Best stock trading tips: Six mistakes you should avoid7 min read . Updated: 02 Sep 2020, 01:08 PM IST
Avoid these amateur mistakes before you sink all your money into the market
Lena Birse is a stay-at-home mom who loves buying tech stocks during market crashes. Jay Smith is a former pro gamer who switched from cryptocurrencies to blue chips. Heloise Greeff is a data scientist who uses machine learning to analyze trading patterns. And Mik Mullins is a retired hotel executive who’s betting the market is about to plunge.
These four amateur traders use different approaches but have one thing in common: They’re killing it in one of the wildest markets in memory, with returns ranging from 20% to 60% this year.
While many institutional investors bailed out of the market in the early stages of the Covid-19 pandemic, retail investors have piled in and pocketed big gains, especially in surging tech stocks. The U.S. digital brokerage Robinhood signed up 3 million new users in the first five months of the year, giving it 13 million total customers, which is almost as much as at Charles Schwab Corp. Stockpicking, which has long been eclipsed by investing in index-tracking funds, is suddenly back in vogue.
Playing the market is fraught with risks, of course, and stories abound of newcomers making rookie mistakes, never mind professional investors who’ve fallen short during the relentless rally in American stocks. To learn how to avoid pitfalls, Bloomberg News picked the brains of these four top performers on eToro, a digital trading platform with 14 million users that’s regulated by the U.K.’s Financial Conduct Authority. EToro lets people copy the trades of investors with proven track records, like this quartet.
They all believe newcomers make mistakes by not investing for the long term and for failing to diversify their portfolios with at least 30 well-researched names. Here are the other things they see people doing wrong, based on their experience:
Jumping In Without Testing Out Trading Strategies
When Heloise Greeff decided to plunge into the stock market in 2016, she did what any good scientist does — she experimented. Greeff, a 30-year-old research fellow in machine learning at Oxford University, used a “demo account" on eToro to execute simulated trades with $100,000 of fake money. She discovered straight away that trying to time the market and trade in and out of positions everyday was a bad idea.
“I was impatient, and I didn’t want to wait for things, so I started off looking at commodities, and I was drawn to oil, which was quite volatile," says Greeff via Zoom from her flat near Oxford’s historic cluster of colleges. “Using the account, I could do that without losing any real money, and I learned some hard lessons before I put real skin in the game."
Greeff loves looking for patterns in oceans of market data. When the S&P 500 Index and other benchmarks were hitting all-time highs late last year, the data was sending her a powerful signal: It was time to retreat. “I am a conservative trader so I liquidated 60% of the positions in my portfolio, and while I missed the highs of January, I had peace of mind," she says. Since then, Greeff has waded back in, and two of the biggest holdings in her 60-stock portfolio are MasterCard and IBM. She’s up around 20% this year.
Chasing Hyped Stocks Instead of Doing Research
After dropping out of school at age 14, Jay Smith sought glory on the virtual playing fields of eSports as a digital warrior in StarCraft, the fabled sci-fi military game. In time, Smith, who lives in southern England, became smitten with Bitcoin and other cryptocurrencies, as well as solar energy stocks. He would livestream his trades and observations on Twitch for hours. When the digital coin bubble popped in 2018, Smith’s portfolio fell almost 54% and he learned a painful lesson in the dangers of hype.
These days, the 32-year-old’s bets are a far less racy mix: Chipmaker AMD and Microsoft are longtime favorites, and this year he started buying shares in Home Depot and Lowe’s, the home improvement giants. Still, he doesn’t hesitate to dial up the risk when the need strikes him. Anticipating a crash from the coronavirus, he started converting a big chunk of his portfolio to short positions in February, betting the stocks would fall. It was a good move: He eked out a 0.24% uptick in March, a month when the S&P 500 Index lost a third of its value.
He feels comfortable with such tactics because he does his homework on companies. “In the past I spent too much time communicating about investing," said Smith, who goes by the handle Jaynemesis on eToro. “Now I spend a large amount of time reading product user manuals and watching launch events on YouTube. A solar company I follow recently held a training day online, so I watched to see how they install their equipment."
He’s up about 50% this year.
Making Big Bets Instead of Starting Small
A few years ago, after Lena Birse and her husband sold their heating business in Bristol, England, they decided to invest the windfall in stocks. Birse balked at paying fees to a money manager. She started small, buying modest stakes in household names, such as the U.K. retailer Tesco. Eventually, she grew confident enough to switch to high-octane tech stocks like Facebook and Netflix.
Birse knew concentrating her portfolio in tech was a perilous move, and sure enough she lost 3.8% in 2018 when the Nasdaq index swooned. But she stuck with her strategy. When the industry rebounded in 2019, so did she. The mother of two teenagers splurged on a beachfront dream house on the Mediterranean and a London flat.
Investing Money You Need in Five Years
Mik Mullins says he felt like a blind, drunk monkey stumbling in the dark when he started investing in the early 2000s. Eventually, Mullins, a British expat in Singapore, found his footing by getting in early on companies that were disrupting global industries, like Facebook and Zillow. In 2012, he retired at the age of 42 from his profession as a hotel marketing consultant to tend his portfolio. And he advised friends to follow one primary rule: Never invest money that you’re going to need for big ticket items such as a house or college tuition.
Like his fellow eToro investors, Mullins is a true believer in investing for the long term. He doesn’t even like to look at his portfolio more than once a week. Yet in May, he wavered. He doubted the rally in the S&P 500 and the Nasdaq 100 was sustainable as the global economy deteriorated. So he started shorting the indices, as well as soaring stocks like Tesla and Hertz, the car rental giant that’s jumped 84% since June 1 even though it’s going bankrupt.
So far his bearish bets are in the red but he’s still up almost 29% for the year thanks to his long positions. Mullins, a white-haired man with a tropical tan, laughs at his skepticism. “Human nature being what it is, sometimes you don’t stick to your plan, and so far it’s been a wrong move," he says over Zoom from his garden patio. “But I have to mitigate the risk of catastrophic losses. The sooner the market goes back to being boring the better."
Getting Yourself Into Complex Trades Before You’re Ready
It’s never been easier for retail investors to use leverage, options and short-selling, but amateurs should avoid complicated tactics like these until they understand how they can backfire, say Mullins and Smith.
The rush of newbie traders into flashy equity-trading apps have already led to some grim consequences. In June, Robinhood pledged to change elements of its options trading platform after the suicide of a 20-year-old user who had an account that showed a negative balance of more than $700,000.
The company’s co-founders said they would consider additional eligibility requirements for users who wanted to tap more advanced options strategies.
Obsessively Checking Your Portfolio
It can be tempting to keep looking at the daily swings in your stocks’ prices, but if you do this every day, it spurs panicky trades and losses.
Over time, Birse said she built a tolerance for risk. After the pandemic hit, she resisted the urge to panic. Instead, she bided her time and prepared to add to her positions in longtime “winners" like Shopify, the Canadian ecommerce firm that’s skyrocketed 148% this year.
“I used to turn off the computer during selloffs," says Birse, 50, who goes by the handle Onegirl on eToro. “But then I wanted to be more active, more aggressive, so in March I steeled my nerves, waited three weeks, and then it was time to go shopping. It felt like the sale of the century."
Her portfolio is up 61%.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.