3 Steps To Become A Better Stock Market Investor

Moneystepper’s 3 Steps To Becoming A Better Stock Market Investor

buy cc master collection My name is Moneystepper. This is my confession. I’m a terrible stock market investor. But, today I share with you the story of my 3 step journey to becoming a better stock market investor to make sure you avoid the mistakes that I made!

So, I was a terrible stock market investor! Is that big news? Is it worth writing an article about? Should you care? Are you a terrible stock market investor?

I’m afraid to say that the answer to all of these questions is probably yes.

 

My investing journey, and how I went from a terrible stock market investor to a much better stock market investor can be split down into three main points in my life:

 

 

Investing Journey Step 1 – Becoming Aware Of The Stock Market

After finishing university, I spent a “gap year” playing poker professionally. No, really, I did. You can read about it here:

Playing Online Poker To Make Extra Money – My Story

At this time, I was hearing more about investing in the stock market. Looking back in hindsight, I was only hearing more about investing in the stock market because the stock market was booming.

As a novice stock market investor, it’s amazing how much you hear about investing in the stock market when the performance of the stock market had looked like this over the prior four years:
Stock Market Investor Chart 1My bank balance was steadily increasing and I had planned to put this money towards a house deposit later that year, and so I wanted to invest my money at a good rate of return in the meantime. Again, now I know that this was a terrible plan as this was money for a short-term goal that I was looking to put into a long-term investment.

Luckily, at this time, my brother was working “in the city” and when I asked him about the stock tips that I read in the paper one morning when I was thinking about investing, he was fortunately wise enough to say: “Graham, forget about investing in the stock market for a few years”. He said this due to my current financial position and the fact I was looking to invest in individual shares. It’s sometimes good having a wiser older brother!

Fortunately, I followed his advice. And then this happened to the stock market in the following two years:

Stock Market Investor Chart 2

Unfortunately for me, I didn’t consult him (or anyone with any financial acumen) about whether buying a house in late 2007, as a 22 year old moving to a new city with a new job and a 6.5% fixed mortgage rate was a good idea! NB: it wasn’t:

UK House Prices

 

 

Investing Journey Step 2 – Picking Individual Stocks

So, after a couple of years with all my salary paying off my mortgage, it took me a while to have the money to get back “into” investing.

Once again, the stock market caught my eye. But, this time, for other reasons. The global economic crisis had taken its hold on the stock market and shares were “on sale”. This is where I made my second investing mistake. Well, in fact three mistakes:

  1. I thought that I could outsmart the stock market and pick individual stocks based on the knowledge that I’d built up as a chartered accountant over the prior few years.
  2. I thought that I could “time the market”.
  3. I thought that it would be worth my time to try and beat the market

As the linked articles above will tell you, I was wrong on all three.

A friend and I started to invest in individual stocks that had either taken a beating in the economic crash and were “bound to bounce back” or future prospects which were undervalued.

This is where things got interesting. And by interesting, I mean financially disastrous! Whilst we were right about the market coming back (it always does), our method to investing meant that we very much missed the boat on the gains that were available by investing in the market.

Here is a table of all of my stock buys and sales over a period of three years from 2010 until 2013:

Performace Stocks.jpg

There’s a lot of stock buys and sells there. I spent a lot of time “analyzing” companies’ annual accounts, their management teams and future prospects. I used everything I learned through 3 years of education from my ACA exams.

And what was my result: I lost £1,536.74 over three years, which represented an annual return on investment of -1.2%. With dividends included, I was probably break even at best.

Why was this so terrible?

Well, because in the same period, the FTSE 250 performed like this:

Stock Market Investor Chart 3

So, whilst I was languishing with a negative annual ROI, in exactly the same time frame the “overall market” (reflective of the type of companies that I was picking in my individual stocks) was a mammoth 20.8% annual ROI!

What did I learn in this chapter of my investing journey? Luckily, I learned several lessons that will stick with me for the rest of my life. If you are new to investing, or if you are currently picking stocks (but you’re not a fund manager), then I would put the following articles right to the top of your reading list:

  1. Why You Shouldn’t Listen To Stock Tips!
  2. Please Stop Following Stock Tips & Claims Of Impressive Returns
  3. Top 10 Best Performing Shares…And Why We Should Ignore Them
  4. How Much Effort Should I Spend Trying To Beat The Market? None!

 

 

Investing Journey Step 3 – Max, Trax and Relax

This then brings me to the current step of my investing journey. I’ve educated myself on the dangers of active investing, both in picking individual stocks and the impact of fees on mutual funds. Now, my long-term investment strategy is remarkably simple and will remain so: “max, trax and relax”. This can be split down into:

  • Max – maximize investments in tax-wrapped accounts (namely pensions and ISAs).
  • Trax – invest in market tracking low-fee index funds or ETFs.
  • Relax – forget about it. Don’t worry about the daily, weekly or monthly performance of the market. Simply buy the “trax” assets, and leave them alone for many, many years to come.

Again, if you are not convinced that this “passive investing” approach is better than active investing for 99.9% of all stock market investors, here are a couple more for your reading list:

  1. Why Passive Investing Is Better Than Active Investing
  2. More Arguments For Passive Investing

 

 

 

Good News – Moneystepper Is No Longer A Terrible Stock Market Investor…!

…I’m now by very nature an “average” stock market investor. But, by average, I mean that I’m not performing at the same of the market – the mean return for investors. However, the median return (which is what the typical retail investor will be obtaining) will still be very much worse.

The good news is that I learned this lesson when I did.

I’ve been back and I’ve looked at all the stock picks that I made in that long list above, and I have calculated how much I would have gained or lost if I had not sold them when I did in favour of a passive investing strategy.

Performace If Held

So, from this table you can take two key pieces of information:

  1. My stock picks didn’t get any better over time. In fact, between when I sold (usually around 2013) and in September 2015, the FTSE 250 climbed by another 5%. In comparison, my stocks fell even further, losing another £3,410, compared to my original loss of £1,537.
  2. My overall performance from stock picks if I’d have rode them out between when I bought and today is dreadful, even worse than when I “cut my losses”. As such, don’t be afraid to change your strategy. You should obviously never buy high and sell low. However, if the alternative is to continue with a long-term strategy that doesn’t work and means that by holding for longer, you would be buying high and selling LOWER, then selling now may be the best option.

From these observations, it’s very easy to conclude that it was a good job that I changed my long-term investing strategy when I did.

 

Becoming A Better Stock Market Investor: Conclusion

Don’t overestimate your ability to beat the market like I did in the past. As I said in the introductory video: you don’t need to beat the market, you just need to BE the market!

Previously, I spent hours trying to research companies, pick apart financial statements, analyse stock charts, keep up to date with market announcement. My result was significantly under-performing the market, to the extent that I actually lost money in a strong bull market.

Now, I spend barely minutes each year thinking about my stock investments, safe in the knowledge that if I can equal the overall market performance over the long-term, I’m very easy (and much more surely) going to achieve my financial dreams.

Finally, speaking of financial dreams, don’t forget that you can enter the Moneystepper Savings Challenge before the end of October absolutely free. Sign up today and join a community of participants who are earning, saving and investing their way to financial freedom!

 

[yellowbox]I’ve learned a great deal whilst writing Moneystepper. But, these 10 wealth building lessons have been the most important on my journey to financial freedom:

[/yellowbox]

 

3 thoughts on “3 Steps To Become A Better Stock Market Investor

  1. Stock market investing is an addictive attraction. It’s so easy to get sucked into the idea that you can beat all those average joes out there.

    Personally, I wasted far too much money and far too much time trying different “sure thing” investing strategies over the years then I would want to admit. Learned a lot, but if rather have the money and the time back at this point…
    Jack recently posted…What’s New for the Financially Inclined #1My Profile

  2. My husband wants to invest in the stock market. What kind of stocks have consistently been on the rise? The threat of losing all of our investments is really daunting!

  3. Like what I said in my other comment, there is always a low moment in stock-buying. We just have to know when those low moments happen. We also need to know about stocks first before we invest in anything about them.

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge