We believe in two things. That anyone should have the opportunity to learn to invest. And that it should always be free. So let’s break down the art of investing and how it can change your life. Investing in the most simple sense, is buying something in the hope you can sell it for more in the future. There’s just one difference, you won’t hope you’ll know. So let’s kick this off with one of my favourite speeches by Warren Buffet for motivation.
Let’s kick this off with explaining the stock market in a way you’ll understand. The stock market is a system that lists companies. These companies are split into portions (shares) of ownership, and priced for each portion. For example, one share of Apple is priced at $276.10. To make money on this share at $276.10, the stock value would need to rise above $276.10.
The Stock value will rise when more investors decide to buy Apple. So in theory, when this stock rises you can sell the stock leading you to making a gain. Eg. Bought at $276.10 and it rose to $350 and you sold – you’d make $73.9 (26% gain). Hopefully you’re still with me – now let’s look at why you are probably here.
Now, let’s talk about how our emotions control the market and how to get started.
You might think the stock market is all about mathematics. Especially when Mathew McConaughey said in the Wolf of Wall Street, “You are dealing with numbers all day long, decimals points, and high-frequency digits.” In a perfect world, the market is about mathematics.
Unfortunately, our emotions, fear, and greed, control the market. Fear is lacking confidence in your investment. Whereas, greed is having too much confidence in your investment.
Investors are fearful when the markets are down (bearish). Because your stock is decreasing in value. Thus, you are inclined to sell. Because you fear that you will lose more money if you let your shares keep decreasing (loss-aversion).
For example, if you bought Apple at $350 and it dropped to $300 you would likely sell. Because fear would convince you to sell Apple to avoid losing more money if the share fell further.
Investors become greedy when the markets are up (bullish). Because when markets are up, your stock is increasing. Thus, you are more likely to leave your cash in the company so you can make more money.
For example, if you bought Apple at $276 and it rose to $350, you would unlikely sell. Because greed would convince you to let Apple rise more so you can make more money.
How to overcome emotions during COVID-19 and beyond
In a crisis, such as COVID-19, fear, and greed are on steroids. The fear of COVID-19 caused the markets to plummet from late February to mid-March. The markets then surged from mid-March to mid-April. Causing more investors to buy shares and make money off rising prices. (greed)
If you put emotions aside when investing, you will make more money. So how can you put emotions aside?
1) Long-term investing
- Invest in businesses that will be around in the long-term.
- Start with businesses you know = Commonwealth Bank, Qantas, and Telstra etc.
- Long-term investing overcomes fear and greed. Because fear and greed are most-alive in the short-term.
- Like Warren Buffet says, “What is going to happen in a day, month or even a year I don’t know, nor do I believe is important.”
2) Do not blindly follow what the banks, the media, or even your Uber driver tell you.
- The banks want you to benefit them. They will use the Fear of Missing Out (FOMO) or say how much money this stock can make you to activate your greed.
- The media creates fear by reporting the worst story.
- The Uber driver/average investor is often following what the media/big Institutions are saying.
- Solution: “Only invest in businesses YOU understand”- Warren Buffet explains this solution between the 4-6 minute mark.
3) Do not drown yourself in COVID-19 news.
- You trade with information, not money. However, there is too much information.
- Keep it simple. Focus on the news relating to your investments.
- Solution: 1) Invest for the long term = the daily news becomes less important. 2) Read YIG’s weekly updates, articles, and our COVID-19 strategies.
In the Age of Aquarius people will be drowning in a sea of information. You can already see this happening. Knowledge will continue to increase, but this does not mean all will be wise. pic.twitter.com/z6kcK1GmLx— Nick Hinton (@NickHintonn) February 28, 2020
How can you start trading?
Open a brokerage account. A broker is someone who will buy and sell your shares. I always say to people choose the broker that relates to your bank (e.g. Commsec for Commbank). Because it’s easier to move funds.
However, if another broker better satisfies your needs feel free to choose that broker.
Once you open a brokerage account, click here to access our free, digestible, and smart COVID-19 investment strategies.