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Memoires of a Newbie |
| Category: Musings |
Published: 13-12-2007 |
By: perdant |
| [click to enlarge] |
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| BHP drilling |
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| This is BHP in 1985 |
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| Testing Testing 1 2 3 |
I thought this post might be of some interest to:
(1) Those new members of the site who may be contemplating their first foray into the market;
(2) Those at a similar stage to me, so that we can compare notes; and
(3) Those more experienced members on this site whom have given advice and posted information that might have seemed small to them, but, which has helped me on my way. Thank you.
I read somewhere when I first started out in shares that of five stocks
purchased: one will perform as expected; one will pleasantly surprise;
and three will disappoint. By definition therefore, I had a better than
even money chance of being disappointed!
I consider myself lucky that my introduction to the market has been during a bull run, however, I wonder if I will be prepared when the bear comes? Time will tell.
So this is what I have learned so far:
You need a plan
A plan is essential AND you need to stick to it! Haphazard choices may
give short-term positive results but long-term success comes from
consistent application of a proven plan.
Buy shares, make money, is not a plan. It is a fanciful, optimistic
notion that does not provide you with the tools, strategies and rules
you need to be successful.
A plan should achieve the goals that you set for yourself and should be
monitored regularly to confirm its effectiveness. Set yourself
realistic targets and don’t get greedy.
Find a mentor
If you are lucky enough to find a GOOD one, learn as much as you can!
If not, read as much AND as widely as you can. There is so much
knowledge out there, you just have to look.
Research
If the word ‘research’ conjures up thoughts of wasted time and missed
opportunity, think again. Who, reading this, has not missed an
opportunity? The market has been here longer than all of us and will
still be here long after we have gone. It is far better to pay a higher
price for a share and understand its dynamics than it is to buy blindly
and wonder wtf
is going on when the price drops 50%. Think of incremental increases in
price [if any] as the cost of understanding. In the long run, this will be time and money well invested and who knows, it might even save you from making a bad investment decision.
Make decisions on investment based on sound, educated research – YOUR
research. YOUR research will make it easier to know when to sell out or
buy more of a company as only YOU will understand the reasons behind
your investment choices.
Once you have committed to any stock, remember why. You may have
selected x stock on the basis of a, b, or c – these factors needs to be
monitored. If any one changes, does this mean the stock is now any less
viable now than it was before? What else may have changed to compensate
for these factors - the company direction, commodity prices, new
markets, management?
If after careful research your company’s stock starts falling in price,
is this related to some failure on your part to identify a significant
factor or is it related to something more general. At the end of the
day, no matter how carefully you research and plan, it can all come
undone because of something you least expected. When you lose, don’t
lose the lesson.
Something I read that might help put the importance of research into
some perspective [and for the life of me I can’t find where I read this
so feel free to jump in here anyone] related to an internet company in
the dot com era. When the company floated it stated in its prospectus
that it had no intention of producing anything. Yes, that’s right, it
was not going to do, make, buy, or sell anything. The shares made it to
$80 on the back of the dot com bubble alone, before the crash. Who
would seriously have considered buying into this company in light of
this?
Context
Everybody’s financial needs are different. Therefore, advice, tips etc
need to fit in with YOUR plan not somebody else’s. For example, I might
feel bullish about X stock at 6 cents going to 60 and pour $5K into
them, but what is the size of my portfolio? What percentage have I
risked and does it matter to me in the larger scheme of things if I am
wrong? As a large investor possibly not but it will probably almost
certainly matter to a smaller investor.
Rampers
Beware of people who make outrageous, unsubstantiated statements. If it
sounds too good to be true, it probably is. Some of these individuals
appear at predictable times, spending x minutes a day ramping their stocks at more than one site! Try a Google search!
Also, beware of the sneaky ramper that puts a dud amongst known winners. The following site offers an article that might be good for newbies to read.
http://www.incrediblecharts.com/start_trading/pump_and_dump.htm
Tips and Advice
Sorry, hot tips remind me of rampers. At the very least, a hot tip
received from a broker or friend or read in an investment newsletter or
magazine has probably come two months too late. You are probably buying
from smarties and lining their pockets with money. If you are lucky,
you might make some yourself before they exit stage right.
Always remember that if making money in the market was all so easy,
everybody would be doing it and nobody would need to work. This is
clearly not the case.
I have found that newsletters and magazines that have large followings
offer investment advice that becomes a self fulfilling prophecy. When
every body gets on board the price goes up and therefore they look like
geniuses. Maybe that can be used to your benefit, maybe not.
BlackOil refers to the herd mentality here often and this website might
be of interest to newbies http://www.stock-market-crash.net/zero-sum.htm
Always be willing to take advice, BUT, measure this against what you already know.
Stop Losses and Trailing Losses
Many here will tell you that preservation of capital is paramount to
long term success. Taking a loss is hard both psychologically and
financially but you really need to learn how. It is equally important
to learn to take your profits…..before they disappear.
One of the best posts I have read was titled ‘The reality of Trading’
and I would recommend all newbies to search for and read it.
I came across this post at a time when it made sense to me. This is not
to say I had not read this information before, but this time there were
several points that really struck home.
The first was contributed by stephek and relates to stop losses and
trailing losses I have included a snippet here for continuity of
reading but suggest newbies read the whole thread.
“Stop Losses are what I think are even more important than buying the right stock. A stop loss
in simple terms is a price you set on a stock, preferably before you
Buy, at which you will sell should the trade turn bad (i.e. Share price
goes down). If the price hits a stop loss you SELL. No emotion no thought
Same goes for trailing stop losses, take a decent profit. Even set you
profit goal before you buy and sell when you planned. a Trailing stop loss protects profits and is basically a stop loss that has been moved up the price scale to 'lock-in' profits.
Consider this - a 50% loss on a trade takes a 100% gain to recover and
I can tell you - a 50% loss is easy whilst a 100% gain is many times
more difficult.”
Management of Trades
The second post in the ‘Reality of Trading’ thread that really hit home
was Ingot54’s analogy re the management of trades. When I purchased my
first bundle of shares I really didn’t think I could make money when
they went down! But from my own experience these last six months I
understand now how I can.
Again, I have included part of this post for continuity of reading. I
really think there is some sound information in the whole thread that
is essential reading for newbies.
“The key to all of this is management of trades.
You can give 10 traders $50,000 and tell them to buy BHP with it.
After 3 weeks:
one of the 10 traders will have $75,000
two traders will have $65,000
two traders will have $52,000
three traders will have $48,000
two traders will have less than $42,000.
The difference is in approach and management. The trader with $75,000
might have bought and sold 5 times, at strategic (for him) times.”
Similarly for the $65,000 traders - they may have initially cut some losses, but re-entered on trend resumption.
The traders making losses may have bought at the top of a trend, but
got out when the trend retraced 5%.They may have bought back in when
they thought the trend was resuming, but it did not, and turned down
once again. Now they are down 10%. They think this HAS to be the
bottom, but yet again, get caught.
They decide to pull their money out, only to see BHP gap up 7% overnight.
Another trader might have just bought and held on - explaining the $52,000 positions.
Red Days are Good Days
When I purchased my first bundle of shares I couldn’t stop looking at
the trading screens. Rises were rejoiced, falls were abhorred. Green
arrows meant happiness, red ones depression. Oh how this has all
changed! I think I am finally seeing the forest!
Armed with my newly found understanding of trade management and profit
taking I am keenly awaiting the next correction day. There are several
companies I am interested in picking up cheaply. I now understand how
important it is to take advantage of these situations. Rather than
feeling depressed at my falling portfolio [and going back to my
previous comments regarding research, if I purchased for the right
reasons and nothing has changed, then really I should not be concerned]
I will now go about looking for some value or buy back some I had
previously sold, after all, I did spend many hours researching the
company in the first instance and perhaps I can take advantage of small
term fluctuations again.
Rights Issues
So your company is going to give you special rights or issues.
Congratulations, what a satisfying feeling that is! A thought I will
carry with me next time this happens is take up my entitlement but sell
what I hold now! It comes back to taking profits.
The first time this happened to me I was offered a renouncable rights
offer with AXD. Perhaps the fact it was renouncable made a difference,
as it was [and still is] the only company in my short experience whose rights issue has not seen the share price fall back to the issue price.
I had often read this was the case but as with everything I measured
new knowledge against what I already knew. At that time, this had not
been my experience. I will remain mindful of this in the future.
All my left over bits
There are a couple of other bits I wanted to add here but couldn’t find the right place to put them. I guess this is it.
There are many members here who have given me much to think about and I
don’t mean to single out any member for fear of offending others.
Everything I know about the market has come originally from this site
and so I am appreciative of every member’s contribution so I will
randomly and anonymously list some of the more memorable:
“Don’t buy shares in a company with a falling price and think you have got a bargain”
“Emotion about a stock and shareholding are not compatible"
Options [the company issued type] can offer greater leverage and returns than fully paid shares.
If you buy shares in an ‘unloved’ company – be aware that in the event
you need to sell, they are only worth what a buyer is willing to pay
not what you think they are worth.
When you buy shares in a company that has experienced a downward trend,
be aware that you will have to pass all the stale bulls on the way back
up.
Impatience equals trade. “Bored punters are restless punters.”
Don’t try to pick the top or the bottom of a share or market, exit when
your goals have been realised or stops have been reached.
Where to now
My next step is to learn more about market analysis. I realise there is
much much more to learn. However, in keeping to my motto of doing just
a couple of things well rather than a lot badly, I will try to build on
my knowledge slowly, mastering one before moving to the next.
Armed only with Glenn’s reading recommendation and a trial program
which has since expired, I will try to delve into technical analysis.
I am also keen to learn more about the psychology of the market. Two
things I have learnt so far are [generally] never buy anything on
market open but wait till about 10:40 for it to settle and [generally]
Fridays seem to offer one the opportunity to pick up shares cheaply.
Wait till 3:40 on Friday and place a silly bid for something you like, you never know!
There is also much manoeuvring and game playing pre open.
I hope someone got something of use from this. If so, I have achieved
my goal of giving something back. Thanks again for all the help
everyone has given to me.
Kind regards,
Perdant.
PS. Oh one last thing, keep an eye on how much your brokerage can eat
into your profits!
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; "BHP drilling")
; "This is BHP in 1985")
; "Testing Testing 1 2 3")
