7 Tips for New Investors Young and Old

It’s not so much the stocks you buy but why you buy that counts

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Writing about stocks to buy can be a humbling experience. When I first started covering investments, I was scared to death about having an opinion on a stock, lest I be called out for my crazy stock picks. 

Fast forward more than a decade, and I’m surprised when I don’t have an opinion.

My progress and confidence gained is nothing more than repetition, something financial planner and blogger Barry Ritholtz believes is one of the four most important ways to increase financial literacy in society.

Unless financial literacy is constantly reinforced, as we noted above, it fades pretty fast. Core concepts need to be repeated and reinforced after graduation. It is not realistic for us to expect high schools to be able to accomplish this,” Ritholtz wrote April 30 for the Investment News.

Whether we’re talking about the subject of finance generally or a more specific topic like which stocks to buy, if you’re new the game, whether young or old, having a repeatable system will help ensure that you always are following a sensible path.

With that in mind, I’ve come up with a list of seven tips for new investors that should help keep you on the path to knowledge, wisdom and, hopefully, profits.

Focus on Stocks to Buy That Make Money

Focus on Stocks to Buy That Make Money
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It seems in 2019 as if none of the stocks that are going public make money. Yet investors are throwing wads of cash at underwriters fearful of missing out on the next great Amazon (NASDAQ:AMZN).

Trust me when I say this: investors had plenty of time to figure out whether Amazon was the real deal before plunking down their hard-earned savings. Jeff Bezos took the Seattle company public in May 1997. A CNBC article from last September said that if you had invested $1,000 in Amazon’s IPO shares, you would have amassed $1.36 million 21 years later.

Now, consider if you had waited until Amazon was consistently making a profit before you plunked down your $1,000 — I’ll say the beginning of 2007 — today you’d have $49,427, an annualized total return of 37.2%.

Sure, it’s not $1.3 million, but relative to most stocks to buy in America, it’s pretty darn good.

Investing in companies that make money isn’t a guarantee you will make money on your investments. However, if you buy into a business that’s consistently profitable and doesn’t use a lot of leverage, the odds are stacked in your favor over the long haul.

Try to Invest in Industries and Businesses You Understand

Try to Invest in Industries and Businesses You Understand
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I never invest in biotech companies because they’re not my circle of competence. I couldn’t tell you what a CRISPR was if I tried. However, give me a consumer goods business like Church & Dwight (NYSE:CHD) and my level of understanding is much higher.

Warren Buffett believes in investing in industries and businesses he understands. That’s why he has owned very few tech companies over the years. When he examines stocks to buy, he’s looking for a company that has a proven pathway to profitability today and well into the future. He’s not interested in a fly-by-night investment that’s here today and gone tomorrow.

“Different people understand different businesses. And the important thing is to know which ones you do understand and when you’re operating within your circle of competence,” Buffett stated in the 1999 Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) annual meeting.

You’ll do far better investing in businesses you know and understand than guessing which company will become the next trillion-dollar market cap.

Don’t Buy IPOs

Don’t Buy IPOs
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You probably won’t like this piece of advice given how IPOs are performing so far in 2019 — the Renaissance IPO Index is up 33% year to date — but I’m going to give it anyway.

Do not buy IPOs. Not through the actual offering or on the first day of trading. I think it’s best to wait at least six months to a year before jumping in so you can figure out whether a company’s financials and business are for real.

The fascination with unicorns (companies worth more than $1 billion) that are generating tremendous revenue growth but losing money is something I’ll never be able to understand. If I offered you the opportunity to buy my business and showed you a profit and loss statement with lots of revenue growth along with plenty of losses, unless you were a seasoned turnaround artist, you’d tell me you weren’t interested. Yet investors are lining up to buy into the Ubers of the world.

I’ll leave you with a quote by Stephen Jarislowsky, a retired Canadian money manager who’s got more years of investing experience than most people have been alive.

“New issues are typically well promoted,” wrote Jarislowsky in his 2005 book, The Investment Zoo. “My experience is that you can buy nine out of 10 new issues at a lower price a year or two later … I generally avoid new issues….”

When it comes to stocks to buy, Jarislowsky’s advice has never been more accurate than in 2019.

Read and Write Lots

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Whether you ask Warren Buffett or Mark Cuban for advice, they’ll both tell you it’s an absolute must to read books if you want to be a success in investing or life.

“I still probably spend five or six hours a day reading,” Buffett said in the HBO’s documentary, Becoming Warren Buffett. “I like to sit and think. I spend a lot of time doing that and sometimes it is pretty unproductive, but I find it enjoyable to think about business or investment problems.”

Cuban believes that people who do a significant amount of reading provide themselves with a knowledge advantage over the rest of the world. Buffett believes that if you read 500 pages a day of valuable material (don’t forget fiction every now and again), you’ll be miles ahead of most people who rarely will crack a book.

The problem with university graduates today is very few are capable of analytical thinking, a key ingredient in making smart investment decisions about which stocks to buy. 

I’ve found that if you take reading one step further and write down some of your thoughts on the subject, you’ll find yourself much farther ahead.

Over the 15 years, I’ve written about investments, the more words I’ve put to paper, the better my investment theses. That doesn’t mean I’m always right, but I’m definitely in the ballpark more often as a result.

Read a lot. Write a lot. You’ll do fine.  

Avoid the Noise

Avoid the Noise
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I worked for a Canadian online mutual fund startup in the early 2000s. It was a terrible time to be flogging mutual funds given the dot-com crash had soured investors’ appetite for risk. I left after a couple of years to greener pastures to write about investments.

The one thing I’ll always remember is the founder and CEO’s fondness for the Simpsons and other regular TV shows. In our offices, we had a TV that played all day. Naturally, CNBC was on a fair amount of the time. However, our boss would come out of his office regularly to change the channel to something less professional, but more fun.

He didn’t see the point of watching talking heads all day when we were providing a balanced portfolio solution years ahead of its time. It was the beginning of institutional-quality investment management for retail investors in Canada.

The point is that if you listen to others (including yours truly) and don’t follow your own path, your investment decisions won’t be nearly as consistent because you’ll be swayed by their opinions.

Find a path that suits you and stick to it.

Don’t Swing for the Fences — Understand Your Risk/Reward Threshold

Don’t Swing for the Fences -- Understand Your Risk/Reward Threshold
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You see the words “risk” and “reward” bandied about in the investment media. They often appear together in a sentence about the risk-to-reward ratio, defined as the amount of risk an investor must take to earn a specific expected return, or something to that effect.

You rarely hear people at a cocktail party mentioning this when bragging about buying the latest money-losing unicorn’s IPO shares. They might claim to have considered the risk involved relative to the rewards they hope to gain, but they haven’t considered the consequences of their actions.

Using a baseball analogy: Don’t swing for the fences. Singles and doubles add up to runs scored just like home runs. Only it takes longer.

Investing is a journey, not a destination. Don’t try to get to your ultimate goal in the first inning. You’ll more than likely strike out.  

Be Able to Explain in One Sentence Why You Own a Stock

Be Able to Explain in One Sentence Why You Own a Stock
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This last tip is probably the most important of the bunch.

Anyone who’s ever worked with me would consider my investment style to be that of a number cruncher — a writer born to be an accountant who couldn’t pull the trigger on doing the schooling.

The truth is I’m far more interested in how a business makes money and its business plan than I am about its financial metrics. A great company will always be the one with a laser-like focus on its purpose and reason for being. The financial aspects generally fall into place when you’ve got your eyes on the target.

So, if you like a unicorn IPO like Lyft (NASDAQ:LYFT) and want to invest, take the time to write out why you want to own it (no more than 140 characters)  and then share that sentence with a good friend. If they agree with your rationale, you’re on to something.

The Harvard Business Review discussed the art of the elevator pitch in an October 2018 article. One section distills what I’m talking about.

In his book Leading, venture capital investor Michael Moritz tells the story of two Stanford graduate students who walked into his office at Sequoia Capital and delivered the most concise business plan he had ever heard,” wrote HBR contributor Carmine Gallo. “Sergey Brin and Larry Page told Moritz: ‘Google organizes the world’s information and makes it universally accessible.’ In 10 words, that logline led to Google’s first major round of funding.”

Do the same with all the stocks you buy, and you’re bound to be successful more often than not.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/7-tips-for-new-investors-young-and-old/.

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