Getting Started in Investing
How I Made $2,000,000 In The Stock Market
How Did You Learn to Invest?
In Cabot Wealth Advisory, we tend to write for a pretty well educated investor. We do still like to reiterate the basics, like “stick to a system” and “cut your losses short,” but in general, we operate on the premise that you have some idea of what you’re doing when it comes to investing.
We’re assuming a certain amount of selection bias, basically. We write—a lot—about how to become a better investor. And we like to think that you read and absorb some of it. We assume we’ve done a good enough job to teach you the basics, like the aforementioned importance of having a system and cutting losses.
But I think sometimes we forget how common the “other” type of investor is. You know the type: the guy who buys stocks on “hot tips” from his barber, or because he’s convinced the company’s product is going to be a big hit.
The fact is, most investors start out as that guy. None of us are born knowing the fundamentals of investing. A few of us, like myself, are lucky enough to learn them as children. (I got my first subscription to the Cabot Market Letter in middle school, I think. My sister and I both received our own paper copies in the mail every two weeks; it was about the only mail I got.) Our Chief Analyst, Mike Cintolo, shared his father’s subscription to the Cabot Market Letter, and thus learned the important lessons while he was still in college.
But Mike and I (and my sister) are the exception.
Most investors start investing in some piecemeal way before they learn much about it. And they have to decide where to start somehow.
One of my good friends decided to get into the stock market a few years ago. He read a book that argues that you can’t beat the market, then he bought a few index-based mutual funds. He still owns them, and has also added a handful of stocks that he thinks will benefit from the gradual legalization of marijuana. He reads Cabot Wealth Advisory sometimes, but he’s mostly still flying by the seat of his pants.
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That’s a pretty common way to get started. Legendary investor Nicolas Darvas recounted how he learned to invest in his book, How I Made $2,000,000 In The Stock Market. Although the title suggests that he was some kind of investing genius, he didn’t start out that way. In fact, he started out with no investing knowledge at all, buying his first stock in an odd twist of fate when it was offered to him as his payment for performing at a nightclub.
When that stock did well, Darvas was hooked. He wrote: “I decided I had been missing a good thing all my life. I made up my mind to go into the stock market.” Of course, like most people, he knew nothing about investing at this point. He wrote:
“But how to start? How to find what stocks to buy? You could not just pick them out with a pin. You must have information. ... I asked everybody I met if they had any stock market information. Working in nightclubs I met rich people.
Rich people must know. So I asked them. The question was always on my lips: ‘Do you know a good stock?’ Oddly enough, everybody did seem to know one.”
Darvas also recalls some of the other “methods” he tried after asking around for tips that failed to pan out. He bought on recommendations from brokers. He took $1 trial subscriptions to dozens of “investing newsletters,” many of which were actually pushing small caps as part of pump-and-dump schemes.
Eventually, he subscribed to stock market information services from Moody’s, Fitch and Standard & Poors. He was on the right track in his search for quality information, but he admits he “did not understand any of it.”
He even recounts several periods of investing based primarily on common Wall Street sayings that rang true to him. At one point, he became convinced of the truth behind the saying, “You cannot go broke taking a profit.” But he soon discovered that the saying was not only an incomplete investment system, it was also simply not true. The small profits he was regularly taking on his winners were always outweighed by the losses he had to take on his losers, not to mention transaction fees.
He also dabbled in the over-the-counter market in an attempt to implement the saying, “Buy Cheap, Sell Dear.” But he found that he often couldn’t sell his thinly traded stocks when he wanted to.
He also tried following insider buying, and betting big on rumors of major developments. Like his other “methods,” neither worked, of course.
Darvas lost a lot of money investing on hunches and tips. But, along the way, he earned an excellent education. It was the expensive way to learn, but he learned.
You have to learn to invest somehow. And since most investors don’t start learning until they start investing, learning from your mistakes is usually a very important part of the process.
I’d like to hear your stories. How did you learn to invest? What were your earliest stock-picking methods? And when did you eventually settle on a system that works?
Just reply to this email and let me know. I may publish some of your stories in an upcoming Cabot Wealth Advisory.
Wishing you success in your investing and beyond,
Chloe Lutts Jensen
Editor of Dick Davis Digests
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