It takes practice to become good at anything. All of the investors you feel inspired by today made a ton of mistakes too. Even after you read this post you will do mistakes too, but hopefully, you might avoid a few of the most common mistakes that beginners do when they start to invest.
The Trading Level
The trading level described the earliest of your days as an apprentice in the world of investing. Most likely, you came here because you thought that investing in stocks could be cool and maybe even profitable.
You’ve read about financial gurus making millions in a few seconds by just clicking a button.
While you might accept that you don’t have the knowledge to make millions of dollars right now, at least you can make a few hundred or thousand if you just do as the professional analyst tell you to do.
Sell when they tell you to sell and buy when they tell you to buy. A bulletproof plan, right?
So you start off as a trader just like the big boys on Wall Street. You can even put “trader” on your Twitter account and be a part of the financial community.
The strategy is quite easy. You listen to the analysts and you have a laser focus on stock prices as they move up and down.
After this, you start to compare price graphs and look at patterns. You notice that the last time the stock was trading at this price it jumped up 30%.
You also see that the stock during the last year never went under a certain price. That’s surely the bottom and all you need to do is to buy at the bottom and sell once it reaches the past previous high. Easy.
If pure look should have it, this actually works. The stock price actually goes up and you get excited and happy.
Naturally, you start to think that this investing thing is really easy and maybe you don’t even need to work again if you just do this enough and get enough cash?
Most people lose a lot of money here. Trading is a highly difficult sport and to perform well over a long time takes dedication, luck, patience and a good amount of clever risk management. As much as 95% of all traders lose money.
I highly encourage you to wait with trading until you understand more about the financial market. While it might seem easy now, unless you have a bulletproof system there is no way you will succeed. Be patient and learn more before choosing to solely focus The Trading level.
2A Cocky Trader
You survived with some ugly battle scars, but you are now done as a trader. You’re tired of losing sleep, because you have put a lot of money and bought something having no clue what it really is, and every day is either a nightmare or a triple rainbow.
You start searching the internet after keywords as “investing,” “which books should I read?”, and you start by reading “The Intelligent Investor” by Benjamin Graham.
You finish the book halfway through, but there are so many words, so many new things and concepts.
So you forget about it for a while and put the “investing project” on the shelf for better times. As a replacement, you start learning about technical analyses and you find it very easy and logical “Buying at the bottom and selling at the top” how hard can that be?
At this point, a lot of people falls back to point 1) trading, because they now think that they have enough knowledge to beat the rest of the market (the people who buy and sell stocks). Unfortunately, these guys will lose too, and most of them will never touch a stock ever again (some guys actually figure out a way to use technical analyses to make a profit, but it takes a lot of rules and you have to be super strict. Not something beginners should try to do)
2B MR Smart Guy
Respect. You didn’t even touch the trader path. Instead, you went straight into safe saving and started monthly saving in funds. Good for you. But from here, you might forget about the money, and never see them again until your old and boring. Well, that’s a shame.
You might also check your account every other year and see that the fund is doing quite well hurrah. But then you tell your buddy about this extraordinary achievement, and he says you would be better of just saving in the index? What? Index? WHO is that? (I´ll tell you all about this later)
2C Humble Novice Investor
You were so close doing the 2A road, but instead of quitting after Mr. Graham’s book, you joined an investment forum, listened to podcasts about investing, read blogs and you talked with people who had considerable knowledge about investing.
They told you what diversification is, how to buy stocks and what brokerage is. They even told you that it might be smart to buy good companies in other stock exchanges, not just your familiar stock exchange.
They also talked about a method called fundamental research and you start to learn what key numbers like P/E, P/B and yield is. Basically, you saved.
I must admit that I was halfway through 2A, but I was lucky.
I was saved by some very kind individuals who taught me that I should do things differently, and they also showed me how. And that is why I have made this blog.
To make sure that people who are in the process of joining 2A can be “saved” the same way I was.
I’m not saying that I have found the only right and true method, but I can show you that my alternative is soooo much better than what you were trying to do. Some readers might already be at 2B, or even 3, 4, 5 or 6 whatever that is, and I will try to make it interesting for you guys as well.
This is so easy! If I just do some quick trades and raise a lot of cash then I can finally start investing for real. In that way, I will have much more capital and can get a far higher dividend income. Sweet!