Investing for Beginners

10 Things You Need to Know

Apr 13, 2023

Even if you are new in your investing journey or have been investing for some years, I think these ten tips will help you make better investment decisions.

When a new investor starts investing, there are a number of things they need to think of. This thread is not helping you find the best stocks but will hopefully help to avoid the worst mistakes.

Why avoid mistakes?

A loss of 50% is recovered by an increase of 100%. A loss is recovered by a bigger increase than the decrease. So avoiding mistakes is very important as it takes more to recover. See the below graph.
This is why Warren Buffett has got two rules.
#1: Don't lose money
#2: Don't forget rule 1
Be long-term because equities will work with you, while they will work against you in the short term. Short-term, the market will make a fool of you, and you will only feed your broker transaction fees. The best-performing accounts were the accounts the user had forgotten or died.
Focus on profitable and cash-generating companies. If they are profitable and generating cash, will they not need additional capital to survive, and you won't be diluted or need to put additional money in the company to protect your share.
Mathematically there is an asymmetry when investing in equities. The downside is 100%; the upside is above 100%. But the probability is more often the company goes to zero and goes bankrupt than it goes above 100%.
Don't follow big social media accounts or investment bank pitches blindly without any of your own research. Other research is very good for being time efficient, but it doesn't mean you should do nothing yourself. Confirm the research and understand the investment case. Have your own opinion about the investment case; type down 2-3 things you will check every quarter and those go against your investment case sales. You will most often be last to sell when it is not your original case.
Don't invest money you can't lose. Big losses in the portfolio and big costs in personal finance are a combination that occurs more often than you think. The best would be to commit the money to the portfolio forever than thinking that you can withdraw whenever.
Save an amount every month, no matter if the sentiment on the market doesn't matter if it is down or up. Don't try to time the market; what is important is time in the market. Let the money work for you, and it does so invested not by going in and out of shares. Only the banks win Peter Lynch's fund. Magellan earned a CAGR of X% per year. Despite that, the average investor loses money. Why is that? People tried to time the fund. Resulting in selling when it was down and buying when it was up. The opposite of what you want.
Stay away from financial products such as options, derivatives, CDFs, and so on. To understand how the products work is in itself a lot of research. To quote Warren Buffett:
Derivatives are financial weapons of mass destruction.
If you start in your twenties, go all stocks and learn as much as possible, as you have a lot of time to make up for mistakes later when you have a higher salary and more time to compound. Knowledge and experience are more valued. And you don't have any big responsibilities. Suppose you start in your late 30s and have responsibilities such as kids, spouse, and even a house. You don't have time, energy, or knowledge about the market. Invest at least above 60% in mutual funds/investment companies, a good mix would be 75% funds/investment companies and 25% individual stocks. That way, you can have a mix that will probably perform with the market and a part where you can learn and have fun with. You can increase your stock part as you see it working for you (it will grow by itself if you outperform the funds so).
Have a barbell approach to risk. Low risk in personal finance allows for high risk in your portfolio. Remember, equities are high-risk assets, as you can lose all your money if you choose the wrong one. Which I hope you avoid by reading this thread.

Investing can be rewarding, but it's important to remember that it's not without risk. By keeping these tips in mind, new investors can avoid costly mistakes and make informed investment decisions.'

Thank you for reading Investacus. This post is public, so feel free to share it.