The Stock market is a place of gambling and investing. You don’t get rich without risks, but you may save money for your future and get passive income. But how to invest effectively and what mistakes you should not do? Let’s read:

You won’t get more than 10% in $ per year in the long run. Even s&p500 grows 6-8% p.a. on average. Once Warren Buffet said that just a few funds will be more effective than s&p500. To prove it, he argued with fund managers that they will not gain more than S&P500 in 10 years. At a point in time, the funds had higher returns. But there was a crisis, and most of the funds lost all the profit that they made in previous years. Only 2 funds, as i remembered, outperformed S&500.

Don’t panic. We are all people: we have emotions and biases. When the stock falls, we start a panic, we think that it continues falling or that we must buy more because the stock is cheaper. That is our human nature. We think that the status quo, the one which was before the current events, will stay forever, but it does not always work this way.

There were nearly two hundred large companies that became bankrupt after the 2008-2009th crash, and if it was true for the index that time, then nowadays, with the risk of recession, the index may fall for a decade, who knows.

Buy when there is uncertainty and sell when there is euphoria. It works, but mostly if you stick to 2 types of assets: index or shares of stable companies that are not seriously affected. When you invest in an index, you lower the risk of bankruptcy of a given company. If the index is on historical (or 10 years) minimum or maximum, that is too different from reality, or if the

Markets fall every 6-8 years. Charles Kindleberger analyzed 400 years of the stock market. He found that each 6-8 years there was a crisis, with only some exceptions. Interestingly, each time people were sure that this time the situation is different from previous ones: new technologies or that people already learned previous mistakes. No, there is always a new problem, that leads to that. Did we have a market crash in 2020? No, we didn’t, but it will be soon – thanks to the Russian government, EU, and American politicians. The supply chains are broken, and the prices for production rise. Then the final prices rise. The demand falls. How can then companies generate huge profits? Think rational.

Don’t care about your losses. You will lose money on some stock, no one knows when, but you will. When you lose e. g., 10% of your portfolio, you would like to get money back, usually, you want it fast. As you may imagine, getting 10% of your portfolio fast, e. g., in one week is extremely risky:

weekly_rate = 100%/90% # 11.1% weekly  to cover losses  
annual_rate = (weekly_rate)^(365/7)*100
# it is 24317% annually

As you remember, the average annual rate of s&p 500 is 6-8% annually, and not a lot of investment houses can outperform S&P500 in a long run.

Macroeconomics first. The political situation in a country affects all of the companies. Look at Russia in February-March 2022. All companies, that had huge potential crashed in one day 30% to 70%. Russian addressed depository receipts have dropped to 0.01$. All of that happened not because of bad business decisions, but politics. When you invest in a developing country, you buy shares and bonds with discounts. These discounts are given because of such risks, as in the Russian case (I can’t say the word “War” by a law).

Political factors are harder than economic. Economic processes are well explained, for example in Pearsons’ books. We have enough data to expect prices for grains, raw materials inc the calm times. Therefore, in such times, the stock market trades not today’s value, but future value. Usually 6 months in advance. So, market lives in the future, that can be accurately predicted.

When unexpected things happen, the stock market players are uncertain about the future. Usually, players need 2-3 days to understand the future situation. Within these 3 days, there is uncertainty and the volatility (standard deviation, or simply, range of prices) is high. After, the market finds a fair price and predicts the future just 1 week in advance. Why 1 week? On Saturdays (or rarely on weekdays after market closing), politicians make speeches and announce new information and plans. Market players try to predict the announcements and set a fair price. So, if e. g., If J. Powell says that the inflation will be 10% (dramatic for the IT sector), but market players predicted that, then American IT companies will not lose too much equity after the speech. The chance of this event was already discounted.

Politicians are people and sometimes their decisions are not optimal, unpredictable. Let’s take the Russian president. He made the worst, unlogical decision – he attacked Ukraine. After, he lost connections with developed countries. Moreover, the Central Bank of Russia lost access to gold and dollar reserves worth $500bn. Only a few people could predict such an event.

Always have cash. You must have cash for at least some months to live (in my case, 6 months). Liquid instruments (EUR, USD, for example) are easy to withdraw, and you can buy whatever you need without a premium (commission).
When the war in Ukraine started, I had 25% of the cash. The following day I sold some shares and ETFs with a loss of 20-40% and withdrew all my cash (50% of a portfolio) to my Austrian account. Later, Moscow Stock Exchange stopped the trades. All my bonds and shares became untradable. If I did not withdraw money, I would have lost much more and would not have had any money to live in Austria.

both technical and fundamental analyses are important.

Most of the risks and opportunities are already in a share price. You may think that some companies have a bad future, based on something that you have read in some articles. But investors already know about this risk and have lowered the fair value even before reading the article. You may win in this strategy if you use your thoughts and calculations, or if you know insider information or any kind of information that only a few people know. Imagine, you are a telecommunications engineer and you know that Nokia makes good 5g transmitters, that are easy to use, and you know that Qualcomm (i just made up the assumption) makes worse 5g transmitters. Then, you, as an engineer assume that Nokia will take over the market. You look at newspapers and you see that there are just a few unpopular articles about that. Here you have a jackpot, and with a high probability, you will earn some money.

Bonds are good, even if they don’t cover inflation

Don’t use futures, options, and other instruments if you have not read books about that.

Never gamble. The stock market is not a place to try your luck. I, an investor, will be very pleased if you will gamble because you lose your capital, and probably I will own the money you lost.

Instead of Casino, in the stock market, you can lower your risks without losing returns. In the long run you will be profitable

The stock market is about psychology in the short run, and about numbers in the long run. It is hard to predict the stock price within a quarter or half of a year. You don’t know what happens in such a period of time. You may learn about the situation in a company by reading the company’s reports or news. Reports are usually shown each quarter and annuity. they represent the real situation in a company with all numbers etc. I recommend reading Global financial accounting and reporting to be a pro in analyzing the company’s reports.

News show the situation in a company in real-time, and each information affects the cost of a share. I used before this short-term strategy, and I was always stressed:

Invest for the long-time and don’t read news. You don’t want to spend your time

10% change in the company’s cost is not important. Don’t care about fluctuations of the stock. It can rise, fall tens of times per annuity. If you will take each fall into account, you will be stressed. You will get a habit to check the news about the market and each company all day long. And you have tens of companies in a portfolio. You will loose the ability to analyze the stocks and will only rely on news and graphs. If don’t want to have such problems, invest in ETF.

Invest in ETF. Exchange-Traded Funds are managing the capital, that investors bring to them. They decide on which stock (or other instruments) to hold, buy, sell. The Funds take a commission for the service in exchange for you patience. The Funds don’t guarantee a profit, therefore you need to know to whom to give your money. You may do it the same way as with companies, by analyzing their reports. Don’t forget, that the huge returns in the past don’t guarantee profit in future. Take an example of Cathie Wood, the manager of Ark Innovation ETF. She went from 50 in 2019, to 100 in 2020, to 130 in 2021, and to 60 in 2022. As you see, if you invested even in 2020, you would have lost 40% of investments, even though she had 30-100% of annual returns in the past.

Expect an unexpected. Humans make decisions in politics and business. Sometimes, people take wrong decisions and do stuff that they were not supposed to. Even a small thought or event, like a traffic jam, may affect the final decision. You cannot predict such events. But they happen often. That is why the even the algorithms can’t get huge profit

Power and information are compensated with a size. Big investment funds and banks know much more about investing: they have educated employees, networking, fast processors, and data. However, the investment banks are huge and they invest billions of dollars. But how do they invest?

As you know, on the stock market, people put their request to buy or sell a defined amount of stock for the exact price. If the requests to buy and sell are identical, the exchange happens. You see all of the available requests for exact stock in a “bucket”.

As you see, there are not so many offers, it is rarely bigger than 1 million dollars. If you are a small investor, it is easy to buy stock for the market price. But what if you are a big company and you need to invest 100 million dollars for that price? Obviously, the demand will be so huge, and the supply will be low, so the price must go up. A dumb manager will try to sell the stock for higher and higher prices because he has to invest fast. That is why price

What services to use

SimplyWall.St gives basic information of any company from reports. SimplyWall.St also compares a company with competitors and the market. It even shows the fair value of a company, that I don’t recommend to take seriously into account.

Wolfstreet.pro is similar to SimplyWall.St, but provides more information with beautiful minimalist design.

Yahoo Finance provides all the graphs of the cost of companies. I download CSV file with prices of stocks to use it with my code, that I write on R or Python.

Statista provides statistics about anything you want. It is free for students as far as I know.

Bloomberg terminal is a powerful tool to analyze companies that cost nearly 5000€ per year. But if you a student, you may ask your university whether they have this subscription. For example, the Vienna University of Economics has such a subscription.