Investing is a nonstop journey that can seem overwhelming for some, however once you start learning it becomes easier. Most investors stop after only a couple months of trying because they are lost, investing for them appears to be an alien concept. This is far from the truth and to get you started on this journey I give you 12 of the best tips to help you become a better investor.
I have been investing for over 20 years successfully. Here are some of the best tips for new investors who want to jumpstart their financial journey.
- Learn to remove emotion
- Read everything
- Ask questions
- Understand how to manage risk
- Learn how to build a Portfolio
- Understand what your investing in
- Pick a sector and stick with it
- Learn different types of investment methodologies/strategies
- Remove yourself from the market
- Understand the value of compounding interest
- Get sleep
- Understand the bigger picture
Here at Chronohistoria I teach people how to generate above average returns in investments. I routinely publish articles on investment research, methodologies, and tips/tricks of the trade so that you are better prepared to earn in today’s crazy market.
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Tip 1: Learn To Remove Emotion
Investing is a game of emotions. You are betting that an asset will increase in value while others are betting it will decrease.
One of the main things that you can do that will separate yourself from other retail investors is learning how to remove your emotion from investing. This will make you more rational in decision making. Which in turn will lead to a higher yearly return.
To practice this step I recommend reading some stoic philosophy. Some of the best leaders and investors in the world practice stoicism. It might surprise you but a lot of hedge fund managers major not in finance but philosophy and history.
An emotional person tends to make irrational decisions. You don’t want to be in that mindset when you’re managing your financial future. Once you master your emotions in finance you can then start to master the market itself.
Tip 2: Read Everything
No analyst or investor knows everything. They however must make sound financial decisions all the time.
When the money of themselves or their clients are on the line the investor must read. As such you need to read nonstop. Reading like much else is a skill. The more you do it the better and faster you become.
Professional investors and traders read every waking moment of the day. Famous investor Warren Buffet spends over 8 hours a day reading everything from financial reports to novels.
You must read everything you can that will help with investing. This means investor reports, competitors reports, books on theory, economic journals, and much more. The list is never ending.
However the more you read the more you will earn. For example, one of the worlds largest hedge funds, Bridgewater Associates, forces their team members to read at all waking moments. This overtime has pushed Bridgewater to become one of the best hedge funds out there.
Read at all points and at every waking moment. You will be surprised at how much you will earn from it.
Tip 3: Ask Questions
When it comes to investing there are no stupid questions.
If you are unsure about something, ask a question. This can mean raising your hand at industry conferences or reaching out to investor relations.
Too many retail investors either don’t want to risk ridicule or make themselves look unknowable. However from my experience the investors who ask questions nonstop are the ones who do better at the end of the year.
The important thing to realize is that when it comes to investing nobody knows for certain what is going to happen. As such everyone should ask as many questions as possible to get the best possible information to make an educated financial guess.
I am always free to answer questions if you’re stuck on something.
Tip 4: Understand How To Manage Risk
Many retail investors simply want to see large returns. However what they should be worried about is the risk in their positions.
Risk can creep up on you and destroy your portfolio if you’re not careful. The trick here is learning first how to evaluate your positions for risk and then learning how to manage it.
There are many ways to evaluate risk, one of the most common is value at risk. The VAR formula takes an expected return, timeline, and possible loss and spits out a max potential theoretical loss on a portfolio or position.
Once you have the VAR formula down you should then learn how to manage this risk. One of the easiest ways is to practice a skill called “hedging.” If your interested I wrote up an entire article on the 3 easiest ways to hedge an investment.
Managing risk is the secret weapon of investing. It takes some time to get the hang of it but once you understand what’s going on you can then pursue those 100-200% returns that you dream of.
However I don’t want you doing that until you know how to evaluate and manage risk. It’s better to make only a 20% yearly return while managing risk then it is to make a 200% yearly return and risk 100% or greater.
Tip 5: Learn How To Build a Portfolio
Portfolio construction and management is an art. The best portfolio managers are painters who create a mosaic of positions that each compliment each other.
The result? A solid portfolio that has very little risk in it while drastically increasing potential return in the market. This is why good portfolio managers make well above $1,000,000 a year in the United States. They have spent a whole lifetime practicing their craft.
However you don’t need to be a hedge fund portfolio manager to learn the basics of portfolio construction. You can model your portfolios after some of the best in the industry. After a bit of time learning and understanding how the greats do it you can venture out on your own.
One of the best portfolios to model yours after is Ray Dalio’s “All Weather Portfolio.”
Much like the name suggests the “All Weather Portfolio” aims to position your positions to grow regardless of market condition. In theory during another great depression this portfolio would still beat the market and continue to grow.
The secret to the “All Weather Portfolio” is not superior research or insider trading. Rather it is the assets the portfolio holds and how each position compliments the other. When one position declines in value the others will rise.
Once you understand how portfolio construction works you can begin to see the subtle art. At this point you’re ready to start building your own portfolios.
Tip 6: Understand What You Are Investing In
Too many amateur retail investors just throw money at random companies today without knowing what it is.
In order to invest in something you need to know what you’re investing in. You should know what the company’s business plan is, its services/products, its current financial situation, and any risks the company is aware of.
Only then should you invest in the company. The reason for this whole tip is because of how deceitful modern companies are to shareholders. Companies have learned that they can create a fake product and market it as the next big thing and shareholders will pump up their stock. Then the company will use this new valuation to create capital.
This overtime has led to a drastic increase in P/E for many companies (outside tech). If you stop and think I am sure you could think of a couple companies guilty of this.
Further, by knowing what you’re investing in you can better build a portfolio and hedge against your position. As such before you click buy you should spend time researching your potential investment.
Tip 7: Pick A Sector And Stick With It
The best investors and traders in the world become experts in one sector and only invest there.
This is because when you know everything about every major company in a sector you can build a great portfolio that will capture a majority of the alpha present in the sector. This is one of the main secrets to investing, become an expert in one thing not a jack of all trades.
For me I have spent over a decade investing in U.S energy stocks. Pre 2012 the U.S was in a shale fracking revolution. Natural gas was the main investment. Right now the sector as a whole is transitioning to renewable energy with windmills taking over. This trend has largely been going on since 2012. Next is going to be solar which will continue up through 2045.
As such you can position a portfolio to take advantage of this change. If you’re ahead of the market as a whole you position a portfolio before everyone else and make massive returns on even value investment picks.
Therefore pick a sector and stick with it. I recommend finding one you’re interested in so that reading won’t be a chore.
Tip 8: Learn Different Types Of Investment Methodologies/Strategies
An investment methodology/strategy is just how you are going to open a position to capture some return.
There are literally thousands of investment methodologies/strategies besides just buying and holding stock. Some methodologies require lots of capital while others require a high degree of programming knowledge.
However it’s important to understand a couple of these methodologies/strategies so that you can use them. They are just tools. When you see a trend appearing in the market you can use the proper tool to maximize your potential returns.
This is why people spend lots of money on hedge funds fees. A fund will specialize in one or two methodologies to maximize returns for their clients. Below is a list of a couple funds and their methodologies.
- Bridgewater Associates: Global-Macro
- Renaissance Technologies: High Frequency Trading/Arbitrage
- Elliot Management: Activist Investing
Knowing how each of these methodologies works and their applicable situation is going to set you up to earn more. If your interested I wrote up an entire article on different investment methodologies/strategies.
Tip 9: Remove Yourself From The Market
It’s vital that you remove yourself from the markets and unwind. Stress is a major killer in the finance industry. There is absolutely no reason why you need to be attached to the markets 100% of the time.
One of the main reasons you need to learn to unplug is because of the general market. Professional hedge funds use algorithms to predict when people are going to be stressed and make bad financial decisions. They use this information to scalp a few percentage points from retail investors. (2019 Behavioral Finance Article Explaining This Methodology)
If you’re not stressed you wont make bad decisions. As such during periods of lull in the market you should get up and walk away. My favorite thing to do is either go for a walk or play guitar. For me this is instantly calming and allows me to re focus my attention on what truly matters.
Everyone has a bad day in the markets, I have had several. The trick is learning how to process this and remove yourself from the markets. In the long run you will be better off.
Tip 10: Understand The Value Of Compounding Interest
Here is some forbidden stock market wisdom. The real secret to beating the market is to take advantage of compounding interest.
In the above image we have a portfolio worth $100,000 that gets about a 7% return year over year for 30 years. At the end of 30 years we will transfer the portfolio to a conservative dividend portfolio made of stocks/bonds.
After 30 years that $100,000 portfolio that was left untouched and allowed to grow is now worth almost $800,000! Further, when we transfer to a dividend portfolio you are generating around $50,000 a year for the rest of your life without touching that $800,000.
How did this happen? Well that’s the power of compounding interest. If the portfolio gets 7% every year then the first year you made $7,000. The second you make $7,490. The third $8,014. Over time this turns into a runaway snowball that can make you huge returns every year.
All that from just putting an investment away and letting it grow. Don’t underestimate the power of compounding returns.
Tip 11: Get Sleep
I am sure you have had one or two days in your life where you have gotten no sleep. How did you perform the next day?
Now imagine you’re managing a client’s or your own money. Chances are you wont do too good. That’s why sleep is so important to investors.
Unfortunately most people worry about their positions or worse become addicted to the market. Novice investors and traders will lose sleep over their open positions in the market and end up making simple mistakes the next day just from sleep deprivation. (source)
Don’t be that person. Get your sleep so that you don’t make costly mistakes the next day. You staying up all night researching or worrying is only going to cost you in the long run.
Tip 12: Understand The Bigger Picture
People invest and trade to grow wealth overtime.
You need to understand that this is a long distance marathon covering multiple decades and not a race. Professional investors will position investments for 6-12 months out. You should do the same to maximize your potential return.
Even professional traders will open a position with the idea of closing it out in the next couple months, not days. This is because even their time frame is much longer than the average retail investor/trader.
It takes time to learn to think in this long term timeframe. Investing takes time. Your positions need time to work, it’s not going to happen overnight. Sure there are methodologies and positions that you can open and close intraday to make 1-2%. However if you’re just starting out investing it’s better to get your bearings first and then work your way to those.
That’s what I am here for. I help people obtain higher than normal investing returns. If you like this content you should share it around the web so that others can benefit from it, I really appreciate it. Further if you have any questions feel free to reach out!
Understanding the bigger picture is more of a mindset than a skill. You need to approach the markets everyday thinking about where you want your portfolio to be 1-2 years from now.
There you have it. The 12 professional tips that I wish someone would have shared with me when I started out on this journey. It’s my goal to expedite the process for you so that you don’t make the same mistakes I did (trust me I have made them all).
I love talking about the markets and researching new and exciting investment things. I routinely publish articles on investment research, methodologies/strategies, and tips/tricks of the trade so that you are better prepared to navigate today’s insane markets.
Feel free to sign up for the free newsletter to remain up to date on all things investing.
Further, you can check out the latest articles below.
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Until we meet again, I wish you the best of luck in your investing journey.