Section 2.1

Stock Fundamentals

Before you can invest in the stock market, you need to know how the market works, and you need to know a lot about the individual stocks you want to buy.  Some people say that they don’t invest in the stock market because it is like gambling.  If you don’t know what’s going on, then it is gambling.  If you do understand what is going on (you do your homework), you are becoming a businessperson when you buy a stock, not a gambler.  Still, the risks are such that I recommend against investing in individual stocks for your primary retirement account.  Most employer-sponsored retirement plans will not let you invest in individual stocks, so this should not be too much of a temptation anyway. (ETFs are usually also prohibited, which I disagree with strongly).

If you have a personal IRA on the side, you will only want to consider individual stocks if you are young and fearless.  If you need the money later in life or you know you will lose sleep at night if the market turns south, don’t put yourself through it.  If you have an inquisitive personality and love a challenge, then consider it.  For the cost of a weekend in Vegas, you can open a trade account.  If you are cautious, you can trade on that and learn volumes without spending another dime.  You cannot say that about the casino!

I am very fond of having a discretionary portfolio that isn’t tax sheltered.  That money can be set aside for a dream vacation if you are successful, and you will not be devastated if you don’t do very well.  There is no better way to understand how the markets work than to have money in the markets.  I’ve found that account to be an extremely valuable educational tool, and I’ve learned many, many things not to do in my retirement account that really matters.

I’ve made day trades, swing trades, hedged some trades, chased some penny stocks, and even sold a few iron condors and generally had a lot of fun.  At the end of it all, I am still in the game, and I have learned a lot.  I still haven’t taken that dream vacation.  I haven’t made that much profit yet, although I think I may have sent TD Ameritrade stock up a point or two with commissions.

My experience is that you win a few and you lose a few, but you can’t retire like that.  You need something more substantial than whims and experiments to really make money.  Keep your mad money and your retirement account separated.  Your mad money is whatever you want it to be; for me, it’s an educational tool and a VIP pass to the world’s greatest casino.  (I do plan to get serious and start making some money with it soon; you will have to read about that project in the forthcoming third book in this series).  Note that I do not do experimental things or take risky bets in my retirement account (which is why it has done really well, unlike the mad money account).

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