I don’t know about you but when I started investing I made so many investing mistakes that if I got 1$ for each one of them, I would… well, I’d surely be rich by now.
So in this video I want to tell you about all the horrible mistakes I made that cost me a fortune in my life, literally, and I’m telling you, if you listen carefully and avoid these mistakes while investing, this is going to make the difference between becoming rich and losing all your money.
1. The stock market is a short term liar, but a long term friend.
This is one of the most important concepts and what I mean by that is that, in the short term, the price of a stock almost never reflects its real value.
Like Warren Buffett often depicts it, the stock market is like a neighbor that every day comes to you and tells you a different price for a farm he wants to sell. One day he wants to sell it $100.000. One day he tells you 80.000. One day maybe $200.000$. And this is because the stock market is not telling you a price that reflects the real value of the company, but a price that reflects what people expect from that company.
Most people in the stock market act emotionally, not rationally. But, if you are patient enough, and you invest in something that you know is going to grow in the future, even though in the short term the price will go like a rollercoaster because it’s based on people’s emotions, in the long term it will tend to follow the real growth of the company. In the long term, the stock market never lies.
2. The past is not the future
This is one of the most typical mistakes and by the way it’s a mistake I keep making even now, and it costs a lot of money.
A strong performance of the past does not foretell a strong future performance.
Many people look at companies that have been growing well in the past months or years, and assume that they are going to keep growing in the future. Not only is there no assurance that the company will keep growing in the future, but sometimes a rapid growth can even be a signal that in the future it’s going to drop.
And this is valid both for real financial performance of the company, and for the stock price.
For the real performance of the company, we first have to understand why the company had this rapid growth and if we believe that they are going to be able to keep growing in the future.
And as for the stock price, in the short term this is dictated by emotions, not by reality. The more people buy a stock, the faster the price increases, and the more people are going to believe they can make money with it and buy more. On the other hand when investors start selling a stock, the price goes down and now you’re going to have more people that are afraid to lose money and sell the stock, driving the price more and more down.
So never try to foretell the future of a company only based on how it performed in the past. There are many ways to understand if a stock price is increasing too much but just to give you an example, if you see that a company’s revenue is growing by 10% annually, but the stock price is growing 30% annually, sooner or later the stock price is going to return to earth.
3. Never go All In
I love investing and if you hear great investors like Ray Dalio, you’re often going to hear that cash is trash.
And that is because Cash sitting in a bank account is a losing investment.
If you have $10.000 in the bank, you can rest assured that after a couple of years that money is going to be worth less than $10.000. And this is because of inflation. The cost of living increases, all prices increase and therefore your $10.000 are going to have less and less buying power.
But sooner or later you are going to need money for an emergency. It might be that you lose your job, or you need to buy a new car because the old one broke down, whatever happens you need to have easy and quick access to a certain amount of liquidity. And when that happens, you don’t want to have to sell stocks to have some liquidity.
So, the first step when starting to invest in the Stock Market is to create an emergency fund that will always have your back. You can build your emergency fund over time by setting aside a particular amount from your income every month, or you can decide to first put everything in your emergency fund until it’s ready and only then start investing.
Now, some things to keep in mind when creating an emergency fund are:
1. Ensure it is Liquid
namely, if you need it either it’s already in the form of cash or you can transform it into cash quickly and easily.
2. Put it in a high interest-earning account
It’s still true what they say, that Cash is Trash, so we need at least to fight inflation as much as possible. Find a bank account that offers a good interest rate and that still gives you daily access to your money.
With a quick online search you can find Savings accounts that give you 1, 2, even 3% per year, that are going to help you fight inflation while still giving you quick access whenever you need it.
3. It should cover your expenses for at least 3–6 months
Imagine that you lose your job, you are probably going to need at least 3 months if not more to find a new one and you don’t want to find yourself in the situation of having to get into debt in order to pay for grocery, rent or electricity bills.
4. Remember that Emergency is Emergency
The money in this fund is only to be touched in case of emergency. Not if you want a new iphone, or a new laptop, or maybe pay for your holiday in summer.
For all these expenses you are going to use other money. If you start considering your emergency fund as money that you can use as you wish, when a real emergency comes you are not going to have enough.
4. Don’t put all your eggs in one basket
In other words, learn to diversify.
When it comes to investing, the first thing that comes to mind is to invest in stocks and in particular in individual stocks. But the problem with stocks is that they are strongly volatile and in case of economical crashes they all go down a lot, like now for example, and you don’t want to have extreme fluctuations in your portfolio.
That’s why most investors suggest diversifying and to give you an example Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, in the 90s created the so-called All-Weather Portfolio.
The all-weather portfolio gives you an indication of how you can diversify your investments, percentage-wise, if you want your portfolio to grow over time but also to remain stable and have little to no fluctuations in case of economic crisis.
The All Weather portfolio of Ray Dalio consists of 30% U.S. stocks, 40% long-term Treasury bonds, 15% intermediate-term Treasury bonds, 7.5% diversified commodities, and 7.5% gold. Now this is just an example of asset allocation, and of course every investor has its own idea of diversification. For example Warren Buffet has deep trust in the american economy and is a great fan of the S&P500 index, but the concept remains the same: if you focus all your investments in a particular asset, if the asset goes bad you’re going to face a strong loss.
So, now you might ask “Rick, how am I actually going to invest in stocks, bonds, gold, other commodities… where do I find them”. Well, the best way to have access to all these different assets is through the so-called ETFs, or Exchange-Traded-Funds. If you know me and my channel you know that I always talk about ETFs and I consider them the best way to invest.
Now to give you an example, let’s say you want to create a portfolio that is exactly like Ray Dalio suggests. Let me put back here the graphic of the All weather-Portfolio. Now basically here we have stocks, treasury bonds and commodities like precious metals and oil. So how can you replicate this? One way to replicate it is by simply buying 5 ETFs with the following weight:
- 30% Vanguard Total Stock Market, Ticker VTI
- 40% iShares 20+ Year Treasury Bond, Ticker TLT
- 15% iShares 3-7 Year Treasury Bond, Ticker IEI
- 7.5% SPDR Gold Trust, Ticker GLD
- 7.5% iShares S&P GSCI Commodity Indexed Trust, Ticker GSG
Basically, no matter how you want to diversify, ETFs allow you to do that.
Now, if you like reading and you want to learn something about the best investors of all time there is a great book by Tony Robbins that I strongly suggest you read and is called “Money: Master the Game”. This book is not a deeply technical financial book, so if you already have good knowledge about finance there are other books that are certainly better, and Tony Robbins himself is not famous because he’s an investor but if you want to have a first glance at finance in this book he collected interviews of many great investors including Ray Dalio and his All-Weather Portfolio. So if you find the time, it’s really worth a read.
5. You can’t time the market
This is one of the most difficult truths to accept. I don’t know why but no matter how often this truth has been proven over the decades, we still believe we are going to be able to understand when the stock market is going to crash or when the growth is going to start again.
People, if you don’t believe me, at least believe the great investors like Warren Buffett or Peter Lynch when they tell you that it’s impossible to time the market. Let’s hear it from Peter Lynch.
Alright, so you heard him, but still you might say: Rick, look, we are in an economic crisis right now. Stocks are down like 30-40-50% and we don’t know when they are going to go up. So maybe, I could just wait to see them touching the bottom and go back up, and then I can invest all my money. Well the problem is, that is not going to work.
First of all, there is no way to predict when the crisis is over. You might see all the stocks go up for a couple of weeks, think that it’s over, invest your money and a month later it’s all back down 20% more.
And second, the problem with the stock market is that the biggest gain days are right after the biggest loss days. So the probability that you have the time to recognize the right moment and invest before the big gain happens, is close to zero.
The university of michigan conducted a study that measured returns from 1963 to 2004 and found that 96% of the positive returns over that period came from just zero point 85 percent of trading days. Coming to a similar conclusion, Andrew Stotz, one of the top equity analysts, observed a 10-year period from november 2005 through october 2015 and concluded that if you missed the 10 best market days over this specified 10-year period you would stand to lose on average 66% of the gains you would have captured by staying in the market.
So since you can’t time the market and you can never know when is the right time to buy, how can you approach investing? The best way, and by best I mean the one that with the highest probability is going to give you the highest returns in the long term, is using an approach called Dollar-Cost Averaging.
That means that no matter how the market is going, if stocks are going up or down, you invest exactly the same amount every month. What happens is that you are going to cut through all peaks and crashes of the stock prices and your portfolio result is going to grow as the average long term growth of your stocks. If you want to know something more about the dollar cost average method and how to apply it in the best way, just let me know in the comment section below and if there is enough interest I will make a video about it.
6. Never listen to the news
Now, have you ever heard what financial news say when the market is going down? They spread panic. And what do they say when a stock price goes up? They say it’s a great stock and it’s performing well.
In fact if you just google best Stocks to buy or best ETFs to buy and you read some blogs, interesting enough you are going to find that they always suggest the Stocks that had the best performance in the last year. Remember that whatever everybody says is always the reason why stocks are either overpriced or oversold. So most of the time what everybody says is wrong.
7. “Buy and hold” doesn’t mean “buy and forget.”
Now, this is a difficult one, I admit.
If you want to invest in the right way you know that you have to invest for the long term and you don’t have to panic and sell when stocks go down. We know that. So whenever you buy a stock and a year later the stock has lost 50, 60% of its value, you find yourself in the extremely uncomfortable situation of having to hold onto it and see your value getting destroyed little by little.
Usually, if you made the right decision when you bought it, holding onto it is the right thing to do. But this doesn’t mean that it’s always the right decision. Sometimes, a company grows wonderfully over time but then does something so wrong that cannot be repaired. An example was the telephone company called WorldCom. Worldcom until the beginning of the 2000s was the second-largest telephone company in the US.
In the 90s it was a growing, dynamic company that was giving great returns to the investors. But, after a while, the company started to be accused of illegal activity and the stock price started falling. Many people kept their investment in the company, maybe because they just didn’t pay much attention or wanted to invest for the long term. So after the company’s fraud was revealed the stock price went to zero, the company bankrupted and whoever still held stocks lost everything. So what I want to say is, buying and holding is the right strategy, but you should never buy and forget.
From time to time, or if you see that the stock price starts dropping for no particular reason, always check on the underlying business and try to find out if something bad happened.
8. Don’t rely too much on metrics
Nr. 8 is don’t rely too much on metrics. If you start getting interested in investing and you inform yourself, you are going to learn a lot of sophisticated metrics and numbers that try to help understand where the stock price is standing and where it’s going.
You’re going to learn about P/E Ratios, Earnings per Share, book value, cash on hand, trailing margins, ROI, and so many other terms. And you are going to use these metrics to try to understand if it’s worth investing in a company or not.
So first of all, let me clarify: it’s extremely important to understand these metrics if you want to invest in individual stocks. I’m not saying you shouldn’t understand them. But you can’t rely on them to understand the future of a company or an industry.
If you really want to invest in a company, you need to take the time to dig into financial reports and fully understand what the company is doing, what are their plans for the future and also if you believe that the market is going to head in that direction or not.
Investing mistakes – Conclusions
If I had to summarize the whole video in a nutshell, I would tell you that the most important lesson I wished someone told me before I started investing is to understand the difference between investment and speculation.
I dare to say that 99% of all investments in the world are driven by speculation, which in the investor’s world is just another word for gambling. For one reason or another, either because we hope to get rich quickly and we take a gamble, or because we research a company but can’t see the whole picture because we are not expert enough, most of the time we invest money without really knowing what we are doing.
The stock market is a wonderful way to make money but can easily become the best way to ruin you financially if you take it lightly.