If you’re new to investing, then you might profit from beginner’s luck.
That explained my first stock market success.
After Volkswagen’s emissions scandal, its shares tanked. I did no research. I simply asked, “Will VW still be here in 5 years?” and bet £500 that it would.
Within a year or so, those shares doubled to a thousand.
But that’s not the big story.
It was years before I repeated this investing success – with many lessons to learn.
First, I didn’t even use a Stocks and Shares ISA
This meant I had to report the capital gains.
And to the core of my being, I hate paying taxes. Every last penny is painful.
Unless you enjoy taxes, you should use a Stocks and Shares ISA. Think of it as a tax-free shopping basket. You can add up to £20,000 a year. Pay zero taxes on dividends and capital gains.
That’s lesson one.
However, beginner’s luck can also lead to a much bigger pitfall
You might believe you’re smarter than you really are.
There’s a saying on Wall Street: “Don’t confuse brains with a bull market.”
Sometimes the tide just happens to be rising, and so follows all the boats.
It happened to me during the cannabis bubble.
My “pot stocks” skyrocketed well over 100%…
…only to get smoked 80-90%.
Paper gains can evaporate like steam from a kettle.
It’s easy to be seduced by stocks with sexy stories. And it’s tempting to buy ludicrously expensive shares in the hopes of them becoming more expensive. But if you invest this way, you’re taking a big risk.
What’s more, your emotions may stop you making prudent decisions.
After the cannabis carnage, I knew I had to separate emotion from investing.
I wrote a ground rule in my journal, and have stuck with it ever since.
I only buy shares which I think are undervalued and could profit from a big upcoming trend.
When you set yourself rules like this, you divorce your decisions from emotion.
Yes, you might miss some opportunities, but you’ll also avoid dreadful mistakes.
Looking for undervalued companies is invariably a good rule
You can sometimes buy a company for little more than the cash on its balance sheet.
Other times, you can buy at a discount to book value. You might get £1 of assets for every 90p, 75p, or 50p you invest.
You’ll often find these shares in the unloved sectors. So ask yourself…
What might be the next upcoming trend?
You can, for example, make a strong case for uranium.
Ever since the Fukushima disaster, uranium has plummeted. Investors loathe it.
However, this tide might now be turning. India and China are expanding their nuclear plants. Low uranium prices have restricted supplies.
Meanwhile, utility companies buy their uranium on long-term contracts. Many renewals are now coming due.
It’s why commodities expert Rick Rule says: “Either uranium prices go up, or the lights go out.”
He argues a similar case for oil: “Greta notwithstanding.”
And it’s difficult nowadays to bet against precious metals.
Despite what many think, Rishi Sunak doesn’t have a “magic money tree.” His deficit spending is funded by the Bank of England’s printing press.
Look, whatever your politics, you have to ask: What’s the value of your pounds, when someone else can print billions more for free?
I buy gold, because central banks can’t print it. And I buy gold mining shares, because when gold rises, mining margins explode.
This brings me to how I doubled £2,000 in 2 months
You see, it’s all about conviction.
How much do you really believe in your holdings?
That single question could make all the difference to your investing success.
During the “Covid Crash” my investments fell harder than the average index. I was down thousands in a single morning. When this happens, holding your shares is difficult. You are, after all, being quite cheeky.
You’re basically saying: “I know better than the entire market. I think everyone else is wrong.”
Thankfully, I’d studied the gold market inside-out.
I only wish I had more than £2,000 set aside. I added to my Barrick Gold shares. Within days, prices rebounded. Within weeks, gold was at new record highs.
Then came news that Warren Buffett had invested.
Again, Barrick’s share price surged.
But don’t buy Barrick just because Warren Buffett did
And don’t buy anything just because it “doubled in 2 months.”
Whatever you buy, you must believe in it yourself.
Do you have something that’s undervalued and primed for a big upcoming trend?
If your answer is “Yes,” you’ll have the guts to hold through a crisis. You may even decide to double down.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.