TWO YEARS AS A STOCK TRADER - 8 Important Lessons

I think I can now say that I learned something (very little) about the Brazilian stock market. Two years ago I was just starting my adventure as a trader, at that time I had read one of Dr. Alexander Elder’s great books and, of course, the classic Intelligent Investor, by Benjamin Graham.

Now you could ask me, what have you really learned during this time?

I’ll try to be as specific and direct as possible. One of the most important things is this:

1) the stock market won’t make you rich in a short time, and that is simply because it is not a lottery, it is not a game, but although is not a game, on the other hand no one really knows where the market is heading for. Everything today could preview that we’re going to have a major fall on the market tomorrow, and suddenly tomorrow the market rises or either it could fall but your portfolio could actually rise! That leads us to another major truth about the market.

2) No one knows the future. Not you, not me, not the experts, only GOD…

Once I made some good money with MNDL3 (new code for MNDL4 – Mundial) I thought I was on the right track, so what did I do? Of course, why not? Bought some more stocks because its price had fallen and I was positive that everything that goes down, will come back up some day. Which is not a completely wrong philosophy, but one should always consider what kind of company it’s been represented by the stocks, if the company is well administrated, if it’s capable of expanding its negotiations in the next years and, therefore, the amount of money it generates. The result of this was a downside of approximately 70% on stock price, affecting my portfolio in approximately -20%!

3) Always take profits. I remember when I bought my first 200 stocks of PETR4 (Petrobrás PN), which I hold until today, its price was R$25,61 (aprox. 12 USD). I followed the price rise up quickly to R$ 29,00 and didn’t take profit. Well, the price now is around 18’s and never came back again! So it seems to me that you can be a buy-holder for as long as you live (as suggested by Warren Buffett), but not taking profits it’s against the logic of being a trader or investor. So, whenever you have the chance, take profits, ‘cause if you wait too long prices could fall and you’d fail to make your money grow.

This is one is very important, and I only realized six months ago when reading some other very good Blog, which led me to read the book Asset Allocation: Balancing Financial Risk, from Roger C. Gibson.

4) Keep your costs as low as possible. Do not try to trade to often believing this could lead you to instant wealth, it just doesn’t work that way. "Remember, your goal is to trade well, not to trade often” (ELDER, p.53 - "Trading for a living") The more you spend on taxes and brokerage, the less you’ll profit.  I’m not telling you to go looking for a broker who’ll trade your stocks for free. What I mean is, never, ever, make moves where taxes and commissions are bigger than 1% of the total being bought or sold. Keep your costs low and you’ll be richer sooner. It’s just like buying a car. Buy the fanciest you can and it’ll make you poor, buy a popular car, keep your costs low and you’ll be richer.

You could choose not to diversify your portfolio, but you’d certainly be under unnecessary volatility and risk, which is not going to help on the long run. This is the next point to take into consideration.

5) Select at least five stocks to compose your portfolio, and do not act different unless you absolutely know what you’re doing and understand the concepts of risk and volatility.

Volatility is different from risk, look for the difference and you’ll understand why diversification is a need, not luxury.

I steal believe that realizing losses is not a good way to profit, but I also understand there are special psychological considerations regarding holding losing positions. Buy and hold and whenever there’s a big downside, be patient. I still hold some losing positions in my portfolio which I’m not proud, but I also know they won’t last forever.

We all hear and read of wonderful people who made great profits as investors buying  stocks of unknown companies. Well this is no doubt possible, but let’s look at this as a great fortune and not something that happens all the time, otherwise we would be considering only the luck factor, and be better off on a casino, when we mustn’t forget considering other issues concerning stock investing.

6) Keep a detailed report of what you buy and sell so you won’t have problems with the government, the federal reserve of your country, and you’ll know exactly how much you’ve profited from your investments. This is chiefly important, otherwise you could be misguided to think you’re making money, when you’re actually losing it.

7) Averaging prices of stocks could be a good strategy if you’re a buy-holder, it’s probably going to cut the time you should hold them waiting for the best time to profit. I’ve done that, but didn’t really get to the desired point of selling all stocks of one company yet. If that is your case, try your patience to get a successful conclusion on the trade. This finally brings us to the last of today’s important things.

8) Always enter the trade with a plan. Whenever you don’t know what to do you start getting anxious and desperate to do something right or jump out of the trade. The problem is, if you haven’t calculated how much you could afford to lose, or either at what point of the trade you’ll take profit, hesitation is going to be your guide and, certainly, you won’t make a great move. So, if you don’t want to lose some time trying to get it right, planning your steps on a trade, or don’t have anyone to do it for you, either skip the trade or buy some ETF shares (Exhange Traded Funds).

It’s not easy being a loner. As a stock investor that’s how I feel most of the time. Read books, blogs, and other sites, talk to some investors and never take anything for granted. Always analyze and rethink strategies, so the investor gets better at what he should do best, invest!

This was my first post in English. Hope I have helped you to reanalyze your convictions on stock investing. If you enjoyed this post, please share it with your friends.

Wish You Wonderful Investments!

Bonne Chance!