One investing skill that can be used over multiple different investment instruments is technical analysis. The ability to derive insights from the price action of the investment instrument can help you decide on the timing and direction of a trade. In this introductory article, I will cover the fundamental thought processes surrounding technical analysis.
I have a philosophy about working and getting paid, which I mentioned in an earlier post about effort and rewards. I believe that all the work that we do will eventually get paid for, but it may not be in a time or manner that you expect. Similarly, all payment you receive was based on work done in the past (and not the recent past).
Most of us go through school for about 2 decades. We did not get paid during all those 2 decades, but we were definitely working. Working to learn our chosen trade, working to get better results than our peers, working to get accolades to boost our overall credentials alongside the academic ones via internships, special projects etc. In fact, our parents paid quite a bit of money, so that we could concentrate on our task, which was to learn. The first time we do get paid is when we land our first job. This pay is usually minuscule because the only field we have proven ourselves in thus far is in academics and that may or may not translate into practical application. The companies decided the amount to pay us based on what we have done up to that point, not based on what we will do, because they can only guess at how well we will do the jobs given to us.
The work you do on your first job does not determine your pay. Your pay has already been decided when they first hired you, based on the work you did up to that point. So for about the first year, you go to work and contribute to the company and some of you deliver more value than you are paid while others deliver less value. Those that the company recognizes to deliver more value will more likely get a pay raise, while those that deliver less value may have their pay stay stagnant or be reduced. Again, your pay for the next year is determined by what you did in the past year. You are paid for work you have already done.
This applies to all work you do in your life, not just for your salary. Because when you work, you are gaining practical experience, practice, knowledge, insight....basically, you are growing yourself. And that is ultimately what you get paid for, the skills that you have developed over time that you can apply to justify a reward.
When I had a job, I almost never turned down additional work. I understood why people would say "this is not what I am being paid for", but I also understood that I was not being paid for anything I was doing at that time, I was being paid for work I had already done. In that vein, whatever I do now will justify my pay in the future. So I happily did whatever task was necessary, not because I am naturally helpful, but because I knew the ultimate person to benefit from that extra work was me.
The best type of work to take on is work that you find difficult and challenging. Because that is the work that will allow you to grow your skill set by leaps and bounds. Sure you might fail, but with each failure comes lessons paid for by the pain of that failure. And if you are in a job, it is only emotional pain that you feel, because you are failing on someone else's dime. Once you start out on your own, either via entrepreneurship or investing, failure gets even more painful because you will be paying for it yourself. So fail while you have someone else to pay for you and grow from that failure.
This is also one of the reasons I spend time writing this blog. If I don't do this, I would spend the time paying computer games and watching Netflix, neither of which will help me grow as a person. While doing this, I have learnt how to create a website, how to organize my thoughts into (hopefully) coherent, bite sized chunks, how to market a website and much more. Even though I do not get a financial reward currently for this work that I am doing, I am confident I will be rewarded for this in the future based on the skill sets that I am developing.
This concept is especially important when it comes to investing. I put in over a decade of work outside my regular office hours to learn the concepts and practice various techniques and for many years I was not paid for my work. In fact, I was paying a lot to others via courses and bad investments. But slowly and surely, I honed my craft and now I am now reaping the rewards of all that work. I find that most people that want to start investing for themselves do not want to put in the work, because they want to be rewarded immediately. They have been conditioned by the structure of salaries to think that labor and effort is rewarded immediately. Life simply does not work that way.
Another more direct impact of this need to be rewarded immediately comes in the form of scams. Being impatient to make money via investing opens you up to many charlatans who understand this impatience and lack of willingness to put in the work. It allows them to easily use confidence techniques to lead you to believe in their scheme via promises of fast, high returns with no work involved. Even if you want to invest in what someone else is doing, you need to put in the work to understand how they generate that money, whether the returns projected/promised are realistic based on what they are doing, what safeguards are in place to protect your money, etc.
Hopefully if you internalize this concept as I have, it will help you to change your mindset and be more willing to work and hone your skills, whatever those skills may be. This will most assuredly lead to financial rewards in the future. Also it will help you become more patient in requiring a reward for the work that you do and prevent others from taking advantage of that impatience to deprive you of your hard earned money.
All investments involve some form of risk. Seasoned investors will tell you that risk is the first thing you should look at when evaluating an investment, even before you look at potential returns. Unfortunately, I find that most investors look at risk as a probability and miss out on the more important quantum part of the equation. In this article, I hope to help you understand more about risk quantum, it's mitigating strategies and the pros and cons of those strategies.
In last week's article, I showed you how to automatically extract historical fundamental data from morningstar.com. This tool is extremely powerful in obtaining the data for you, but if you don't know how to effectively use the data to improve your investing, all that data collection can be for naught. In this week's article, let me share with you some ideas on how to effectively use the data you have extracted and hopefully you can improve your overall investment performance with some help from data science.
In my last article, I showed you where you can find some data for performing fundamental analysis. That's a great source for data, but it takes time to click through the web pages and analysing the same data for different companies. I personally analyze the fundamental data of 1,700 companies on a regular basis, which would be impossible without some automation. In this article, I will show you exactly how I do just that. Check it out here and hopefully it will shave off hours from your analysis time and allow you to scale up your fundamental analysis and widen your investment horizon.
The most logical approach to analysing any investment is to look at the data surrounding the investment. If you are investing in stocks, this would involving looking at the fundamental data like earnings, debt, dividends, cashflow etc. This is what is known as fundamental analysis. If you are new to fundamental analysis or are looking for a more considered approach to fundamental analysis, this article might just help you out.
One of the key problems with investments is often touted as one of it's key advantages, the simplicity of the action. For those of you that trade stocks, you will know how easy it is to execute a buy order, pick a stock, select the quantity and click "buy". Boom, you are the proud owner of a small portion of that company. Even in other investments, like buying a property, agents typically go out of their way to make the process as easy as it is for you to invest. Agents will spend the time to slowly explain the option-to-purchase, lawyers will handle all the other nitty gritty. I believe this is one of the key reasons why most investors do not do well, let me explain...
Imagine for a moment, you are due to make a key presentation to the rest of your company including your bosses. You know your career will definitely be affected by this presentation and so you take many days/weeks to prepare, drawing from all your lessons learnt in school and your entire career's experience to try your best to make the best presentation possible. Our minds correlate difficulty of execution and expected impact with the required amount of preparation. Unfortunately, our minds do not correlate expected reward with the required amount of preparation.
Now, compare that with how we approach investments. Each trade is like one of those presentations, it will affect how much money you are going to make in the future. But because of the ease of executing investments, many of us are not prepared to put in the preparation effort. Instead of having 4 years of formal schooling in a subject, and multiple years of experience executing trades, many people bet their hard earned money on investments they do not understand.
Investing, as with any skill in life, will improve with education, practice and experience. Make no mistake, even though investing is easy, investing successfully is one of the most difficult things to do. The proof is in the pudding, most investors lose money over time. So if you want to succeed in investing and building an alternative income to retire on, you need to put in the effort to learn and gain experience, arguably more effort then you put into learning what you do for your current job. Even then, you are not guaranteed to succeed, but you will have a much better chance then the unprepared.
A different perspective
Another way to look at this is my philosophy that you get paid for what you have already done. Remember your first job? Why did the firm hire you? Because of all the work you have done and the results you have shown since you started school until you graduated. And your pay was likely based on what type of degree you have. The raise you receive for the following year is based on what you did in the year before. If you performed poorly, you will get a small raise or no raise, even though you might go on to do spectacularly the next year. You would only be rewarded for that work the year after that.
Investing is the same thing, the work you put in today to learn and practice investing will only be rewarded much later. Worse still, the feedback loop on investments is much longer and can be confusing. Many investments take years to mature and you will only learn the lessons from any failures many years later. For some investments, even if you do everything wrongly, you will still make money and even if you do everything right, you will still lose money. So at times, it is very difficult for individual investors to hone their craft, because the feedback mechanism is so convoluted. In summary, don't expect an easy learning journey. Be prepared for a long drawn out learning curve. I personally took almost 10 years of practice and part time learning before I was consistently profitable.
I have opined on a whole bunch of problems, what do I think is the best way forward? I still think learning investing for yourself is the best solution. It is the most rewarding option and keeps you in full control, albeit requiring the most effort on your part. Your results will only improve with time as you put more effort and gain more experience. However, I also understand that approach is not for everyone, as some may not have the time or motivation to learn. That does not mean you should miss out on the rewards of investing successfully, but you might have to take a different approach.
So, in order of preference:
Technology in the stock market has improved over the years and new types of instruments have been introduced over time to provide tools for investors to achieve their objectives. If you are new to the stock market, you might be confused by the different instruments available. Do you know the difference between an ETF and an index? How about between a futures and an option? If not, this article might just help you get there.
When starting out on any new thing, people will generally make mistakes that more experienced people will know to avoid. The same goes for investments. However, mistakes for novice investors can be very painful financially, so a good idea would be to learn from the mistakes of others, so that you don't make the same mistake yourself. Find out here what are some of the mistakes to avoid if you are new to the world of investing.
Selecting a broker is one of the most important decisions you need to make when starting out on your investment journey. They are the company that will hold all of your trading funds and the efficiency of their systems may determine your level of success in investing. Go here to find out more about what criteria you should use to decide which broker best suits your needs.