15 Things I wish I knew when I started

Through the years we have heard many stories from clients sharing their insight and pain on what they wish they knew about money and trading when they started. I am going to share some of them with you today. I don’t want you to make the same mistakes, I want you to be successful.

1. Position size.

I know. I know. Some of you are already rolling your eyes because I repeat it so often, but I speak from personal experience as someone who has trained beginners in trading CFD’s and equities successfully. Many beginners don’t know how to determine their position size when trading CFD’s or futures. They don’t know whether they should use a teaspoon, a tablespoon or a shovel. Position size is crucial. A 20% decline of your capital means you will need a return of 25% to be where you started. A 50% decline means you need a 100% return to be where you started. There is also a different calculation that should be used when you determine your position size for long term equities versus short term CFD’s and whether you trade with stop losses or whether you don’t.

2. Weighted average price per share.

Okay, without trying to sound like a mathematician, I want you to know that when you have 200 shares at R10 and you buy another 100 at R5, your new weighted average price will be R8-33 and not R7.50. Why? Because the weight you have added to the position at R10 is more than at R5. This is important to note because it means you can calculate before-hand what the new weighted average price of your holding will be should you add to the position at current levels and if it will really have a material impact on the price. Personally, I only like to add to an equity position when the share is more than 45% in a loss, but we could write a whole stand-alone blog on when to add to futures or CFD’s… maybe I will!

3. Don’t take a stop loss.

I can already hear the heavy breathing of the risk managers and the CA’s and the engineers. CA’s and engineers are some of the most difficult people to train on ALSI trading because “precision” is their middle name and they want to plan everything right down to the last balanced cent. Technical analysis is not an exact science, however, so you must allow for breathing space and deviations. Luckily, there is a trading model where if you trade small enough, you do not have to use a stop loss. This is very popular when trading indices and Frans is a big advocator of this type of trading model. The trader builds a position over time, to benefit from it when the market comes into his/her direction. Patience and discipline are needed to be successful with this model but there are thousands of traders who do it successfully.  

4. Interest on CFD’s.

Charges on brokerage accounts are a massive issue and trust me, if you don’t keep an eye on them, charges can sometimes add up to a significant drain on your profits. The interest charges on a trading account can be material, especially when it is long positions that are held for longer than 3 months. Keep in mind you pay interest on long positions in CFD’s but you receive interest on short positions in a CFD. Why? Because you are ‘renting’ the underlying share, and your broker has to own the script.

5. Online growth scams.

If it sounds too good to be true then it usually is! We have stopped counting how many clients have been caught by scams where people promise to trade for them and guarantee great returns. The first few weeks are usually fantastic and then they encourage you to add to your account. You do so, expecting the winning trend to continue, but when you try to withdraw the funds the trouble begins. You have worked hard for your money. Make sure you place it in safe hands when you trade.

6. Registered FSP’s platforms and not the fly-by-nights.

There is a reason why there are governing bodies to make sure that brokers are adhering to rules and that they are adequately funded. If you use a trading website (they are usually in dollars) that is not a registered FSP in South Africa, you run the risk that they can do a hit and run on you. You can search here to make sure you use a registered FSP https://www.fsca.co.za/Fais/Search_FSP.htm 

7. Brokerage costs.

Like in point four above make sure you look at the charges. Anything more than 30 basis points on CFD accounts is expensive. If you are a short-term trader of equities, consider trading CFD’s if you want to save on your brokerage costs. Make sure you don’t pay the spread when you trade. Make sure your brokerage is a fixed percentage!

8. Technical analysis.

“I wish I learned about technical analysis earlier.” These are words that even prestige fund managers have uttered in our presence. Why? Because a graph tells you the story of the price action of the instrument. When fundamentals are out of the window, look at a graph. Nobody wants to buy a share at its top! Keep in mind that for every buyer there must be a seller, but you don’t want to be the buyer at the top with nowhere exciting to go so that Mr Buffett can sell his share after his 100% profit.  

9. Support and resistance levels are real.

No matter how valuable a company is on paper, if there are not enough buyers that share price won’t rise. Support and resistance levels highlight who has been stronger, the buyers or the sellers. They tell the investor where the buying and selling pressure has been and can go to depending on which side of the line it breaks out from. The support and resistance levels act as the “floor” or “roof” of the share. Do you want to stand on a floor that is cracking underneath you while you are 15 stories up in a skyscraper? I didn’t think so!

10. Taking the easy money.

The power of greed and fear when trading is real. An obsessive 10 000 hours in front of a graph doesn’t necessarily guarantee success or allow you to avoid disappointment. Things can and will go wrong, but we have seen time and time again; it is the small profits that add up. It is the banking of the easy money that makes your account grow. You can’t always have a whole cake and still eat it every day. But if you eat your slice or two (or three!) of cake when they’re plated for you and available, you’ll benefit from the taste, but feel less overwhelmed when you don’t overindulge. Either way, it’s enough to know the result will stay the same, slices versus the whole cake, you will gain weight. You want to take the easy profits and soon your account will gain weight. In trading forget the idea that you must buy at the very bottom and sell at the very top: it’s a lovely rich chocolate cake if you can get it, but it’s a myth in your head that you should get rid of.  

11. Saving from a young age.

We have heard terrible stories of people spending their money when they were young and not having enough in their old age to retire. With health issues and a lack of energy at 55, it is a hard life if you still have to struggle to make a living. The power of compound interest is hugely understated. If you start investing R100 per month at the age of 19 with a fixed return of 8% per annum you will have R571k when you turn 65.  If you start investing R100 per month at the age of 30 with a fixed 8% per annum you will have R224k when you turn 65. 11 years can have a R346k impact on your future well-being and quality of life at the age of 65, for just a R100 per month. It should make you think the next time you want to buy that takeaway.

12. A will for your loved ones.

When you die you won’t have a say on who takes what or gets what, but you want to make life easier for your loved ones who stay behind in an already difficult time of grief. Without a will your loved ones who stay behind will be left in the dark regarding your debt and assets. A proper will and testament will make their lives so much easier. Show you care, draw up a will.

   13. TFSA account

The government only started TFSA accounts in South Africa in 2015. This is a type of account where all capital gains, dividends and interest are tax free. There is a maximum per annum and a maximum per lifetime for the account, but all profits are tax free! Particularly, if you are young, then you HAVE TO invest in this account because not a lot of things in this world are free, so take advantage when and where you can. And best of all is? You can choose the ETF’s that you want to invest in.  

14. I wish I had saved 3-6 months of monthly expenses in an account in case of emergencies.

Covid19 has taught us all, once again, anything can happen. When you have 3-6 months of living expenses saved up in a separate account, any unforeseen retrenchments, sicknesses or emergencies can be taken care off. One less thing to worry about when you face a winter season in your life. Start small but build that account up until you have 3-6 months of living expenses in a separate account. Separate so that you can’t or aren’t tempted to touch it. I know many of us have itchy fingers and we want to scratch where we shouldn’t; perhaps you think that keeping it in your account and doing the math in your head will allow your budget to miraculously balance out? Nope. You don’t run with your slippers on do you? Slippers are for inside the house, relaxing. You run with tekkies. So keep things separated.

15. I wish I had disability and life insurance.

Insurance is never necessary until it is. Accidents are an unfortunate fact of life. They happen unexpectedly and unintentionally, but happen they do, typically resulting in damage or injury. When an accident causes you to lose your job and as a result, your income, you will wish that you had proper insurance. If you have debt, life insurance is critical for your loved ones who stay behind. When you are young this type of insurance is usually very cheap but can make such a difference in the case of an accident. 

I want you to succeed in your money matters. I want you to make wise decisions and build wealth. I want your money to work for you. I want you to be able to retire comfortably when you are ready.

So take to heart the mistakes others have made and make sure you don’t make them in your own turn.

Till next time