The Stock Exchange For Beginners
In my previous message about investing for beginners, I tried to
convey some of the realisations that a new investor needs to
make to help him or her become successful.
This time, I am going to offer a few thoughts on what I believe
helps me to be successful and a few examples of what can and may
go wrong. As ever, I hope that this isn't below your level of
either confidence or competence as I don't wish to insult.
However, I have found that there seem to be far more people that
want to understand finance 'a little better' than there are
people who can lecture on the subject.
Firstly to an example. Back in the mid 90's I joined an
Investment club in the UK. I knew a couple of the members from a
local health club I was a member at. Knowing that I was (a)
keenly interested in investment and (b) more knowledgeable than
most of them, I was invited along.
Suffice to say that on the first evening, I realised that I had
been invited along to do all the work! I enjoyed the work so
that didn't actually bother me. I also could purchase some
additional investment tools 'for the club' which I couldn't
justify for myself.
The main work of analysis was carried out by myself and another
member who is a long-time friend and no mug in the world of
shares and investment himself. We were using as our template a
theory offered by Jim Slater which centred around price /
earnings growth ratios. In short, it was highly successful.
At the end of the first year, we were 'up' by around 80%.
Admittedly, this was during the tech-boom bull and any idiot
could get 30% pa without trouble or effort, but still we were
very impressed. The second year started well too and within 6
months of year two, our small company growth share portfolio
(the only portfolio) was up comfortably over 100%. Nice work if
you can get it.
For those of you that haven't been a member of an investment
club and don't know, they are a democracy. Every opinion counts
equal in a vote to buy or sell, whether they understand
investment - or not. Here was our trouble. If you can believe
it, making an enormous profit was 'boring' and they needed
'excitement'. To me, making money as quickly as we did was not
merely exciting - it was thrilling!! But, when we wanted to sell
they wouldn't and when we offered rock solid buy predictions
they disliked something and again, we wouldn't.
I think our lowest point was not buying shares in a UK pizza
delivery firm (that was growing very quickly and would have
turned into a great investment) because (and I kid you not) one
of the founding members didn't like 'Italian food'. Who cares?
The club ended rather badly with arguments and falling outs.
Several years later it still has a couple of holdings in shares
that might 'one day turn around'. Fat chance!!!!
So here is the tip: why do you want to invest? This needs
analysis.
My friend and I invested because we were willing to put in the
effort, wanted to increase our holdings, make money and frankly,
we like winning in a global market against the nation's smartest
minds!!
Our other members however, were there to gamble. It was just
fun. Who cares about the result? We all meet in a pub, have a
meal, chat about shares and throw some money at the market. We
wanted profits, they wanted a social group.
After being up by over 100% after 18 months, we closed the club
at a loss of both money and friendship. Ridiculous.
What about you? Why do you want to invest? If you want to
gamble, take up sports betting. You get to watch a game as well
as be financially involved - that sounds much better.
Do you plan to follow the market? If you don't, best to keep
away.
I'm not the world's greatest at tracking a market - I can admit
it. Each day, I look at the shares in my portfolio, funds I
advise clients about, prospective investments I am mulling over,
general financial news and read a few posts by other advisers /
analysts online. And yet, if I'm honest, I worry that don't pay
enough time each day to the markets.
If you want to make serious decisions, with serious amounts of
money and (hopefully) make serious amounts of profit, you need
to be - SERIOUS!!!
Personally, I don't like the idea of gambling much. I consider
myself to be either a speculator or an investor, not a gambler.
When I first started investing, I didn't know the difference
(though I started at 18 and had no-one to guide me). That meant
that all my investments were gambles. Mostly, they weren't so
hot.
These days, I assess and analyse much more. I avoid
'turnarounds', since I don't think they turn around too often.
Greater life experience has taught me to recognise that most
companies that need to turn, or might turn, are already dead -
they just don't know it yet.
I also have learned my lesson with 'development' companies. You
know the thing, one great idea that 'if' they get to market will
make 'tens of millions'. I own shares in a couple that I bought
years ago. Broadly, I was right to buy. Of all the development
stocks I could have bought, these actually did develop and do
make products. They just don't make profits yet - years after I
bought.
One of my development picks actually dominates the bluetooth
market. That's right, I invested in the company that developed
much of the bluetooth technology we use today! How could it not
make a bundle of money? Am I a genius or what? Years later, I am
still down 65%.
Another has an amazing fuel saving device for gear boxes in
cars, lorries and off-road vehicles. In this age, you'd think
that fuel saving technology would be all the rage. Over the
years, I have bought more shares in the lows and sold them in
the highs to make some 'trading' profits. But still my initial
investment (I think 8 years ago) is down.
Though I may not have realised it at the time, these were not
investments, they were gambles. So is the stock exchange really
a place for beginners?
An investment is in a company that has products, a defined
market and notable market share, profits, a track record and
much more. Remember that. Think about Warren Buffett - he makes
investments, good ones at that.
I'm also quite traditional about investing. I have never spread
bet, used an option or future or sold short. I don't use
leverage. If I can't figure out what might go wrong, FOR
CERTAIN, I'd rather not do it. I buy, I hold and I sell. That's
it.
I have no doubt that these admissions mean that I miss out on
all sorts of possible investment opportunities. There are all
sorts of weird and wonderful investments out there, but I invest
and I don't like to gamble.
If you think about it though, what I just said doesn't really
hold me back. I own some coins, stamps, comics, unit funds,
shares, books and art - I did mention that I speculate didn't I?
And if the world suddenly has a crisis, it means that I own
actual, physical assets as well as just share certificates.
So that brings me to another point ... can you focus?
Ideally, you need to know quite a lot about certain areas and
use that knowledge for your investment benefit. The art and
books I own are mostly related to cricket. I love cricket and
know a lot about the game and it's history - which means that I
know when I see something of value. If it has value now, it
probably will have for some time to come. Whether I buy at a
good price or not, value and scarcity count.
Who'd imagine ME telling you that the stock market isn't
everything?
Investment risk is lowered by knowledge. Every time. If you are
buying shares on the stock exchange, what does the seller know
that you don't? What do you know that the seller does not? You
can bet your life that the buyer or seller opposite you in any
transaction has done some serious research. If you don't do
yours, who do you think will win? You or the market?
So of all the things that I might have said about investing, I
haven't really made it sound 'sexy' yet. Have I? The truth is,
investing isn't really very sexy. Pop stars are sexy. Carmen
Electra is sexy. Investing is graphs, moving averages, annual
reports, company statements, calculators and work. Not so sexy.
It's kind of like being an accountant but with marginally more
life and a few graphs.
But the great thing about investment is that in the long run,
you decide whether you'll be successful or not. The harder you
work at it, the luckier you will be. If you are just starting
out, think about YOU first, not the market or companies. Decide
on what you want to specialise on, whether the stock market for
beginners is a place to invest and how you will approach it.
It might help to find areas in which you have useful knowledge
already. Either that or decide on an area and slowly become an
expert. What do I mean? Well, if you worked in a bank for 10
years, you must know something about banking. When you read an
annual report from a bank, do you laugh and see through the
waffle or does it make real sense? If you can see through the
waffle of some far off CEO and CFO, you can start to compare the
relative prospects in the same market of competing firms. Hey -
that could be an opportunity!
If you really know about banking, you can compare the product
offerings and service as well as the annual reports. You might
still know some bank staff that are happy to tell you honestly
that they are being 'creamed' in the market or whatever. Before
you know it, you have a picture building of a competitive
market. Before long, you will REALLY understand the investment
potential of several companies. That will put you far ahead of
many other investors.
As I said earlier, investment risk is lowered by knowledge -
EVERY TIME.