Learn From Your Investment Mistakes

Every one makes investment mistakes. From the time we were born, we learned from the mistakes we made. As investors, we need to learn from our investment mistakes by recognizing when we make them and make the appropriate adjustments to our investing discipline. When we make a losing investment, do we recognize our investing mistake and learn from it, or do we attribute it to some outside factor, like bad luck or the market? To make money from your investments and beat the market, we must recognize our investing mistakes and then learn from them. Unfortunately, learning from these investing mistakes is much harder than it seems.

Some of you may have heard of this experiment. It is an example of a failure to learn from investing mistakes during a simple game devised by Antoine Bechara. Each player received $20. They had to make a decision on each round of the game: invest $1 or not invest. If the decision was not to invest, the task advanced to the next round. If the decision was to invest, players would hand over one dollar to the experimenter. The experimenter would then toss a coin in view of the players. If the outcome was heads, the player lost the dollar. If the outcome landed tails up then $2.50 was added to the player’s account. The task would then move to the next round. Overall, 20 rounds were played.

In this study there was no evidence of learning as the game went on. As the game progressed, the number of players who elected to play another round fell to just over 50%. If players learned over time, they would have realized that it was optimal to invest in all rounds. However, as the game went on, fewer and fewer players made decisions to invest. They were actually becoming worse with each round. When they lost, they assumed they made an investing mistake and decided to not play the next time.

So how do we learn from our investing mistakes? What techniques can we use to overcome our “bad” behavior and become better investors? The major reason we don’t learn from our mistakes (or the mistakes of others) is that we simply don’t recognize them as such. We have a gamut of mental devices set up to protect us from the terrible truth that we regularly make mistakes. We also become afraid to invest, when we have a losing experience, as in the experiment above. Let’s look at several of the investing mistake behaviors we need to overcome.

I Knew That

Hindsight is a wonderful thing. As a Monday morning quarterback, we can always say we would have made the right decision. Looking again at the experiment mentioned above, it is easy to say, “I knew that, so I would have invested on each flip of the dice”. So why didn’t everyone do just that? In my opinion, they let their emotions rule over logical decision-making. Maybe their last several trades were losers, so they decided it was an investing mistake and they become afraid to experience another losing trade.

The advantage of hindsight is we can employ logic as we evaluate the decision we should have made. This allows us to avoid the emotion that gets in our way. Emotion is one of the most common investing mistake and it is the worst enemy of any good investor. To help overcome this emotion, I recommend that every investor write down the reason you are making the decision to invest. Documenting the logic used to make an investment decision goes a long way to remove the emotion that leads to investment mistakes. To me the idea is to get into the position where you can say “I know that” rather than I knew that. By removing the emotion from your decision, you are using the logic you typically use in hindsight to your advantage.

Self Congratulations

Whenever we make a winning investment, we congratulate ourselves for making such a good decision based on our investing prowess. However, if the investment goes bad, then we often blame it on bad luck. According to psychologists, this is a natural mechanism that we, as humans possess. As investors, it is a bad trait to have as it leads to additional investing mistakes.

To combat this unfortunate human trait, I have found that I must document each of my trades, especially the reason I am making the decision. I can then assess my decisions based on the outcome. Was I right for the right reason? If so, then I can claim some skill, it could still be luck, but at least I can claim skill. Was I right for some spurious reason? In which case I will keep the result because it makes me a profit, but I shouldn’t fool myself into thinking that I really knew what I was doing. I need to analyze what I missed.

Was I wrong for the wrong reason? I made an investing mistake, I need to learn from it, or was I wrong for the right reason? After all, bad luck does occur. Only by analyzing my investment decisions and the reasons for those decisions, can I hope to learn from my investing mistakes. This is an important step toward building genuine investment skill.

Luck Becomes Insight

The market is comprised of a series of cause and effect actions, which are not always transparent. This cause and effect has created some interesting behaviors by some very successful people. For example, some baseball pitchers are known to not step on the white chalk line when they are playing. I am sure you have heard of many “superstitions” that people hold to be true to help them perform well.

In an experiment by Koichi Ono’s in 1987, subjects were asked to earn points in response to a signal light. They could pull three levers, though they were not told to do anything in particular. They could see their score on a counter, but did not know that points were awarded completely independent of what they did. Nothing they did influenced the outcome in terms of points awarded. During the experiment, they observed some odd behavior as the participants tried to make the most points possible. Most subjects developed superstitious behavior, mainly in patterns of lever pulling, but in some cases, they performed elaborate or even strenuous actions. Each of these superstitions began with a coincidence. In some cases, the participants would pull levers in a particular sequence. In other cases, even more odd behavior was observed, including a person who jumped off a table and then later jumped up to touch the ceiling to “score” points. Keep in mind the points were awarded either on a fixed time schedule or on a variable time schedule, not based on the action of the participant.

The point of this is that as humans we tend to think that luck is insight. We fail to analyze effectively the situation and the real reason for our success or failure. In investing this behavior will lead to ruin. To help overcome our natural tendency, we must document our investing decisions and then assess the results. This assessment process helps us learn from our success and from our failures and is critical for each of us if we hope to become successful investors.

Learn from Investment Mistakes

To help avoid investing mistakes, what should you document before you make an trade? I like to look at three categories regarding a stock I am considering. First, I look at a series of fundamental information such as earnings yield, return on capital, revenue growth, insider holdings, sector, and free cash flow. The fundamental information helps me identify if this is a good company with growing earnings, good management and has potential. After reviewing the appropriate financial information including SEC documents, I identify the risks inherent in the company. These risks might include competition, market share, insider transactions, and any litigation that the company is experiencing. Here one needs to try to identify every possible risk and assess them critically. Finally, I look at the chart of the stock, seeking to identify support and resistance zones. This gives me potential entry points, exit targets, and the trailing stop loss. I complete these sections with a written trading strategy describing how I expect to make my trades. All these investment factors should be documented before making a trade. Once the trade is complete, I review them to see what I can learn so I can avoid any investing mistakes in the future.

To learn from our investing mistakes, we need to document our actions before we make the decision. We also need to be honest with ourselves when assessing our results. As we have seen, it is quite easy for each of us to put on rose-colored glasses and think we are better investors than we really are. We need to assess critically our investing abilities without distorting the feedback we receive from our decisions. Those of us who are able to learn this valuable skill will benefit greatly. Those of us who are unable to apply this learning will be destined to mediocrity at best and likely lose much of their capital before they quite investing.

Beginner Stock Market Investing Tips

There is no certain time that a person should decide on when deciding to start investing even with the the economy getting worse and worse. There is also no particular product that you start investing your time and money is right away. The best thing a person could do is sit down and look at all the options that are offered and choose the one that fits you and your budget the best. The number one thing a person looking to getting started in investing could do is to first learn the stock market investing basics and get as much information as possible from different very well known sources.

The longer you spend in investing, the more you will come to know about the ins and out of investing. Beginner stock market investing is listed on tons of great website’s that can help you along the way. The best thing a person could do for themselves would be to start very simple. It is a good idea to start investing in smaller funds first and then expand when you feel comfortable. There are so many different avenues to take when investing in the stock market so choosing the right one for you is the best route to go.

The first thing that a beginner in stock market investing should do would be to sit down and figure out what your investment goals are – be it big or small. Some questions that you may want to ask yourself are:

  • Are you going to be investing in the short term or the medium term?
  • Are you doing the investing for your retirement?
  • Do you need to invest to get money before your retire?
  • Are you saving for your children’s college?

Those are just a few questions a person may want to ask themselves before diving right in. There are also many different types of investment accounts that you may want to start investing your money is when starting such as:

  • Certificates deposit
  • Discount Brokerage
  • Full Service Brokerage
  • 401K or 403B
  • Traditional IRA

Again those are only a sampling of what is out there for investing purposes. Be sure to take a closer look at all options before beginning your investments.

Once your investment accounts are open and you have put your finances in, it is time to depart on the investing process. Some great stock market tips that you may want to follow would be to:

  1. Choose your levels that you want to invest in.
  2. You will want to choose your asset class to invest in. Such as money market accounts or CDs.

Once you’ve pegged down how you would like to invest then it is time to determine the actual investments. Shopping and looking around for the highest percent possible on your CDs will help you gain the most money possible. It’s a good idea to see which firm is offering the best deals by visiting a few brokerage firms or banks. The most popular investment is to trade stocks. Starting with mutual funds is always a great idea for investment beginners. You should look into investing in Bond Funds if you are nearing retirement age. You can of course use them if you are young but they are mostly done by the older generation.

Taking the time to sit down and determine the best things about investing will benefit and make you more money than upright jumping right in. It is very important to remember that the stock market is very risky and there is no guarantee that you will make any money. It is very possible that you may lose all your money in your investments. For someone who is a novice in stock market investing you may desire to talk to a few banks or brokerage firms. If you need help just ask – they all have people who would be willing to help you. The stock market can be a very rewarding thing just take time to learn as much as possible so you will be sure to benefit from it in the end.

Private Placement Investments

What Trump & Buffet won’t tell you: “How to Maximize your Return & Eliminate Risk”

There are many things in life that are kept hidden from common public knowledge for one reason or another, but ultimately they are there if you do some research and find them. The number one thing that is not readily known is that there are “retail investments” and “wholesale investments”. The majority of the public only knows about “retail investments”. The character of retail investments are lower returns and sometimes even higher risk. The reason that some of these retail investments are higher risk is that they shed off so little return that you are actually losing money when you compute inflation into the equation. The reason that they give you such little return is that they say your principle is safe. Ask yourself this question: “How safe is my money, when it is actually losing money consistently when inflation is taken into account”? Another question to ask is “How much of my principle is at risk”? Let’s take a look at just some of the many “retail investments”.

1. Stocks
2. Mutual Funds
3. CD’s (Credit Deposits)
4. T-Bills and T-Bonds

Now the question should be what are “wholesale investments”? Wholesale investments in and of themselves are highly protected in nature. The reason the previous statement is true is because the majority of the wholesale investments are private or “by invitation only”. They are peer to peer or small groups of networks. You have to know someone who has access to the wholesale investments in order for you to have access to them. There are various reasons for this. One, of many, is that there are a lot of regulations that are placed on investments deemed “public worthy” by the SEC and various other regulatory agencies. These are your retail investments that everyone knows about. The people that have access to the desired wholesale investments have no desire to put up with regulatory agencies and to be honest, don’t have the time. The regulatory agencies are fine with these wholesale investments operating, just as long as the people running these types of investments don’t advertize or solicit for business. So these are the rules that everyone plays by. Everyone is happy, except for the general public which is not given the full picture of all of the different types of investment vehicles which are available. The characteristics of wholesale investments is high rates of return, paid weekly, monthly, and sometimes yearly depending on what the investment is and are by invitation only. Most of these wholesale investments have very little risk and the best ones have zero risk. That is right, let me repeat myself, the best wholesale investments eliminate risk. Really, the only downside to these wholesale investments is that there are mandatory minimum investment amounts. Generally speaking $100k USD is the minimum. The majority of wholesale investments source the funds as well. This is for the protection of everyone involved. Let’s take a look at some of the different types of wholesale investments that are out there:

1. Private Placement Memorandums- Allows you to invest in a private company before they go public on a stock exchange by doing an IPO (Initial Public Offering).

2. Corporate Investment Programs- Consist of contracting with financial institutions. Everything from returns to funds placement is contracted. This particular investment is one of the best wholesale investments available. There are two reasons this is the case. It has an extremely high rate of return and risk is eliminated due to the contractual component of this type of investment.

3. Private Managed Accounts- These are different than public managed accounts, as they do not advertize and are only available through word of mouth, usually an intermediary.

4. 506 Regulation D- Another form of Private Placement Memorandums

5. Syndications- These types of investments are different almost each and every time they are put together. The main thing to know is that they are temporary in nature and work for a common goal.

Unless you have already invested in some of these, likely you do not have access to them. There are many different ways to get involved with them, but the easiest is to know someone that is already involved with them. Though this might sound like an impossible mission, I can personally tell you it is not. The best and most effective way to do this is to use an intermediary, private placement individual, or referring broker. Many times all three are one in the same, meaning that they all do the same thing. These are people that have access to these wholesale investments and would be able to get you into them. There are different protocols to follow when getting into these different types of wholesale investments. Standard documents before even discussing any particulars are:

1. Non-Solicitation Agreement- This basically states that you were not solicited and that you will not go out and solicit for business.

2. NCND (Non-Circumvent & Non-Disclosure)- States that you will not go around your intermediary and that you will not disclose the confidential information.

By submitting these documents, it will get you in the door. After that, there are some compliance departments that will look further into your background and make sure that the funds you have available were not made by any illegal activity and that you do not have ties to people with questionable backgrounds . Remember that these investments are reserved for the best of the best and that if you are fortunate enough to be a part of them, you have to abide and play by the rules.

Some cautions to wrap this up. Believe it or not, there are many individuals that say they have access to these wholesale investments but don’t. Sticking to the following guidelines will keep your funds safe and out of harm’s way.

1. Never wire your funds anywhere! A lot of dishonest intermediaries try to get you to wire funds to them; they then enter into these wholesale investments, and keep the majority of the returns only giving the actual investor a small portion of them. The only exception is for managed funds. Even then, ask for references for the fund, track records, and a contractual guarantee of returns. Any legitimate managed fund should be able to provide this upon request.

2. Have your lawyer review any contracts! A lot of these wholesale investments are contract driven. This is very good as it provides contractual guarantees. With that being said, you need to have an attorney that understands what you are doing and what sort of program you are getting into. Most of the time, nothing is negotiable in these types of investments. It is an all or nothing type of investment. You still should know what you’re getting into by having competent legal counsel to lay it out for you. Also, you should only deal with intermediaries that encourage you to do this. At the least, they should not have a problem with it.

With all that being said, I hope that this report was insightful. Remember that the really neat thing about the contract driven investment, which most of the wholesale investments are, is that you have absolutely no risk and no commitment until those contracts are signed. Nobody makes any money until the contracts are reviewed and signed. Anybody trying to get you to do something else, probably does not have your best interested at heart. If you stick to the guidelines above, it will keep you away from most of the dangers associated with dishonest and unethical people that are out there. Just make sure that you understand that there are great investments out there that are not available to the general public. You just have to find the right people that are “in the know” and have access!

Investment Basics For the Clueless

Many investors are clueless when it comes to knowing how to invest. One reason for this is that they do not know the investment basics. Put another way, they have no investment knowledge so they have no way to intelligently select investments that fit their needs.

In fact, many folks have so little investment knowledge they don’t know what questions to ask when presented with an investment proposal. How would they when they don’t know investment basics. Relax, what follows will give you a base to work from so you can someday invest informed, not clueless. Learning how to invest is a process.

Here are five investment basics to be concerned with when considering any investment opportunity. Without this investment knowledge you cannot invest informed, you are clueless.

Liquidity…How quickly and easily could I sell this investment if I want all or part of my money back? Will there be charges, fees or penalties if I cash in early? Don’t lock yourself into an investment if you may need access to your money in the next few years.

Safety…On a scale of 1 to 10, how safe is this investment? Will the value of the investment fluctuate? This investment knowledge is crucial if you cannot afford to have this money at risk. If you need safety a CD at the bank is appropriate. A growth stock is not.

Growth…A growth investment has the potential to deliver higher returns than money in the bank. Growth is necessary for investors accumulating money for retirement. It is also necessary in order to stay ahead of inflation and taxes. Stocks are growth investments, but such investments offer few if any guarantees, and prices or values will fluctuate. Don’t ignore the most basic of investment basics: where there is high growth potential there is also risk of losing money.

Income…Some investments pay higher income then you can get at the bank. Bonds and bond funds are examples. Don’t expect to get higher income without some risk. If someone promises you a risk-free 6%, 7% or more per year in interest or dividends when your bank is offering only 3% or 4%, show your investment knowledge. Show them the door.

Tax Advantages…Certain investments or types of investor accounts offer tax advantages. Examples include municipal bonds, the IRA and 401(k). Take advantage of these tax breaks if they are appropriate for you. But invest informed. If you pull money out of an IRA or 401(k) too soon, you may be subject to taxes and penalties. Beware or anyone offering you a tax break that seems too good to be true.

Now, when faced with an investment decision, consider all five of these investment basics. There is no perfect investment. Don’t be mislead. A growth investment is not safe, and a safe investment doesn’t pay high dividends or grow at an annual rate of 15% or more.

It’s all a matter of trade-offs and finding investments that fit you. Once you know the investment basics it is much easier to increase your investment knowledge.

Get up to speed, don’t invest clueless. Put some effort into learning how to invest, so you can invest informed.