You can teach yourself to invest, and with the right help and knowledge, you can reach your goals. To become an investor, you do not necessarily need pre-existing knowledge; in fact, you can learn while you invest a small amount. The biggest issue I faced when I wanted to teach myself to invest was to stay patient while keeping my emotions in check. This post will tackle the FAOs in teaching yourself to invest in the stock market.
Teaching yourself to invest is to have the ability to be patient and resilient by understanding what you are buying and staying updated with your investments. To invest is to stay in the market for a long time without having your judgement clouded by short term market turbulence.
The new investor four stage guide for investing
There are four critical stages that every long-term investor needs to go through to become more sophisticated with their choices. Teaching yourself to invest is to educate yourself, understand yourself, make your goals and obtain experience. The following is a rundown of those four points:
Stage 1 – Educate yourself
This is where you get your fundamentals and start formulating your plans and retirement goals. By educating yourself, you understand why it is critical to participate in the stock market and how to participate in it. Financial literature is the most crucial thing in this stage. You can learn more by reading this article: How to Become Financially Literate by Yourself?
Stage 2 – Understand yourself
To invest, you need to understand your circle of competence and what type of business you are interested in and can simply understand. It can be within your profession (What you do for work) or your hobbies. In addition, you need to get your emotions in check. If you think you can not control your emotions, you should not invest because most people can be emotional with money, especially if they do not know how to leverage it.
Stage 3 – Make your goals
In this stage, you will formulate your goals and when you want to retire, which has to do with understanding your environment, retirement age, and lifestyle. As you develop your goals, you will become more familiar with your weaknesses and strength and how much you are willing to sacrifice now to get what you want in the future.
Stage 4 – Obtain experience
The last stage is to act on what you have learned according to your goals and strengths. It is critical to start small by making small investments as you unravel your ability to control your emotions and compare your expectations to reality. There is no need to rush and take your time to analyse, learn from your mistakes, and wait for the right opportunity to present itself.
The feedback loop
As you go on your investing journey, mistakes and misjudgements can happen, so you should keep educating yourself, then reshape your ideology based on that knowledge, which you will make changes to your goals and then act based on that feedback loop. Below is a summary of those four stages:
9 Ways to teach yourself to invest
After going through the initial stages of teaching yourself to invest, it is time to focus on proven techniques that make you more mainstream in your investing journey. The following are 9 ways to teach yourself to invest in the stock market.
1- Read investing books
The best way to know something is to learn from people who spend their life doing that thing. Reading investing books is probably the most important thing you can do to get the required knowledge before investing. You can skip the guesswork and negligence by learning from their experience. The following are a collection of the best-written books on stock market investing that you can buy on Amazon (Click the image to go to Amazon):
2- Get the latest news
There are many ways to get News and updates about the stocks you are interested in, and there is no right or wrong way to do it. You just need to find a way that you are most comfortable with. You can find News by reading blogs, listening to podcasts, watching youtube … etc. News helps you spot good deals and opportunities that can be within your circle of competence.
3- Understand your circle of competence
Understanding your circle of competence is a crucial step in your investing journey. Not every business you come across is suitable for you, even if it is trading ten times below its intrinsic value. Simply because what you understand in the world is usually limited and sticking with what you know can help you along the way when the business is in distress. In doing so, you are more rational in making decisions and less stressed when the price is falling.
It ain’t so much the things that people don’t know that makes trouble in this world, as it is the things that people know that ain’t so.
Mark Twain
So how can you distinguish between the stocks you know well and the ones you do not know? The answer lies in your experience; what you do for a living and what you buy and uses in your day to day activities is probably lies within your circle of competence. You do not have to invest in a complicated business that you do not understand. If you work in hospitality, your circle of competence is probably in retail stores, restaurants and food, not pharmaceutical companies or microchips.
People usually tend to overestimate what they know and only search to confirm their pre-existing beliefs. Therefore, it can be extremely difficult to know exactly what you know, so you should write down your circle of competence and be specific.
In Rule#1 Investing book by Phil Town, Phil does the following exercises to help individuals find their true circle of competence. Draw three circles that overlap. Start by writing what you love in the first circle, what you are good at in the second and how you earn money and spend money on in the third circle. The overlap is your circle of competence.
4- Understand the companies you want to invest in
After finding your circle of competence, you will stumble on companies that you understand its business model very well. And with some research, you become pretty familiar with the company structure. In general, to understand the company, you need to know three things:
- Meaning: what is the business about and the different sources of income (How it makes money).
- Moat: what is the competitive advantage of this business over other companies that offer similar products and services. Read more on how to How To Identify An Economic Moat.
- Management: How is the management running the company. Are those people you can trust running a company you are investing in? Read more on Assess Management Before Buying Shares.
5- Learn what the smart money is buying now
There are websites such as dataroma.com dedicated to tracking the 13F reports of the superinvestors required by the SEC for any institutions with at least $100 million of assets under management. Those reports are produced quarterly, which gives insights into what the smart money is buying.
We can learn what Warran Buffett or Charlie Munger is buying by browsing those reports and finding businesses that can fall in our circle of competence. It is essential to know that the reports in those websites are older than when those investments were made initially by those investors, which is why you should not copy blindly because you can be buying at a market high.
Moreover, even the pros can make mistakes; therefore, such websites can be used as a source to find good companies you understand and can buy at the right time.
6- Give yourself a big Margin of safety
The Margin of safety is a way to protect yourself if you were wrong in your analysis. Since the market can be irrational for a long time, the Margin of safety can protect against such volatility and give assurance that you will at least not lose your original capital. While if you were correct in your analysis, the Margin of safety could increase your earnings since you were buying below the intrinsic value.
Essentially, you want to find the business’s intrinsic value and give it a margin of safety of your choosing, such as 30% or 50%. In this case, you are only buying stock when it trades way below its intrinsic value or fair value. If you are not familiar with this term, you can read this article I made that show you how you can calculate this value using excel, Calculate The Margin of Safety.
7- Start small
If you are new at something, you should take your time learning. There is no need to put a huge amount of money at once. Spent your time analysing companies with a good moat and under good management. Keep those companies on your shortlist until they are available at an attractive price. This process can take months or years, so you need to be patient. You can buy heavily when the opportunity presents itself.
Moreover, you do not have to own 10 or 20 companies. You only need a few to be successful. Investors like Charlie Munger have a stock portfolio that rarely changes, while the holdings stay for 10-15 years. Focus on two or three good investments. The more concentrated portfolio you have, the better chances you have at keeping track of changes to the business.
Moreover, the amount of money you put into each investment can also affect your portfolio’s effectiveness if you have 5 or 8 good ideas for investments. Should you invest the same amount of money in all of them? Especially if idea number 1 is more assured than idea number 8. Therefore, it is essential to start small and increase the number of positions as you become comfortable with investing.
If you are worried about diversification, look at the superinvestors portfolios and compare them to mutual funds. Superinvestors such as Mohnish Pabrai have consistently beaten the market with an average return of 28% with few stocks compared to mutual funds managers who have usually failed to beat the market while having at least 20 different positions. This proves that diversification is not always the way; you just need to invest in companies you know well and believe in.
8- Stay on top of your investments
You have to stay on top of your investments once you buy them. That means keeping track of the latest News, management, insider trading and financial report. If you are a value investor, you have to review the quarterly reports and annual reports when they are out and stay on top of your investments to distinguish between short term and long term changes in the stock price.
To stay on top of your investments is a way to ensure that the business is not going bankrupt or not heading for trouble while ensuring that you will get your target of compound earning while owning this business.
9- Master your exit strategy
Even after you buy a business at an attractive price and keep track of its annual reports, you still need to have an idea of your exit strategy. There are many exit strategies. The following are a few:
- Selling when the stock price trade just above its intrinsic value (can be short term).
- Selling after a long time to avoid short term capital gains (To reduce taxes).
- Selling when the company fundamentals have changed (The business is no longer attractive).
- Selling to avoid a drop in stock price due to legal issues or product issues (Sometimes short-term changes).
- Selling when a more attractive investment opportunity is available (An opportunity to increase your compound interest).
- Selling to offset capital gains or to reduce further loses (To reduce taxes)
You can learn more about When Should You Sell a Stock for Maximum ROI?
In general, If you understand what you are buying, you will not stress as much when the stock goes down. It would help if you had an exit strategy before deciding to go in. The longer you hold, the more chances you increase your earnings. Therefore, you should ensure that you only buy something you want to keep ideally for a few years to pass the short term turbulence.
Finally, do not put money in the stock market that you will need in a few months, as it can force you to exit at a loss. Only invest money you do not need now. This way, you are not stressing with any current financial needs.
The Bottom Line
To teach yourself to invest is to spend time learning. Investing, in general, is not complicated if you stick to your circle of competence, do your analysis carefully and only buy at a considerable margin of safety. As Warren Buffett says, you only need a few stocks to do well in the stock market. To discipline yourself is to adhere to those principles above, as they are a proven strategy used by the superinvestors.
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