Sometimes investing can be incredibly simplified using common sense techniques. Applying common sense to your investing usually results with profitable returns too. The reason that using common sense works is that for some unexplainable reason there is a lack of it used in the stock market. As such, you can use common sense to somewhat predict/anticipate future stock market moves.

As I write this article, the stock market has taken an ugly tumble downward in the past few days. Fortunately for me I haven’t had so much as a penny invested in any stocks right now. The reason why I have my portfolio positioned 100% in cash is because I anticipated a poor start to the new year. How was I able to do it? I used common sense. Here’s how it’s done…

Look at the variables, and “become the market”…

Last year ended on a bad note with stock prices falling heavily. Meanwhile, oil prices were rising, concerns of recession and stagflation were becoming more prevalent, and the real estate crisis just kept getting worse. Despite the fact that many stocks were getting lower in price and looking attractive, I had to take a step back and ask myself some common sense questions. Questions like “Why would I want to be buying stocks right now?”, “What reasons do we have to look forward to a strong economy this year?”, and “Are we just delaying the inevitable recession?” ran through my mind.

Eventually the answer became clear that stocks were not the best choice at the moment. I also knew I wasn’t the only one who saw all of these red flags, so I anticipated that “the market” would feel the same way and wouldn’t want to be buying stocks right now. Going back to basic economics, more selling and less buying means lower prices.

That my friends, is common sense investing.

Click image to enlarge

It feels great to have outperformed the market this year. This year ended with my portfolio up 15.78%, while the three major indices (S&P500, Dow Jones, Nasdaq) finished up for the year 4.24%, 7.24%, and 10.73% respectively. However the most significant percentage is the S&P500’s 4.24%, as the S&P500 most accurately depicts the entire stock market’s performance with its broad range of companies listed within it. With that in mind, I beat the market by over 300%!

For the most part I’m not saying this to brag, I just want my readers to see that I am a successful investor and I am capable of outperforming the market. So how did I do it? I was 100% in cash when two stock market corrections occurred in 2007 and I explain how I was able to do this with my article “How to Avoid Stock Market Corrections and Crashes“. Further, I invested with a list of rules to invest by created by myself, and stuck to investing only in stocks with good fundamentals.

My biggest winning stock of the year was Apple, a stock I horribly regret not holding onto longer. I learned this year that if I believe a stock is great but the economy/stock market looks troubled, I should only sell a portion of my shares. I made the mistake of selling all of my Apple shares because I was too worried about a stock market crash.

It’s funny to me when I think back to the first day I opened an account with Ameritrade and bought my first shares of stock. I knew so little about investing, the stock market, and economics at the time. But I couldn’t care less; I was so enthralled by my fascination for the stock market that I ignored all rationale and dove head first into the stock market like a man into a sea of hungry great white sharks. This is the pathetically humorous story of my introduction to the stock market.

How it started…

It started in late 2005 when during a conversation with my girlfriend she mentioned that she owned some shares of Coca-Cola. I remember thinking it was interesting, but didn’t give it much thought and our conversation quickly turned to other subjects (because I’m a random topics kinda guy). After a short period of time though I began thinking about the stock market and it reminded me of an online video game I used to play that had an economy in it. And of course when I played that game I was incredibly diligent at having the best items and most gold, so I quickly learned the ins and outs of that video game’s economy. So with this in mind, I thought it would be amazing to see what it would be like if I applied that passion to the real economy and stock market.

So I went to the Ameritrade’s website and opened up a brokerage account with them and funded it with the bare minimum. I remember thinking how overwhelming everything was. I was switching between tabs and asking things like “What is a market order?”, “What is volume?”, “What should I buy?” as if I had any idea what I was doing. I played around with the web site for about fifteen minutes and somehow concluded that I was ready to buy my first shares.

Want a free a song? My first shares…

I chose the incredibly successful company known as Napster for my first stock purchase. I really can’t remember why I chose Napster; I never used their paid service, and never thought it was anything worthwhile. Nonetheless I felt like a proud owner, joking with my friends that “I own 0.000017% of Napster, want a free song?”. Of course I didn’t even own that small percentage, because I was doing my calculation based on the daily volume instead of the stock’s market capitalization (not understanding the difference).

I had bought about $800 worth of stock, and became incredibly excited when I saw the share price rise a few cents. I didn’t understand the concept of percentages and was only concerned with the immediate dollar value changes. I eventually went on to sell the stock for a gain of nine dollars.

The bottom line…

I can’t believe how naive I once was and how ridiculous my thought process used to be when it came to deciding what companies to invest in. I would sit and think “Which company will come out with the next iPod?” and then go out and invest in stocks like Nike for no real arguable reason. But I can’t say I regret this since it all got me started on my path to investing properly and investing successfully.

You can take some lessons from this story of my start into the stock market if you are a non-investor thinking about getting into it. If you want to dive head first into investing, trading, and the stock market, just remember there is an incredible amount of ideas, concepts, and terminology that you need to learn. In my story alone I didn’t understand

• Volume
• Order types
• Market Capitalization
• Percentages over Dollar values

And that’s all while not investing without any sort of plan or strategy. If I had to do it all again, I would’ve read all those stock market books before I started buying stock, not while I was already buying stock. The only good part of all of this is that I invested with a very small amount of money that I could afford to lose. So even if I lost every cent I wouldn’t be living out on the streets, and would atleast have gotten an education if I failed.

How did you get started?

How did you start out investing or trading in the stock market and what inspired you? I’d love to hear from everyone what got them started and what rookie mistakes they made. Don’t be shy, leave a comment and tell us your story! It can’t be any worse than me buying shares of Napster (I was being sarcastic earlier about it being an incredibly successful company if you didn’t notice).

I’m going to begin posting polls atleast once per month.

This month’s poll asks what you think about 2008’s future.

Bullish means your outlook is positive, Bearish means negative.

How do you feel about the Stock Market for the next year?

• Bullish
• Bearish
• Unsure

View Results

A commonly used phrase throughout the financial media is “the market”. While it seems like “The Market” and “The Stock Market” are the same thing, they actually share little in common and represent two entirely different things. Because of this common misunderstanding, many novice investors often can interpret news incorrectly. So I’m going to clearly define the two and explain the difference.

As an example: A financial news reporter states “We’re seeing prices head higer as the market believes the Federal Reserve will help ease lending issues. On the whole however the Stock Market has experienced some wild volatility as the market has struggled to find direction”.

In this example, the financial news reporter is saying that stock prices are rising because the majority opinion (”the market”) is that the Federal Reserve’s actions will help the Stock Market. In the second sentence, the reporter is stating that the stock market has experienced volatility because the majority opinion (”the market”) continued to switch it’s mind on whether to be positive or negative about the future of the Stock Market.

But why does the majority opinion matter?

The majority opinion matters because it is a collective reflection on whether we want to be buying or selling stocks. This goes back to basic economics; More buyers than sellers will cause prices to go higher, and more sellers than buyers will cause prices to go lower. So the majority opinion matters because it determines which direction stock prices will go.

E-Trade Financial (Ticker: ETFC) is showing their appreciation to their loyal customers by offering one full day of commission free trading on Wednesday Dec 19, 2007. This is coming after E-Trade’s stock price recently plummeted on lending troubles followed by rumors of takeovers or bankruptcy.

Continue Reading…

I can’t get enough of these Stock Market comics. Here’s another comic brought to you by Cyanide and Happiness. Enjoy.

Continue Reading…

If you’re really into the stock market or know someone who is, then you know how hard it is to find good stock market gifts during the holidays. So hopefully I can give you some ideas with some products I really enjoy myself. Here’s my list of stock market gift ideas:

Continue Reading…