The following is a guest post from Troy at Market History.
As a professional investor, it took me years to get to where I am today. Along the way there were a lot of missteps. Learning the wrong investment strategies and following the wrong advice can be more detrimental than getting no investment advice. And as a novice, it’s hard to distinguish between good and bad investment advice. So without further ado, here are 5 ways for inexperienced and novice investors to become better at medium-long term investing.
Understand What Drives Your Market
Every market has its own main driver. This main driver will determine the medium-long term direction of the market, so you need to know what your market’s driver is. Some investors call this the “fundamentals of a market”, but I don’t. Fundamentals usually refer to the state of the economy, and not all markets are driven by the state of the economy.
- Stock market investors should know that the state of the economy drives the medium-long term direction of the stock market. The stock market will rise as long as the economy is growing steadily. How do you know if the economy is growing? Do not look at GDP because GDP is a lagging indicator. Instead, focus on indicators such as Employment Reports, Housing Starts, Retail Sales, and Industrial Production. Are these indicators missing or beating analysts expectations? If these reports are “weak” and miss analysts expectations for consecutive months, then the economy is deteriorating. Hence, the stock market should fall significantly. Otherwise, stocks will be in a long term bull market.
- Just like the stock market, long term real estate prices are determined by the state of the economy. When the economy deteriorates, people have less wealth and avoid investing in real estate. Hence home prices fall.
- The long term outlooks for commodities like gold and silver are driven by rising and falling inflation. Gold and silver will be in long term bull markets if inflation is rising significantly. Otherwise, commodity prices will swing sideways in a big range.
Read the Timeless Books on Finance and Investing
There are a lot of investment and finance books out there, but most of them are written by “investors” who aren’t very good at investing themselves! These are the “I make money by teaching you how to make money” types.
Instead, you should read the books that are considered timeless. These books will tell you when to buy, when to sell, how to allocate your portfolio, what signals/indicators to watch out for, etc.
Some of these books include, but are not limited to …
- Reminisces of a Stock Operator
- Market Wizards
- Hedge Fund Market Wizards
- No bull: my life in and out of markets
- Adventure Capitalist
*Disclaimer: I am in no way affiliated with any of these books or authors.
Follow the Right “Experts”
A lot of the self-proclaimed “experts” are simply clowns. Guys like Jim Cramer aren’t good at investing, so they make money by telling others what to invest in. On the other hand, there are some real pros who have been investing and running hedge funds for decades. These include billionaires like George Soros, Warren Buffett, Jim Rogers, Jeremy Grantham, etc.
Every once in a while these investing legends will appear on major media outlets like CNBC to explain their view on the markets right now. Tune in. You can learn a lot by listening to their words. They’ll explain WHY they invest in certain markets. These guys typically have decades of investment experience, and you can learn a lot from their investment strategies and thought processes.
Get a Holistic View of Economic and Financial News
You need to keep abreast of the latest financial and economic news. Ideally you should read a variety of different news sources because all media outlets will have their own biases. Some like Barron’s will always have a heavily bullish bias on the markets, while others like Zerohedge will have a heavily bearish bias.
However, you should not be absorbed by the news. It’s easy to get confused by the day-to-day details and forget the bigger picture. Focus on your long term outlook for the market and use the day-to-day news to alter that long term outlook.
Practice, But with Small Amounts
There are a lot of good investment strategies out there, but not all of them will work for you. Each person’s “right” investment strategy must match his or her personality and talents. For example, someone who’s very impatient cannot use a long term strategy that involves a lot of patience.
The only way to know what strategy works for you is to TRY THEM OUT. Try different investment strategies that you think might work. But when you do so, make sure that your investments are not large. Make small investments because it’s likely that you’ll lose money as a novice investor. You don’t want to blow through a large chunk of your portfolio when you’re still learning. Focus on learning and figuring out what works for now. You’ll be able to make a lot more money later once you’ve tested a strategy that works for you.