Happy Monday morning everyone! One of the reasons I started this blog is to be able to connect with and learn from likeminded people. That said, today I’m happy to bring to you The Magic Bean Counter’s first guest post! This was written by Troy over at www.markethistory.org and he shares what I think is some valuable advice on investing.
If you have any interest at all in learning about the stock market then Troy’s website is a great place to start. Below Troy is going to outline 4 simple steps to becoming better at investing. I hope everyone enjoys his post!
Some people believe that there is no better strategy than buying and holding for 30 years. I disagree. I believe that there is always room for improvement and that it is possible to beat the index over the long run. Here are 4 simple things that you can do to make yourself a better investor.
Read more investment and finance related books!
I honestly think this is the most underrated advice that any investor can receive. There are so many great books out there that are filled with great investment strategies. However, it’s important to separate the good from the bad because reading the bad ones will teach you the wrong strategies (which will lead to losses later on).
*Disclaimer: I am in no way affiliated with these authors.
- My favorite 2 favorite books are Market Wizards and Hedge Fund Market Wizards (they’re part of a series written 30 years apart). The author interviewed a lot of really famous investors and hedge fund managers such as Jim Rogers and Stan Druckenmiller. The books are full of investment strategies, tips, and advice that investors of all skill levels can use.
- When to Sell. Most books teach you when to buy stocks. However, this is one of those rare books that tells you when to sell and take profits. Remember that there are always 2 parts to every successful investment: buying and selling.
- The Complete TurtleTrader. A billionaire investor taught 30 different individuals how to trade to see if “trading” could be taught as a skill. He published his teachings in this book.
Hold cash when there are no attractive opportunities
Some investors believe that they always have to park their money in an asset. The funny thing is that this kind of mentality actually leads to worse performance. All assets tend to go down in an economic recession, so there is no such thing as a “safe haven”.
There will be times when there are simply NO good investment opportunities. I’ve certainly been in those situations. When global assets around the world were ridiculously expensive in 2007, it would not have been prudent to park your cash in an asset just because you didn’t want to hold cash.
There is nothing wrong with holding cash and sitting on the sidelines. Even Warren Buffett does it. He has tens of billions in cash! You don’t become rich by simply indexing yourself to the market. You become rich by waiting for good opportunities and grabbing those opportunities by the jugular. Buffett believes that patience is the key to success. He holds billions of dollars in cash during the boom times so that he can buy at dirt cheap prices at the bottom of bear markets. Buffett did not become who he is today by mindlessly investing in assets at a predetermined pace every year.
Simplify your portfolio
Diversification is a buzzword that many bloggers and investors throw around without truly doing it the right. Holding 30 different stocks in your portfolio is not called diversification: it’s called a waste of time.
Studies show that very few investors who diversify across dozens of stocks actually beat the index. This is because we all have a limited amount of energy and time every day. So if we spread our time over dozens of individual stock analysis, the quality of those analysis will be very low.
Thus you should still diversify, but at the same time simplify your portfolio. Know what you want to do. If you’re investing in auto stocks because you’re bullish on the long term prospects of the U.S. auto industry, do you really need to buy some Ford shares, some Tesla, and some GM? I don’t think so. How much do you really know about these 3 individual auto companies? Probably very little. That’s why it’s a better idea to just invest in an auto sector ETF. You should invest in sector ETF’s instead of spreading your money among many individual stocks.
Of course the above only applies if you’re investing for capital gains. If you’re investing for dividends, then it is a good idea to buy individual stocks with high dividend yields.
Follow the right “experts”
The term “expert” in finance tends to get thrown around as a derogatory word. “Experts” are clowns such as Jim Cramer and Art Cashin (on CNBC) who have a historical track record of terrible market calls.
With that being said, there are some legendary investors and hedge fund managers out there who share their market outlook every once in a while. These are the true experts. These guys have a consistent record of beating the market for decades. That isn’t blind luck. That’s skill. Pay special attention when they all start to have the same market outlook. For example, right now Stan Druckenmiller, Jim Rogers, Jeff Gundlach, and David Tepper (billionaire investors) all recognize that stocks are overvalued but do not think equities will go down in the next 1-2 years.
So there you have it. Some great advice from someone who is very knowledgeable with regards to investing. I want to thank Troy for being a guest post on The Magic Bean Counter today. Be sure to drop Troy a line in the comments and also don’t forget to check out his site www.markethistory.org