Personal Advice for New Investors
60 lessons I wish I learned much earlier, and all the tools I've found useful along the way - update #3
December 2024 marks my third year of intense interest in investing and financial markets - with this article, I’ll attempt to tell new investors everything I wish I had learned much earlier. Basically, I’m writing this post as if it were a letter to my younger self from 3 years in the future. Partly a personal exercise, but I feel like these principles could actually help folks who are just staring on this journey, so here goes:
(Skip to #35 for the helpful tools - everything else is displayed in no particular order)
Ultimately, everything must come down to you. You will have to find your own strategies, your own stock selection and buy/sell criteria, and you will probably have to learn these criteria by making mistakes - I and many other investors I know had to make countless mistakes before figuring out any semblance of an investment process. This list may provide you some useful pointers to get started, but ultimately the things that have worked for me may not work for you, they might even hinder you which is why it is crucial that you put together your own system. Similarly, any success you see or mistakes you make are yours. Especially when it comes to mistakes, it’s foolish to blame mistakes on others. If you were following someone else’s trade that ended up going badly, that’s on you - you clicked the buy button in the first place, after all. Maintaining this mindset can help you take charge of your own investing journey and more importantly, it’ll help you recognize and learn from mistakes which is crucial.
I suggest new investors begin the learning process by diving in headfirst. If you’re anything like me, learning by personal experience/trial and error/simply making mistakes and learning from them is crucial. I suggest you set to work picking apart balance sheets, income statements, and cash flow statements, and look up every single term you find unfamiliar as you do so - Investopdeia is a great resource for this. Also, there are free courses on Financial Accounting available on YouTube that can help you understand the inner working of these statements and business operations in general. You will need to read and interpret 10-Ks, proxy statements, and other company materials like shareholder presentations. It can take a while to get a feel for these documents but they contain vital information that will help you greatly - and always, always, always, pay attention to the “Risks” section of these financial reports, read them in their entirety. You can access these forms for any US company at sec.gov.
Learning how to invest well takes time - a very long time, in my experience. After three years on this journey, I still feel as though I have no idea what I’m doing probably the majority of the time. The more you know about something, the more you’ll know about the things you don’t yet know, or can’t know. This is why you will often hear seasoned market veterans remark about how dumb they are - nobody is perfect, everyone has good years and bad years. Everyone misses great trades, or takes losses on bad trades from time to time. Becoming more consistent about things will take a while, to say the least.
Similarly, the process itself takes time. Sometimes good companies take a while before the market recognizes their potential, or bad companies will take a while to decline - months or even years. Be patient, basically.
Nobody knows with 100% certainty where stock prices will go. You don’t know, I don’t know, the quant traders at Jane Street don’t know, the analysts at Goldman Sachs don’t know, Warren Buffet himself doesn’t know, and Jim Cramer certainly doesn’t know. Anyone who tries to convince you that they do know is lying to you or to themselves. People can make bets, people can be right about things, but ultimately nobody can ever be fully certain of anything, simply because anything and everything can happen in markets, literally.
You can glean a great deal about a company from the looks of their shareholder presentations. Some small companies might have jankier presentations because their investor relations teams are smaller or less experienced. Some companies might have flashy presentations, usually growth companies, and larger, more mature companies might have presentations that look nice but are rather boring. Either way, these presentations can help you get a feel for a company and the people that run it once you’ve seen enough of them.
Listen to (and learn from) smart people. Find people with more experience than you and ask them questions if you can, read their writing, but more importantly you should try to understand their thought process around any given decision. Don’t just buy when they buy, try to understand why they are buying. This can help you dramatically when it comes to creating your own investment framework. Find bits and pieces of other people’s strategies that work for you, and cobble these bits together to develop your own process over time, a process that you fully understand.
Some people that I’ve found very helpful below (all on Twitter):
Cluseau Investments - small cap financials, musings on market microstructure, and plenty of great trade ideas + memes
Citrini - thematic equity and cross asset macro plays. If anyone actually does know where stock prices will go, it’s Citrini. This dude is like trading Jesus, I’m not kidding
Buyback Capital - equities, great writing on pricing power and capital allocation
Myles (finphysnerd on Twitter) - great writing and insight international value stocks and special sits. If you’re a little scared of the P/E ratios in the US, read his Substack,
southernvalue95 - exceptional commentary on enterprise software companies, I relied on some of his writing for my IOT thesis
Always research the management of any company you might invest in. There are companies with fantastic management teams such as Interactive Brokers (IBKR), Constellation Software (CSU.TO), and Berkshire Hathaway (BRK.B). The managers of these companies are not only smart, but they know their own companies very well. The ideal management team knows when to buyback stock and when not to, when to pay, raise, or cut a dividend, when to finance their operations with debt or equity, and many other potential choices and long term value creation strategies. Bad management teams are either plainly dumb, or they do not know these things. Take Inmode (INMD) - there was a period of time where this company had nearly 50% of its market cap in cash and refused to buy back shares because their CEO literally did not understand how share buybacks actually worked. Another example could be Dollar General (DG) - these guys thought it would be a great idea to take on debt to buy back their own shares in 2023, and look at how that turned out:
Multiple expansion is a hell of a drug. There are really three ways to make money in this business: be smarter, be first, or cheat. I find just being first is the most predictable avenue to achieving high returns, especially during large scale bull markets or mania periods where valuation multiples of many stocks increase dramatically. If you can manage to buy great companies at decent or cheap prices before these periods (i.e., being first), you can put up very good numbers. Though, it’s important to realize when to sell during these periods too - your personal investment framework can help you make these decisions.
Similarly, multiple compression can be absolutely crushing. This is why valuation is very important when determining an investment. Research specific scenarios and targets, like “If this company keeps growing earnings at x% per year, I’ll be paid back within x number of years.”
Ignore analyst price targets - they are the furthest thing from infallible. Predicting the movement of markets is generally extremely difficult, and that doesn’t really change just because you’re working at a big bank. Analysts across the board have been known chase growth stocks, even at extreme valuations, strictly because they are going up and they don’t want to be left on the sidelines. Treat analyst price targets as you would any other market noise. Though I will say, occasionally an analyst upgrade can cause short term price spikes, and similar for downgrades, especially in smaller names that don’t get much coverage.
Price targets in general are probably largely useless. In my experience, they are mostly arbitrary and are best used for determining entry or exit prices when combined with a pre-existing investment selection framework.
The pre-existing framework is crucial. You need to have a plan laid out to help you determine how to react to any given situation before it happens. At least in my case, trading off instinct alone is usually an awful idea - markets love to make you doubt yourself or question your conviction around any position you might own. It’s important to make a plan and stick to it.
Financial modeling is not infallible - said another way, the market doesn’t care about your spreadsheet. I had to learn this lesson the hard way with Rocket Lab (RKLB) - Back in August ‘24, I modeled that shares could return 25%/year from a base of around $6.50, for a 2030 price target of $30.10. As a result, I ended up being hugely underweight with the company as it went on to rocket some 250% by December ‘24 on a move driven almost entirely by near-term multiple expansion that I didn’t factor into my model.
Modeling can be useful for determining fundamental valuation drivers like RIOC, ROE, and others, but no model will ever by fully accurate - things can and do change all the time. Modeling may be just one piece of a winning investment framework.
The market is by no means perfectly efficient, not one bit. Anyone who tries to convince you otherwise is either lying to you or to themselves. It might be pretty efficient in many cases, but there are plenty of opportunities for an astute trader to exploit inefficiencies. The reason there’s any alpha to be made at all is because markets are not perfectly efficient.
Use market structure and dynamics to your own benefit - index listings, for example, can be pivotal moments in the journey of any company. One example could be Super Micro Computer (SMCI), which fell by 70% after being added to the S&P500 index on March 18th. Why is this?
Well, the company had run up massively before its inclusion, as you can see. The S&P committee is not infallible either - they chased this company at the literal top despite numerous potential red flags, simply because other investors had bought it up to such an extreme level. Index listings can be very positive catalysts for other companies, usually smaller companies. These listings will force any ETFs that track said index to buy shares of the company, which can do wonderful things for the share price in certain situations. I would familiarize yourself with the listing criteria of various indexes, large and small, to help you determine when you can use these listings to your advantage. You can also use Koyfin to determine how much of a company is already owned by ETFs.
Similarly, certain funds may be prevented from buying stocks that are too small, or stocks that don’t pay a dividend. If your company announces even a tiny dividend, that can allow dividend funds to buy the stock which can help the share price. Other companies, particularly small caps, may see substantial price moves when crossing certain milestones, like the $1Bn market cap milestone. An example of this could be International General Insurance (IGIC). After this company reached a market cap of $1Bn, Oppenheimer initiated coverage of the company and threw out a $30 price target which led to a 6% daily gain for the company’s shares:
While this particular example ended up top-ticking the stock for a time, you can still use these events to your advantage.
Institutional investors are not infallible, even though they’re often pretty good. I have seen numerous examples where retail investors actually did the majority of the research and legwork around a company before institutional investors stepped in to buy at a much higher price. Rocket Lab (RKLB) is fantastic example of this phenomenon. I guarantee you, the vast majority of professional investors would have completely ignored RKLB at $5 while retail (me included) was loading up - now, institutions are getting involved at $25. AST SpaceMobile (ASTS) is another fantastic example of this occurring, and another could even be Palantir (PLTR). This is another principle that is most beneficial when working with small caps. Larger institutions are literally physically unable to take meaningful positions in many small or micro-cap stocks because of low trading volumes or other size limitations. Take Berkshire Hathaway as an example: Warren Buffet might identify a fantastic company at a $500 million market cap, but considering Berkshire itself has a market cap of nearly $1 trillion, this company wouldn’t move the needle for them whatsoever, even if they were to buy the entire company. Also, there are often limitations due to liquidity. Either way, if you’re a craft retail investor with a smaller portfolio, you have access to a lot of opportunities that larger funds don’t.
When trading, nice round numbers are usually hit in my experience. This sounds really dumb on paper but I swear it works. For example, if the S&P500 is trading at $4950, there’s a good chance it’ll hit $5000, if only temporarily. The same could go for downside moves to $4000 or upside moves to $6000. If an index gets very close to one of these nice round numbers and falls short, that may be a sign of near-term strength/weakness, or it may be a buying/selling opportunity, but either way you can derive insights from the price action around these round numbers if you know what you’re looking for. This can also apply to individual stocks, like when Nvidia (NVDA) was screaming upwards to $1000 (pre-split) - you could think, “It’s probably going to hit $1000, why not buy some?” I did have that thought, but I didn’t buy any, oh well.
The more research you do, the higher conviction you’ll have. Sometimes though, it’s a good idea to avoid doing too much research. Some of the best ideas are simpler to begin with, and you don’t want to psyche yourself out by overcomplicating things. Still, research does help conviction greatly.
Technical analysis can be useful when incorporated into an investment framework. Some investors fully eschew technical analysis and some exclusively use technical analysis, but like any other strategy, it has its own benefits and limitations. I would at least pay attention to moving averages like the 50-day and 200-day moving averages, and the RSI. If many other investors are also paying attention to these factors, patterns can become self-reinforcing.
It does pay to be a contrarian, sometimes. They say the market can remain irrational longer than you can remain solvent, so don’t necessarily go shorting stocks you think are overvalued during a broad-based bull market rally or mania period. With that said, you can make a lot of money (or avoid losing a lot of money) by going against the herd when the herd starts to stampede.
Speaking of, the vast majority of investors will see very little success when it comes to shorting stocks. Trust me, when people tell you that shorting is meant to be used only by sophisticated and savvy investors, they are telling the truth - that’s another lesson I had to learn the hard way. Shorting can be very profitable but it takes a good risk management framework, good intuition, and usually good research.
You should have a risk management framework and do your best to stick with it. This can be as simple as avoiding YOLOing your entire portfolio into short-dated options trades, or as complex as setting very specific buy/sell/hold criteria for any stock you own or would like to own. Some people have very specific portfolio concentration limits and will rebalance their holdings periodically to ensure compliance with these limits. Do what’s best for you, but try to create a risk management strategy that will protect you from downside, that’s really the entire point.
Expensive stocks can always become more expensive, and cheap stocks can always become cheaper. Generally, some kind of positive or negative catalyst can reverse these trends, but it’s oftentimes difficult to determine what these catalysts are before they occur - hindsight is 20/20, after all.
Don’t chase FOMO - if you feel yourself panic buying, that’s usually a bad sign in my experience, and as always,
Sometimes the best trade is no trade at all.
There will always, always, always be another wave, another opportunity. Don’t be discouraged if you can’t find anything compelling - keep looking, keep waiting, eventually something will come up. Chances are, there are many valuable trades hiding in some markets, somewhere around the world right now - all you have to do is keep searching and you’ll find them.
You only need maybe 3 or 4 fantastic opportunities every year to do well. If you can find one of these really great ideas, my advice is to bet big - Stanley Druckenmiller uses this philosophy, and he’s one of the greatest investors of all time.
There truly are countless different strategies and opportunities out there. Literally, a near-infinite number of them. Quant trading strategies, deep-value plays, special situation analysis, merger arbitrage, momentum investing, trading stocks, bonds, currencies, metals, even obscure futures contracts, everything in between and so much more. The markets will let you gamble on almost anything under the sun. In reference to number nine, most of these fall under the category of being smart in my opinion, but with any investment generally, it almost always helps to also be first.
Listen to your gut and believe in yourself. It’s just like Stan Lee said, “If you have an idea that you really, truly think is great, don’t let some idiot talk you out of it.”
Try to understand how moves in large market indexes can affect the stocks you own or would like to buy. I’ve owned a lot of small caps this past year, so I’ve done better when small caps rally, and worse when they decline. Understanding this can help you hedge your portfolio against downside moves in whichever index matches your holdings the closest.
It might be helpful to think of it like you’re playing poker against every other market participant acting as one entity - sometimes the market will try to convince you of something completely crazy and you can make a lot of money by calling its bluff.
Use tools to your advantage - these include charts, portfolio trackers and watchlists at your brokerage, stock screeners, data providers, investment blogs or forums. Here are all the tools I’ve found most helpful:
Charts: TradingView - free, with some incredibly helpful tools.
Screeners: Koyfin - the screener is free, you can access small cap data and some international markets as well. Tikr Terminal (below) also has a screener, but you’ll have to pay to access any non-US companies or some smaller companies.
Data Providers: Tikr Terminal, YahooFinance, Finviz - Tikr is great for financial statements. The free version provides 5 years worth of data. It features a CAGR display for any stock out to 18 years. It also allows you to make custom charts of financial statement data which is super helpful. YahooFinance offers statements, basic charts, and a good bit more, and is also free. FinViz features lots of neat ratios and other data about specific financial items that can be annoying to source or calculate with other providers - it’s also free. OpenInsider can be used to see insider buys and sells for free - true story, I saw loads of insider cluster buys at Carvana (CVNA) in 2023, right before the stock ran up 300% (I didn’t get in, of course). It’s probably a solid idea to check the cluster buys display every so often.
The Quartr app is incredibly helpful for listening to earnings calls and reading transcripts of those calls - the app is free, but the website is paid, but you only really need the app.
Investment Blogs & Forum: Substack itself for one, but there are lots of great ideas on Finance Twitter (FinTwit).
YouTube - you can find a good amount of information on here. Some executives might reveal things in interviews that they won’t tell the analysts or include in any financial statements.
You can use MarketScanner to find information on various indexes and their components.
The random stock generator can be a helpful and informative tool. If you roll this thing for an hour or two and look at the companies it provides you, you’ll get a good feel for how companies are distributed across the market. The majority of the stocks you’ll find here are small and perform poorly, but occasionally, you’ll recognize great companies, or companies that could perform very well. If anything, it can provide some interesting stock ideas if you’re tired of screening. I found Encore Wire (WIRE) in here, which proceeded to rally 60% in 8 months before being bought out, though, I haven’t had much similar luck since… either way, it’s kinda fun!
If you can, try to gain an information edge. Do you have insight into a particular company or industry that the market doesn’t know? Not insider information (that’s illegal), but publicly available information that most people wouldn’t look at or consider. If you have or can find this info, it can give you a serious edge against other investors.
Don’t assume everyone is doing their homework - another reason why it’s crucial to have your own investment framework. Sometimes a lot of market buzz is generated by investors who don’t really know or understand how certain companies actually work, or maybe the company is subject to some crazy risk that’s only mentioned once in the 10-K and most people don’t know about it. It’s always best to do your own research to avoid these pitfalls, even if you’re following someone else’s trade idea.
Every so often the benevolent market will give you a few “basically free money” opportunities. I’m convinced a savvy trader could do very well if they just waited for these opportunities to come around and pounced on them… a few examples could be:
In August 2023, shares of a Vietnamese EV company called Vinfast (VFS) squeezed up to an insane price on a very low float, like 5 or 10%. This company had only delivered a few thousand vehicles at this point, and because of the low float and general market rowdiness of that time period, shares rose to the point that the company’s market cap was equal to something like Toyota or other mature auto companies. This was obviously an unsustainable situation, and one could’ve made a good chunk of change shorting that - I sold call spreads on a papertrader back then and made a solid amount of fake money. Shares peaked in the $90s and are now hovering around $4.
Recently as quantum computing stocks have rallied, there’s been one stock that’s rallied nearly 1,400% just because it has quantum in the name - Quantum Corporation (QMCO), they manufacture computer storage devices and their business has nothing to do with quantum computing. Obviously this company’s shares could decline substantially once investors figure that out, but how to actually trade that is up to the individual to decide. This particular stock might be difficult to short, I don’t haven’t looked into it yet but the setup is interesting.
These opportunities are not technically free money and really, nothing should ever be thought of as free money, they just present a risk/reward setup that’s much higher than the average trade idea. These really favorable setups aren’t too common but they come around often enough, you could probably spot 5 or 10 in a year just from monitoring social forums like Twitter or Substack.
Do everything you possibly can to stack the odds in your favor - whether that’s loads of research and analysis, an impressive technical setup, or a catalyst that others are discounting but you think will be a big deal, use all of these in your favor and more. Do more work than the market, understand the picture more than the market does, and you can outplay the market at it’s own game. A lot of this, really, is just an information game. It’s about what you know (or don’t know) that others do (or don’t), and how much experience you have. With that said though…
“It’s not what you don’t know that kills you, it’s what you know for sure that just ain’t so.”
Financial history is fascinating and can be very helpful. Understanding previous market events can help you draw parallels to the present day - Patrick Boyle on YouTube has some great documentaries on historical events that affected markets. I highly recommend his documentaries on John Law and the Mississippi bubble, the 1987 Black Monday collapse, his Charles Ponzi documentary, and his documentary on Jesse Livermore, the guy who wrote “Reminiscences of a Stock Operator.” These are all truly fascinating to learn about and you will be able to draw parallels from these histories to the present day. The market might change quite a bit over time, but human psychology never really does.
Trading illiquid orderbooks can be quite dangerous. Always familiarize yourself with the bid/ask spread of whatever you’re trading, and try to use order types (limit orders) that limit your downside if you do get a nasty execution. Execution costs probably shouldn’t matter too much for immediate beginners but they really can drag the performance of certain strategies if you’re not managing them well, and please be careful with market orders…
Small companies that develop better IR teams may perform better as a result, use this as a catalyst.
Generalists and specialists can both perform well - generalists can take advantage of a great many more opportunities, but specialists can come to know certain sectors very well to the point that they can absolutely crush it within that sector, consistently.
Don’t ignore international stocks - there are many great companies internationally, and if you’re in the US, you can usually buy them at much cheaper prices than US stocks. Japan especially has loads of quality companies, some trading under their own book value significantly.
Always research industry competitors - ideally, you should only buy companies with good match-ups against their competitors. It is crucial to understand the competitive landscape.
Always research the history of a company, and it’s management. Do they have a track record of making good decisions? Bad decisions? Do the executives seem qualified? Is the business founder-led, and does that matter or not matter? All these questions and more ought to be answered before you purchase a single share.
You can understand all of this perfectly and still not know what to do, and that’s okay. This is a process of continual learning and continual improvement, and again, it’s gonna take time. Don’t lose hope if something isn’t working out immediately, figure out why it’s not working, and try to work around it.
Watch for different market indicators disagreeing with one another. Say, stocks are rallying but treasury yields are increasing and the dollar is on a tear - those latter two should be bad for stock prices so maybe, one asset class is behaving incorrectly and could correct. It’s also helpful to monitor these indicators over time, like interest rate futures, inflation swaps, treasury bond and TIP yields, credit default swap usage, and other derivatives as well. Different currency baskets can also provide useful information as they change. It’ll be important to research different indicators you come across and understand how they work and what they might suggest about the positioning of other investors, the general sentiment, the risk appetite, the market environment. If you’re trying to trade around everyone else (which is the goal here more or less, that’s how you make money), it’s really helpful to know what the market and other investors at large are thinking.
Every kind of business under the sun is available on the public markets, you just need to look for them. I once saw someone on Twitter post about how he’d spent months of time and a lot of money to buy and operate his own self storage property - someone in the comments did the math and figured out that he’d have gotten a higher return for much less headache if he’d just bought a self storage REIT. Beyond self storage properties, you can find many more opportunities to own great businesses within the public markets, such as: local grocery store operators, obscure silverware manufacturers, hospital operators, small water meter suppliers, literal rocket companies, niche software plays, and so many more. Many of the greatest companies in the world are out there in the public markets, doing all sorts of things, you just need to look for them! And there are so, so many more of them out there than you’d think at first.
Sometimes a company’s stock will re-price but their outstanding bonds or preferred shares won’t follow the same move, meaning that one of them likely isn’t priced accurately and could re-price. Looking for discrepancies like this and figuring out how to read and act on them could make (or save) you a lot of money.
A lot of really great research is free and available online. One great source of information is the New York Journal of Finance’s top 50 most cited articles page - among the findings here, you could learn that family run companies do outperform over time, or that when a CEO is hospitalized, companies do tend to perform worse. Another source could be equity research published for free by banks or other financial institutions, interviews with execs or fund managers, and much more. There are also a lot more books on trading and investing than you would think (though they’re usually rather expensive unfortunately).
Think about taxes ahead of time - some strategies look great on paper but if turnover is too high, your performance will get destroyed paying taxes. Certain funds and products are tax advantaged, use these to your advantage. The free money you can generate out of your computer or phone is really nice until you have to start paying taxes on it…
There are lots of different approaches that can make money effectively - I hold the view, any honest strategy that works is just as valid as any other. Doesn’t matter what your strategy is, as long as it works!
It’s OK to cut your losses and move on, if that’s a part of your strategy. The sunk cost fallacy is real - there might be many cases where you can more effectively allocate money away from trades which aren’t working and into fresh, new ideas. Some folks have stop losses built in for specific positions, I use my gut, but either way, you don’t have to feel bad about it. I remember reading somewhere that even the best analysts only get things right 2/3 of the time on average. But if you know what you’re doing on the portfolio management side, that’s a really good hit rate. You could be right on trade ideas only 1/3 of the time and still make loads of money if you’ve got the portfolio management down, so, don’t lose hope if a trade doesn’t work out. Everyone has some bad weeks, months, or even years, and everyone has trade ideas go awry.
I find that trading around the swings in market sentiment is very possible, contrary to what some people say. Really, you should use sentiment to your advantage. Think, “Who might buy this company from me 20% higher under a similar market environment? Who’ll buy this in a different market environment? Why might other cohorts of investors want to buy these shares off me, and what might make them averse to doing such a thing?” Your entire goal is to buy companies at prices which are advantageous to you, and sell them off to someone else when they’re priced higher, at a later date - it might be helpful to keep in mind who that someone might be.
Nobody ever when broke by taking profits. Maybe you shouldn’t take too many profits on your best picks, but that really just depends on what sort of investor you are. I find the best times to take profits on companies you know a lot about, is right when the market is suddenly crazy about them - if you’ve owned something for a while and it’s just now catching a lot of eyes, if people who aren’t as familiar are scooping up shares and you think the valuation is stretched, feel free to trim some of your stake. I saved myself a fair amount of losses headed out of 2024 with this approach.
There are certain times (panic periods) where people don’t really think, they just strictly sell risk. Almost any form of risk, whatever it is, nobody wants it. When it gets really bad, it won’t even matter how risky the asset is, many of them will all go down at once, like a miraculous waterfall of red. Maybe it’s a good idea to join them, maybe it’s not and you can buy some great opportunities off them on the cheap - your investment selection and portfolio management frameworks can help you make these decisions when the time comes, and it will always come around eventually. Markets change… people don’t.
If you’re gonna get hedged, you ought to do it when hedges are cheap. There are periods where volatility is so low that it might cost you a very small amount to hedge your portfolio against any downside risk. As soon as a downturn starts, the cost to hedge downside automatically goes up, and you won’t get as much bang for your buck.
