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Weekend reading: Far out

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What caught my eye this week.

With hundreds of investing blogs having published thousands of articles over the past decade, there’s a lot of repetition around.

(Indeed I’m getting déjà vu. Didn’t I say much the same the other week?)

Anyway, you have to admire a post that finds a new spin – such as combining astrophysics and economic upheaval, as Klement on Investing did this week.

Especially when it brings – ahem – gems such as this:

The chaos of the universe is needed to create new structures. And islands of order like a star and its planetary system eventually disintegrate into chaos out of which new structures are created.

A wonderful symbol for this order out of chaos is the fact that on Neptune, the atmosphere is so volatile and chaotic and the pressure is high enough, that scientists suspect it sometimes rains diamonds on it.

Wow. I wonder if Elon Musk is short Tiffany, the upmarket jewelry store?

Let there be… light entertainment in the interlude

Klement’s argument is that the confusion and misery of Covid-19 will similarly produce much of value in time.

But it seems a stretch to compare diamond showers on faraway worlds with people working in their pants and not shaving for a week, or with Starbucks staff serving coffee from behind a 2″-thick plexiglass screen.1

When it comes to our investing beat, the disruption is mostly just more oddness, which is at least on-brand with the times we’re living in.

CNBC veteran Jim Cramer, for example, is using his airtime to lambast the antics of the lockdown day-trading generations’ Pied Piper – the Internet entrepreneur Dave Portnoy.

There’s probably 50 years separating the demographics of their target audiences, but I’m sure they’re united in enjoying the spat.

Who knows what happens next. We seem to have run into an air pocket – in the markets, in the global Covid-19 narrative, and in the economy – where everything is neither getting better or worse, at least for a moment.

Normality returning? Or maybe we should hold on to our hats (and our diversifying safer assets…)

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  1. Who is making all these screens? There’s a Covid-19 winner for sure. []
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How to hunt for profits in the stock market

Today’s new traders aren’t paying dealing fees with Freetrade. But there are plenty of other costs to overcome.

There’s stamp duty, spreads on shares, platform fees, and if you do well even taxes (though these can often be avoided – see point #2 below).

More importantly, most people can’t pick stocks to beat the market.

They have no ‘edge’, in the lingo.

That includes most fund managers, incidentally. Most of their funds lag the market, too. (It’s all because active investing is a zero sum game).

A potentially costly business

That’s not to say you can’t buy a bunch of shares that will go up.

In a market that’s been flying higher like we’ve seen for the past two months, it’s easy.

But most of the time you would have done even better just to put your money in an index tracker fund and gone back to those Udemy cookery lessons.

Most things go up in a bull market.

12 tips to help you make money investing in shares

I’m not going to labour the point about passive investing in index funds today.

You opened your new trading account for excitement, not something that’s just as dull to do as it sounds – even if it is more profitable.

I’ll mention it again before we’re done (Monevator believes index funds are best for nearly everyone) but let’s assume you want to invest in individual shares to make money.

You want the glamour of being a high-rollin’ ball-bustin’ share trader!

Sitting on your sofa in your Gymshark shorts on your iPhone!

Here’s a dozen pointers from someone who has been striving to beat the market for nearly 20 years.

My tips might help.

A bit.

1. Keep costs low and trade less frequently

A commission-free broker like Freetrade is a great start, but remember UK investors also pay 0.5% stamp duty when buying into most larger UK shares. There’s a bid/offer spread on shares, too – same principle as when you change currency at the airport – and if you buy overseas stocks there will be a foreign exchange cost. Churning your portfolio every few days quickly multiplies these costs. With most platforms (though not entry-level Freetrade) there are annual charges, too. Check out our comparison table to find the best platform for you.

2. Use tax shelters – in the UK that’s ISAs and SIPPs

Even Freetrade charges £36 a year if you want to do your trading in an Individual Savings Account (ISA) while other platforms charge you to do so in a Self-Invested Personal Pension (SIPP). Despite the nailed-on expenses, you should bite their arm off and open them. In theory small-time traders can muck about without worrying about taxes on capital gains and dividends, but as your pot grows, taxes loom. Use an ISA and you can forget all about taxes, while a SIPP defers any pain until you retire. (More on tax-efficient investing and ISAs vs SIPPs).

3. Don’t blindly buy strangers’ share tips

It’s fine to read the better blogs, financial Twitter, and forums to learn about investing. You can learn a lot from smart investors who share how they think. But be wary of people touting their specific trade ideas – unless at least halfway vetted and presented in some depth, on a venue like Seeking Alpha or The Motley Fool – and run away from anyone urging you to get in NOW because it’s “about to go ballistic”. They’ll usually be clueless, cheats, scammers, or some exotic combination. Even if they’re not – is that how you’ll invest for the rest of your life? Following strangers ramping stocks online? Does that seem a likely route to wealth to you?

4. At our level, technical analysis doesn’t work. It’s horoscopes for grown-ups…

Most of these Internet hucksters will urge you to look at charts. They will talk about reversals, channels, double-tops, breakouts, and sacrifice chickens to the moon. The quickest and easiest summary of what you should do is ignore it all. It’s true that some ultra-sophisticated hedge funds find trading signals in price information (read The Man Who Solved The Market) but Barry on his iPad isn’t one of then.

5. …although you should favour shares where prices are rising over those falling

The one bit of price action it’s worth paying attention to is momentum. You’ll probably get better results if you buy shares the market seems increasingly keen on (a chart where the price is going up over time) versus one it seems to dislike (the price is sliding). The market isn’t stupid. It usually figures out when a company has something good going on. Also, momentum is a factor that can give a slight edge to a portfolio. (I’m hugely oversimplifying. That’s what happens if you don’t want to read a 480-page book…)

6. Don’t get carried away with value investing  ‘fundamentals’, either

Most people eventually realize that trying to guess where shares will go by looking at their price charts isn’t making them any money. They may then dive in the other direction to study the metrics of a company/share. Things like the price-to-earnings ratio (a measure of how much you pay for profits), dividend yield (the cash you get back every year, if you’re lucky), or the book value (what, in theory, the company is worth, if things like Coca-Cola’s brand name weren’t in reality worth billions). That latter point gives you a clue as to the can of worms you’re opening. Yes, learning to understand these fundamentals is vital, eventually, and far better than watching random chart squiggles, but it’s a huge undertaking that’s prone to gross simplification. You only need to utter “this share is a bargain because the P/E is 3 and it yields 15%” once before a company goes bust to realize the numbers don’t tell you everything.

7. Instead, think about shares as businesses

This one might seem blindingly obvious, but even experienced investors often forget stocks are not an abstract mathematical artifact – they are mini-ownership stakes in businesses. When you buy shares you buy a part of a company that faces opportunities and struggles, and that’s striving to grow with the economy. This is what enables stock markets to go up over time (rather than being a futile piece-of-paper-shuffling racket as some believe). Analyze your shares by understanding them as companies. I believe you’ll eventually see much better results. This also connects your investing to the everyday world around you, which is a far more interesting way to live!

8. Be wary of ‘story stocks’

One danger with looking at shares as business propositions though is that you can be seduced by a good story. Every stock picker has been tempted by a tiny miner just months away from striking gold, a biotech about to cure cancer, or a manufacturer with a prototype engine that runs on old Amazon packaging. Also known as ‘blue sky’ stocks (because there’s often nothing to them) these are speculative ventures that should get – at most – a tiny percentage of your money and time.

9. Invest for the long-term: run your winners, and cut losers

At first, you think it’s all about buying low and selling high. That it’s never wrong to take a profit. That falls in markets are due to ‘profit taking’. And all of this makes sense if you’re a trader who lives or dies on your rules or system. But as I said, most people shouldn’t be traders. Be an investor. And when you invest in companies for the long-term – think years – the best can multiply in time many times over. I put 1% of my portfolio in Amazon a few years ago, and it’s gone up ten-fold. That kind of growth makes up for a multitude of small losses, but it’s too easy to sell up along the way. Remember, the most you can lose on a stock (assuming you avoid margin/leverage) is as much as you invested, but your gains are theoretically unlimited. One of the most successful stock pickers of all-time never sold anything.

10. Realise the stock market does not move in step with the economy

Another thing some people never understand. The market is not giving you a running tally on the economic headlines. There is a strong connection, certainly, between the real-world economy and the market. As I said the market consists of companies operating in the economy. But because investors can bid up or crash the prices of those companies for myriad reasons – hope, fear, greed, miscalculation, laziness – the two often seem out of kilter. In early 2020 markets started falling before many of us had even heard of the virus. They then rose as tens of millions lost their jobs. This seems bizarre until you understand markets look forward into an uncertain future. People are constantly trying to predict that future when they select what firms they want to own (or sell) and what price to pay, based on how they see things going.

11. Benchmark your performance (possibly)

If you’re going to be an active investor – as opposed to a passive investor using index funds – then you should probably track your returns accurately, and compare (benchmark) your performance against the market. The best way to do this is to unitize your portfolio. This enables you to properly compare your returns with any active or index fund. If after a few years you see you’re deluding yourself that you have edge, you can stop the bleeding! The reason I say ‘possibly’ is that tracking returns can encourage bad investing behaviour. You can get too short-term focused, trade more often, and simply get stressed. This is something I struggle with. Investing is a passion for me, and I sometimes think I should go back to not tracking my returns because I suspect I did better in those laid back days. But, of course, I don’t know that I did, because I didn’t track then…

12. Make a start with a passive index investment, on the side

An easy compromise is to split your investment money in two, and to put half into an index fund and half into your stock picks. You can do this even on a share-trading platform like Freetrade or Interactive Investor by buying a world index-tracking exchange-traded fund (ETF). Assuming you don’t add new money to your portfolio you’ll get a sense of how well you’re doing compared to your benchmark, that ETF. (If you do add new money, invest it equally between your ETF and your other shares to keep the comparison straight.) If after a couple of years you’re not adding value compared to the ETF, then sell your individual shares, invest in a proper passive ETF portfolio, and get yourself a new hobby. You’ll almost certainly end up richer as a result.

Put these on your reading list

What if you find you’re one of the rare few with the strange combination of personality traits required to make it as a market-beating stock picker?

Or if you really want to maximize your chances, at least?

You need to stop reading FinTwit and start reading books.

I have read over 100 books on investing, easily. Most of them had something to teach.

Here’s a rather eclectic list to get you started:

  • The Art of Execution – One of the very few books about how to actually go about building – and pruning – a portfolio for profit.
  • You Can Be A Stock Market Genius – Stop looking in the obvious places for your investments. Hunt out hidden advantages. The examples are dated, but the mindset is timeless.
  • One Up On Wall Street – Again, dated examples, but you won’t find a better book on thinking like a business owner even as a spare bedroom investor.

If you want to try share trading, do so for free with Freetrade. Sign up via that link and we both get a free share. You’re already winning! The Interactive Investor and Amazon links are also affiliate links. This is a marketing cost for them, and doesn’t affect what you pay.

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Weekend reading: Boom

Weekend reading logo

What caught my eye this week.

Always remember the stock market strives to make as many people who express an opinion look as foolish as possible.

Indices – especially in the US – have been rising despite Covid-19 still spreading across the globe.

People said it was dumb. They blamed day-traders on their iPhones.

Warren Buffett looked shell-shocked at his pandemic-poopered shareholder meeting on 2 May, as he explained why he wasn’t buying anything – why far from grabbing bargains with both hands, he’d pulled the ripcord on his holdings in airline stocks.

Americans were rioting.

Even I owned enough gold to give Mr T a hernia. (Okay, only about 5% of my portfolio, plus a couple of percent in a miner. But still, enough to send my 2012-self into a fury).

And then… on Friday we saw ‘the biggest payroll surprise in history’. It revealed that US employers are now hiring not firing.

And the Internet finance kids went wild.

[Video referenced was taken down, presumably due to multiple copyright violations…]

Thinking about everything that has happened over the the past four years and this crazy 2020, if you told me I was living in an extra-terrestrial’s plaything – a sort of The Sims meets The Truman Show – and some Martian producer’s child had been accidentally left in charge of the controls…

Anyway, we hope you didn’t sell.

Have a great weekend all.

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What is behind the coronavirus trading boom?

Photo of lots of people

You might think the quickest stock market crash since the Great Depression, a global pandemic, the daily death count on the news, and millions of people losing their jobs would turn people off investing.

Yeah, well, people are weird.

The past few months have seen an army of new customers open accounts with online brokers.

Still crazy after all these fears

At first the influx of avid traders was chalked up to the lure of commission-free trading in the US.

But the spike in interest came well after the advent of free dealing, and mostly coincided with quarantine:

Viral investing

Source: CNBC

Besides, UK platforms like Interactive Investor and Hargreaves Lansdown that charge dealing fees have also been as busy as a doctor with a Covid-19 test kit during lockdown.

According to the Financial Times:

The Share Centre reported a 269% increase in brokerage account openings from March 9 to 30, compared with the same period in 2019.

The month of March is typically busy for investment and savings accounts as the Isa season reaches its height, but the numbers have exceeded the expected annual uplift. Half of all accounts opened on the platform since February 17 were opened in the final two weeks of March.

Interactive Investor, the UK broker, reported a 119% increase in the number of Isa accounts opened on its platform between February 18 and the end of March compared with the previous year. The number of self-invested personal pension (SIPP) accounts opened was also up almost 50% over the same period. Interactive Investor has reported record trading volumes since mid-February.

Vanguard UK reported a three-fold increase in the number of new accounts opened in the first quarter of 2020, compared with the same period in 2019. Account openings in March were up 60% on the previous month.

You can anyway trade for free in the UK, too, with FreeTrade1.

The UK-based Robin Hood rival now has over 150,000 customers. More than 50,000 signed up in the first few months of 2020.

Other explanations for the trading craze point to the sports shutdown – which also kyboshed the gambling business – or to how millennials grew up watching the market recover from every setback, and now want their piece of the action.

‘Just buy the %$& dip’ has been a winning mantra since 2009. It’s doing okay in 2020, too.

But maybe the boom in traders was simply because billions of people were sitting around at home bored and self-isolating?

During lockdown we meet our friends online, date online, get our rocks off online (maybe no big change there), and learn how to bake sourdough online.

Why not go all Wolf of Wall Street online, too?

There’s nothing dumb about investing during a bear market. A crash means shares are cheaper, and expectations for future returns higher. With a long-term view it’s rational.

It’s not how people usually behave though – that’s the point. Share trading mania is associated with markets soaring, not slumping. Think dotcom boom or Bitcoin bubble.

This is what makes the surge in interest during the coronavirus crash so remarkable.

You too can lose money on the stock market!

The point is: millions are now in shares who weren’t just six months ago.

And some pundits say they’re already having an impact – mockingly pinning the recent ‘irrational’ rally on these smartphone traders buying Tesla and Zoom while the smart institutional money sits on the sidelines.

I don’t buy that.

For a start I don’t think the smart money is all that smart when it comes to market timing.

Besides, I welcome this legion of new investors.

I’ve heard podcasters laugh at their exploits, but we all begin somewhere. I also believe capitalism works best when more of us think like capitalists – rather than just leaving it to the 1% to get rich.

More people investing in shares means more chance of spreading it around.

Or at least it does if they stick with investing for long enough…

And that’s the one thing I am worried about.

Because the statistics behind short-term / day-trading are brutal. Most people who try to trade lose money. The vast majority will lag super-simple investing that uses index funds.

Day-trading is not only very hard to profit from – it’s too much fun to be profitable, unless you happen to be running a brokerage:

Losing money makes you want to go back for more. Las Vegas wasn’t built on the triumphs of its punters, but on the takings of the house.

And in the long run, the house nearly always wins.

People choose day-trading as opposed to trying their hand at freelance tax accountancy because one seems exciting and the other insanely tedious.

But the truth is that if you want to make easy money, you should do something hard.

If you can’t beat ’em…

I’d be a hypocrite though if I didn’t admit that I am an avid active investor myself.

So next week I’ll share 12 tips for new traders that might help set you off on the right path with stock picking. Subscribe to make sure you get it.

Why do you think the share trading boom has taken place during such a grim time for society and the economy? Let us know in the comments below.

If you want to try share trading, do so for free with Freetrade. Sign up via that link and we both get a free share to get you started. The Interactive Investor link in this article is also an affiliate link. These are marketing costs for these businesses, and doesn’t affect the price you pay.

  1. Note: This and other links may be affiliate links. See my comment at the end of the article. []
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