What i learned after 4 years of¬†investing in¬†a¬†stock market
The¬†Stock market is a¬†place of¬†gambling and¬†investing. You don‚Äôt 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‚Äôs read:
You won‚Äôt 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‚Äôt 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‚Äôt, but¬†it will be soon¬†‚Äď 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‚Äôt 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‚Äôt say the¬†word ‚ÄúWar‚ÄĚ by¬†a¬†law).
Political factors are harder than economic. Economic processes are well explained, for¬†example in¬†Pearsons‚Äô 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‚Äôs 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‚Äôs take the¬†Russian president. He made the¬†worst, unlogical decision¬†‚Äď 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‚Äôt cover inflation
Don‚Äôt 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‚Äôt know what happens in¬†such a¬†period of¬†time. You may learn about the¬†situation in¬†a¬†company by¬†reading the¬†company‚Äôs 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‚Äôs 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‚Äôt read news. You don‚Äôt want to¬†spend your time
10% change in¬†the¬†company‚Äôs cost is not¬†important. Don‚Äôt 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‚Äôt 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‚Äôt 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‚Äôt forget, that the¬†huge returns in¬†the¬†past don‚Äôt 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‚Äôt 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¬†‚Äúbucket‚ÄĚ.
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‚Äôt 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‚ā¨¬†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.