I’m in the process of putting together a beginner’s guide to the stock market for a new website I’m working on and thought I’d let you take a look too. I hope the few articles I do write (I’m planning three) won’t be too insulting to you, dear reader, but I hope they also contain a useful nugget.
Before we begin, I should point out that these will not be like any other ‘beginner’ page you have seen. This is why…
Investing has fascinated me since I was a teenager. Most teenagers read the sports pages, I read the financial pages. I bought my first shares when I was 18 years old. I reached adulthood and became a financial advisor at the grand age of 24. I have taken and passed numerous financial exams and several investment-specific professional qualifications.
I have read dozens of books on stock picking, economics, finance, politics, business, marketing, investment gurus and their autobiographies. In short, I am now in my 30s and have spent most of my life thinking about investments.
I was involved in a UK based stock club and did much of the club analysis. At the age of 23/24, I was involved in managing a portfolio of close to £100,000. I have read hundreds of company reports, annual and interim. I have also looked at hundreds if not thousands of charts. Still, to this day, I read about the investment markets for maybe 10 to 15 hours each week.
Back in his early 20s he used to help a close friend, sadly now gone, with his investments and decisions – his portfolio held over 100 UK holdings and was worth several million pounds.
The point I am getting to here is simple. No matter how hard you study and work, the investment markets are huge and have so many variations that no one person will be able to master them all.
I have friends and clients who work as economists and don’t really understand investing. I have friends who work in investment banking who categorically don’t understand investing.
In fact, as far as I can tell, investment bankers are the last people on earth you’d want investment advice from. They usually have an MBA and a good degree and are very intelligent people, but in general, the only thing they understand about the financial world is the area in which they work or have worked before.
They can discuss the water industry or whatever specialization they do, but ask them what they would buy if they had to invest their own money right now and they have no idea. I can think of a couple I’ve met whose deep understanding of money management goes as far as “I put it in the bank.”
Caramba! And these guys are the smart ones! Heaven help us all!
You could have asked an auto mechanic, a barber or a bricklayer and received better financial advice than that.
So here’s the problem… There are very few people on earth who can accurately predict how the stock market or any other investment will behave in the short, medium or long term. In fact, very few people. I don’t claim to be one of them.
The few people who can do this, charge a fortune for their advice or don’t actually give any advice at all, are operating only for themselves. This makes some sense. Do Warren Buffett or George Soros Offer People Advice? No they don’t, not at any price.
People who have the kind of understanding of market movements that I am writing about generally belong to the ‘technical’ school of thought. This means that they follow a price, moving averages, indicators, market action in a pretty mechanical way, but the art is in how they interpret those charts!
I don’t have a number for this, what I’m going to say next is pure speculation, but as far-fetched as it sounds, I wouldn’t be surprised if it’s actually correct. I imagine that of all the hundreds of millions of people around the world who own stocks and follow the markets, probably only a few thousand are competent and skilled at technical analysis. That is, a few thousand on earth.
It is such a difficult and time consuming skill to master and once mastered it will take hours every day to pour out charts and graphs that the individual must let dominate their life. Math and numerical analysis will become key components of daily life.
For the rest of us, life is too short to spend looking at 100 charts and indicators every day. I know for a fact that my time here is too limited for that.
Fear not, I am not a technical expert and this report will not have much to say about this branch of financial analysis.
So what I’m saying is that it’s very, very difficult to manage money successfully in the medium to long term. Heck, even a chimpanzee throwing darts at a page in the Financial Times or the Wall Street Journal will have some success, but will that success last long?
I have worked with a number of financial or investment advisors over the years. I’d say over 100 by now. It may not seem like a large number, but each probably had between 80 and 150 regular customers. Between them then, these advisers were helping some 15,000 families plan their finances.
Advising the region of 15,000 families about money is a pretty serious responsibility. In truth, helping a single family is quite a responsibility. Trust me on that.
The vast majority of these advisors specialized in mortgages and the financial aspects of home buying. That is very understandable as most real estate markets have a reliable turnover of properties and therefore a reliable source of business and income for the advisor.
However, all such advisers had to be able to sit for and pass annual investment-related exams and, on occasion, provide advice on the subject. I don’t think I’m being harsh in saying that only 2 of the advisors could competently give investment advice.
In short, if you want good quality, competent investment advice, you need to do one of two things. Either get lucky and have an advisor who really is an expert on the subject or take out the checkbook and pay for quality.
Please do not get me wrong. I’m not trying to be mean to these fellow professionals. I am simply trying to make a very direct point: there is so much investment information out there that one person can never ‘know it all’. In fact, it is almost impossible to know much.
First of all, I think we should start with a realization.
The stock market is rarely a “get rich quick” place. Offhand I don’t know where anyone does that, but certainly not in investments. Sure, some occasional stocks will go up quickly making their owners money, but you will rarely get rich. Keep in mind that if an investment doubles in a year (which is quite rare), you have to be rich to make a lot of money. If you invest a thousand, you just ‘made’ a thousand. You are not rich or wealthy yet.
The second realization is this… It’s not easy. If everyone could become a billionaire by investing, Warren Buffett wouldn’t be famous. It takes time, study, and effort, and most importantly, independent thinking. Not everyone has the will or the stamina to go through with it. I know mine falters from time to time. Who does not suffer setbacks and blows of confidence?
Third, although it may be a ‘hobby’, it is not ‘fun’. The investment world is dominated by investment banks and their bankers. They make all the big deals, float companies, issue bonds, trade stocks, bonds, currencies and commodities and make a lot of money. They employ some of the brightest young MBAs in the world to discover new and better profitable companies. They do all of this because it’s a business, with real money and real profits. Nobody is playing.
If you want to be successful, you must also see it as a business. This is tip number one: if you’re interested, go and read a little about Benjamin Graham. Buy the books from him and digest. It will take a while, but it is the right place to start. Ben Graham was the first to coin the idea that successful investing is entrepreneurial.
All that said, the little guy can still make money by investing. I know what I do. I’m not rich and I don’t make a fortune, but every little bit helps. Why can’t you do something similar? Big funds find it hard to invest in small companies, maybe that gives you an advantage. Money managers are often so busy working their 15-hour days that broader discoveries in society are lost. Just by going to the mall or supermarket, you can spot lines that are selling well and get a head start on analysts. If that approach sounds good, perhaps you’d like to read a book by Peter Lynch: he offers guidance on how to find winners or, as he puts it, ‘tenbaggers’.
If you really want to do well in stock investing, then you should approach it like your own business. Maybe a part-time business, but it’s still a business. That also means taking your sources of information seriously. There are many online portfolio tracking systems, some free and some that require a monthly payment. Sign up for one! There are magazines that follow and report on the stock markets and shares every week. Subscribe to one!
If initially, you just start reading and try to understand what the hell those guys are talking about… you’ll make progress. It is better than investing blindly.
A stock market, for beginners, can be a daunting way to earn a second income. Fear not, over time, you can learn the skills. But, I warn you again that it takes effort, independent thinking and study to do it really well.
For more information on this topic, you can find me at www.StockExchangeSecrets.com