Friday, July 29, 2011

The "Social Media" Investing Model

Good Advice
I was doodling on my note pad at the Social Media seminar I attended earlier in the week.  It occurred to me the advice we were receiving would be useful for those wanting to learn more about investing.

The fastest way to learn anything (other than from adversity) is from other people's experience.  Since there are as many investing strategies as there are people, look for the classics like "The Intelligent Investor", by Benjamin Graham, "Stocks For The Long Run", by Jeremy Siegel, "The Wall Street Journal Guide To Understanding Money and Investing", by Kenneth M. Morris.  I like "How To Make Money In Stocks", by William O'Neil.

Technical Analysis has increased in popularity of late.  I recommend achieving an intermediate (as opposed to beginner) level of understanding.  Search Amazon, and look for something of interest.  I started with Stan Weinstein's "Secrets For Profiting in Bull and Bear Markets".  The investing world is divided between fundamental and technical investors.  Why rely on a monaural approach when we can enjoy the advantages of a fully enhanced stereo experience?  I suggest using fundamental analysis to determine what to buy, and technical analysis to identify when to buy. 

Set Goals
Do you want to become independently wealthy?  Do you want to supplement your income?  Do you want a fully paid vacation?  Remember, goals should be SMART (Specific, Measurable, Achievable, Realistic, Time-sensitive).  Consider setting short-term goals based on longer term ones.

Paper trade.  There are sites and contests on the internet which allow us to buy and sell stocks using practice accounts instead of losing real money.  It is rather like learning to ride a bike.  We are bound to fall and get a few scrapes before we can hold our own at the Tour de France.  Understand, however, paper trading only goes so far.  There is nothing like the feeling of losing significant amounts of money in a bad trade, or the excitement of riding a huge gain.  Learn to set limits based on the level of personal experience.

Keep accurate records.  Use those records to identify what works for your situation and what doesn't.  Do more of what works and less of what does not.  What works in some situations will not work in others.  Nothing in investing works all of the time.  Anyone who says otherwise is lying.  Be prepared to shorten time horizons, or lengthen them.  Trade more; trade less.  Never fall in love with an investment, or a trade.  They all have their day, then, can turn on us in a heartbeat.  Investing is like public speaking; getting too comfortable or too lazy is usually a mistake.  Anticipate various scenarios and plan appropriate responses.  Plan ahead, do not react.  Instinctive reactions are necessary for survival; they usually go contrary to good investing practices.

Measure progress toward goals.  Make improvements without relying only on the advice of others.  Investing is like playing poker.  People come to the table with their own agendas and strategies.  If their real agenda is consistent with what you are attempting, then fine.  Understand that nobody in the Financial Services industry wants to make you money if it interferes with how they make their money.  Also, understand that they almost never get paid based on the amount of money they make for you.  If that were the case, there would be a lot of starving workers in the industry.  Ever wonder how companies can afford to pay those huge bonuses?

The advice for determining the percentage of equities in a portfolio based on age is only a guideline.  Revise your goals based on your results and your desired results based on your goals.  I know that sounds like double talk, but just like fundamental and technical analysis, we are not limited to one instead of the other. 

I started out in the safest of mutual funds, then sector funds, then Exchange Traded Funds (ETF's), then leveraged funds, then individual stocks.  I will be trying my hand at options when I open my first Tax Free Savings Account (TFSA).  Each time I found myself repeating the process.   Sometimes it is necessary to repeat the process because of a change in goals, or because of differing results.  It took me a long time to determine what works and what doesn't, and that wasn't for a lack of asking questions - I rarely received straight answers.  According to the industry, we are not supposed to do it ourselves ("Doctors don't operate on themselves!"), and we sure as heck are not supposed to time the markets ("It is time in the markets, not timing the markets!")  I invite you to take advantage of what I have learned.  Use me as your resource.  I love doing this stuff, it is what I do, and I am more than happy to share what I do with others.

Have you followed a similar approach?  How do you test your ideas?

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