How to invest in stocks

How to invest 10,000 dollars

If I had $10,000 of cash sitting on the sidelines and I could afford some risk, I would invest in the stock market. As much as trading shares have been dragged through the mud lately, it is still a great way to make money. It is not as good as direct ownership in your own venture but it is good for disposable income to build your empire and be financially free.

Stocks are a good investment because:

  • Perfectly liquid
  • Little start-up capital needed
  • Easily leveraged to exponentially increase returns or losses
  • Wide range of investment information easily available, public and free
  • Thin spreads and low transaction costs as it is an active competitive market
  • You are not speculating but as a long-term investor participating in the growth of the economy
  • Wide choice and easy diversification
  • Stock trading really is just fun. I do not even thinks is the money as much as the intellectual challenge. You are the captain of your own ship and many people trade from home or on the beach.

My system for investing I write about ad nauseum, often repeating the same things but it works for me and I prefer a simple primer for trading shares than too much noise.  I do not do anything too exotic but it does allow my capital and assets to work for me.

My strategy for investing is like my theory on love. I always wanted nothing too complex and heavy, nor superficial, just someone who makes my heart skip a beat when she come into the room.

It is as follows:

How I Invest in the stock market

  1. Market timing – Use the 12 month moving average on the market as a whole (a broad stock index) to determine if you should invest or not. Market timing does work. This is a statistically proven fact. You significantly amplify your returns. If you want to know how read some more of my posts, I talk about how to market time a lot.
  2. Value investing – Use good quant shop data to narrow the universe of stocks. quantitative investing is will give you the edge that the pros have. This is the center piece for my strategy. You must base your initial screen on science, not day trading hype. This is my biggest point. If you do nothing else right build your foundation on picks from a quantitative model.
  3. Intangible worth – From this universe of stocks, drill-down and select stocks that you personally would buy products from or other feel-good criteria like management team. All investment decisions are management picks.

You can use your own selection criteria, such as low debt to equity ratio and good investment ratios, like P/S (price to sales) or PEG (price to earnings growth), in addition, but hopefully the quantitative investing screen should do that for you. Therefore, your focus in the last test is to focus on intangible value. This is where your value-added comes in and can not be reduced down to some empirical rigid system. Maybe it can but I do not know anything that really measures the intangibles like, do I personally buy the products or management competence.

My dream stock pick based on management – For example, if IKEA was a private company and I could buy the stock I would. I have a very positive experience with the company including corresponding with the President in Sweden. But as with Wriggles Spearmint gum (Warren Buffet’s favorite fantasy pick) the best-run company’s are often privately held and for a reason.

Stock picking tools

Once you determine if you should even be in the market using a stock market prediction analysis with the 12 months moving average, then you need to look at quantitative picks.

I use a lot of the tools on MSN money as they are free. Here is MSN’s free quantitative tool for picking winners.

top stock picks
Use the best quantitative top stocks like this MSN quant shop. Select from the top 10 or to 50.

Me, I only like cream. I do not want watery milk. Narrow your universe with the best of the best and then start your work.

trend analysis
Do a reality check on stocks with trend analysis like Stan Weinstein recommends.

The best thing you can do is research management. Are they a bunch of old guys collecting their money or are they dynamic and risk-taking innovators?

But also consider how the numbers look.

stock trading software
Use Online resources not to listen to rumors but to look at the financial results

Look at the balance sheet on a quarterly basis. Look at the cash flow and how are they investing their cash. Do they stock pile cash because they have no ideas of their own and just hope to purchase some company or is their organization dynamic from the inside and they know how to make use of their own assets?

Unsystematic risk – Strategies to make your stock picks safer

These are really basic ideas and many people forget them or roll their eyes but diversification and dollar-cost averaging really do help.

There’s nothing modern about it. – Harry Markowitz on modern portfolio theory as it is all based on mathematical models.

You do not need to get into market neutral investing etc to make this work. If you are a stock trader at least consider these two ideas.

Diversification – For diversification you need a minimum of 5 stocks and more optimally 16 but as many as 32. If you own more you start to get the same return as the index and might as well just buy and index fund, and spend your time pursuing hobbies than trading shares. I personally like to be on the low number of this range even if it is not enough to diversify away all the ‘unsystematic risk’, or risk inherent in the company. I believe if you choose the right one than you do not need to hold 32 stocks in your portfolio. I often only have 5.

If I own too many stocks I lose focus and cannot stay on top of them as well. Pick the right stocks not a lot.

I only see one move ahead, but it is always the right one – Jose Raul Capablanca – World Chess Champion

Dollar-cost Averaging – If the market is giving you unsure signals you can do sector analysis. Sectors that have nice technical trends, will give you more confidence in a flat market. On the other hand, another way to invest in a flat market is dollar-cost average in. Buy one stock a month until fully invested. Therefore, if the market tanks your investments are at various costs. Everyone wants to put all their money on the table at once, all $10,000 dollars, but I would not even do that at Vegas.

Therefore to invest $10,000 dollars take your time. I tend to buy lots of 100. I know it is very unscientific but I am in the habit since odd-lot purchases in the old days did not get the optimal price.

In conclusion, I challenge anyone to add or subtract from this system. That is trying to poke holes in it. I do not say this out of pride, but rather greed. I am always striving to improve.

My most important tip for investing is let scientists, physicist and mathematicians do the stock-picking for you with their quantitative models, and you do the high-level intangible selection and good fundamental portfolio strategies. Once you feel good about this and make returns over time, try leverage and spike your returns. This way even if you only invest 10,000 dollars you can still get returns like greedy wall street investment banks.

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2 responses to “How to invest in stocks”

  1. David

    You tell that you start buying lots of $100, it means that when you pick the stock then you buy $100? and then when do you buy the next one? every week? until which quantity?

    It will help me a lot as I want to try to invest $10.000 as you tell.

    1. Mark Biernat

      I tend to buy lots of 100 rather than lots of $100. I buy a hundred shares at a time, just for simplicity not any mathematical research method. The basic ideas is to not but all your eggs in one stock or time period and spread it out over time is a good idea. You do not have to use my rule about buying lots of 100 as prices vary but I would recommend not to invest all you money at once.

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