What is my #1 Investment Advice for Beginner Investors

 

 

 

 

 

Last week, Dan Mac from Dividend Growth Stock Investing sent me an email to participate in a “group post” where he compiles answers from many bloggers. He asked us a couple of questions (what is your best dividend stock? and what is your best investment advice?). I gladly participated and shared my answers. When both posts are live, I’ll link to them. In the meantime, I wanted to go deeper into the answer I gave him with regards to the #1 investment advice. He actually asked for advice for beginner investors but I think mine would apply to all investors. But before I share my advice with you, let’s rewind several years ago when I started investing.

 

How I Started Investing

 

I started investing 10 years ago… man time flies! I was 23 at that time. I just finished my bachelor degree in finance-marketing and got a job in a bank. I still remember the face of my banker when I ask her for a line of credit. It was right after getting my job; I didn’t have a paystub to give her as I was too eager to start trading. Yup… I asked for 20K line of credit to leverage everything and invest in the stock market. I actually told my banker it was to get married, but that’s another story ;-).

 

At the beginning, I didn’t plan on using the full 20K. My goal was to borrow 3K and buy shares of Power Corporation (TSE:POW), the biggest Canadian conglomerate. It was like buying shares of a small (very teeny weeny small) Berkshire Hathaway. My girlfriend, who became my wife a couple years later (see, I didn’t completely lie to my banker!), wasn’t too excited about borrowing $3,000, which was about a month’s worth of salary, to “spend it” in the market. She didn’t use the word “invest”, she used the word “spend”. As if buying shares was like buying clothes, as it had no value since it was very risky.

 

So I opened an online brokerage account, withdrew $3,000 from my line of credit and bought shares of POW. The investing plan was simple: the dividend paid by POW was more than the interest charged to my line of credit – it was a risk-free investment. Then, after a few weeks, I thought that buying one stock and looking at it going up and down each day was kind of boring. My investment return was tied to a single stock where I had no control over it. I wanted to trade more but didn’t have any money. This is why I withdrew another $5,000 to buy shares of two other companies. My three investments were up over a short period of time. This is where I realized that I could make lots of money on the stock market. Within the same month, I withdrew the remaining of my line of credit and had $19,500 invested in my brokerage account.

 

Things went well… in fact very well. Within three years of trading (from the end of 2003 to 2006), I had over 50K to put down as cash for my house. All profits from trading. I was featured in the Globe & Mail for my awesome returns. I thought I was a wiz buying low, selling high and always looking for the next trade.

 

Then I Learned I Wasn’t Investing

 

What I was doing at that time wasn’t called investing. I thought it was but it was more like gambling than anything else.  But I realized that only the moment when I lost money with a trade. I guess it’s the only way to understand something; when it hurts!

 

We are now in 2007, I’m taking more and more risk with my investments since I make more and more money. I flip stocks within months, sometimes within weeks. I’m halfway through my year and I’m +71%… as I said before, I’m a real investment wiz. This was until I decided to put almost all my money at that time (remaining 10K after I bought my house) in a single stock going for the homerun. Instead of skyrocketing, the stock (a junior mine) plummetted by 50% upon bad results. I still remember when I noticed the drop. I just had a good lunch with a few colleagues and looked at my computer to start the afternoon. At first, I thought it was a split… but why in hell would a penny stock split? It took me a few minutes to read more news about the company and realized that I had lost a real $5,000 in this transaction. Needless to say that I had hard time breathing! The stock market doesn’t always go up. Sometimes it tanks!

 

What Was My Biggest Mistake During the Whole Time?

 

This whole story leads to my #1 investing advice for any investor. Young investors make the same mistake as I did but I believe that many more experienced investors miss the same point as I did. After all, it took me 4 years to realize that I wasn’t investing properly. I even bought a house with my trading profits; this is far from being an investment horror story. Nonetheless, I would have avoided losing money on a penny stock if I didn’t make this mistake.  I didn’t take the time to follow an investing strategy.

My biggest mistake was to go from one trade to another, to buy and sell stocks upon rising profits without ever really thinking of where I was going with my money. The goal was simple; buy stocks, sell them when they are high and pick another later on. I had absolutely no investing strategy to back my trades or explain my portfolio.

 

It Took Me Three Years to Build a Solid Investing Strategy

 

After being burned by a lack of methodology in stock picking, I didn’t trade much. We had two kids (2005 and 2007) and I started my MBA. I just didn’t have time to take care of my portfolio at that time. I had a few funds during that period as I just couldn’t find the time to manage my portfolio. On top of that, I was quite frustrated by how my trading experience was going.

 

In 2010, I bought this blog as I was interested in dividend investing. I started my learning process in how to identify and select strong dividend payers and built my portfolio according to this premise. I’ve tried a few trades and kept reading about the topic. I am now, more than ever, convinced that a dividend stock portfolio has better chance to beat the market. But it took me three years to clean up my portfolio and establish a solid investing strategy.

 

I had to play around with stock filters, look at the ratios I want to use, the dynamic between stocks within my holdings and how it performs on the market. Since 2010, all my new dividend picks were good trades. I stuck with dividend investing up to a point where I now own 100% dividend stocks in my portfolio… and I’m doing well again on the market.

 

My #1 Investment Advice

 

So my #1 investment advice is quite simple but very powerful: take the time to establish your investing strategy. Put it in writing and understand why you buy, hold or sell a stock. Don’t trade because you read something in the newspaper or because you panic. Sell because the stock doesn’t fit your investment strategy anymore.

 

The benefit of having an investment strategy is often to design the limit of your risk within your portfolio. With such limits, I would have never gambled all my money in one trade based on the hope that exploration mining results would be awesome. Sure, this trade could have multiplied my portfolio by 20, but I lost 50% instead.

 

With the portfolio I’m currently building, such an event will never happen. I don’t invest based on hope anymore, I invest based on solid financial ground with companies paying strong and increasing dividends year after year. This is how I can make money from the stock market without having to spend 4 hours per day reading the news!

 

I’d like to know how much time you have put into your investment strategy. Did you even put it in writing? 

The post What is my #1 Investment Advice for Beginner Investors appeared first on The Dividend Guy Blog.

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