Practice Makes Perfect

When I started trading the stock market, I started from scratch. I had never even as much as taken a class in finance. Stock trading is a skill, and, as with any other skill, certain people are more naturally talented at trading than others. I think we’d all agree that Lebron James is one of the most talented basketball players of all time. But, even as gifted as Lebron is, do you think he could just walk out on an NBA court at age 25 and score 30 points in a game if he had never touched a basketball before? Of course not! So why should someone who has never traded stocks before expect to open up a trading account and immediately start making spectacular trades?

There will always be a small percentage of people who will get lucky with their first few trades, but even that type of luck can be more of a curse than a blessing because it can lead to overconfidence. I remember reading an article by a trader one time that said that he thought one of the worst things that can happen to a new trader is for them to make nice returns on the first few trades they make. That type of initial success can lead to a lack of respect for the market and a tendency to become reckless.

Of course, the rest of us have another problem to deal with: when we first start trading, we will are pretty bad at it. The more experience we get, the better we become. But the key is to avoid losing all of our money before we finally start to get comfortable with what we are doing! My website and book are geared toward people like myself who are not professional traders, and I have a feeling (based on feedback I have received) that a large portion of readers are actually brand new to stock trading. If that happens to be the case for you, here’s the best piece of advice I can give you (straight from my book):

…Do not buy a single share of stock until you are comfortable with everything involved in the process. Opening a trading account and buying stocks is a relatively easy process. It makes sense that it would be an easy process because that process is the way the online brokerages make money. Their business models revolve around getting people to sign up and buy stock. Getting started is easy. Making money on your investments is not nearly as easy. Do the brokerages profit from your success or get hurt financially when you lose money? Of course not.  The beauty and the beast of managing your own stock portfolio is that you and you alone are responsible for your success or failure. If you are uncomfortable with this idea, I would not recommend opening a trading account.

A great exercise that I would recommend to any new investor is maintaining a “mock portfolio” for a few months prior to starting a real portfolio. A mock portfolio gives you a good sense of the day-to-day emotions that you can expect when you have real money at stake. I would recommend finding a competitive friend (the more obnoxious, the better) to join you in this exercise. Tell your friend you are going to open a trading account and that you are going to run a practice account for a couple of months to get comfortable with the idea of managing stocks. Make sure to be clear that you believe you could do a much better job picking stocks than your friend, and any truly competitive person will jump at the challenge! Lay out the following set of rules: all trades must be shared with each other in real time, each trade must occur at the current market price at the time of the trade, each trade must have a predetermined “commission fee” that will be deducted from the total profits at the end of the game to simulate a broker’s trading fees, and each of you will start with $10000 of mock money. Pick a set amount of time (I would suggest two to six months), and have fun “playing” the stock market with zero real financial risk.

You might be wondering what benefit you get from a silly exercise like a mock portfolio competition. Before I started my real portfolio, I undertook this exercise with a friend of mine, and I feel it was a great experience for several reasons. Why a friend? As with any exercise, it is impossible to cheat when you have someone there to hold you accountable. There will be no cheating when you have your real account, so you might as well get used to the fact that you will not just be able to forget about your bad stock picks.  In addition, if you pick a good friend that really rubs it in your face when you lose, you get just a taste of the emotions involved with trading. Aside from getting a feel for how the market trades and how stocks react to news on a daily basis, you get an idea of the emotions that a trader experiences during market swings. Controlling your emotions is one of the major themes of this book, and I will return to this idea many times. It is easy to sit and watch a stock go down and have no emotional response when real money is not involved.  However, if you know that a phone call from your opponent is getting closer and closer with every cent your mock portfolio loses, you get a preview of the sickening feeling you will get in your gut when you watch your hard-earned money evaporating during a downswing in the market. Nobody’s portfolio goes straight up day after day and month after month without downturns. The sooner you make peace with this idea, the better…

Are you anxiously considering buying your first (real) shares of stock? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common SenseI don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market (beating the return of the S&P 500 by an average of more than 25% annually) over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and is always available on your local internet!