Seasoned investors know there are ways a trade can go wrong for you - that's why thorough research and tight investing discipline are so important.
But, the truth is, there's only one surefire way to lose your shirt, only one move that's absolutely, positively guaranteed to cost you money.
And it's a shockingly easy play to make. In fact, as of 2014, more than 52% of Americans have made this fatal trading mistake.
They didn't see it coming, and, even worse, plenty of these folks thought they were actually playing it safe.
But there's good news: this trap is as easy to avoid as it is to fall into. And once you avoid it, you'll never have to worry about it again...
The First Trade You'll Ever Make
That's right. The biggest mistake you can make is to not be invested at all.
Plenty of novice investors, like the one we'll hear from in a moment, are unsure of how to get started investing.
Take "K" here, for instance. K asked:
"Everyone has opinions - bear/bull market, don't buy bonds, sell and take your profits, buy XYZ stock... For a beginner, how do you figure out the best way to start investing?"
That's a great question, because it speaks to the heart of the matter. How do you do it? Getting started is extremely important - and we do it all the time.
You get started every time you make a trade, every time you pick an investment. So, you should treat every position you take like you're starting over.
There are almost innumerable ways to trade and invest and more how-to books and websites than any individual can count. And there's a lot of great advice out there in the information-overloaded world.
However, there's no single starting point that encompasses a universal truth from which you can launch headlong into the investing game and be successful.
The Universal Truth of Investing
It's true, there is a single universal truth from which to launch yourself. And even better, that truth, if you employ it above all others, will make you successful.
Here it is:
There is no "figure out the best way" strategy. There is only the position, putting on the trade, getting into it.
Make no mistake. All "investments" start out as a trade. It doesn't matter if you're putting on a stock trade, a bond trade, or a commodity trade - it's a trade.
There are only two directions the trade can go in: in your favor or against you.
Now, I'm going to digress here for a moment, and then come back to what you should invest in and when.
Do This and You Can Trade Anything
Personally, I can trade anything. I have traded stocks, bonds, commodities, currencies, packaged products, options, forwards, futures and derivatives - all quite successfully. I'm not an expert in everything I have traded, by any stretch of the imagination. But I have made money trading everything.
How? Because it's a trade; I'm either going to be right and make money or be wrong and lose money. And for me, not doing a trade is itself a trading decision.
The game is all about making money, nothing else. It's not about being an expert. It's not gambling either. It's simple. Do you know enough about where your trade may go to make money?
It's not about over-analysis, nor is it about jumping in on a guess. Making money in the market, any market, is about what you know, or think you know. That's why I can trade just about anything, be comfortable, and, far more often than not, make money. I trade on things I understand - not that I'm an expert in.
If I'm wrong, I get out. If I'm right, I stay in the trade. And sometimes I stay in for a long time, which makes it an investment holding.
So, how do you do it?
Obviously, start with something you know something about or are interested in enough to keep tabs on. Then you buy some shares. Then you manage the trade. You have to be in it to win it.
A Novice Investor's Story
Here's a real-world example. A young lady at a TV studio where I was appearing asked me the exact same question. And I gave her the same advice - along with some more that I'll give you below. She understood she had to make a trade to be in the game and asked me what she should start with.
I asked her to tell me what she was interested in. She liked fashion. I said pick a fashion stock. She didn't hesitate.
She blurted out, "I really love Michael Kors clothes." I said, "Then start with Michael Kors."
And she did. She didn't hesitate. She did some homework on the stock, Michael Kors Holdings Ltd. (NYSE: KORS) and the company, and she jumped in. The following week she told me she bought a few shares at $80.
She was happy when they were at $100. I asked her if she had followed my other "trade management" advice, and she said she hadn't. She was going to keep the stock because she was up so much.
She ended up selling it back down where she got in - actually a little lower.
Now, here's the advice you need. Make a decision to get into a trade because you believe (there's no such thing as "knowing") you understand the company, what it does, how it does it, how it makes money and whom its competitors are. Buy a few shares if you think they are going up. That's how you start.
Take a Deep Breath and Manage Your Trade
You could buy a tech company, you could buy an industrial company, a fashion company, an ETF based on oil, or corn, or a basket of financial stocks. The only thing that matters is that you think you understand what might happen. Then there's trade management.
You'll never panic when you put on a trade if you know how much money you'll be comfortable losing.
Don't lose more than you can laugh at. It's not a laughing matter, but if you lose a little and chalk it up to a learning experience (and you better figure out your lesson on every losing and winning trade), then you can keep trading. The more comfortable you are with understanding how much you can lose and be comfortable actually losing that, the more you will actually make.
Before you put on the trade, have a trade management plan. If it goes down a certain amount, get out and figure out what happened. Why did the stock go down? Was it something the company did? Something a competitor did? Did a falling market drag it down? What happened?
It is not important that you lost on that trade. What's important is that you understand why the stock went down.
Losing is not about you losing money (though it is in a secondary way). It is about you understanding why the stock or exchange-traded fund (ETF) or commodity went down.
If you understand, then you're not a loser. You've won by learning something, by gaining more experience, by understanding.
That's everything. Understanding makes you comfortable. It's power. It gives you power to believe it is you who will make money; it is you who controls your destiny.
Trade management is about knowing where you'll get out if you start losing on the position. And it's about what you do when you're making money.
There are many fun and profitable ways to manage the winning side of trades.
We'll get to them in due course.
This has worked worked for me for 33 years. I'm never afraid. I love to trade.
I hate to lose. But when I do, I always study what happened - I try to understand.
After all is said and done, trading and investing isn't complicated. Wall Street just wants you to think it is so you go running to them for advice - so they can soak you.
You can trade and invest and make a ton of money. It really isn't rocket science
It's mostly basic common sense, understanding who you are, and trusting yourself.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.