My 1st Million At 33 – yes, you can do it too

Learning how to invest is very important for everyone. Understanding investment is important for your whole life even if you’re not doing the investing yourself. Otherwise, you won’t be able to know how to select your money managers, or even tell whether your money manager is lying to you.

Read some books & paper trade
These are really the cheapest way of learning your ways through investing. Following good advices will always save you money in the long term. When you put your money into the stock market, it should be like a battle, not a gamble. On the battle, you don’t want to find where your gun is. That will be a little too late for that. I have an incomplete book list at my advices page. But there are lots and lots of books that you can read.
If you have not invested in anything before, paper trade your way using Yahoo’s portfolio or any other portfolio tracking site for a few months should help you. Get familiar with reading financial reports by the companies, such as cashflow, income statements, and balance sheet.

Emotional component
You can gain some experiences from paper trade. But there is definitely something that you cannot learn from paper trade: the emotional component. Only when you put your own hard-earn money at the mercy of stock market, you can start to learn and experience the up & down rollercoaster for yourself. Can you watch a rollercoaster video to learn about riding the rollercoaster? My answer is no. Experiencing the emotion first hand is very important for your success as an investor. The more emotions you go through, the better for your education. Only through observing yourself through up and down time, and subsequently looking back on your own trading/investing history, can you learn about your own self. As an trader/investor, you want to be as emotionally detached from your investment as much as possible. If you cannot be emotionally detached (which is probably true for most people), at least you must understand how you would react to the up and down in the market. Hopefully by such understanding, you can self-correct your course based on introspection, instead of letting your emotion controlling your investment decisions.

Unfortunately, the emotional part about investing is often a learning AND re-learning process. Most likely you will make similar mistakes many times until either you finally get it right, or you run out of your play money, or you get sick of doing it. Any of the three resolutions is good, assuming that you don’t become an addicted gambler and keep bringing more play money onto the table for more loss.

Fee for your tuition
Given that you probably will not learn something without going through some losses, the best way to limit your loss is the place a hard limit or a hard percentage. How much exactly is up to individual tolerance and financial situation. Certainly when you’re young, you are able to withstand a bigger percentage loss, since most likely you will have more savings and time to replace or recover your losses. Using myself as an example, I lost about 40% of my money, while the total dollar amount is about $12K to $15K. It’s big, but I was able to replace my losses with saving.
I did not look at how much my loss really is compounded through 40 years. I think the right perspective is how much more losses would I have if I don’t learn my lessons early. But certainly you want to put some limit on your losses. Don’t become an addicted gambler and keep bringing in more money to feed the brokerage houses.

Basics that you should do

• Follow the daily news in MarketWatch.com and/or theStreet.com.
• Pull out some charts at BigCharts.com or StockCharts.com.
• Read some financial reports at Yahoo finance quote centers.
• Be more familiar with various sectors, such as pharmaceutical, high-tech, consumer-staple, etc.

How do you know that you are on track
As you learn more and more about investing, two things should happen:

• Your percentage loss should decrease down to the level of about how market fluctuate, or preferably smaller by the use of cash and bond.
• You should start to construct your own trading/investing rules, or other people’s rules should echo with you strongly.

I google searched three very good trading rules here. You should look over them.

• 10 biggest mistakes made by investors
• 12 top trading rules from BigPicture.
• Trading rules from stockcharts.com.

And I wrote about The Worst Mistake that a Trader can Make: Average Down which is described in ALL of the above 3 links (may not be in exact words). Why do I call it the worst mistake? Because among all mistakes that you can make, this is the only one that can potentially WIPE OUT your entire portfolio. All the other ones can hit you with big losses. But this particular mistake can really bring you down.
I heard about a real story from my uncle. He said one of his friends kept averaging down by using margin, and then mortgage the house, and eventually everything was wiped out through the bear market of 2002. Don’t be an attached gambler!

That’s it for today. If you have any other good tips, please add to the comment sections. I got some of the trading rules pointers from Millionaire Now, but I couldn’t get the URL from his site. So I resort to finding the original source instead.