I Want to Start Investing in Stocks, but I’m Afraid of Losing Money: Throwback Thursday
Today, we share our answer to the question: I want to start investing in stocks, but I’m afraid of losing money. Would penny stocks be the best place to start?
This is another post in our ongoing Throwback Thursdays Series, where we share blog posts from the past to bring you a ton of value and help you learn faster.
Below is an answer I wrote on Quora about beginning investors investing in penny stocks…
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I hope you enjoy and learn a lot from it too.
Value Investing Journey is dedicated to developing the world’s best value investors. In that vein, I occasionally answer questions related to value investing, finance, learning, mental models, etc., on the crowdsourcing site, Quora. I hope you enjoy the question above and answer below.
Below is an answer I wrote on Quora to the above question. The question and answer are important to how we all learn our craft of value investing so I’ve decided to post it here as well.
If you’d like to follow my other value investing, finance, and other answers on Quora, you can do so here.
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Penny stocks – also known as small, micro, and nano caps – is the worst place a new investor can start. Especially if you’re afraid of losing money.
Yes, by investing in smaller companies you can make more money over time if you know what you’re doing. But if you don’t know what you’re doing the likelihood of losing money is almost 100%.
Why?
Because smaller companies are small for a reason.
Most of the time they’re newer companies. Companies in niche industries. Companies that don’t have competitive advantages. And many are even unprofitable and terrible businesses.
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And I say this as a micro cap loving investor.
I know this because after I gained confidence as an analyst and investor I now concentrate almost exclusively on smaller companies.
After going through several thousand companies I analyzed my data and found I invested in fewer than 0.2% of the companies I came across. Or fewer than 1 out of every 500 companies I research.
This was more than two years ago…
As I’ve continued to improve as an analyst and investor. And continued to improve my investment processes and checklists this number’s gotten lower.
I haven’t analyzed my data since then but I would guess that I now invest in fewer than 1 out of every 1,000 companies I research.
Why so few?
Because of my ultra strict criteria I require before I will even consider investing in a company. I’m an ultra conservative value investor who requires safety from losing money as my number one criteria.
Another reason is a combination of the things I mentioned above… Most small companies are newer businesses. Many of which are terrible companies that shouldn’t be public.
If you don’t know how to spot these things you shouldn’t invest in smaller companies. Are even bigger companies for that matter.
If you’re a new investor and analyst start evaluating and investing in bigger companies first. As you learn, gain knowledge, and improve your processes and analysis you should start dipping into some of the smaller companies. But again, only if you know what you’re doing. And are confident in your abilities.
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I love small companies and their stock – but to start there as an investor is nuts. You’re almost guaranteed to lose money in these kinds of smaller stocks unless you know what you’re doing.
Let me know your thoughts on the above in the comments below.
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