Paul Wilmott was described by the Financial Times as 'the cult derivatives lecturer'. He was an academic before moving over to independent financial research, training and consultancy. He is a leading authority on quantitative finance and derivatives. He has written a number of bestselling books and ground-breaking technical articles.
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Get into the habit of looking at stock price history, not just at today's value.
You've probably got a PC, maybe even Microsoft Excel or other spreadsheet package. Use them to plot prices. There are lots of simple things you can do on a spreadsheet that will help you make better trading decisions. And learning about these can be fun as well as profitable. (But please don't use any of that Technical Analysis nonsense !)
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Think in terms of risk and return. Return is good.
How has your stock behaved lately? Has it performed well. If so, will this continue? Can you quantify 'performed well'? It's not hard on a spreadsheet. Try ranking stocks by their performance over some period, the previous year, say. At the top of your list should go stocks with the greatest growth.
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Think in terms of risk and return. Risk is bad.
A risky stock is one that is highly volatile, one that bounces around a lot. Its price history will be very jagged, showing lots of peaks and troughs. Even if a stock rises a great deal it may be a poor investment if it has taken a bit of a roller -coaster ride to get there.
With volatile stocks timing is everything. The difference between getting out triumphantly at the top and getting out reluctantly at the bottom may be measured in weeks or even days, rather than years . Try ranking stocks by how volatile/jagged their price history looks. The more jagged, the higher up the list they go.
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The 'better' you think a stock is the more you should invest in it.
This is the key. 'Better' means having a good return i.e. growth, with little risk i.e. volatility. If you followed my suggestions above and rank stocks according to recent growth and 'jaggedness' then you want a stock that's near the top of the growth list but also near the bottom of the risk list.
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Diversify.
You cannot be right all the time. The best you can hope for is to be right most of the time. And to take advantage of this you must spread your risk. If one stock loses maybe another will win. Spread your money across investments that are unrelated - in technical jargon they are 'uncorrelated'. An industrial sector stock and a leisure stock may behave completely independently. Having said that, during stock market crashes they're both gonna tank together. And I can't help you there.
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Be aware of transaction costs.
If you trade frequently you're going to quickly lose your money thanks to transaction costs, bid-offer spreads etc. If you are investing in a market with large transaction costs you should think extremely carefully before changing your position from buy to sell or vice versa. This takes us back to our old friend volatility. A stock price fall that makes you want to close your position could be a new trend or just an unfortunate downward blip in a particularly volatile stock.
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Don't take this business too seriously, it's only money.
This speaks for itself. Also, don't invest money you can't afford to lose. If you find yourself forging your spouse's signature on their car ownership papers or dipping into your children's college fund, you've probably gone too far and should seek immediate help.
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If a rich friend gives you financial advice, take it.
He got rich somehow, maybe picking stocks. And if his choices plummet then you could always touch him for a bob or two.
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Put your stock certificates in a safe place.
Many's the time I've bought some stock and then lost the certificate. Have I lost the money? Will the stock be traced back to me on my death? I've no idea. But on the other hand “ many's the time I've bought some stock and then lost the certificate. Have I lost the money? Will the stock be traced back to me on my death? And then years later I find the certificate. Whoopee! I'm rich!
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Get out there and create some wealth.
To end on a serious note, what's the future for mankind if we all spend our time logged on to our online brokers ? What would the world be like if everyone was a public sector employee, an accountant , lawyer or fund manager? I'm sure these are all important jobs (except, maybe, for lawyer) but in proportion . Somewhere at the bottom (or the top, depends on your point of view) of all this there is a small number of people actually 'making stuff'. Be one of them. Take your play money, and invest in yourself. Turn your hobby into your own speculative investment. Again this is a risk/return thing, but at least you have control.
