Five Tips for Making Good Investment Decisions

Five Tips for Making Good Investment Decisions

by | Nov 7, 2021 | Value investing, Mindset

To become a good stock market investor, you need to practice becoming good at making quick decisions on your own.

If you think about it, investing is all about being able to make decisions.

After all, decision-making is the core of investment if you cut it right down to the bone. You must be able to assess all possible information and make the call to say yes or no to investing in a company.

The ability to make a clear decision without relying on others is what sets successful investors – and people in general – apart from others.

When people come to me with challenges they face in the stock market, their problem is often due to the fact that they have left the decision-making to others.

Maybe they:

  • invested in specific company because someone hyped it up on a podcast.
  • bought shares in company because their neighbor gave them a “good investment tip.”
  • let the bank invest for them and are unhappy with the result. While others have benefited from 12 years of bull market, their fortunes have virtually stalled, and any profit has been eaten up by fees. Well, they left it to the bank to make the decisions.

Why You Shouldn’t Get Stock Tips From Others

A lot of people are looking for stock tips from others.

Don’t do that. You’re looking for someone to make the decision for you.

If you invest in a company because someone else thinks you should, you’ll quickly become nervous and fearful if the stock drops, because you don’t really know what reasoning is behind the decision.

Can you call that person up at 3 a.m. when you can’t sleep and ask them?

When the stock market takes a general dive, those who have invested following a “stock tip” get scared and sell with a loss.

They argue with family about the economy and sleep poorly at night. It affects their whole life. And that’s just plain wrong.

Making independent decisions is the key to success (in investing and all sorts of other areas of life).

Here are five principles for your decisions.

1. Make Decisions Without Asking for Advice

I’ve done it too.

You ask someone else what they think.

Should I go to the party or not?

Should I wear the blue or the red dress?

The next time you feel like asking someone what they think, stop yourself. Make the decision on your own without asking or talking with anyone about it. Instead, check in with yourself. You have the answer inside you.

Think of it as a practice that will benefit you as an investor… and in decision-making in general.

2. Challenge Yourself to Make Brave Decisions

We only have one life.

What do you want to do with your life? Play on the safe side? Or try your hand at new situations?

When I’m faced with a big decision, I try to ask:

“What’s the worst that can happen?”

If we move to Portugal, what is the worst thing that can happen if it’s a bad call?

It will be having to move back home again after a year. But then we tried it.

Just as you clarify the “worst case,” you must also give yourself space to expect the best outcome.

When you do that, you’ll be heading in that direction. The best case will become your target.

3. Make Quick Decisions

Search for the data you need, but once you have the information, you need to be ready to make quick decisions.

With ordinary everyday decisions, you need to know where the party takes place, what time it starts, whether you should be dressed up or not… and when you have the basic information, you decide if you want to go.

When it comes to investments, follow the checklist and get the questions answered, and once they are answered, you’ll make a decision.

As I say: money loves speed.

4. Change Your Mind Slowly

Once you’ve made that decision, stick to it.

Don’t glance towards the exit. Be faithful to your choice.

Only in exceptional cases should you change your mind.

When it comes to investing in stocks, this means that you have to avoid speculating whether you should sell every time you or the market get a little nervous.

Only reconsider if important new facts about the company emerge or if some key event changes the answers to the checklist.

5. Let the Money Go Work Its Magic

When it comes to everyday decisions, put your focus on whether you really want to have it or do it… and not so much on the finances behind it.

Of course, you shouldn’t throw all reason overboard and live beyond your means; Always make sure that your income is higher than your expenses.

But having said that, don’t let the cost or price of something be the deciding factor in your everyday decisions.

When it comes to investing, look at the company’s valuation and compare it with the stock price. But once you’ve done that and decided it’s reasonable and have invested in it, you must let go of the money. Kiss it goodbye, send it into the universe and let it do its thing. In other words, don’t stare at the stock price as it jitters up and down, as stock prices tend to do.

You need to have some faith in the process…and in your own decision-making ability.

Remember, you can download the checklist here and the e-book here.

Why People Keep Investing in Losing Positions and How To Avoid It

Why People Keep Investing in Losing Positions and How To Avoid It

by | Oct 24, 2021 | Value investing

When Warren Buffett was a young man, he went to the horseracing track and bet the earnings from his newspaper routes on a horse.

He lost.

Instead of going home, he put more money on a new race, which he also lost.

The same thing happened again and again.

He kept going until he had lost all his money.

Afterwards, he regretted it. He bought himself an ice cream treat with his last coin and thought about what had just happened.

Why did he bet all his money and lose it?

He had had an encounter with the sunk cost fallacy phenomenon.

He didn’t want to accept that he had lost money on a particular bet, and he tried to win it back.

Betting on the same horse is an illogical move. Each new bet must be seen as an independent decision.

Sometimes we have a hard time letting go of something because we have invested time and money in it.

We have a hard time accepting that the money is gone.

Friendships and Pants

You find sunk cost fallacies in every aspect of life.

The sunk cost fallacy is at play in our relationships.

It’s at play when you stay in a dysfunctional friendship you’ve had since childhood.

It’s when your friend seems jealous of your success and doesn’t cheer for your decisions, and you don’t even laugh together anymore. It’s when a little voice tells you: “Well, we’ve known each other for 15 years – 20 years – 30 years.”

You’ve invested time in that relationship, and you don’t want to accept that it’s a loss that should be cut. You keep showing up for birthdays and couples’ dinners and keep spending your valuable time with a person who brings you down.

Sunk cost fallacy is also at play in your wardrobe.

It’s when you stick with things because of the value they once had. Maybe it’s a pair of pants that no longer fits.

It’s when you clearly remember how much they cost and where you bought them, and you keep the pants (or the bag or the appliance) because you don’t want to acknowledge that the money is gone.

The Loss Accumulates

It could also be that you’ve started a business and have invested time, money, and resources in it.

Maybe you bought an expensive international domain several years back. Every week you pay the cost of keeping the business afloat. Add to that all the time you’ve spent on it.

The weeks, months, and years go by, the loss accumulates, and you’re still not making money on it.

Every week you keep throwing more time and more money at it. It’s becoming harder and harder to let it go.

Why not just bring the project to a close and go for something that you can monetize?

Because you’ve invested in it, and you refuse to give up.

Giving up is waving goodbye to all the expenses, hours, and resources.

As long as it’s still alive, you think there is still some hope of getting the money back.

Sunk cost fallacy is also at play when you’ve invested in a stock that has tumbled.

Maybe you think, “NOW it must have reached the bottom,” and then you might invest even more (just like Warren Buffett at the racetracks).

Did you know that people are more likely to sell a winning position in a sound company than a losing position in a lousy company?

They do so even though the losing position is a bad investment in a company that has a negative net income, and the other position is in a profitable company.

It’s illogical, but that’s how people do it.

How to Avoid It

Warren Buffett learned an important lesson from losing money at the racetracks.

As Warren Buffett puts it: “You don’t have to make it back the way you lost it.”

Remember that statement. It’s so true.

He promised himself that he would never react the same way again, and that is one of the lessons that has made him such a phenomenal investor.

Warren Buffett is good at pulling out of the positions he no longer believes in.

One example is when, at the beginning of the pandemic, he sold all Berkshire Hathaway’s stocks in four different airlines.

So now you know what it is.

How do you avoid falling into the sunk cost fallacy trap? Here are three steps to avoid it:

  1. Let the present facts be your baseline. Look at it as if you’ve never encountered the investment, the pants, or the friend before.
  2. Accept that the past is past. If the money is lost or spent, it’s gone. Whatever the friend did 10 years ago is gone. It’s who he is today that counts.
  3. Assess the future. Are you likely to wear that pair of pants in the future?  Is the business likely to make a profit? Is your friend likely to support you? If you think so, keep the friend, the pants, the stock. Hell, get one more. But if the answer is a no, get out of there.

When you stick to things solely because they’ve cost you time or money, you are undermining your own potential and devastating your future.

Because one thing is for sure.

You won’t get financially free and wealthy by sticking to bad decisions from the past.

Approach all decisions as if the past doesn’t exist, and have the courage to make real changes.

Learn how to assess a company’s potential in my free e-book Free Yourself here.

The Biggest Mistake Many New Value Investors Make

The Biggest Mistake Many New Value Investors Make

by | Oct 17, 2021 | Value investing, Newbie

You have become a dedicated value investor, and now you want to get started at the actual investing.

You have seen the light.

You understand that it’s about buying shares when they are undervalued on the stock market and selling them when they are overvalued (or keeping them).

Congratulations. That’s actually an important milestone.

Maybe the concept seems obvious to you, but for many it’s not that obvious.

A lot of people never get it.

Most people think – and this is the dominant mindset in the market – that stocks always have the “right” price.

Most people believe the market is efficient. They believe that since all (or almost all) information is out there, all data is priced into the stock by the efficient machine called the market. Based on this, the logical conclusion is that whatever price the market decided to place on a stock is the right price.

There’s just one flaw in that line of thinking.

The market is not a perfect machine.

The market is made up of people making tons of decisions, and people are driven by emotions.

It’s about as efficient as a crowd at the town square. One moment throwing rotten eggs and the next moment throwing flowers.

People are driven by all sorts of emotions, including fear and greed, which are the dominant emotions in the stock market.

Prices sometimes fall below a logical level because people get scared out of their wits, and other times prices soar above any logical level because they get caught up in greed and don’t want to miss out.

Not all people get the idea behind value investing.

Warren Buffett said value investing is like buying a dollar for 50 cents. He also said that some people catch the idea right away, while others don’t.

If someone doesn’t get it, you can explain it for days on end, but they will never understand it (according to Warren Buffett).

In other words, you’re one of the chosen who get it – and that’s not something to take for granted.

Be grateful for that.

The Big Value Trap

So what’s the mistake that lots of newbie value investors make?

I believe they haven’t completely let go of the idea that the market is efficient. They basically believe that it’s effective… but that it occasionally slips.

When they see a stock dip, they immediately assume it’s on sale.

You often hear people say something like “stocks are on sale” when the major indices fall 2%. Then they buy left and right without looking into what they’re buying shares in.

But what if the dollar that Warren Buffett talks about has been pumped up by greed for 12 years and has become $10? Is it on sale for $9? Not at all.

Some people use the term “falling knife.”

A falling knife is when stocks in a company are in steep decline but have much longer to fall before they stabilize.

If you try to catch a falling knife, you’ll cut your hand open. It’s a bloody mess.  You have to wait for the knife to hit the floor.

You can also imagine that you’re jumping onto a roller coaster just as it’s twenty inches from the top and twenty feet from the bottom.

This picture is a little less bloody, but it describes the – uncomfortable – feeling in your gut when you buy something that keeps falling.

You can’t count on the rolling coaster going up again… and then it’s money you’ll never get back.

How to Avoid the Trap

So what can you do to avoid these value traps and falling knives?

It’s a bit like the annoying doctor who tells you there is no way around it: you need to exercise and eat vegetables.

No pill can fix it.

Maybe that’s not so bad.

For many of us, exercising and eating fresh vegetables is an enjoyable part of our lifestyle. The same with investing.

What does this mean in stock language?

It means that there is no quick fix where you can just look at a chart on your screen and expect to know that something is cheap because the stock price has fallen.

The first thing you have to figure out is whether it’s broken or not.

You don’t want to invest in something that’s going into chapter 11.

You have to look at the reality of the company. You have to go through a checklist and ask some critical questions so you are sure you’re buying stocks in a healthy company with a good team of managers and strong products that can compete in the market.

Once you’ve figured that out, you can look at the numbers to see what it’s really worth.

It may sound difficult, but it is not.

There are pretty simple calculations that anyone can learn and that are easy enough to do on the back of a napkin.

If you want to learn more about that, download my free e-book here.

Don’t forget to download my e-book Free Yourself where you’ll learn about check list and simple value calculations. You can download it here.

Three Ways to Find Your Next Investment Idea

Three Ways to Find Your Next Investment Idea

by | Oct 3, 2021 | Value investing

How do you pick the companies you want to buy stocks in? How do you even know which companies to look at? Where do you find your inspiration?

These are some of the questions I get asked most frequently.

Here are three ways to find your investments or to get your initial inspiration:

1. Read the Business News

As part of your daily routine, read the news.

You don’t have to read every newspaper from beginning to end, but it’s crucial that you stay up-to-date by skimming the major international and national news media.

You need to at least read the headlines.

When we invest as value investors, we buy stocks that are cheap. This means we often buy shares in companies that are experiencing some kind of headwind.

You can find signs of that headwind in the news.

Let’s say you read about a company that is filing for bankruptcy.

Don’t go directly for the troubled company, but what about researching other companies in the industry?

Stock price crashes have a tendency to spread like wildfire.

When, for example, an airline company files for bankruptcy, there is a high likelihood that many other airline stocks will become depressed. The investor will be worried for a while that there is a general problem.

Ask yourself: which company in this industry is the best? Look at the numbers. Success leaves clues.

Go for that one.

2. Look Around in Your Own Life

Make it a habit to be alert in your life and jot down brands and logos you come across.

Ask your friends why they prefer one brand of dog food over another.

Ask them why they’re flying with just that company or why they’re buying that headset.

Be curious.

Some of the best investments you’ll ever make are companies that you’ll come across as a consumer.

When you start thinking this way – as if the world is full of investments – you will spot wonderful companies everywhere.

When you notice something you want to research later, do something to remember it. You can take pictures with your phone or jot down a note or even set up a reminder.

Do it right away so you don’t forget.

Then you can google the company later on to find out if it’s investable.

How do you actually do that? How do you find out if a company is private or publicly traded?

You google the company name and “stock” or “shares”.

If no share price appears, it’s probably not a company that is listed on the stock exchange.

3. Look at the Fact List

This isn’t a third grade math book, so obviously there is not fact list at the back.

But there’s something even better.

There are websites collecting information about what the top value investors invest in.

One of them is called gurufocus.com. There, you can look up what Warren Buffett, Charlie Munger, Monish Pabrai, and many of the other value investors are investing in.

Warren Buffett began his career by imitating his teacher Benjamin Graham, so there’s no shame in copying the masters.

Stir the Pot

The best thing you can do is to combine the three methods.

You keep an eye on the media and see that a company goes bankrupt.

Then you research the industry and find other companies. You look them up and find out if some of the best gurus are investing in some of them. If you see that a guru has bought shares in one of them, you zoom in on that company.

Of course, you also use experiences in your own life.

Ask your friends whether they use products from the company you’re looking at.

Why do they? Why don’t they?

Next step is to try out their service or product yourself to see what you think.

To learn more about this method of investing in stocks, read my free e-book right here

How Do You Make a Living From Stocks?

How Do You Make a Living From Stocks?

by | Sep 5, 2021 | Investing in stocks, Value investing

How do you actually make a living from stocks?

What are the specific steps? Do you sell the shares?

This is a question many people ask me.

The underlying question here is also: what comprises a return on a stock? Is it just the rise in the stock price?

In this blog post, I will explain the three things that can make up your return.

I’ll also explain how I generate an income so I can pay the bills.

What Makes up a Financial Return from the Stock Market? 

Let’s begin with a definition.

According to Investopedia, a financial return is “the money made or lost on an investment over some period of time.”

Let’s break that down. How can you make money on a stock?

Here are the three factors:

1. Increase in The Stock Price

A financial return on a stock can be an increase in the stock’s market price.

This is probably what most people associate with the word “return” when it comes to stocks.

To make a living this way, you will have to sell, and this will of course reduce your remaining number of shares.

Hopefully, the remaining shares are worth so much more than when you first invested that your total wealth grows even if you sell a small portion of that portfolio.

2. Dividends

When a company makes a profit, they can choose to pay part of the profit to the owners.

As a shareholder, you are one of the owners.

When companies pay out a portion of the profits, that is called a dividend.

The dividend goes into your investment account without you having to sell the paper.

Sounds cool, doesn’t it? You don’t have to sell. You can just lean back and enjoy the ride. 

Then why not just focus on companies that pay a lot in dividends?

There are, in fact, major disadvantages to actively pursuing the so-called dividend kings.

Companies that are growing and have a large market potential ahead of them are too busy reinvesting the profits in new markets, new employees, innovation, and acquisitions. They don’t pay dividends, because that would mean missing out on great growth opportunities in the market.

The major dividend stocks typically consist of very mature companies like the Coca-Colas and Johnson & Johnsons of the world.

If you only invest in the dividend kings, you’ll miss out on great growth opportunities, and your overall return will falter.

The other disadvantage of dividends is that you have to pay tax on them. This handicaps the effect of compounding.

You can read more about the advantages and disadvantages to dividend stocks in this blog post.

3. Share Buybacks

Share buybacks are an alternative to paying dividends.

Instead of giving the money directly to the shareholders, the company may choose to use some of the profit on buying back some of their own shares.

This will cause the price of the stock to rise in the long run, because the cake (the company) will be divided into fewer slices (shares). When the cake is cut into fewer slices, each slice is worth more.

Your piece of the cake, your shares, will therefore be worth more over time if the company makes regular share buybacks.

Warren Buffett loves stock buybacks, and his company Berkshire Hathaway regularly buys back shares.

So what are the benefits of buying shares back in terms of dividends? Why is Warren Buffett so happy about it?

It’s simple.

When you receive dividends, you must pay tax on that amount. You don’t have to pay taxes when the company repurchases stocks (provided, of course, that you don’t sell the share).

This means that share buybacks don’t cripple the effect of compounding. The money can continue to grow exponentially.

But to take advantage of this, you will of course have to sell the stock at some point, and then we’re back to square 1.

You can read more about share buybacks in my blog post here.

How Do I Make a Living From Stocks?

A lot of people ask me how I do it.

Do I sell shares in order to pay the rent? Or do I pick dividend stocks?

The answer is that I do something completely different.

I do a particular kind of options trade that creates an income flow.

I follow the principles of value investing when doing these trades. I look for undervalued companies and analyze them.

The great advantage of my method is that I can live off my shares without having to sell them.

It doesn’t hurt my portfolio and doesn’t set up barriers for compound interest rates.

This is the secret method that I don’t usually talk about in my blog posts because people can get it horribly wrong if they do it uninformed.

Where did I get the inspiration for this method? From Warren Buffett himself.

It’s a public secret that Warren Buffett is one of the biggest stock options traders in the world.

Why is it a secret?

Because he doesn’t talk about options.

One thing is what Warren Buffett does and another is what he recommends his followers do.

He tells his followers to invest in an index fund. But that is pretty far from his own value investing and stock picking style.

Why does Warren Buffett never talk about his options trades?

I believe it’s for the same reason I avoid it.

I’m afraid people will google “options” and do it wrong and lose a lot of money on it. You have to know what you’re doing if you move into options – or you might put a lot of money at risk.

There is only one place where I talk about options, and that is in my courses.

I’ve been teaching this stuff for years in Danish, and more than 150 people have attended my 8-12 week long courses.

This fall I will launch my first course in English.

Make sure you’re on my email list if you want to be invited to my next webinar where I tell you about my upcoming online value investing courses. If you download my e-book, you can say yes to receiving emails.

The Five Most Typical Beginner Mistakes

The Five Most Typical Beginner Mistakes

by | Aug 8, 2021 | Value investing

How do you invest in stocks? What do you invest in specifically?

Many newbies have probably asked a friend or googled these questions.

But there are other questions that are at least as important to ask: What should you NOT do when investing? What should you avoid investing in?

For me personally, investing in stocks has changed my life. I’ve invested myself into financial freedom. It has made it possible for me to move to Portugal with my two young boys.

From where we live, we can walk down to the beach. There is a trail that winds through the dunes and an area with protected wildlife (as you can see in the picture).

We swim, play tennis, sail, and ride horses… a lifestyle that I previously could only daydream about from my apartment in downtown Copenhagen.

Today, I live my dream.

This dream has been possible because I have managed to make a good return on my investment over many years.

It wouldn’t have been possible if I had thrown my money into a few bad investments.

Through my blog and my investing courses, I’m in touch with many private investors. I speak with a lot of people who have jeopardized their savings, and I have recognized some patterns.

In this blog post, I will look at the typical investment mistakes private investors commit.

Mistake 1: They Only Invest in Companies From Their Own Country

There is some geographical blindness when it comes to stock investing.

The typical Danish equity investor can almost only spot Danish companies.

The German investor almost only spots German companies.

If you are from the States, it might be alright only to invest in American companies, but if you live in a country with a smaller size economy, you should consider a greater geographical spread.

Mistake 2: They Invest in Very Risky Companies

Quite a few investors put a big portion of their money into very high-risk companies such as biotech, IT companies, or startups – or even cryptos.

What’s the problem with that?

Most biotech companies don’t have a product on the market yet.

They don’t have an income and they run with a deficit.

What you’re investing in is a hope that they can develop a future medicine. That’s an extremely risky form of investment.

If you take start-ups, the problem is similar. They might have a product on the market, but they probably still run with a deficit.

You can invest in risky business if you really want to, but it should only add up to 5-10% of your total portfolio.

The bulk of your money should be invested in companies with a stable (and growing) revenue and stable (and growing) profits.

Mistake 3: They Have No Reliable Strategy

A lot of people follow investment advice from random TV show or a podcast without being critical or even researching the company.

There are several pitfalls with this way of investing:

  • You risk investing in a company that is a flop. It might go bankrupt.
  • You risk investing in an excellent company, but at the wrong time when the stock is too expensive.
  • Or you risk getting wildly nervous when the stock has natural fluctuations – and selling at the wrong time – because you haven’t researched it yourself.

Mistake 4: They Leave the Investment Decisions to The Bank

Some of the most bitter private investors I talk to are those who have let the bank make the decisions for them.

After a decade or two, it dawns on them that the money isn’t growing, and the only people who are getting rich are the money managers.

They realize – with experience and lost opportunities – what is going on.

Why doesn’t their money grow and benefit from the power of compounding?

Because the bank will almost certainly invest your money in a mixture of their own stock funds and bonds.

What’s the problem with bonds?

This is how bond works: You lend your money to governments or to companies, and you get paid for that. The problem is that in a low interest rate market, that payment is very low.

The second problem with letting the bank invest is the cost.

Maybe you think it’s cheap. Let’s say they charge you 2% to invest your money for you. That doesn’t sound expensive, right? But it is. Because it’s 2% of the entire amount invested. If they manage to make a return of 3% per year and take 2%… well, they are getting fatter than you are.

Mistake 5: They Neglect Investing in Themselves

A lot of private investors buy stocks without really knowing what they are doing.

We send our children to swimming lessons so that they can learn to swim.

We give our children driving lessons so that they can learn to drive safely.

But nowhere do we learn about managing and investing our money. It’s not something we learn about in school, and it’s not something you need a driver’s license for.

To be fair, you won’t drown or kill someone if you throw yourself into it without knowledge or guidance, but you risk smashing your financial future and freedom if you don’t follow some basic traffic rules.

As Warren Buffett says: “the best investment you can make is an investment in yourself.”

Don’t be afraid of enrolling in investment courses. It might be the best investment of your life.

You Are Your Most Important Asset

My life in Portugal wouldn’t have been possible if I had made bad investment decisions.

It wouldn’t have been possible if I had let the bank invest my money for me.

It wouldn’t have been possible if I had bought in greed or sold in panic.

It has only been possible because I have received a stable and good return over years – and that is something I have learned to create.

It’s not luck. It’s based on knowledge.

You can get the first bit of knowledge by reading my book Free Yourself. You can download it here.