There are different kinds of investors. There are passive, buy-and-hold investors like Warren Buffett, more active traders such as Jim Simons, and hybrids like George Soros. One of the things you have to think about before investing is what your investing style will be. Will you invest passively, making only a few investments a year and holding them for long periods? Or will you invest actively, trading in and out of positions on a regular basis, perhaps making hundreds or thousands of trades a year? This article is for those investors whose temperament and ambitions suit them for active trading. I will explain how you can start active investing from home.
Warren Buffett likes to say that diversification is a defence against ignorance. WHat he means by this is if you don’t understand business, or the markets, your best bet is to invest in a diversified instrument like an index fund and simply walk away. In this way, you no longer concern yourself with beating the market because you become the market. When you become an active investor, you can’t just place your money in an index fund like the Vanguard 500 Index Fund: you have to understand the underlying businesses -or commodities, if that’s your game-. By increasing your trade frequency, your odds of making a mistake dramatically escalate. Failure is more likely as an active trader. For investors like George Soros, investing on the edge and attempting to keep from going over it, sharpens their senses and gives them a thrill. Soros says it’s the only way he can invest.
Given the risk of error, your biggest defence is education. You have to educate yourself about the markets. Even buy-and-hold investors like Buffett say that you must be willing to read hundreds of pages a day in annual and quarterly reports, newspapers, books and trade publications. You have to commit yourself to understanding your craft. A less than ravenous reading appetite will expose you to countless errors.
You have a few investment ideas, but you don’t know if they’d work. Asking primary care doctors is not the right move. The best thing to do is to start off with stock market simulators. Contact a broker and see if they have one. Many often will. These simulators mimic market activity, allowing you to trade according to your investment thesis and style, and see how you would perform in the real world. Paper trading, which is what this practice is often referred to as, is not a substitute for the real thing. Apart from the fact that you don’t make any money from it, the emotional conditions are not the same. Try adding some real jeopardy into your paper trading. Perhaps commit yourself to giving away a certain amount of money for each day you lose money on the markets.
Create a checklist of procedures and ground rules that you will follow for each stage of your trading, from selecting an investment to exiting a position. Atul Gawande, a former doctor, found that even among experienced hospital staff, making it mandatory to go through a checklist for everything they had to do, improved outcomes. Pilots use checklists as well, regardless of how many hours they have had in the air. In the heat of a trade, when you’re weighing an investment in Regal Assets, or a stock you like, it’s easy to make mistakes and forget your principles. Create a checklist of what you should do and don’t veer from it.