Jul 24, 2014 Investment Education: Gaining Investment Experience Rapidly
“Experience is the best teacher.” Yes, but what is the best way to gain experience in investing in stocks?
First, invest real money. Your buy/sell decisions and your greed/fear emotional responses to stock price ups and downs will not be the same with a “paper” portfolio, i.e. a list of stocks you are watching but do not have any money invested in. So, I suggest buying a small number of shares of each stock, few enough so that if all the stocks go down, the loss won’t be more than you can afford.
Second, have both a long term investment account and a trading account. With the long term account, you will gain the experience of seeing what happens when you resist the temptation to buy or sell in response to day-to-day price fluctuations and news. You will watch a stock price’s behavior both before and after a company’s quarterly earnings report. Of course you will only know after the report whether the quarter’s results were above or below or matched expectations. All the better for your experience. Be sure to check the earnings estimates for your company before the quarter is reported. You can find these estimates by Googling “consensus earnings estimates for (company name)”. Then, try to listen to the company’s conference call after earnings are reported. These calls are free, and the phone in number or internet link can usually be found by looking at your company’s newsfeed on Yahoo Finance, or, on the company’s website, click on Investor Relations and you will likely find instructions.
In your trading account, follow your instincts. If your company reports better than expected earnings and the stock pops up, go ahead and buy some if you want. Of course, you may find that the stock’s pop only lasts a few days and the stock settles back, but even if your loss is only a few dollars, you will never forget that lesson. Or, if you own the stock and it pops, you might be wise enough to sell it “on the pop”, and feel like a genius when the stock settles back. But will you remember to get back in before it starts to rise again? How will you know when? Yes, you will eat through some commissions when you actively trade, but hopefully, the experience you gain will be valuable over many years of future investing.
Which is better, long term investment or trading? Conventional wisdom suggests most traders underperform. And keep in mind that “investment” does not mean buy and hold forever. Think of investment as an intention to hold the stock for at least one year. Obviously, even a stock purchased for long term investment could need to be sold anytime if the outlook for the stock changes significantly.
Let’s look at the 5 year stock price chart of Stratasys (stock symbol SSYS). You can find the chart on Yahoo Finance or other sources. From a bottom of about $20 per share in October 2011, the stock ran up to $135 at the end of 2013. That’s over a six-fold gain in 26 months. OK, let’s be honest, it’s not likely that you would have got in near the $20 bottom. But even if you bought anywhere between $20 and $40 over the 6 month period after the bottom, you still made a terrific gain. In fact, even if you paid about $50 per share near the prior price peak, you still had a double, or better.
When you look at the 5 year stock price chart, you will see a lot of zigs and zags where a trader might have taken profits and then got back in at lower prices. But what if the trader failed to get back in, and the stock moves up above what he sold it for? Should he still buy back in? Try trading and see if it works for you. Here is another suggestion. Be a long term investor watching your stocks closely for at least a year before you try short term trading.
Let’s look again at SSYS stock. What about the “correction” that began in January 2014. At this writing, the stock is down close to 30% year-to-date. An investor who bought between $50 and $20 a couple of years ago, and “forgot” to sell near the $135 top, will still have almost a 2 to 5-fold gain, nothing to complain about How would a frequent trader have fared during this correction? Might he have got back in when the stock was only down 10%, to $122 and then watched it go even lower?
This year-to-date 30% correction in SSYS begs the question, “How do I know which interim “top” is the real top?” The answer is that you do not know, except in retrospect, and then it’s too late. This is why you need to have a feel for valuation, i.e. what a stock is or should be worth. Although valuation is far from a perfect science, having a feel for valuation will help you decide what might be the real top. In “Why Stocks Go Up and Down” we discuss stock price valuation from a number of perspectives. We also remind that in the short run, markets can and will overshoot and undershoot what seems like “fair” or reasonable value. Your accumulated experience with your own money on the line, will move you up the experience curve faster.
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