One of the worst feelings in the world is losing your hard-earned money on a bad investment decision. Unlike trading, investments are a long-term commitment of funds, such as one year or more. I like to invest for periods lasting more than five years. I’m very patient.
Investing is the art of making money work for you. A tree was once a plant, and under the right conditions, the tree will outlive a human being.
Your purpose should be to make a few high-quality decisions. If you want to become rich quickly, investing isn’t right.
Stepping out of your comfort zone
Everyone makes mistakes. We’re all human, and losing money isn’t the end of the word – it’s a learning process to make better investment decisions. The fewer mistakes one makes, the better, but no one is perfect, and mistakes happen.
The loss of the value from the original sum invested is one of many people’s reasons to leave their excess cash in a bank – to play safe.
Most people don’t like taking risks out of fear of failing. Failure discourages people from stepping out of their comfort zone. Unfortunately, years of indoctrination of our educational systems have taught us that failing is terrible and that you are stupid.
Practice makes perfect, but we cannot become perfect without practising. Perfection is the final destination of our journey that we may never reach. However, we aspire to pursue perfection by learning from our failures. Failure teaches us to understand what went wrong, and the learning process of fixing those mistakes to avoid them in the future takes us one step closer to perfection.
One should strive to take calculated risks. Balancing taking too many risks or being risk-averse is vital.
Step 1: Before you invest – things that you can control
The best way to solve a problem is to prevent it. If you know about a problem, you can deal with it before you encounter it or before it becomes unmanageable.
The sections below explain things to consider before you invest.
Prevent problems before they happen
Never invest money you can’t afford to lose. Ensure that you have enough money to pay your commitments (e.g. mortgage, water and electricity expenses, food, contingencies for home or medical emergency, etc.).
Always keep enough money in your bank account that you can turn to in case of unforeseen circumstances like a loss of employment.
Never invest money you can’t afford to lose, as investing involves risk. Investing isn’t for you if you’re making your ends meet.
On the other hand, you may use any “excess cash” sitting idle in your bank account for investing.
How much of your “excess cash” should you invest? It depends on your financial situation, and it may be a single digit amount to thousands or even millions. The more money you have, the more investments you can have. Starting with a small amount can give you the same experience as investing in higher amounts.
It’s important to remember you should only invest money that you won’t have any regrets losing if the investment goes wrong. Investing is a risk.
We’ll refer to any “excess cash” as investment money. Investment money relates to capital, i.e. the original sum poured into an asset. Investing doesn’t mean spending all your cash on purchases at one go. You may opt to invest some of it now or wait for deals.
Fundamental analysis looks into information beyond price-time charts of the asset you’re considering to invest your capital. Fundamentals concentrate on news like past achievements and prospects. The current price of a stock or cryptocurrency might not reflect publicly available information.
For example, a company may have suffered from a bad earnings report; however, the same company is investing heavily in research and development. It may take years before it the study yields any realisation. Investing in R&D can make this company a unicorn by giving stellar earnings and a multi-digit return on investment (ROI).
If you were to mention Bitcoin back in 2015, many people associated it with drugs, hacking, extortion, etc. The average price in 2015 was $315.
In 2021, Bitcoin became mainstream, with major financial institutions having some form of stake in cryptocurrency. Bitcoin reached the value of $69,000 in November 2021, increasing over 200% in 6 years.
To diversify or not to diversify, that is the question
There’s no need to diversify if you’re investing in a fund. A fund is like a cake, and it has different ingredients that make it up. You can’t separate the flour and the sugar from the food item. Likewise, funds may contain various stocks, bonds and cryptocurrencies. You buy the whole thing.
Like anything, there are various funds. Some are exchange-traded funds (funds based on the performance of the shares of a particular stock exchange), blue-chip funds (funds based on the performance of large companies, e.g. Google, Microsoft, etc.), and many more.
If you invest in a fund in a way, your investment is already diversified.
I recommend investing in a fund if you don’t have too much knowledge about a particular industry. There is nothing wrong in doing so.
Say I know about cryptocurrencies very well; however, I lack the time and fundamental knowledge about the energy industry (e.g. oil, natural gas, nuclear).
Investing in a fund will save more time than if I had to start researching these companies or commodities from scratch, especially if I’ve committed resources in other sectors.
Focus is the opposite of diversification. You don’t need diversification if you know what you’re doing. You’re putting all your eggs into one basket. The risk is higher, the reward is higher, and the losses may be higher.
Learn more about your preferred industry – the big players, the critical people of every company in the industry of your choice, past achievements and failure. If you have the time and the energy, I suggest focusing on one particular sector. Choose an industry you like, e.g. automobiles, tech, crypto, commodities, etc.
Researching isn’t something that you do in one day. It can take weeks or months before you hit the buy button. The more you research, the better. Keep in mind that you’re committing your money for the long-term, and therefore you should aim to make a few quality decisions.
Timing and patience
Timing is critical in investing. Christmas comes once a year on the 25th of December. Items tend to increase in price towards the days leading to Christmas.
Boom! On the 1st of January, one week after Christmas, we start seeing January sales and discounted items because Christmas is over. The same principle applies to investing. Timing certain market events can determine a reasonable entry price for your investment.
For example, on the 3rd of February 2022, Meta’s shares (formerly known as Facebook) lost around 25% of their value, from $323 per share to $237 per share the next day. The decline cost the company $250 billion (yes, $250 and nine leading zeros) loss in market value.
Meta’s disappointing results caused the biggest wipeout in market value for any U.S. company so far.
An earnings call is a predefined date, like the Christmas example above, when a publicly listed company on a stock exchange releases its financial results for its previous financial period. Earnings calls may have significant implications for the prices of shares.
If an investor bought Meta shares on the 2nd of February, 2022 being the date of the earnings call, then the investor would have lost 25% of his investment the next day.
Other investors believe that Meta is a good company with solid fundaments capable of bouncing back from this setback. These investors see this as an opportunity to buy Facebook’s stocks at a 25% discount.
While cryptocurrencies don’t have any earnings call, crypto may have other similar dates. Bitcoin halving, a hard-fork, a network upgrade for Ethereum and Cardano can be a few examples.
There is a tendency to see the price of particular cryptocurrencies surge in the days leading to the market event and a decline in price soon after.
I recommend concentrating and executing individual trades in the area of expertise and investing in funds where I don’t have substantial knowledge.
Step 2: The buy button
Hitting the ‘Buy’ button on your favourite platform is the most rewarding experience. It’s the time when you execute a trade based on weeks or months of research, hoping that the decision will pay off.
Step 3: After you invest – things you can’t control
Once you hit the buy button on the platform, you officially execute the trade and become an investor in a particular stock, fund, crypto, commodity, etc. There is nothing that you can do.
When the market is doing well, and your investment is profitable, everyone feels like they’re a genius and feel good about themselves.
Most platforms show a percentage next to the total value of the investment. Your investment starts losing money when the rate turns from a plus to a minus or from a green number to a red number.
The value of the investment has gone below the capital or the amount you’ve initially invested. Most people start getting heartaches and become tense. These can manifest into actual physical pain.
Below is a list of thoughts I follow if I see my investment tank.
You’re in it for the long run.
When one plants flower seeds in a plant pot, you water it and leave it there. One does not dig up the soil every day and sees whether the flowers have started growing.
The same applies to investing. Keep in mind that you’re doing it for the long run. There are ups and downs in everything, let alone in financial markets. A lot can happen throughout your investment period.
If the fundamentals of your stocks and cryptos are solid and intact, then you shouldn’t worry about your losses. The markets may be undervaluing the asset. What goes down does up.
Problems in the global economy
There are a few things you can do if there are unforeseen problems in the global economy. Examples include a recession, the threat of war, inflation, and many other events).
Once the news is public domain, markets tend to price in what may be the most likely scenario from these events. No one knows what will happen tomorrow, let alone over the next few years.
The global economy is dynamic and not static, and scenarios constantly change. You don’t have control over international events.
Don’t panic sell
Most inexperienced investors buy assets at high prices and sell them at low prices. The behaviour happens when their investment starts to go awry. The result is a loss.
Given unfavourable situations, the best thing to do is weather it out. It means to let the storm pass safely.
Once again, if the fundamentals are solid, there’s no need to sell your investment at a loss. Suppose they aren’t. It’s advisable to liquidate your investment.
You have to buy at low prices and sell at higher prices. Your objective should be to make money and not lose it.
Only positive vibes
Most smartphone stock and crypto apps come with automatic notifications whenever an investment is doing well. Enough to make someone smile.
Unfortunately, the same apps that deliver good news also provide notifications of bad news. A happy face on one day may be a sad face the next day. Negative emotions tend to cause anxiety and stress.
Whenever I feel that my investments are having a bad day, I delete certain apps. Deleting apps not only eliminates notifications, but I won’t have a temptation to access that app to see my investment’s performance.
I shy away from the investment platform’s website and avoid news portals telling me what I already know.
We’ve mentioned earlier that you’re investing excess cash, i.e. money you’re willing to lose if the asset price goes zero. Just as the financial markets price in negative news ahead of the event, you should price in the excess cash you will invest before actually investing it.
The reasoning is to have no regrets as you’ve used money that you’ve already written off as having lost before actually investing.
“Nanakorobi yaoki” is a Japanese proverb that translates “if you fall seven times, you get up eight times”.
Experiencing a negative return investment can be pretty painful, especially if you’ve put a lot of effort into your research. The more you experience you have, the more immune you become.
I’ve been investing in crypto since 2013. I made many mistakes and experienced at least four or five bear markets. My inexperience used to make me tense. Nowadays, I see bear markets as an opportunity to enter or add to my positions.
Investing is a continuous cycle. It can take weeks or months before hitting the buy button on your preferred financial exchange. Once you make a decision, never be in doubt.
The financial markets are fluid. Doing research and going into enough depths will help you make better-informed decisions. You’ll be minimising the risks with your high-value analysis.
However, the world is connected, and unforeseen circumstances happen all the time. One has plenty of options to weather out bad periods, provided that the fundamentals are still intact. Being patient and disconnecting from negative influences pays.
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