Have you ever said to yourself that you need to start investing? Or, perhaps you tried it in the past and it didn’t work out for you. Schools aren’t teaching what they should about how to invest. This is changing to some degree, but still has a long way to go.
We also get caught up with all the high-flying investing stories that make our greed meters flip out. Media coverage about rich billionaires leaves us wondering what we are doing wrong. This adulation with these investors makes us go about investing in all the wrong ways.
Let’s start off with a basic tenet of investing to set expectations. Investing is hard. Now, this website is dedicated to making life easier for those learning these skills. But, there is no getting around it takes work to succeed.
You will find plenty of charlatans who will be more than happy to sell you “systems” that claim to make investing easy. I can tell you from first-hand experience that this is impossible. I worked for a bank during the heart of the toxic mortgage fiasco. In fact, I worked for a group that dealt directly with packaging these toxic mortgages. They hired high-paid Quants to come up with models with hundreds of combinations. The idea behind these models is to try to find the probability of failure with a bunch of variables combined. We all know how this worked out for them. It became a crisis of epic proportions. We are still recovering from it to this day
Just take a look at the all the indicators at FinViz.com (great site, by the way.) At the time of this writing, there were 63 indicators in the stock screen (choose the All tab when you visit). These screeners can filter out stocks based on the criteria given. But, it won’t account for a company who is cooking their books. This takes knowing getting down-and-dirty with the financial statements and reading through the footnotes, etc. There is never a substitute for this.
I am not against automated systems, by the way. You should use screeners to give you a good starting selection. But, these screeners should not be used to make any trade decisions. It’s too early at that stage. You need to get to know those companies as if you were going to run them yourselves. Imagine that you are given the title of CEO of each company you are considering investing in. Wouldn’t you need to learn about how those companies are doing and what they are all about?
You should also be aware of the limitations of automated systems. If they fail and you trade based on the system, should you blame the system and use that as an excuse? Sure, if the system is not working you should eventually abandon it. But, the ultimate responsibility for your portfolio rests with you. Period.
First, you have to learn how to sift through the noise and figure what is useful. If you get nothing else from this article, learn how to read financial statements. I will be including plenty of resources for you to get a solid footing on this topic, as well as many others.
The management of your potential companies writes about how they are doing and what their plans are in their annual report. It’s always worth it to read through this. You may have noticed the financial spin doctors make a big deal whenever Berkshire Hathaway releases its annual reports. Investors flock to see Warren Buffett and Charlie Munger speak about their results.
Don’t Have the Time?
Most people complain that they don’t have time to sift through pages and pages of annual reports. I get that. We all lead busy lives. If that truly is the case, you have no business investing directly in stocks. If you take ownership of a company, then you are responsible for knowing what that company is all about. There is no substitute for this.
There is help for people who truly feel that don’t have time to put in the work. You could invest in mutual funds. Now, there are hundreds (maybe thousands) of these. How do you know which ones to pick? If nothing else, choose an S&P fund. Most money managers over the long run, have a difficult time beating. So, the natural conclusion to this is if you can’t beat them, join them. Vanguard has an S&P fund. Set up automatic investing, and forget about it until you’re ready to retire.
Another option is to subscribe to a few financial newsletters that cater to your investing style. Here too, there are plenty to choose from which makes it more difficult to figure out the right ones. What I would suggest is to try a few out. Most offer a trial period which can help you
Financial Markets Education provides resources to help investors learn more about financial markets and investing. Where I find resources that already exist to help, I will point you in the right direction. When I find information that does not cover a topic well, I will seek out others. If I can’t find it, I will create it (or have someone else do it).
Investing is hard. But, you can learn it and get better at it, if you are willing to put forth the effort. It can be quite rewarding when you become more proficient. You will start recognizing what is hype and what constitutes solid, well-run companies. When you get to that point, you can take comfort in knowing that you did all that you could to determine the right companies to own.
Performing due diligence with your investments won’t prevent mishaps from happening with the companies you choose to own. You do what you can, but occasionally, these mishaps will find their way into your portfolio. It’s the cost of doing business with investing. Sometimes, those mishaps can be short-term blips, while others, they can be a death-knell for the company. Make a decision about those companies and move on. You cannot dwell on what’s happened.
One thing is certain, someone who takes ownership of companies without taking the time to learn about them, will have those mishaps occur more frequently in their portfolios. It is worth it to learn about business ownership.
How to Get Started
If you are waiting on the sidelines for the perfect time to buy, you will be waiting until you are retired and have no money. There will never be a perfect time to enter the market. The perfect time is when you get in. There will be better times than others. The trouble is knowing when they occur. The top investors in the world, don’t wait to get in. They know being invested is better than waiting.
If you are skittish about buying stocks as a beginner, then by all means, learn about mutual funds and ETF’s. Set up automated deposit into your brokerage account (you do have one of those, don’t you?) Also, if your company offers a 401K with matching amounts of money, you are crazy not to get involved. They are giving your free money that is deferred tax. It just doesn’t get better than that. Even if you have them withhold a small sum of $25, you will be amazed at how quickly this adds up. Don’t miss out on this golden opportunity.
The best aspect of starting this way is you can still learn about becoming a business owner. As you learn more, you can build up shares of your stocks. If you become proficient, you can switch some or all of your funds to individual stocks.
Bear in mind, that some people try to learn about the investing process and discover they are not cut out for it. Those people stick with fund investing and never look back. This is the purpose of these types of investments, i.e., to allow others to manage it for you. Your time is freed up to do whatever you please.
You should be aware that funds are not risk-free. This is why you still need to learn about how to choose the right ones. If you are struggling with this, you should consider seeking the advice of a professional financial planner.
I have no doubt that anyone is capable of learning about how to evaluate companies. It’s not easy, but it’s also not impossible. Like anything else, it gets much easier the more you do it. Who knows? You may uncover a hidden talent where you can be the next Warren Buffett!