Flush the Toilet: Young Entrepreneurs

Many younger entrepreneurs these days have an idea of the equities markets yet believe there’s some underlying magnificent science to smart investing. This is bull. The single most significant commodity in the economic spectrum is knowledge, and the more you know and experience, the more your likely to develop a sense or a ‘feeling’ for markets.

#1. Don’t jump into the pool if you can’t swim.

One of the worst habits novice traders experience is something we call ‘plunging’. Markets are crazy and hectic these days, and in my mind its never been a better time to be alive, so get your feet wet and make sure you’re used to the temperature before jumping in. Far too often investors plunge into an idea making two huge mistakes. First off, extending all their capital into one price at one time, and secondly leaving emotional decision making into the buying and selling of their positions. Let me address the latter of the two first and foremost. Emotion is the downfall of investing. The only reason you get involved in the market is to make money. Markets fluctuate, and when you’re investing for value; small up and down trends in a stock leave novice investors buying high and selling low. Build positions. If you find a company you like, don’t buy it all in one day. Build a cost basis over smaller built positions and buy on true fundamentals. Plunging into a stock triggers emotional trades, and losing sleep over an investment is a worse experience than losing money in an investment.

#2. Love hurts.

I’m sure you’ve all heard of the term, “Dollar-cost averaging”. Typically investors will buy into a position, see the stock lose boatloads, and decide to buy more. Your job in investing into the market is not to hopelessly fall in love with a company and pray your ideas come to fruition, but rather buy on solid fundamentals. Let’s call it what it is, a certain percentage of companies you buy will lose money, and the more money a stock loses the more likely it is to continue on a down-trend. Cut your losses in bad companies, take one on the chin, and live on to invest another day.

#3. Don’t chase the wagon.

Far too often I have someone call me up, explaining the truck loads their friend made in some fly-by night company up over 100%, and want to get involved. I’m sure I don’t have to elaborate on this rule, but opportunities come everyday, so don’t chase an idea that’s already flew down the highway.

#4. Buy Quality.

It’s far too early to explain the analysis of cash flow, balance sheets, or any in-depth fundamental information (that will come eventually) but typically you don’t need to have a degree in finance to see a good idea in front of you. I typically buy stocks that can ‘trend’ with the market. (As opposed to ‘defensive’ stocks. Defensive stocks are huge market cap companies that most investors get involved into to hedge against a bear market.) Generally the best trending companies trade between $10-30 per share with a market cap between 200 million and 1 billion. Most often stocks in the single digit range have adverse trading volume’s and cause for ‘choppy’ charts and price movements. Look for companies with potential for earnings growth, meaning who you think is going to make more money!

#5. Knowledge is power, and power means money.

Start reading, a lot. Financial blogs, Wall St. Journal, Investors Business Daily, news.bbc.co.uk, Financial Times, Barons, anything you can get your hands on to start acquainting yourself with what’s going on in the financial world.

Please comment and ask plenty of questions!