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New investors make their lives harder than necessary.
And I understand why; most think you make money in the markets by placing sexy, directional bets on a stock or cryptocurrency. If you’re right, you make a boatload of money. And if you’re wrong? Well, that’s just the nature of the game.
But this Hollywood view of investing in financial markets couldn’t be further from the truth…
…and today, I’ll give you three rules that can serve as the foundation of your investing journey.
Rule #1. Investing is 90% Waiting
When people first start investing, many want to be day traders.
There’s a certain mystique associated with the term. Many new investors see day traders in movies and on social media and assume that’s how investing works.
But that couldn’t be further from the truth. For one, the uncomfortable reality is that most day traders are not profitable. A study published in June 2020 showed that only 3% of the 1,600 day traders polled were profitable. Not only that, but only 1.1% earned more than the minimum wage, while 0.5% earned more than a bank teller's salary.
This makes sense considering that most hedge funds, which have better information and more resources than day traders, can’t even beat the S&P 500 consistently.
The fact is that most investors generate wealth in the stock market by buying shares in high quality businesses and holding them for many years. This is a sentiment echoed by billionaire investor Charlie Munger…
…and legendary trader Jesse Livermore:
While it’s tempting to fall into the “day trader” trap, remember you’ll make far more money with less effort by buying and holding great companies for the long haul.
Rule #2. Investing is 9% Research
All great investors have a knack for research.
That means a lot of reading. I’d say on average I read 25+ analyst reports a week, including research from investment banks, independent research firms, and financial news sites (the best bits of which I post in my discord).
Subscriptions to these services - like Morningstar, Saut Strategy, and The Wall Street Journal - are thousands of dollars per year. And some you can only get by having previous relationships with investment banks (like I do with Morgan Stanley).
And while new investors are unlikely to pay for these types of subscriptions, there are plenty of free sites they can use. That includes Seeking Alpha, Yahoo Finance, and MarketWatch.
And for financial data, there are also free sites like Finviz that provide an intuitive research platform for investors.
Rule #3: Investing is 1% Trading
In reality, it’s actually less than 1%.
If you're a non-professional investor, obsessing over entry prices for positions you'll hold for years is a waste of time.
Successful investors understand that real wealth is built over the long term. Constantly trading and trying to “time the market” not only incurs unnecessary costs but can also lead to emotional decision-making. As the legendary Warren Buffett wisely puts it:
Trading frequently also exposes you to emotional stress. The market is inherently unpredictable, and short-term price fluctuations can lead to impulsive decisions.
By focusing less time on trading, you spare yourself unnecessary stress and allow your investments to withstand the natural ebb and flow of the market.
You Can Be a Great Investor
Wall Street wants to make it seem much more complicated than it actually is. That’s because it allows them to charge you more unnecessary fees.
Embracing these three rules liberates you from the need to constantly monitor every market fluctuation. It allows you to focus on the broader aspects of your investment strategy, such as regular portfolio reviews, staying informed about market trends, and adjusting your holdings based on significant shifts in the economic landscape.
So, as you embark on your investing journey, remember that successful investing is not about making countless trades.
Instead, it’s about patiently waiting, conducting thorough research, and making strategic decisions when necessary.
Stay safe out there,
Robert