Yes, preparation always exerts a profound influence on an outcome.
by Briton Ryle
I failed this year. It wasn’t just an oversight — no harmless little “whoopsie.” This breakdown was utter and complete. A dropping of the ball right before crossing the goal line…
Normally, I work extra hard in the weeks before I leave Baltimore with my kids for a week at the beach. Because there are no days off for the newsletter biz. Deadlines for Wealth Daily articles, trade alerts, and portfolio updates to subscribers — the fulfillment promises we make to you are solemn and must be met. The stock market doesn’t shut down cause I need a little R&R.
Most years I am totally happy to put in the extra hours so that I can shove my phone and laptop in a drawer and truly check out for a week. But not this year. I did very little extra work this year. So I am sitting at the dining room table typing away while nieces and nephews slather themselves in sunscreen to hit the beach.
Yes, preparation always exerts a profound influence on an outcome. Many would say preparation is the single most important factor for the success or failure of an endeavor. However, it’s not always clear exactly what type of preparation will get you the results you want. Sure, “practice make perfect,” but how do you “practice” investing?
I sometimes get the opportunity to mentor people who are just discovering the amazing and fascinating world of stocks and finance. Most recently it was an intern who is just getting his feet wet trading stock options. I don’t pretend to be an expert on options, or really on any aspect of investing and stock market analysis. I firmly believe the minute you tell yourself you know everything there is to know, you’re gonna get an expensive lesson. The three most dangerous words in investing and trading are “I got this.”
Still, I’ve been at this for 20 years. I’ve seen a lot. I’ve gotten plenty of expensive lessons, and I’m sure I will get more…
“As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics.”
— Peter Lynch, Founder, Fidelity Investments
The first thing I tell a young person who’s looking for some pointers about investing, trading, and the stock market is that the smartest people in the world are trying to get an edge that can make them some money. You’ve got doctors, PhDs, government officials, electrical engineers, hedge fund managers, professional analysts, and bankers all poring over every single news bite to find a tradable advantage.
None of us — me included — is going to beat them all. And you know what they say: if you can’t beat ’em, join ’em.
Analysts and investment banks put out a lot of research. Read it. Find out about stocks and sectors they like. Say a bank likes semiconductor stocks, and it says Qualcomm and Micron are its favorites. Read a little about those two, and then look for a few other semiconductor stocks and read up on them, too. A couple hours, and you can have a pretty good feel for what big trends are driving the whole sector (right now it’s AI, mobile data, and data center servers that power the cloud).
Don’t go crazy trying to become versed in every sector out there (the S&P 500 is comprised of 10 sectors: Consumer Discretionary(NYSEARCA:XLY), Consumer Staples, Financials(NYSEARCA:XLF), Health Care, Energy(NYSEARCA:XLE, Utilities, Information Technology, Materials, Industrials, and Telecom). Pick a couple you feel comfortable with and dig in.
Many of the most successful investors in the world specialize in one or two sectors. A small universe of stocks makes it much easier.
I love that quote from Peter Lynch. The stock market is a human construct. And so it runs more on emotions than it does math. It’s a good idea to get to know what price-to-earnings (P/E) and price-to-earnings-growth (PEG) ratios are. These are decent ways to get a feel for whether a company’s stock price is expensive or not.
But then, after a while, you’ll also realize that P/E and PEG ratios get higher when investors get more confidence that a company will beat earnings expectations. Last October, Nvidia was a $180 stock with a P/E ratio around 60. Today it’s about $260, and the P/E ratio is 42. Nvidia’s stock price has gone up, but the company is actually cheaper than it was last year.
Apple continually beats earnings, and it has a P/E of 18. Why the difference? People are funny…
Now, many traders and investors will say that the most important part of preparation has nothing to do with stocks or the market at all. They will say your own tendencies are what decide how well you will do with the stock market.
Are you methodical and hesitant to take the plunge? Well, then you will miss good entry points and may second-guess yourself.
Are you impulsive? Then you may be prone to jump into a big price spike on a stock and end up quickly in the red when the enthusiasm wears off.
Anytime I’m mentoring someone about investing and trading, I tend to focus on these personal issues. Figure out what you’re good at and where you have deficiencies. For me, I’ve learned that I have a tendency to dismiss companies as viable investments without really having a good understanding of them. (I call this being “grumpy.”)
As a 20-year market vet, I like to be “in tune” with what stocks are doing. Now, this is a very vague and mysterious way to describe my methods. I read a ton and look at a lot of charts. And I’ve found that letting the info swish around in my subconscious for a while until it just pops out as a seemingly spontaneous notion works well for me.
I’ve also learned that if I procrastinate and put off work, then it may well be that I didn’t have anything good to talk about in the first place. Maybe writing at the dining room table while I’m on vacation will lead to a more interesting and useful article…