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Smart Investor: overcoming the novice investor's 10 big problems

Dumb Investor has named some common problems faced by novice investors – here are the solutions.


by Smart Investor on Nov 08, 2012 at 06:21

Smart Investor: overcoming the novice investor's 10 big problems

I recently read an article by Citywire’s Dumb Investor (no relation) where he listed 10 excuses as to why he is struggling to get to grips with investing. Here are my responses to his complaints:

1. Not enough money

For a young person starting out in investing (as Dumb Investor is) it is normal to lack capital. However, the point of working is to accumulate capital and so, in time, it will come. In the meantime, the trick is to keep learning so that when you do eventually have capital, you’ll know what to do with it.

2. Prohibitive fees

See my article on how to keep commission costs down. Think outside the box – I’m sure Citywire readers will have their own suggestions.

3. Too much choice

The most important character trait of a successful investor – and anyone in any worthwhile undertaking – is discipline. Try focusing on the FTSE 100 if you feel the FTSE 350 is too big. Or, just look at specific sectors until you feel comfortable with them before looking at new ones.

4. Not enough time

This is a common problem. If you literally have no time, there is no remedy. But most people are inefficient, and feel they have a lack of time because of their inefficient method of analysing companies. Be ruthless in your analysis and get to the point. You don’t need to watch the news or read the papers to be a successful investor.

5. Lack of knowledge

Some of the most knowledgeable people I have ever met are awful investors and some of the best investors have very little knowledge. It is the application of what you know which is key. Applying a little well will stand you in good stead.

6. Too many competing voices…

Simple answer to this: don’t listen to anyone. Just trust in the facts!

7. …yet I lack information

Inside information? I should hope so. The idea that sell-side analysts have better information is a fallacy. The odd meeting with investor relations people and a handful of financial directors does not improve your chances of success.

8. I don’t know who to trust

I have never understood why people need affirmation from other people. Make a decision for yourself based on facts and figures – why do you need to ‘trust’ someone else?

9. I can’t react quickly enough

You describe yourself as an investor but, I’m afraid, you are a trader. I don’t care if I buy shares in a company this week or next week or even next month. I move like a tortoise and you are moving like a hare.

10. It helps to be interested

As with anything, if you lack desire you are bound to fail. Losses lead to disillusionment, profits lead to overconfidence. You will always have to fight one or the other, so get used to it.

I must admit I have not read every Dumb Investor article. However, I have noticed some very helpful comments by readers, so, as one final piece of advice: listen to your readers!

21 comments so far. Why not have your say?

Geoff Downs

Nov 08, 2012 at 09:36

There has to be losers for there to be winners. If we were all winners prices would only rise.

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Nov 08, 2012 at 13:13

Smart Investor's pearls of wisdom were perfectly valid a decade ago. However more recently we have witnessed a near collapse of the global banking system. The levels of Govt. fiscal debt carried by developed nations is mind blowing and unsustainable.

In the near term central banks will continue to print money in order to defer the day of reckoning, but in the end somethings got to give.

People in high places in the investment world know this and have rows of pre-progammed computers ready to react immediately, if and when the tide turns.

You cannot escape the fact that stockmarkets today are far more sensitive to political and fiscal changes than they used to be.

In my opinion these influences will override fundamental considerations when it comes down to forward projections and valuations.

Small investors need to formulate a strategy that will minimise this increased volatility, which means restricting one's stock picks to defensive stocks, or diversified funds.

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Jim Mack

Nov 08, 2012 at 13:14

When I started investing, I stuck, initially, to the FTSE and "chased" dividends. I generally take the view that, even in austere times, we all have to eat, heat and light our homes, use the telephone and drive our cars. So, I have invested in those Companies which provide this - sometimes I win and sometimes I lose but I do reinvest the dividends - perhaps this is too simplistic but I'm still ahead of the game after 4 years.

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Nov 08, 2012 at 16:31

Where do you get the "real facts" and how do you know those "facts" are not tainted?

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Geoff Downs

Nov 08, 2012 at 16:40

I increasingly think the retail investor is at a major disadvantage. Hotrod's comments are probably correct. As I said earlier there has to be losers, we can't all place the same bet and win.

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wayne roberts

Nov 08, 2012 at 18:28

Everyone has to find their own way through the market via lessons learned the hard way.. and people learn more from losing money than they do from winning it. At the end of the day no one knows where the market will be in the next 5 seconds let alone next month/year, same as property, it's all a gamble.. its up to you to put as many odds in your favour as possible and that takes time, patience and strict discipline, and as most humans are emotional it is hard to sustain over long periods.. also if people could sell at a slight loss they would do OK but most wait until it is a big loss before selling, people don't like admitting they are wrong and that is where smart traders/investors have an advantage..

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Geoff Downs

Nov 08, 2012 at 18:45

Investing has always been risky and more likely to produce losers than winners. Today is more tricky because the markets are being manipulated in a way never done before.

Much of the fundamentals should have produced a declining market and yet up to yesterday the markets were going up. QE was largely responsible for that.

On the question of being smart, it's worth noting that some of the best fund managers of the 80's and 90's have produced very little gains for their clients in recent years.

My personal view is that we are going to find it more difficult over the next few years to simply safeguard our money, never mind make actual gains.

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Nov 08, 2012 at 20:04

If you want problems, try investing direct in US shares. The novice should stick to investment trusts bought through a cheap on line broker. There is plenty of genuine information on the best ones. There own web sites are honest, unlike many tipsters.

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Anonymous 1 needed this 'off the record'

Nov 09, 2012 at 11:10

Investing and understanding the Market/World/Politics/Economies/Commodities is not something that is gained in a few years, I have been investing in good Companies and Funds for 40 years and the Market has been very kind to me. Patience and good timing is a virtue.

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Geoff Downs

Nov 09, 2012 at 12:16

Good for you. My point is simply that for every winner there has to be losers. The original investor has to have further money coming in. The question is therefore, have you been clever or have other investors been less clever.

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William Fowler

Nov 10, 2012 at 08:42

Be brave and invest abroad. It wasn't long ago that every expert worth his salt wouldn't look at a portfolio with less than 60% in the UK. Returns over the last 30 years from around the world have proved the fallacy of that argument and, with yet another labour government due in two years time, things can only get worse.

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Geoff Downs

Nov 10, 2012 at 08:56

I watch the stock markets most days. One simple message comes from them. If the US markets go down everything else does.

The boom in asset classes of all types is still collapsing, albeit it slowly. Equities. property and commodities will not deliver, in my view, for a long time, which ever part of the world you invest in.

Good luck anyway.

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J Hughes

Nov 10, 2012 at 09:11

Interesting article and comments - basically - 1) think long term, 2) I agree that dividend policy is important (our money is tied up but it is still very worthwhile to get a regular income even when the capital is diminished), 3) real facts are definable (balance sheet / P&L, cash generation, borrowing requirements and capital investment levels etc are facts) and my personal view - avoid any business where one person has too much influence (Maxwell, Murdoch, Asil Nadir and many others over the last 20 years).

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Geoff Downs

Nov 10, 2012 at 09:29

Just one other thought. The Japan stock market reached a high of 38,000+ in 1989.

It now stands at under 9000. Despite many false dawns it has never recovered. This shows what can happen after a boom.

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William Fowler

Nov 10, 2012 at 10:38

I agree Geoff, but that proves how foolish it is to put all or many of your eggs in one basket, including the UK.

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Nov 11, 2012 at 00:11

I agree with Geoff in one of his earlier comments; investing is essentially a zero-sum game if we just look at the basic function of the stock market. However, I think that the complexity in this debate comes from the fact that individual players do not make mistakes or winnings which are exactly reciprocal to other players' decisions, as investors all have varying degrees of success in achieving real returns.

J Hughes I agree with your point of view as well; capital growth is definitely achievable with a long term view which looks to strong information based investment decisions, disciplined reinvestment of income to aid compounding, and drip-feeding not only to lower the cost of investments over time but to ride out volatility as well as to avoid the difficulties of timing the market. I take confidence from the fact that when Buffet talks about volatility in the market he refers to Graham, saying that when prices are really depressed for a share the investor should be pleased about the increased earnings per share value that he or she can buy - suppose his genius comes from the fact he always has lots of cash to exploit these situations...

Its my first comment on here but I do like to read the comments - I've only just started out in investing as a student but I hope to keep my confidence up about returns by looking to the long term and really just trying to be realistic about what returns I can achieve.

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jonathan malpass

Dec 03, 2012 at 22:25

just keep drip feeding money into good funds over a 10 to 20 year period and I am quite confident you will be rewarded

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p v

Dec 19, 2012 at 17:48

I started with a donated £30 option certificate for IMI and no idea what a stockbroker was 34 years ago; but as a numerate electronics engineer convinced there was more to life than building society accounts - and from that acorn large oaks have grown. I used shares, Investment trusts, and unit trusts (but not when I had to pay 5% buying commission) and the occasional ETF. I invest (not gamble) and look to grow through a diversified portfolio and reinvest dividends. It is paying for a great early retirement, so something went right.

I disagree over the winners must equal losers. My understanding is that GDP growing is a measure of increased efficiency and wealth - otherwise we would still be banging the rocks together.

I would encourage people to start; it is easy as there are many more cheap service providers and information sources that when I began. Don't be greedy a steady few percent over inflation compounded for 30 years works wonders.

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wayne roberts

Dec 19, 2012 at 18:04

investing IS gambling.. and who has got a spare 30 years to wait to make some money, by that time you won't be able to enjoy it! If you are going to wait 30 or even 10 or 20 years to make some money then don't bother, just spend it now and have a good time! Everyone in the city would love you to give them your hard-earned money so that they can gamble it away on your behalf, cut the middle man and have a good time! You only live once.. hasn't the past 5 years taught you anything?

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p v

Dec 20, 2012 at 12:47

Everyone should live the life they chose. If you think it is gambling then don't do it (but it seems to me odd to read the CitiWire web site if you hold this view).

The past five years has taught me that I am richer now than five years ago and I can afford to live the good life and have a great time - every day.

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Feb 16, 2013 at 10:17

I started when I packed up smoking. I decided I had to do something with my ciggie money or it would simply disappear into my credit card. After 25 years it's amazing what 20 fags a day can earn!

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