One quote I often think about is that “every master was once a beginner”. To caveat this, I’m not saying that I’m a master of investing! However, having bought and sold stocks for many years, I do remember what it was like when I first started. To be honest, I didn’t know how to calculate a dividend yield, or understand what a price-to-earnings ratio was. Thankfully, as a beginner investor, I was given some tips from a good friend of mine. These really helped me to get up to speed, and reduced my early mistakes.
A beginner investor, but not a naïve one
One of the first beginner tips for stocks I was given was to think of the worst case scenario. In today’s terms, I’d call this good risk management. The point being that, as a new investor, I often thought too much about the potential share price gains. In reality, not all the stocks I’ve bought have gone up in value. I’ve sold stocks for heavy losses in the past, for good reasons. So by considering whether I could afford the worst case scenario before I bought a stock, I got a better feel for buying.
A good example of this (which ties into my next tip) was Cairn Energy. A lot of my friends bought into the stock between 2008 and 2010. The stock was very volatile, but was seeing a trend of higher movement. I decided not to invest, as I couldn’t afford it if the stock lost a lot of value. The big difficulty in making this choice was the fear of missing out (FOMO). As a beginner investor, I didn’t want to be out of the loop with my other friends, especially if the stock made large gains.
This was one case when not giving in to FOMO was an excellent beginners tip. Most of my friends sold out for some form of profit, but some held and had to cut with large losses when the share price crashed in 2011 and 2012. To this day the share has never recovered back to those levels.
Investing tips, not rules
One point my friend made was that he wouldn’t give me any set rules for buying or selling stocks. This was simply because the best lessons are learned from experience. This is true in life, and carries over into investing. As a beginner investor, I could’ve had a rule to simply sell if a stock I owned dropped by 20% in value. However, I learned a much more powerful lesson by not having this rule and feeling the pain of having to sell a stock at a loss of 50%. From then on, I ensured I wasn’t as sloppy with my attitude in this regard.
Finally, the last tip I was given as a beginner investor was to always keep a long-term approach to investing. This is because, as a newbie, I would watch the share price 10 times a day. Any small rise or fall would get me alarmed. In reality, I now plan to hold stocks for years. In this regard, short-term movements don’t stress me out.
