Remember the basics when you trade stocks and ignore the hype

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Zero-sum game: remember that on the stock markets, for every winner there is a loser (Photograph courtesy of Pixabay)

The recent Gamestop phenomenom has triggered exclamations, disbelief and renewed interest across generation-divides in investing.

Reviewing a few of thousands of financial media reports, we see stock trading apps, both new and well-established, promoting stock trading as commission-free, easier and fun.

Slogans, such as “invest and chill”, ”you are in control”, “investing, no manual needed”, “ you don’t have to invest like everyone else”, etc, also seek to define new ways of thinking about one’s financial future.

Call it what you will: the lure of striking it rich, the relief of Covid boredom, the earnest intent to learn how to invest, the camaraderie of like-minded trader-gamer groups, the bringing what was thought too difficult down to “easy ability for anyone”, the freedom (and possibly the thrill) of doing it yourself investing!

So, here are some tips, and a few sobering facts. Aren’t there always?

For a complete analysis on DIY investing, please see Step 14, of the Bermuda Islander Financial Planning Primer Book One: The Dawn of New Beginnings – available Monday February 15, 2021, www.royalgazette.com/bermuda-islander/

The process

1. You will need to open an investment account at a local brokerage or banking firm. Be careful about this process.

2. You may be handed a lengthy contract – read it carefully. A basic brokerage account may also include a request to open a margin account where you can purchase investments on margin (leverage).

3. Margin account. Understand what it does; it can amplify your gains, and guess what, amplifies your losses, triggering a margin call – that you may not be able to meet!

4. Have a plan, putting all your trades (and your cash) on one stock – because it continues to rise in value is not a plan.

5. Buy small positions, say $1,000 per stock choice, or even less. Firms do offer “pieces of shares” for high-single price shares.

6. Diversify. Lordy, have in your plan some sort of diversification. Roaring Kitty purportedly lost out on $48 million (on a Gamestop original investment of $50,000). For the life of me, I cannot understand why he didn’t sell that gain for a realised profit – rather than a boasty on paper-only profits. See my article of last week, The Gamestop Phenomenom re: realised versus unrealised gains.

7. Avoid herd mentality. Don’t go with the crowd, no matter how popular you want to be.

8. Set a profit, loss and time limit on each position. Example: if it is a stock of a good company, hold it. On the other hand, a pure momentum trade, set a profit exit, say 30 per cent in a month – sell! Thirty per cent times 12 is a 360 per cent gain in a year. You make your own trading strategy.

9. Selling short. Never, ever, go naked – in investment vernacular – defined as not owning the stock shorted or alternatively not having the cash to back up selling stock short loss strategy.

10. Do not give in to greed by coveting huge gains. Just because one stock is doing well, this does not mean you should buy more of the same – suddenly you may find all your cash tied up in just a few (or one) stocks. Now that’s an emotional roller coaster.

11. Do not love any stock, mutual, hedge, or any other security. It’s not a person, or human in any way. Emotional decisions are not rational, usually.

12. Do enough research on each position to understand how it reacts in volatile markets. Finviz – Financial Visualisation has a great map(s) of the market https://finviz.com/map.ashx?t=sec_all

which shows hues from dark green to red, with bright red indicating more volatility and price swings in a stock. You can also use Yahoo finance and set up a five-year chart for any stock that will demonstrate quite vividly historical price swings.

13. Buy equities of companies you know and whose products you use consistently, Learn to earn, as Peter Lynch says. Chasing unknown penny-stocks and other short-term plays is not for the timid, the beginner, or the budget minded.

14. Read Bloomberg every day. Research commentary you don’t under-stand. You will down the road!

15. Do not be tempted by website and media ads to trade currency, options, and other “get-rich-quick“ enticements.

16. Pay attention – at least once a week or more – unless you are a day-trader. Consider joining an alert type service (or uploading it yourself) that will notify you if your positions are changing.

17. Compute your real rate of return and watch your fees. Broker commissions, turnover costs, mutual fund fees, front and back end loads all take a chunk out of your actual profit.

18. If you are invested abroad, or you live in a tax regime country be aware of the tax impact on your rate of return, eg capital gains, dividend tax, short-term gains are subject to higher taxes than capital, etc.

19. Don’t even think about trading during your workday – this type of activity is not condoned and is considered a redundancy offence in today’s heavily-remotely monitored employment arena.

20. Be sceptical about anyone touting how spectacularly successful they have been. No one wants to admit to a loss – and if they do, you know it was a zinger.

21. It is always wise to remember that investing is a zero-sum game. For every gainer, someone is a loser. You won’t win all the time, but you want to land on the winning side on a consistent basis.

22. Look carefully at the Dalbar Chart Quantitative Analysis of Investor Behaviour in Step 14 – since 1988, the stock market’s average return has been 10 per cent per year. But stock fund investors have earned only 4.1 per cent per year. See it’s your brain’s fault.

Now, after reading this, if you feel exhausted or that you’d rather garden or plan your next trip, you know that your homework has a different tilt.

Rather than researching good stocks to buy, consider a focus on establishing a relationship with an objective licensed experienced investment professional.

CNBC: “You’re making big financial mistakes – and it’s your brain’s fault”, Ric Edelman, August 1, 2019, https://tinyurl.com/y25ze95f

Disclaimer. This article is information only, not to be used for, and not intended as personal investing advice.

Martha Harris Myron, CPA JSM, a native Bermudian, is an author, international financial consultant to the Olderhood Group Bermuda, and financial columnist to The Royal Gazette, Bermuda. Contact martha@pondstraddler.com All Proceeds from these articles are donated by the Royal Gazette to the Salvation Army, Bermuda