It’s best to approach investing little by little, in baby steps. Too many times I see people throwing all their money into one stock hoping to win big. That, my friends, is gambling!
How do you know for sure a stock is going to dramatically go up in price, if you are a newbie and just playing the stock market as if it were a casino?
The thing is, you can treat the stock market as a casino, or you can treat it as an open market where you can build a solid portfolio. The problem is that newcomers to the stock market DO treat it like a casino hoping to win big.
But sadly, many newcomers approach this idea of investing with a gambler’s mindset. Gamblers like to take big risks because they realize that the only way to win big is to lay their cards all on the table, so to speak.
An investor approaches the stock market with a strategy, a plan. They treat their portfolio like a business, and they most likely (like any business) have a business model ready. A goal. An objective. A co-ordinated strategy, etc.
Probability, Logic, Risk Tolerance and Risk Management
To succeed on the stock market, you have to have a plan before you throw your money at the stock market. And having a lot of money doesn’t make the task easier. You could have a small initial investment of cash and you are much more successful as far as percentages go.
But to me, developing an investor’s mindset is all about understanding probabilities and logic, and understanding what risk tolerance and risk management are. And as one develops experience, this mindset is applied a little at a time, and with careful steps in order to achieve success.
Investing in the stock market has risks. We all know that. How that risk is applied is what we want to address. For one, logically, a person with little or no knowledge of the workings of the stock market will have a greater probability of losing money in the stock market.
Knowledge is Power!
If you are a total newcomer to the stock market, you have to get rid of all the pre-conceived notions you have about it, or what others told you.
Like for example, one person says, “Don’t put your money in the stock market. You’ll lose it all”.
While that might be an enlightening assessment, it is FALSE. So, why are investors like Warren Buffett and Carl Icahn making literally billions in the stock market, slam dunking it with extreme success?
They have the knowledge and the experience.
It’s like riding a bike. Chances are you WILL fall, many times even, before you finally learning how to balance the bike and propel yourself forward. Well, the same goes for work on the stock market. Many times, some newcomer tries their hand at the stock market and they lose. They fall down. And then they quit. But it’s just like learning to ride a bike. You might lose money and make poor decisions on the stock market, but through knowledge and experience, the probability will become greater that you will succeed.
Risk management. Risk tolerance. You never put all your eggs in one basket. You put each egg in a different basket, and you’ve increased your probability of success… and applied to stocks, you buy a collection of stocks, spreading out your wealth, and they all can’t fail at the same time. If you pick stocks from different sectors, chances are you’ll have a better chance of building wealth. Diversification. That is the basics of risk management. While risk tolerance is how much cash you are willing to risk in the stock market. At first, and until you’ve gained considerable experience, you’ll want to risk only that amount of money you are willing to lose, and not everything you have. That is risk tolerance at its basic level.