It seems the majority of people in this forum have been active investors for a long time.
My post is about those who are new to investing, or are looking to be more active, eg those moving out of index funds and into “Saul-type*” stocks or whatever their preference.
Given the huge crash in high beta/tech/etc stocks, and the fall in major indexes, what’s a new investor (starting today) to do?
Try to DCA in?
Stay out of the markets till the bull is underway and then try to jump back in, potentially missing the next bull run, or worse, buying at the next peak?
Try to be more aware of macro conditions before jumping in?
^ This is the position I’ve currently adopted: namely, “big risk on”/“risk on” markets favor hypergrowth stocks. “Risk off”/“big risk off” markets favor… I’m not sure what. I’m aware that oil is booming, in a shortage situation and prices are likely to go up. The rest, I’m not sure what.
Personally, I’ve invested in commodities (and have gotten out or am planning to get out of all but oil), and have been conservatively selling secured puts on etfs/stocks I like.
But I’m not sure what the game plan should be going forward, and would appreciate advice from those more experienced.
(While this post is about anyone who might be new to active investing, I’ll mention that for myself personally, active investing is currently a tiny part of my portfolio, and I’m not looking to retire for another 25-30 years, hopefully)
*I bring up the “Saul-type” stocks for three reasons:
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There are numerous posts in the forum by newer investors, who missed the previous 6 years hyper-growth, but instead bought at the peak, and are now fretting over their 70% losses ytd
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Saul focuses on “hyper growth” stocks, starting with Sketchers etc back in the day, to saas-types today. Another way to phrase this is that he, despite his (and his board’s) current obsession with saas, really is chasing a high beta yield - which means that in bull markets, he will outperform the market, but in bear markets, underperform.
Who doesn’t want to outperform the market?
The problem is, we want the return without the risk - ie “give me the outperformance during bull markets but not the underperformance during bear markets”
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The presence of Saul’s board has brought to light many investor behaviors that would normally remain hidden, or brushed under the covers.
Namely, most investors think they have a higher risk tolerance than they actually do.
Saul has repeatedly stated that he lost 70% of his portfolio (or was it more?) during the 2008 crash, and it took a few years to come back to the starting position.
However, these posts were consistently ignored by those who saw his recent 100/200% annual returns and wanted to chase them.
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1. There are numerous posts in the forum by newer investors, who missed the previous 6 years hyper-growth, but instead bought at the peak, and are now fretting over their 70% losses ytd
Once again the PESKY starting date!
To become a long term investor you have to be aware of volatility and to gauge your ability to live with it. Long term volatility is mostly noise but if you take a ride at a bubble peak you got troubles, big troubles.
One of the side effects of volatility is that it converts would be investors into traders, a losing proposition if you are not really good at trading. “Don’t change horses in the middle of the river.”
Maybe the most important lesson for New Investors is to find out that the market could care less at what price they bought and stocks can’t love them back because they don’t even know you exist.
The Captain
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I’m not at all an expert investor, but this is how I’d advise a beginner.
- Learn about investing by reading books on investing. Include books on things that have gone wrong and well as books on how to determine a company’s value.
- Invest small amounts in the beginning until you have it figured out.
- Never follow a fad.
- Invest for the long term. Research the companies that seem attractive and figure out what’s wrong with them, as well as what’s right.
- Don’t try to trade in and out with every little blip in the stock price. Pick a good company and stay with it.
Investing for value is safer than investing for growth, but either will work if you do your due diligence and do it well. Neither will work if you don’t.
In the past I might have recommended exchange traded funds, but in a bear market that’s not such a great idea.
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Thank you for recommending this post to our Best of feature.
I’m not at all an expert investor, but this is how I’d advise a beginner.
…
In the past I might have recommended exchange traded funds, but in a bear market that’s not such a great idea.
I’ve used ETFs that paid dividends often as a place to store cash until I have enough to buy better opportunities. Better than just cash sitting in my account?
Tim
Saul has repeatedly stated that he lost 70% of his portfolio (or was it more?) during the 2008 crash, and it took a few years to come back to the starting position.
Yes, and no, depending on how the “starting position” is defined. Yes, it took until 2011 for Saul to reach his highest ever portfolio position (from 2008). On the other hand, Saul will point out that his stock picking methodologies have worked so well over the past three decades that even after that 2008-9 fall, he was still multiples ahead of the S&P or DOW, his portfolio position being exponentially higher than it was, for example, in 1995.
Pete
In my opinion, every new investor should read the following books:
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The Money Masters by John Train: In The Money Masters, John Train describes the various approaches used by the very best investors, such as Warren Buffett, Benjamin Graham, John Templeton, T Rowe Price, Philip Fisher, Stanley Kroll, Robert Wilson, and others. The profile of Stanley Kroll should make it clear that you have no chance of succeeding at trading commodities.
- As many other John Train books as possible: Out of all the investment book authors out there, John Train is my favorite. His investment wisdom is legendary and has described many investment environments very different from today’s or any that I have witnessed myself. (He was in his 40s during the Nifty Fifty bubble. I wasn’t born yet.)
- Warren Buffett’s letters to shareholders: These letters show what Warren Buffett was saying every year for decades. You can see various cycles and fads come and go.
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One Up On Wall Street by Peter Lynch: I don’t agree with everything he says, but Peter Lynch is special because he has succeeded with a variety of investment styles - cyclicals, turnarounds, asset plays, slow growth, medium growth, fast growth, value, etc.
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The Intelligent Investor by Benjamin Graham: I don’t need to explain this one.
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Cash Flow and Security Analysis by Joshua Livnat and Kenneth S. Hackel: This book explains how to calculate free cash flow as an alternative to earnings. Deterioration in cash flow has often provided advance warning when aggressive accounting was used to manufacture a great earnings picture. This is why I hate the obsession with “forward earnings”. There have been times when even the past earnings were suspect.