Top Tips for the Young Investor in Your Life

We’re in the midst of the worst economic crisis in living memory, there is no sign of it ending and stock prices are flying. In the words of an ABC reporter, “Forget everything you’ve ever learned about the economy and the supposed link with financial markets.” We’re trying, believe me.

There are numerous explanations for the recent no-fault divorce between financial markets and economic reality; and one of them might be your grandkids. Since the market lows in late March there has been a huge increase in the number of new broking accounts being opened. Nabtrade, for example, says trading volumes doubled in March, April and May while new account applications rose 360%.

In the U.S., hundreds of thousands of amateur investors are opening new accounts through platforms like Robinhood. This has 13 million users with an average age of 31. “They are just doing stupid things,” said billionaire investor Leon Cooperman, “and in my opinion, this will end in tears.” There is no reason to believe this is any different in Australia. Why else would Afterpay rise eight-fold in less than four months?

With an investing timeframe and maybe 40 or 50 years, millennials can make a lot of mistakes and still be fine. But there’s no reason why you, the older, wiser, more experienced investor in their lives, can’t give them a few simple pointers. This short list is designed to help you do exactly that:

1. The game is to stay in the game – You can take risks at your age, even stupid ones, with two provisos. First, you learn from your mistakes. The most valuable lessons are often the most painful and expensive. Don’t let that stop you from learning them. Second, you don’t lose everything. Never risk your table stakes; always stay in the game.

2. FOMO kills – You might know someone that has made seven or eight times their money on Afterpay. Why didn’t you? That feeling of regret is the fear of missing out and it’s probably the biggest cause of getting taken out of the game. Recognise that feeling and resist it. You will get your turn to get lucky.

3. Stay calm – It’s almost impossible to be detached when making money-related decisions, especially when share trading feels like a competitive pursuit (it is). But it’s vital you try. People in an emotional frame of mind tend to make poor decisions. Before hitting the buy button go for a walk, stretch or read a book. If you come back to the screen calmer but feel the same way, go ahead.

4. Be wary of debt – At your age, debt can be a real killer. It amplifies your upside but also your risk. Playing with the money you’ve saved rather than money you’ve borrowed will reduce the risk of getting into trouble.

5. A rising price tells you nothing – It’s easy to think a rising share price is proof of a good business or a good decision. In the short term, a share price only tells you what other people think. If the market consists of lots of people that don’t really know what they’re doing, that’s not much use. There is a difference between the value of a stock and the price at which it trades. Focus on the long-term value of a business, not the collective expression of what day traders, insider traders, dumb money and speculators think it’s worth from one moment to another.

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6. Forget charts – There are lots of different ways to invest but using charts (technical analysis) as the basis for your decisions is one of the worst. Charts tell you nothing about the future and not much about the past, which is why chartists aren’t on the rich list. Focus on the business – how a company makes money, the quality of its management, the market for its products – rather than lines on a screen.

7. Pick stocks, not trends, forecasts or gurus – Whilst the market for answers to uncertainty is deep and never-ending it is also a trap. No one can see the future. Focus on the things you can control – what you buy and sell – rather than the things you can’t – almost everything else.

8. Invest in yourself – One of the ways to cut down on mistakes is to learn from others that have trod the path before you. There are no wheels in investing that need to be reinvented. The knowledge is out there. Seek it out and learn from it, perhaps starting with 17 Books to Read to Become a Top Investor or stump up $49 for InvestSMART’s online BootCamp.

9. Work on your psychology – The most experienced investors will tell you that their greatest mistakes were psychological rather than analytical. If you want to beat the market you have to do something different to the market. Your psychology is what can make a difference. Work on how you think about investing.

10. You will never buy at the bottom or sell at the top – That’s not quite true, you might. But if you do it will be down to luck rather than skill. Drop the idea that the aim is to make the perfect trade and concentrate on improving your decision-making. There is skill and then there is luck. Do not mistake one for the other.

11. You will never stop losing money – The human brain is wired to remember the visceral and catastrophic. We all suffer from loss aversion; successful investors get over it. It is impossible to make money from investing without ever losing it.

12. Investing may not be for you, and that’s okay – Most people aren’t cut out to manage their own money. There’s no shame in that. Investing is time-consuming and, if you don’t enjoy it, it can feel like a drag. There is nothing wrong with settling for market returns, just remember to keep your fees low.

13. Go easy on yourself – Nothing in life is quite as bad as it seems (well, usually). Humans have a great capacity for reinvention and what may seem like a fatal error will often be a trigger for change. Go easy on yourself. Time is on your side; learn from your mistakes, don’t get greedy and think of the long term.

Originally published July 2020 by John Addis at Intelligent Investor.