand, had studied his investment (one stock) inside out. He knew where he was headed. So his portfolio still did better than Joe’s.
My point is, a diversified portfolio doesn’t spread out the risk. All you’ll be able to do is match the market’s returns, which is the same thing as buying an index ETF. If you look at many great investors such as George Soros and Jim Rogers. When they have an interest in a market, they don’t just have some skin the the game. They have their whole ass in the game.
Short selling is extremely dangerous, and many a fund in history (the greatest funds in history) have been wiped out by one short mistake. Here’s why.
When you are long a position, and the position goes against you, you have time on your side and can ride out the crisis (as long as no leverage is involved). But shorting a market is different. In the long term, you may be right to short a market, but a fatal mistake in the short term is FATAL. Timing is everything when starting a short position. For example, if you shorted a stock at $50 per share, and you have $50 left in your investment account. Within a month, that stock rises to $100. You’re completely wiped out. But after half a year, that stock falls to $30. In the long term you were right to short the stock, but timing killed you. And trust me, it’s very hard to get your timing right every time. One mistake in shorting a market can be fatal.
Here’s my article on why shorting a market that is in a bubble is extremelyyyyyyyy dangerous.
After reading about Jim Rogers and the internet bubble that burst in 2001, I’ve come to a conclusion that it’s way too dangerous to short a bubble. Here’s the simple reason.
When the market are in the final crazy stages of bubble mode, no one knows how much higher the market can go. Because investors are going crazy at this stage of the bull market, no one can predict when the bubble will burst. It may end in 4 hours, it may end in 4 days, or it may end in 4 weeks. No one knows. This is precisely why it’s too dangerous to short a bubble. One can easily be wiped out in a short, especially when you’re shorting a market during it’s bubble stage. All it takes is a few more days of a rising market to wipe out your short positions.
Last week on Business Insider (I infrequently write guest posts there) I wrote a post about how the uncommitted/unsophisticated investor can only do long term investments. I’ve been thinking about it, and now I believe that that strategy doesn’t work either
Unsophisticated investors (retirees, pensioners, employees, people who do investments for their savings, etc) do not have the emotional strenght to buy and hold on when the going gets tough. When a big financial crash comes along, the unsophisticated investor attempts to hold on at first But as the market keeps deteriorating, it seems as if all the supports are being taken out and there is no bottom to the crash. Unsophisticated investors panic, and sell at close to the bottom, only to watch the market soon rebound quickly. For example, in 2008 all the pensioners and retirees watched in fright as the market dropped one day after another. THen, when there seemed to be no hope left in the financial markets, they sold out in early 2009. And the DJ Average reached its bottom in March of that year.
So if these unsophisticated investors don’t have a chance in suceeding at investing on their own, then the logical alternative is to invest in somwith someone else (in san investment fund). But once again, this doesn’t work for unsophisticated investors. They have neither the knowledge nor capability to choose a fund that is the right one for his or her investment style (because they do not have a good investment style).
The only available choice is to buy bonds. And bond rates are reeeeeal low right now, so it’s not very appealing to be buying bonds. But let’s ASSUME that they do buy bonds. These unsophisticated investors who have 9 -5 jobs or play the markets part time have a steady stream of income to invest with. Eventually, the stock market will go back to its old highs, there will seem to be no limit to where the stock market can go, these stupid investors will buy stocks, and the cycle repeats itself again…..