Wednesday, August 25, 2010

Trials and Tribulations of a Beginning Investor

Jason: I am first and foremost a beginning investor. So when I started up at Kapitall, I soaked up advice like a sponge. One of the first, and most important, rules in investing is to ‘buy what you know’. Now, I’m at a point in my life where I don’t have a lot of things that I am totally committed to. I have a PlayStation3, (Sony) that I am very committed to. I generally wear Nike things, and I have my checking and savings accounts in Chase Bank (JPMorgan Chase). There are things that I’d also love to have, such as the luxury of buying a Starbucks mocha every day, my own AB car (that gets me from point A to point B), and a nice cooling Amerigon seat for it. These are all things that I would look for first under the ‘buy what you know’ mantra. There’s one big issue with that saying, primarily for beginning investors like me: how do you not become emotionally attached?

Currently, while holding Amerigon in my practice portfolio, I have watched the stock grow from the price I bought it at ($8.60) to the price it closed at as of August 17 ($11.05). If I were to put my graduation money ($1,000) into Amerigon when I first bought it in my practice portfolio, I would have been sitting on a nice $285 gain today. So where to from here? I have a number of questions surrounding my ever-growing desire to buy this stock, including:

Will this stock continue to grow?
What is this stock's 6 month projections?
Can I get a profit even after I've watched the stock hit it's year high?
Is this stock just gonna TANK as soon as I put my real money in?

For answers and sound investment advice for these questions, I turn to another Summer Investor, Danny Guttridge.

Danny: Well, Amerigon definitely has the potential to continue growing. What I recently realized is that a stock isn't just affected by it's products or how well the company is doing. There are a multitude of outside factors, such as market influence and the laws of supply and demand. Is the market growing and will it continue, or are we headed for another recession? Is the market in a slump, providing discounts, or is it at the top of its range with stocks also trading at the top of their ranges?

I had always felt like I needed to take action immediately, and I lost a lot of money that way. I ended up with a very expensive lesson on patience and thoroughness. You need to learn how, when the stock's direction is ambiguous, to wait it out to see what it will do.

Jason: When dealing with the specific emotional attachments, it helps to think of the money you put into the real stock market as your 'play money'. It sounds weird. My personal goal is to save $20 per paycheck ($10 for future stock investments, $10 to see Ken Griffey Jr. in his Hall of Fame induction in 10 years). In 6 months, by next January, I will have enough investing experience to feel comfortable trading, and also have a simple $250 to invest. I won't feel as emotionally attached to that money, because I know that it was a direct result of NOT buying those mochas every day. I will then use that $250 as a learning platform for investing even further down the road.

Detaching yourself from the emotional side of investing also means knowing when to buy and sell, and not holding onto the stock because you are too partial to it. This means we heed the advice of Danny again, who says that it's better to be a fundamentalist and chartist at the same time, and use your research to make an unbiased, objective decision.

Danny: After you learn how to decipher a company's fundamentals, good job, but you're still not ready to invest or trade. Just knowing that a company has good earnings and growth isn't enough. You absolutely need to learn technical analysis (charts, indicators, etc.). The picture to the right is an example of the chart and indicators I use for my technical analysis. Some investors label themselves as fundamental investors or technical traders, but having one side doesn't cut it. That's like going to build a house with just a hammer, not the whole tool belt. Good luck, because that's what you end up relying on.

After you practice this with repeated profits on a virtual portfolio, like on, then you can try your hand in the live markets. You can't let yourself get attached to your stocks, though. You have to set a loss tolerance and abide by it. No matter how much you love the company, you have to understand that they might not always love you back. That's why I've started researching and analyzing stocks of companies that I don't know much about. I have no loyalty to the company and I'm ok with selling as soon as my limit is hit.

Jason: Hopefully, this can help put some things into perspective. One of the biggest issues beginning investors have is knowing when to buy and sell. Many make the mistake of buying the losers because prices are low, and selling the winners to ensure profit. Again, it boils down to research and patience. And if we can a third: an objective view of your portfolio.

Let us know what you think!

Jason and Danny

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