What a beginner should avoid while investing in markets?

Investing can be simple but definitely not easy. There is too much of noisy in today’s world. Loads and loads of information flows relating to companies and markets. More than thousands of people share their opinion on news channels, on internet, some people criticize a particular stock and also a particular investor. It creates a confusion for The Solo Investor to what to should listen too and what decision to make. To simplify all this, first The Solo Investor should know what to avoid in stock markets. This will clear the way for some important aspects of investing. Following are the things a beginner investor should avoid in investing:

1. Avoid constant monitoring

The constant movement of the ribbon from right to left on a news channel or a website, the quick changes of the price of stocks and daily news of how much up or down market opened or closed provide too much data on movements of stock markets. The more interesting thing is, if we consume that data, we tend to believe that we are more informed. Use such information during a chat and sound smart. This data is nothing but all the views of participants in the stock market which determine the price at the current moment. And if a stock doesn’t behave as we want it to, we might get afraid and sell it. This usually doesn’t end well for us.

The best way to avoid such situations is imagining that we bought a house. After 2 days the broker says that the price of the house has decreased by 10% and after 2 more days the price decreases 10%. We won’t go out and sell the house quickly because we know such fluctuations are part of the real estate market, it is just that unlike this example, these changes in price movement are slow and over a long period of time. But the prices of the stocks move continuously, but remember it’s just the price moving and not the actual business value. Hence random stock market fluctuations are not that important once we have a long term view for our investments

2. Avoid people on news channels

The people or are on the news channels all the time and giving stock calls do that because that is how they earn their money, by giving calls. What if their calls do not workout as expected? Well it wasn’t a guarantee, was it? Some “experts” also give their industry ideas and business views. While some of them are really helpful, most of them are not. Basically it is your money and you should not listen to someone who tells what to do without knowing your financial situation. These guys have nothing to lose no matter what your investment does.

Some genuine investors come on TV and share their views about the market. But be cautious, why would anyone give their best ideas in a market. Even if a well reputed investor gives his views on TV, acknowledge it, do your own research and if it seems good investment, then act.

3. Avoid forecasts

Morgan Housel in his new book The Psychology of Money said, “33 recessions lasted a cumulative 48 years. The number of forecasters who predicted any of those recessions rounds to zero”. Most of the forecasts we see are nothing but extrapolation of the past. There is a tendency of humans to think the future could be similar to the recent past. This can be justified in normal times until something happens which proves the forecasts wrong. And most of the forecasts do not take such things into account.

No one had any idea that the world economy might see a disastrous halt and that to so quickly due to corona virus pandemic. And at the bottom of the markets, no one new that markets would recover so quickly. People tend to assume that something that has happened in the past will continue to happen in the future, until it doesn’t. Hence it is better to avoid forecasts and stick to our philosophy, principle and be prepared for any situation.

4. Avoid Euphoria

Euphoria is present in the market when it feels like nothing can go wrong. Stocks only go up and everyone is making money. When the person you know has no knowledge of the markets, gives to tips about stocks. This happened during the great depression of 1929 where people took out loans and invested that money in stocks. Because why not? stocks only go up and we can make a quick buck. We all know how that ended. The IT boom of late 90’s was similar. Anything with dot com in their name or just a company who is related to the similar industry, the stock of the respective company went up. In the aftermath, many people and institutions lost money and many IT companies went bankrupt. That was one of the biggest euphoria of the history.

Tulip mania and south sea bubble are past examples of the history. If you think you have to be genius to invest in the stock market and require a high IQ, Newton, one of the greatest scientist lost money in the south bubble too. Mostly it all comes down to “THE GREATER FOOL THEORY”. No matter at how much of a high price you buy, there will another fool who will buy from you at a higher price. This doesn’t end well. Valuations of the markets matter, if not now then eventually they do. Hence avoid things that are too high.

5. Avoid competing for returns

Charlie Munger said, “Someone will always be getting richer faster than you. This is not a tragedy”. This words couldn’t be more true. There is no reason to compete with someone in getting rich or getting higher returns. This can cause you to take undue risks and most importantly you would never be satisfied. W

We do not have any assets to gather like funds managers, nor having shareholders to answer which would cause us to compete for returns. Which ever return could satisfy your needs and is above inflation is a good return.

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