Starting Your Journey in Investment/Trading
I have more people coming and asking me about investing so I thought I’d write a quick introductory post on what I’ve learned for someone at the very beginning of their investing journey. I’m not an expert by any means, but I’ve learned a lot on my journey into trading. As a forewarning, I do position myself as a trader, not an investor, but I’m starting to make more hedges so this is advice to myself as much as it is to you. Get other perspectives. I highly recommend Wealthion as a good starting point.
There are a few things I want to share, before we begin. And I will stress to you: this is not financial advice. You should never take anyone’s advice at face value and you should always do your own research and take your own positions. You could follow Michael Burry (see the movie: The Big Short – it’s about him). He looks like a genius. He made millions shorting the housing market in the 2012 crash. But he has been wrong more than he is right. He’s short on crypto. I think his points are interesting but not quite a complete picture. So following anyone’s advice, ideas or opinions will only put you in the hole. You need a solid foundation of analytical skills to be able to successfully play short term moves and market trends like he does, so you need to build your own stance and perspectives, and use others’ ideas to enforce and challenge your own perspectives until you hone in on something that works for you. You need to know your level of risk. How long you’re willing to wait. What your goals are. Write it down, and stick to it.
This article will discuss some terminology to get you started, and then 3 main topics: the primary investment strategies, the 3 pillars of successful investing, and a recommended approach for picking holdings.
There are a few terms here I’ll highlight to give some context on the vocabulary incase you’re very new to all of this. Some of this is stock specific, some crypto, but it’s all good to understand:
- Stablecoin: A stablecoin is a type of crypto asset backed by something that is not volatile such as a US Dollar or an ounce of gold. USDT and USDC are the two primary stable-coins today. There are reserves of dollars held or borrowed for each unit, so they are backed by an actual dollar at all times. Lack of regulation threatens the stability of these assets so watch this space with care and caution. Gensler calls these the “pokerchips” of the wild west crypto casino. When crypto assets move up or down, these assets always stay still relative to the dollar and aren’t exposed to the volatility of the crypto market. So long as there is confidence in the companies and mechanisms that back them.
- Exchange (centralized): A market place where assets are bought and sold. Some examples are the New York Stock Exchange (NYSE), Toronto Stock Exchange (TSX), Binance, Kraken, and Coinbase. These marketplaces have their OWN pricing, and operate independently of other exchanges. So you may see Google listed on NYSE and TSX, but having different prices. All exchanges exist independently.
- Exchange (decentralized) aka Dex: these are not owned by a single party and are built on a decentralized network similar to (most) crypto assets. These have the advantage of trust, but are generally harder to use and trade on profitably compared to an exchange like Binance.
- Volume: How much trading is actually happening with an asset on an exchange. A small exchange like Kraken will have significantly less volume than a high volume exchange like Binance. Some assets that aren’t well known will have very little volume, and it changes how price reacts, and how reliably patterns form.
- Trading Pair: All assets are traded in pairs. If you’re buying bitcoin, you have to buy it with something. Are you buying it with USD or Tether(USDT)? Are you buying it with XRP? All marketplaces have trading pairs. If you don’t see a pair in the ticker (eg on NYSE or TSX) assume it’s the native currency. This can be confusing to people coming to crypto as many exchanges will let you buy BTC with fiat but not other assets, so you may need to make trades into and out of USDT or BTC. Generally you’ll see tickers on exchanges listed as trading pairs (eg BTCUSDT or BTCETH.)
- Index: A figure representing many other things rolled into one number. S&P (SPX ticker), TSX S&P (TSX ticker – Toronto Stock eXchange) are two major indices representing a broad picture of the US and Canadian stock market across 500 bluechip companies in many different industries. These indices mentioned are intended to give a broad view of the market in a single number. You cannot trade these directly, but you can trade their value in “ETFs.”
- ETF: Exchange Traded Fund. A financial vehicle traded on an exchange like any stock, except it represents something else. Gold is traded as an ETF – you don’t buy and sell physical gold, but there is gold somewhere “backing” the ETF you are trading. It may be an index such as an S&P ETF that represents 500 companies across industries. It may be an asset backed by crypto such as the Greyscale Bitcoin Trust that allows stock markets to gain exposure to cryptocurrency.
- Derivative: An indirect asset or contract tied to the action of an item in a market. Options and Futures are derivatives. Don’t use these if you’re starting out – you can go bankrupt fast.
- Leverage/Margin: A loan covered by assets used to trade at a multiplier. Margin accounts are required for derivatives usually. This is a very high risk mechanism and you will loose all of your money if you leave leveraged trades in, I promise you.
- Utility: A usefulness of an asset. Bitcoin has no utility – you can’t do anything with it. It’s just a store of value, and only has value because people believe in it. Ether is used as a kind of “gas” for applications that run ontop of the Ethereum block chain so it has a use apart from being a store of value. XRP, as another example, is used in cross border and remittance payments, so it has utility. Assets with utility that are in use have a more certain future than those that lack utility, as it ensures demand for those assets will continue. Something like SAFEMOON, by contrast has no utility, and once people loose confidence in the project, it has a risk of going to $0 value very quickly. BTC is probably the only safe bet for non-utility crypto assets today.
- Coin vs Token: Coin describes a fundamental crypto asset like ETH. ETH is a coin or crypto-currenty. A token is an asset that runs on top of another chain. USDT operates on top of ETH and represents something else, so it is a token. NFTs operate on top of blockchains so they are another example of a token. The term token is sort of “representing something else” – think of token cards in magic, or a figurine in a table top game. It’s a token/symbol representing an actual character.
- Market Participant: Anyone “playing the game” – anyone in the market buying and selling or holding assets. There are a few ways to categorize participants: Retail Investor means an individual who is not working in finance and generally has a small investment. Shrimp is someone who has a small investment in the market. Institutional Investors are people in industry who often have a lot of buying and selling power. A Whale is someone who has a lot of buying and selling power. The important thing to know about these categories is that Institutional Investors and Whales can move the market, they will trick you and try to steal your money through manipulation of your emotions (fear and greed.) Shrimp, when there are a lot of them, will provide a stable and dependable movement in the market. When people are scared, whales move the market. When people are greedy, shrimp move the market. So this is the “weather” more or less. If you want to trade on shorter timeframes, it’s important to know what the weather is like.
- Taking Profit: Something new investors are horrible at doing. Taking profit is a term used to describe the sale of an asset on positive price movement. Often people will believe the asset will go up forever on a massive price surge (eg the S&P is historically high, everyone believes the market is infallible, absolute confidence that the fed will make it work for them forever) and will fail to sell assets at the market top, and watch all of their value bleed over the coming years wondering why they didn’t sell.
- FOMO: Fear of missing out. When housing market is at an all time high, people “FOMO” into the market thinking they’re missing their opportunity to get in and profit before it becomes unaffordable. Typically if you’re buying on FOMO you’re holding the bad when the market drops.
- Fundamentals: The use of information about the underlying company or technology you are investing in to choose where to invest. This is more important than technical analysis for long term trading. Pick something that will be there in 5 years and you’ll win. (Assets with utility, stocks in companies that will continue to grow.)
- Technical Analysis (TA): The use of patterns in price movement over time, based on historical data, to predict price action in order to determine buy and sell locations. You can’t really predict the price, but you can trade price action based on how patterns form and then resolve, with a high level of correlation. With proper risk management, you can confidently enter trades, loose most of them, and still make money using TA alone even trading an asset you know nothing about.
This section is probably not what you think it will be. But it’s, non-the-less, very important to start here. There are three major categories of market participant:
- Investor: Long term. The safest approach, the least likely to get “fleeced.” If you’re starting out, I strongly advise you to choose this approach and don’t ask questions. The investor puts money into a market and leaves it there long term (eg years) with the belief that the asset will increase in value relative to the cash used to buy it. At some point, some or all of the asset can be sold (taking profit.) Set it and forget it. Weather the ups and downs, knowing over time things will go up. Housing markets and stock markets are good examples of markets that have historically been safe to invest in and weather any big downturns. The only thing you don’t want to do as this type of investor is buy at the most euphoric moment in history. Don’t set records for house price on the street. Don’t buy when everyone is pounding their chest saying they own bitcoin. Fourth mortgages increased by 7% in Canada this year. This is an example of people buying the euphoria.
- Swing Trader: Mid term. Markets go through fairly reliable changes in sentiment over time and on all timeframes (minutes, hours, days, months, years.) A swing trader looks for signals that the market trend is changing on a time scale (generally longer time frames – months or years) and they will buy at the bottom of a trend (go long), and then sell at the top of a trend (go short.)
- Day Trader: The highest risk stance on investment is the day trader. This is someone who opens positions and closes them in the same day. These short term investors are obsessive analysts who watch the markets constantly, often trading full time either professionally, or independently.
If you’re starting out, the safest thing to do is to set it and forget it. Don’t even look. If you try to start day trading, your emotions will trick you into making bad choices. Look away. Pick your stance, and stick to it, don’t start selling on a crash if you wrote “5 years” down in your plan! And please, make sure you write down that plan and refer to it before you do anything stupid.
If you want to day trade, expect to loose everything you put it a couple times before you can make money.
3 Pillars of Investing
There are a few things you need to be aware of before you take your live ammo, put it in the chamber, and carry that gun around.
- Technical Analysis: You need to be able to understand market trends by reading charts, at least enough to know what the top and the bottom might look like. This informs your level of risk.
- Risk Management: You need to understand how to manage your level of risk. If you’re trading short term, you need to cut bad trades early. You need to evaluate the entry point, potential profit, and point at which you cut. If you’re holding long term, you just need to make sure your entry is sane and that you’re not FOMOing in on market euphoria to a bubble about to burst (eg housing, stock).
- Psychology: You need to understand that your emotions trick you into doing the opposite of what you should do. If things crash and people are scared, your instinct is to sell, and if things are going sky high, your instinct is to buy them. You need to understand that this is exactly the opposite of what you should be doing. If things are crashing, these are the times to hold and acquire more, not to sell, or you’re giving up your value. If you can catch it with good risk management, you won’t be in in the first place. If things are boosting up to the moon it’s so tempting to think it’ll go up forever. This is when you should be selling and not entering any more. It will not go up forever, and if you buy at a historic price, you’re getting robbed. If you bought a house in the last few months, you haven’t learned this quite yet, but in the next year or two I bet it’ll sink in… You enter a position, you see it go down? You see the market move down? Your new mantra is “aggressive patience.” Just wait it out. It won’t go to 0. If it’s crashing, you’re too late to sell. If it’s booming, you’re too late to buy. Wait for the right opportunity to come up again to buy or sell.
If you’re investing, the only thing you need to be concerned with is: don’t buy things at historic prices in markets that are euphoric (or if you do, understand the risk at least!). Just look at the chart. See the S&P chart below.
Recommended Approach for Holdings
As a beginning investor, it can be hard to understand what to hold. In 2021/2022, I’ll give you a few ideas:
- Diversify. We have the risk of inflation, supply chain shortages, covid, rampant and pervasive debt, rising interest rates that threaten to bring the whole thing down. Investing everything in stock or crypto today is foolhardy. The only thing worse would be holding cash as the money supply explodes in a way we’ve never seen before (see m0 below). Some blend of commodities (gold is cheap) and crypto is a good start. Crypto may crash. Gold probably not. Market will crash. Land is a good hold, real assets. Don’t buy them at historic prices but they’re the best assets for what’s ahead.
- Hold some cash or USDC if you expect a crash. If you’re investing in crypto, keep a portion of your holdings in USDC (safer than USDT.) 20-30%.
- Average in. Slowly accumulate positions over time rather than all at once. This helps you average the price. If it’s going up, you’re still gaining. If it’s going down, you’re buying on sale.
- Hold mostly safe assets, and a small assortment of high risk assets. BTC, ETH and ADA move less than something smaller like DOT. High risk moonshots should account for a very small piece of your holdings.
As a starting recommendation, you may want to hold a basket like so:
- BTC/ETH/ADA 40% – Major players, long term stability/growth.
- DOT/KSM/SOL/EGLD 30% – Safe large cap alts.
- 5% – Small cap alts/moonshots. Things like COTI or MVR that have a long term play in the ecosystem.
- 25% – Stablecoin (USDC) – be ready to buy the dip if there is a major correction. This is an important position as crypto is highly volatile in the short term, but low risk over time (historically.) BTC is the best performing asset of 2010-2020 and that will likely continue. China is trying to kill it. The US will try to kill it. But the network will just re-configure. Crypto isn’t going anywhere. Be ready to buy the fear.
Don’t think you need to put a lot of money in all at once if you’re not sitting on a pile ofcash. Think of it as a savings account. Put $200 in a month, not $2000 in once a year. This is a life long adventure.
Whatever you do from here, be willing to loose it all and remember: AGGRESSIVE PATIENCE. Selling or buying on emotion is the best way to make terrible mistakes. Just try to leave it alone. If you want to be a day trader, expect to loose every last dollar you put in a few times and take a couple years of struggle before you can turn a dollar. 95% of people that enter the markets leave in a loss and never return.