How to become an investor – a practical check-list

Topic: a practical check list for becoming an investor

Length: short

Conclusion: focus on the psychology not the maths; read books; continuously refine your strategy by objectively analyzing your decisions (good and bad)


Investing has very little to do with advanced math, statistics and accounting

Sure, you can take that approach, but unless you are talented and have a special interest in those areas, you’re unlikely to be able to compete with those that do*. Instead focus on getting the big picture right; avoiding big mistakes, and controlling your emotions. Use the one, single competitive edge private hobby investors still possess: patience and the lack of impatient clients and monthly update requirements. You can’t compete with high frequency trading algorithms or forensic accounting experts, but you can compete in low frequency trading.

* even professionals who are very skilled and experienced sometimes lose big, despite armies of analysts and accountants spending thousands of man-hours finding value – or lack thereof – hidden in company books (cooked or not). Quickly browse through my 50-point check list for fundamental investors if you’re interested in what you’re up against — and that’s the short version.


Start by reading books about the psychology of investing

I have a few suggestions on my blog (here). I will also soon make my video course on investing available through my and Ludvig’s podcast Future Skills. You might want to check it out, but don’t expect quality advice to be for free.

Another good place to start is my TAOS series of 12+ posts about important investor character traits, practices and habits (the site says 369$ but the artwork actually costs 199$; the price is right once you enter the store. The article series is free of course). You should also browse my previous articles on investing on my Best Of page.

A few of the suggested books are: Margin Of Safety – Seth Klarman, Reminiscences of a stock operator – Edwin Lefevre, The Most Important Thing – Howard Marks, The Black Swan – Taleb, The great crash – Galbraith, How an economy grows and why it crashes – Peter Schiff, The Death of money + The New Case For Gold – James Rickards, Fed Up – Danielle DiMartino Booth. And my own book.


There are dozens – if not hundreds – of viable strategies

The key is to find a strategy that is a good fit with your personality, not forcing yourself to comply with some kind of objectively optimal plan. Nothing beats actual experience on the financial markets so try to get some action as soon as possible to learn the ropes, both in terms of knowing yourself and the markets. Formulate strategies, backtest them, and try them out in demo accounts or with very small amounts of real money.

One more thing: investing on the financial markets does not mean stocks only. There are alternatives: commodities, precious metals, real estate, private equity, your own business, education or skills etc. I personally like the quattro stagione approach (read more here about choosing your investment strategy and building a multi-asset class portfolio)


Find (or create) a place where you can discuss and refine investment ideas and strategies

Avoid the typical gun-slinging machissimo stock trader forums where mostly guys post and brag about their best trades and mock anyone with a serious question. Investing is about truth-seeking, about eliminating unnecessary mistakes and losses, not about being right. Those obsessed with being right usually run into huge losses when they fail to admit their errors and cut their losses.


Trial by fire

As soon as you have a working and backtested strategy, start using real money (albeit small amounts). It’s the only way to stress-test your psychological constitution and verify your fit with that strategy


Make sure to create a feedback loop…

…by writing down your reasons (compliant with your strategy) for entering an investment, and following up on those reasons when you exit the trade. Analyze what went wrong, what went right, what was skill and what was luck. A well executed trade based on good decisions may very well end in a loss, and a string of bad decisions may create a gain. Don’t let your wins fool you into thinking the decisions were better than they objectively were.

Choose and formulate your ex-ante reasons for entering a trade in such a way that they are helpful in deciding when to exit, as well as analyzing whether the ex post result was luck or skill.

Refine your strategy with any new long-term insights you gather from every investment

Remember that both you and markets continuously evolve, meaning your strategy and investment method must too.


Summary

  1. Psychology is more important than maths in investing
  2. Read books and insightful articles about investing, not testosterone dripping online stock forums
  3. Find a strategy that suits you. Refine it in company with likeminded truth-seekers
  4. Use real money; it’s the only way to truly stress test your emotions and your strategy-psychology fit
  5. Create a feedback loop of continuous improvement, your work as an investor is never done
  6. Bonus tip I: it’s not easy, anybody who says it is don’t know what they are talking about (or are actively trying to fool you). Anybody who has simple one-dimensional solutions to the ‘problem’ of investing is either a narrow minded sheep destined for slaughter, or a snake oil salesman out to trick you.
  7. Bonus II: 10 newbie habits you should avoid (+watch CNBC all day long)

P.S. Don’t forget about my podcast Future Skills and the coming video course.

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7 Comments

  1. People often ask me how to get started in investing. What to read, etc. I tell them read day trading books. NOT because you want to day trade. Because those are the skills you need to survive the learning process and weather storms. Or call it psychology, as our host has.

    The first thing newbies need to know is how to cut their losses when it all goes wrong — trade sizing, money management, trade execution, and exit strategies (stop losses). If you do this right you’ll at least break even, which beats 90% of traders who usually lose everything. Next you need to learn how to evaluate charts, scans or fundamentals. This leads to setups and back testing.

    • Great approach. Non-intuitive (often a good sign), in that it starts with teaching transferable skills in day-trading whether you are aiming for value based investing or not.

    • Very varied. Some outright scams, boiler rooms, some pretty decent. Often valuable raw information but often useless conclusions and recommendations (but who cares, I just want the info)

    • It’s a good start. It’s good to know what others know, and get inspiration for what more to learn, to research and to question. IF YOU HAVE THE TIME.

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