Choosing an Investment Style

Hi everyone! I wanted to do a post for people who are very new to investing in the stock market and might not know where to begin. This post assumes that you've already set up a brokerage account, put some money into it, and you're ready to invest. If you haven't done that, start here.

Once you are ready to invest, you need to decide which style of investing you're going to focus on. Here are some questions you should ask yourself:

• Do I want to be an investor or a trader?
• Investors invest. Traders trade.
• If you plan on buying stock in companies that you believe are undervalued and holding it for 5, 10, 15 or more years, looking for steady gains over the long term, you're an investor. Warren Buffett is an investor. He uses a "buy and hold" strategy that involves analyzing a company's financial situation, their management, macroeconomic factors that affect their market, their products, etc., and seeking out companies with a stock price that doesn't make sense given how profitable the company is.
• If you plan on buying and selling stock quickly, holding your stocks for only a few months, a few days, or even a few hours or minutes, you're a trader. This is by far the most profitable investment strategy in the short term, but it's also the most risky. I don't personally recommend it for beginners, because without understanding how the market works at a fundamental level you will never be a successful trader. Most people that do understand how the market works are still not successful traders because their emotions get in the way. 
• You can mix and match. Personally, I use both of these strategies. Primarily, I am a high-frequency trader, but I have another portfolio which contains stock in companies that I believe are undervalued or show promising potential for long term gain.
• How attached am I to my money?
• Remember that with any style of investing, it is possible to lose your entire investment. Even the most careful investors and the most aggressive traders will suffer losses from time to time. They key is to manage your risk. A good test to see if you've got the chops to be an investor is to take ask yourself if you would be able to handle seeing your checking account's value drop significantly for no explicable reason in a matter of days. If you could handle that, you can be an investor. If you want to know if you could be a trader, ask yourself if you'd be willing to throw $500 in the toilet and flush it. If not, trading is not for you. If you can't handle either of these things, you're better off getting yourself a financial planner or a professional money manager and planning on working until you're actually the legal retirement age. Sorry, but that's the way it is. You've got to have brass balls in this game, and you have to pay to play. At the same time, the most profitable investors are almost always those who hate losing money because they are great risk managers.
•  Am I more interested in business or numbers?
• If you're a business person and you think you'll enjoy owning part of a company that you completely understand, you're going to want to stick to fundamental analysis. This means that in order to decide whether to buy a stock or not, you'll focus on the company itself. You'll want to understand how much debt it has, how much money it makes, who its customers are, what products it makes or what services it provides, whether or not you think the products or services are useful, its relationships with its competitors and partners, and more. Your goal as a fundamental analyst is to become one with the stock. Warren Buffet is a fundamental analyst. He once stated that the reason he has been so successful in his investment endeavors is that he never invests in something he doesn't understand. If you follow his strategy, maybe you'll end up like him someday (ahem, he's a multi-billionaire by the way). 
• If you're a numbers person, you'll love technical analysis. While this strategy is generally used more often by traders than investors, many investors couple technical analysis with fundamental analysis to find the perfect buy price for a stock, and the perfect sell price. Technical analysts are the people who can look at a chart like the one below and tell you what everything means, and why it's there, and what's likely to happen to the stock in the future, without knowing anything at all about what the company does. In my opinion, technical analysis is much more exciting because it's very fast paced, high-pressure, and full of fascinating phenomena.
• Again, you can combine these strategies. I do. For long-term investments, I carefully analyze all the aspects of the company itself, and after I've purchased the stock I use technical analysis to watch for warning signs that it might be time to sell part of the position or buy more at a better price. There are also times when I will look for a specific chart pattern for a short term trade, and combine it with something like an earnings release date. Those kinds of alignments can be hugely profitable. I have seen people buy a stock based on a chart pattern and double their money in less than an hour because the company released better-than-expected earnings on the same day.

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• What are my goals?
• Know your goals. If your goal is to be financially independent, this is a great way to  reach your goal. If your goal is to take a ton of risk and become a gazillionaire by next Tuesday, go to the casino. No matter what you do, investing is not something to be taken lightly. It's easy, sure, but it requires dedication and a thorough understanding of what you're doing. After all, this is real money you're playing with. If you lose it, there is no reset button. There is no edit > undo. Know your goals and focus on them. If you need help deciding what your goals are, just ask yourself "Why do I want to invest?" The answer to that question will be your goal and will tell you whether or not it's right for you. 

Knowing which kind of investment strategy you prefer (investor vs. trader, fundamental vs. technical analysis), your risk tolerance, and your investment goals are three major decisions you need to make as you get started. Note that I did not say you need to make these decisions before you get started. I didn't know what my goals were when I first started. I just knew that I wanted to know what investing was all about, and how I could learn to control my own future and not have to depend on someone else writing me a paycheck for the rest of my life. I also transformed from a fundamental analyst to a technical analyst over time. You don't need to know all this stuff right now. You only need to think about it and be interested and dedicated enough to discover the answers as you move forward. As you advance, you will likely agree this is really a fascinating and completely new world within the one you're used to.