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Want to Start Trading Stocks? Tips for Beginners

Principles of Smarter Trading
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Randy Frederick, managing director of trading and derivatives at Charles Schwab, discusses key ways to develop and improve your trading skills.

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Rick Karr:

Randy Frederick has stepped in front of a room of investors nearly a thousand times to share some of the lessons he’s learned throughout his career. Sometimes he includes a list of principles. Beginning investors need to learn them. More experienced investors might need a reminder. And on this installment of the Insights & Ideas podcast brought to you by Charles Schwab, he’s going to share them with us.

I’m Rick Karr. I’ll let Randy Frederick get straight to the first item on his list.

Randy Frederick:

It’s impossible to invest without making mistakes. In other words, it’s impossible to invest without taking losses. The best investors in the world may only make profits 60% of the time. So I think it’s very difficult for people, especially when they’re new to investing, to accept the fact that they’re going to be wrong somewhere between 40% and 50% of the time, possibly even more when they get started.

So that right there is a huge adjustment, I think for many people.

Rick Karr:

That sounds like music or anything else. You’re not going to be any good at it unless you make mistakes first.

Randy Frederick:

Well, I mean there’s an old adage that’s true for anything, not just investing: just simply that you learn more from your mistakes than you do from your successes. If you have successes and you don’t know why, then possibly you’re just lucky. But if you make mistakes, and you know what went wrong… It’s one of the reasons we advocate that you should have some sort of a log where you keep track of what you did and why you did it.

More important, why you did it, so that if things do go wrong you’ll have a record of those. And you can potentially try something different next time and try not to make the same mistake twice.

Rick Karr:

What does that entail, and what kind of pitfalls does that help you avoid?

Randy Frederick:

It can entail a variety of different things. The most basic trade plan would be something that just simply has the date and the number of shares, and how many and what price you paid for it, and then the date and the price that you sold it at, at a later time.

And, of course, that would then track your profits or losses. And then at least some sort of a notepad or little space to put a note in or comment that says why you bought it at that price, why you sold it at that price, and if it worked, maybe your thoughts on what worked... And if it didn’t work, maybe your thoughts on what didn’t work... After you’ve been investing for a couple of years and you’ve done several hundred trades, you’re not going to remember every single one of them and what worked and didn’t.

It’s useful to have something as simple as just an Excel spreadsheet where you can keep track of all these things. That’ll aid you in filing your taxes every year as well, but it’s also a good place to keep sort of a journal. That is what we’re talking about basically—of what went on and what didn’t, and why it happened.

Rick Karr:

That brings us to the second principle on Randy Frederick’s list. Before you put any money into an investment strategy, or a tip you heard from someone, or a hunch of your own...

Randy Frederick:

Practice with play money, if you want to think of it that way. Make or lose money on paper before you actually put your real money into the market. Just because someone who comes on late night television or someone who wrote a book tells you that he or she has a strategy that’s a surefire win with very little risk that does not mean that it works. And the smartest thing you could ever do is to first do it on paper and do it successfully a number of times. Some strategies that work very well in bull markets will not work at all in bear markets or in sideways markets.

So a lot of times it’s important not to simply have a single success but to have repeated successes. At that point, then you can actually start to put your own hard-earned money to work.

Rick Karr:

The third principle on Randy Frederick’s list is a question investors should ask themselves when they believe the market should be doing one thing, and it’s doing something else.

Randy Frederick:

Is it more important to you to make a profit, or is it more important for you to be right? And those two things are not always going to be in the same direction. If it’s important for you to be right and you don’t mind losing money, then you have to have a lot of patience. Sometimes you may find out that this stock that you were convinced should go down might go down. But it may not do that for 12 or 18 months after the fact. And if you’re in it, that can be very painful.

On the other hand, you may not even have all the information you need to fully understand why a particular stock or a market is trending higher. But if you assume that the collective minds of all the investors out there are driving this stock higher, it’s an easier thing for most investors to be part of that trend and to basically if you want to think of it this way, jump on that upward moving bandwagon than it is to be fighting against it.

Rick Karr:

In your experience, what’s the difference between the people who get these and the people who keep making mistakes? Is it being organized? Is it being willing to make mistakes? Do you notice any sort of difference in the personalities of those people?

Randy Frederick:

I think all of those things play into it. But I would say the single factor that differentiates them is experience. It really comes down to that. If you’ve been an investor long enough to have lived through a couple of bull markets and a couple of bear markets—so, for example, most investors now over the age of, say, 40 have lived through the Internet boom, which happened from the year 1990 to the year 2000 and then the bear market that followed that from 2000 to 2003 and then the financial boom that happened from ’03 all the way up into ’07.

And then the financial crisis from ’07 through early ’09. And then now we’re in the midst of the next bull market, which has now been going on for close to seven years. Once you’ve lived through several full cycles—and a full cycle means a full bull cycle and then a full bear cycle and then you get back to the start of the next bull cycle, that takes several years. That’s typically no less than about 10 years most of the time, sometimes longer. Once you’ve gone through all of those—

Rick Karr:

People forget.

Randy Frederick:

Yes, people forget very quickly. But once you’ve gone through all of those and you’ve seen how things happen you’ve now tested your true risk tolerance, which you can only do during a bear market, then you tend to learn that this is just part of the long-term of investing. That the markets go up, and the markets go down. We can never predict when a bull market or a bear market will end or begin with perfect accuracy.

What we can do with 100% certainty is say that every bull market will eventually end and every bear market will eventually end. What we don’t know is exactly when that will happen. If you want to be an investor and you want to be successful at it, it is a lifelong learning process. And you start when you’re young. And as you get older, the older you get the more you know. And you become a little more conservative, and you’re a little bit more careful and a little less emotional.

Rick Karr:

Randy Frederick, thank you so much for talking with us. I appreciate it.

Randy Frederick:

You’re welcome, Rick. It was my pleasure.

Rick Karr:

Randy Frederick is managing director of trading and derivatives for Charles Schwab. That’s it for this installment of the Insights and Ideas podcast brought to you by Charles Schwab. You can find us on iTunes or at insights.schwab.com. I’m Rick Karr. Thanks for listening.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

(1115-9SWD)

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