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4 Things to Know Before Ever Investing in Stocks

4 Things to Know Before Ever Investing in Stocks

Many people hear about the stock market for the first time and assume that stocks are a magical way to turn money into more money. While this may be true for some people, for a vast majority of others, it is just a way to turn money into no money. This is not because investing is the same as gambling, but rather investing without knowing what you are doing is the same as gambling.

Many investors lose money every year because they don’t understand basic investing principles. The sad part is, it doesn’t have to be that way. Some people are able to make profits year after year by employing smart, safe investing techniques and sticking to it. Here are four things you should know before buying a single share of stock:

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Never invest short-term

Many new investors make the mistake of assuming that they can pull out of the stock market at any time. While this is technically true, it is not totally realistic.[1] If you put money into stocks with the plan to sell in a few weeks, or even months, you may find that at the point where you would like to sell your shares, the stock has lost half of its value. This means you could technically pull out, but you will lose half your investment by doing so.

The key to avoid this is to invest for the long-term. Never use money that you will need to pull out in the next few years. You can avoid incredibly stressful and financially devastating results by doing so.

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Stock movements are not random

Many people assume that the prices of individual stocks change on a day-to-day basis completely randomly. This is not the case. In fact, there are many patterns to look for when looking at the price of a stock. Often you will see a stock price follow the same pattern for months, or even years. This can help you identify when it is a good time to purchase shares versus when it is a bad time to purchase shares.

This is called technical analysis and investors do it every single day. Before investing, you should read at least a few books about technical analysis to make sure you understand what to look for when you are looking at stock prices.

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Patience

Many people just getting started in stocks feel an unnecessary sense of urgency. They seem to feel as if they are missing out on something and if they don’t get in on a certain company’s stock now, they will forever miss their opportunity. This is far from true. There are opportunities on the stock market every single day. Don’t even start looking for these opportunities until you know exactly what you are looking for and how to tell if you are getting a good deal or not.

Don’t rush into buying stocks ever.[2] This will inevitably lead to heartache and lost money. If you have any misgivings about the purchase, pull out and wait until something you feel great about comes along.

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Try virtual trading

The best way to learn the stock market is through virtual stock exchange. There are a lot of sites that offer virtual trading and you can use those to be able to play with fake money and decide if you have what it takes to really make money on the stock market. Once you have a good system with fake money that seems to work every time, you can start putting a small amount of real money into the stock market.

Above all, play it safe. The stock market is real money. Don’t turn it into gambling. Do your research, take courses, talk to experts, and only then should your hard-earned money be put into markets.

Reference

[1] Business Insider: 25 Things To Know About Investing by 25
[2] Investopedia: Patience Is A Trader’s Virtue

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Spencer Mecham

Personal Finance Coach, Digital Marketer

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Published on November 23, 2020

How to Develop Big Picture Thinking And Think More Clearly

How to Develop Big Picture Thinking And Think More Clearly

Your neighbors downstairs are playing loud music. Again. How do they not get tired of partying? And why do they choose songs with such a heavy downbeat that the glass in your cupboard is vibrating every two seconds? What can you do to get some peace that you deserve? What should you?

Human mind tends to go in circles whenever faced with a problem without a clear solution. It becomes easy to forget the big picture and get lost in anger and self-pity, wasting our precious time, energy and enthusiasm.

Would it not be nice if we always remembered to put things in perspective?

Would it not be more efficient to face all kinds of problems, from tiny annoyances to life-changing emergencies, with a calm demeanor, sharp focus and fearless determination to promptly take the most efficient action possible?

Alas, humans are not like that. All too often we let anxiety or greed get the best of us and make a rushed or shortsighted decision that we quickly come to regret. Other times, we spend weeks or months at an impasse, rehashing the exact same arguments, unable to accept the compromise required to move forward with any of the available options.

Buddhists talk about getting lost in the “small self.” In this state of mind, we literally forget the big picture and focus on the small one. We start taking our daily problems too personally and, paradoxically, becomes less capable of solving them in an efficient manner. And this is the opposite of big picture thinking.

Let me share with you a story related to big picture thinking…

In 1812, the French army of Napoleon Bonaparte invaded Russia.[1] After a decisive Battle of Borodino, the capture of Moscow and therefore Napoleon’s victory in the war seemed inevitable.

Unexpectedly, the Russian Commander-in-Chief Mikhail Kutuzov made a highly controversial decision of retreating and allowing the French to capture Moscow. Much of the population had been evacuated taking supplies with them. The city itself was set on fire and large parts of it burned into the ground.

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After waiting in vain for Russia to capitulate, Napoleon had to retreat in the middle of a bitterly cold winter. He won the battle but lost the war. The campaign ended in a disaster and the near destruction of the French army.

What can we learn from this historical lesson?

1. Focus on the Consequences

Napoleon focused on the important part: capturing Moscow. Nobody could accuse him of thinking small. Yet he overlooked that the Russian army could still fight even after giving up the country’s most important city.

So was Moscow not an important target after all?

Success expert Brian Tracy has a litmus test: things are important to the extent that they have important consequences. Things are unimportant to the extent that they have no important consequences.[2]

When faced with a choice, ask yourself, what would be the consequences of each option?

  • Want to spend an hour studying or watching the new series on Netflix? What would be the consequences of each option? Netflix can sometimes be a better choice, but it helps to put things in perspective.
  • Want to maintain your apartment by yourself or to pay a cleaning service? Would would be the consequences of each option?
  • Want to meet up for coffee with this acquaintance of yours or catch up on your work instead? What would be the consequences of each option?

The choice can be different for different people. An aspiring filmmaker may have a legitimate reason for choosing Netflix. Personally, cleaning your own apartment can be relaxing and nourishing even if the economics of hiring a cleaner looks compelling because you are earning a high hourly rate.

This is where you will need a basic idea of who you are — what are your goals, values and aspirations.

2. Flip Defeat Into Victory

Kutuzov managed to turn Russia’s defeat into a historic victory by recasting the problem in a wider context: losing Moscow need not mean losing the war.

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Despite the symbolic meaning attached to the Kremlin, the churches, the priceless treasures that had been stored in the city for centuries, the outcome of the campaign was ultimately determined by the strength of the remaining armies.

If you can adopt this result-oriented perspective, many of your personal defeats may be flipped into victories as well. Few events in a human life are absolutely good or absolutely bad, and it usually takes many years to recognize in retrospect, what role a particular encounter did play in your story.

Therefore we have every reason to look for the good in the things that happen to us.

This is a very practical attitude, far from baseless “positive thinking.” After all, if something unfortunate has happened to you and you find good sides in this circumstance, you will then be better positioned to take advantage of those good sides.

Say your noisy neighbors are affecting your productivity. What if it is a blessing in disguise? How can you turn this defeat into a victory?

  • Perhaps you are too serious about life and could learn how to have more fun. Join your neighbors or go out for a walk instead of working;
  • Perhaps you only wanted to be productive while instead procrastinated on social media. Now that your procrastination has been interrupted, stop and acknowledge this much greater obstacle to your productivity;
  • Perhaps you are too sensitive to interference. Take this opportunity to practice ignoring the noise and doing your best anyway;
  • Perhaps you have a victim mentality and the feeling of unfairness drains you more than any actual nuisance your neighbors might have caused. Try accepting this lapse in your productivity the way you would accept bad weather.

Get used to finding opportunities in your problems. This is the quintessential big picture thinking.

3. Ask for Advice

Both Napoleon and Kutuzov had trusted advisers to discuss their affairs with. In general, getting a different perspective — or several — can only help inform your understanding and lead to better decisions. Just ensure that the people giving you advice are competent in the particular area where experience is needed.

Paying money for advice can also be a wise investment. Lawyers, tax accountants, medical doctors spend years learning how to assist people like yourself in living more successful, more fulfilling lives.

A quick legal consultation can save you a fortune down the line or even keep you out of big trouble. A medical check-up can uncover potential issues and help keep you healthy and active for years to come.

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Even big, complex dilemmas at your job or in your romantic relationship can be tackled more effectively by partnering up with a coach or a therapist or, of course, with the help of a wise friend.

4. Beware of Biased Advice

Many imperfect decisions occur in response to an imperfect piece of advice that you choose to act on. This advice often comes from a biased party.

For example, we are often encouraged to buy something that we supposedly need:

  • Protect your skin from harmful UV rays by using a special lotion.
  • Fortify your health by taking multivitamins.
  • Connect with your friends by sending them elaborate gifts.
  • Brighten your weekend by consuming a delicious pastry.
  • Become more productive by getting a faster computer.

However, most purchases are unnecessary.

Some, such as the sunscreen, do have legitimate benefits when used properly.[3] Others, such as multivitamins, only make a difference for a small group of people.[4]

Advertisers of those benefits inevitably want to narrow your focus in order to overstate the importance of their product. They frequently present it as the only solution to your problem, whether real or imaginary.

After all,

  • Skin can also be protected from the sun by wearing appropriate clothing.
  • Health can be better fortified by consuming a balanced diet and getting regular exercise.
  • Spending time or talking on the phone with your friends is the foremost way of connecting with them, and it is virtually free.
  • Your weekend can be brightened by doing something that you love.
  • You can become more productive by focusing on the tasks that have the most important consequences. A faster computer can, in fact, decrease productivity by making it easier to multitask and by enabling your favorite distractions.

There are other sources of imperfect advice. Politicians also frequently want us to focus on a particular “big picture,” to the exclusion of the alternatives.

Even loving parents can be guilty of the same. They can advise their children to pick a career path that is safe and respectable, based on their “big picture” that in life one has to make a living. A child may disagree, however, based on another “big picture” that one’s life has to have meaning and fulfillment.

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Bottom Line

It is human nature to make rushed, emotional decisions based on incomplete information, then regret those decisions later on.

You can protect yourself from poor judgment by striving to attain the big picture when careful consideration is called for.

Focus on the consequences of your decision before considering how you feel about it.

Play with the cards you’ve been dealt, but look for opportunities in each situation and you will find them.

Ask knowledgeable mentors for advice, but beware of biased people who have an opinion, but do not necessarily have your best interest in mind.

Yet remember, true big picture thinking comes from hard-won experience. Legendary military commanders Napoleon Bonaparte and Mikhail Kutuzov were both injured on the battlefield.

Clear thinking comes from putting your big picture to the test of reality.

More Tips on Thinking Clearly

Featured photo credit: Haneen Krimly via unsplash.com

Reference

[1] Wikipedia: French invasion of Russia
[2] Brian Tracy: No Excuses!: The Power of Self-Discipline
[3] American Academy of Dermatology: Say Yes to Sun Protection
[4] Harvard Medical School: Do multivitamins make you healthier?

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