I am in the process of putting together a beginners guide to the stock market for a new website I am working on and I thought I might let you have a look too. I hope that the few articles I write (I’m planning three) won’t be too insulting to you, dear reader, but hopefully they may contain a nugget of use too.
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Before I start, I ought to point out that these won’t be like any other pages ‘for beginners’ that you have ever seen. Here’s why …
I have been fascinated by investments since I was in my teens. Most teenagers read the sports pages, I read the financial pages. I bought my first shares aged 18. Into adulthood and I became a financial adviser at the grand old age of 24. I have sat and passed numerous financial exams and several investment specific professional qualifications.
I have read dozens of books about stock picking, economics, finance, politics, business, marketing, investment gurus and their autobiographies. In short, I am now past 30 and have spent the better part of my thinking life interested in investments.
I have been involved in a UK based share club and did much of the club’s analysis. Aged 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 graphs. Still, to this day, I read about investment markets for perhaps 10 to 15 hours each week.
Again, back in my early 20’s, I used to assist a close friend, alas now departed, with his investment holdings and decisions – his portfolio had over 100 UK holdings and he was worth several million pounds.
The point I am getting to here is a simple one. No matter how much you study and work, the investment markets are huge and have so many variations that no one person will ever master them all.
I have friends and clients that work as economists, and really don’t understand investments. I have friends that work in Investment banking that categorically do not understand investments.
In fact, as far as I can tell, investment bankers are about the last people on earth that you would want to take investment advice from. They usually have an MBA and a good degree and are very smart people, but generally, the only bit of the financial world that they understand is the area in which they work or have worked in previously.
They can analyse the water industry or whatever specialisation it is that they do, but ask them what they would buy if they were to invest their own money now and they have no clue. I can think of a couple I have met whose deep insight into money management goes as far as ‘I put it in the bank’.
Geez! And these guys are the smart ones! Heaven help us all!
I could have asked a car mechanic, hairdresser or bricklayer and received better financial advice than that.
So, here’s the rub … There are very few people on earth that can accurately predict which way the stock market or any other investment is going to behave in the short, medium or long term. Very few people indeed. I don’t claim to be one of them.
The few people that can do this, charge a fortune for their advice or do not actually give any advice, they operate for themselves only. This makes some sense. Do Warren Buffett or George Soros offer advice to individuals? No they do not, not at any price.
The people that do have the kind of grasp over market movements that I am writing of usually belong to the ‘technical’ school of thought. This means that they follow a price, moving averages, indicators, market action in a rather mechanical way, but the art comes in how they interpret those charts!
I don’t have a number for this, what I am about to say next is pure speculation, but as wild as it will seem, I would not be surprised if it is actually correct. I imagine that of all the hundreds of millions of people worldwide that own shares and follow markets, there a probably only a few thousand that are competent and skilled at technical analysis. That is, a few thousand on earth.
It is such a difficult, time consuming skill to master, which once mastered will take hours each and every day to pour over charts and graphs that the individual must let it dominate his or her life. Mathematics and number analysis will become key components of daily life.
For the rest of us, life is just too short to spend it looking at 100 graphs and indicators each day. I know for sure that my time here is too limited for that.
Fear not, I am no technical expert and this report will not have much to say about this branch of financial analysis.
So what I am saying is that it is very, very difficult to manage money successfully over the medium to long term. Heck, even a chimp throwing darts at a page of the Financial Times or Wall Street Journal will have some success, but will that success last long?
I have worked with quite a number of financial or investment advisers over the years. I would guess at over 100 by now. That may not sound like a huge number, but each one probably had between 80 and 150 regular clients. Between them then, these advisers were helping maybe 15,000 families to plan their finances.
Advising in the region of 15,000 families about money is a pretty serious responsibility. In truth, helping just one family is quite a responsibility. Trust me on that.
The vast majority of these advisers specialised in mortgages and the financial aspects of house buying. That is very understandable since most housing markets have a reliable turnover of property and therefore, a reliable source of business and income for the adviser.
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Yet, all those advisers needed to be able to sit and pass annual exams relating to investments and on the odd occasion provide advice on the subject. I don’t think that I am being harsh in saying that only 2 of the advisers could give investment advice competently.
In short, if you want good quality, competent investment advice, you need to do one of two things. Either be lucky and have an adviser that really is skilled in the subject or get out your chequebook and pay for quality.
Please don’t misunderstand me. I’m not trying to be mean about these fellow professionals. I am simply trying to make one very direct point: there is so much investment information out there that one person can never ‘know it all’. In fact, it’s really close to impossible to know a lot.
Firstly, I believe, we should start with a realisation.
The stock exchange is rarely a place where anyone ‘gets rich quick’. Offhand, I don’t know where anyone does that, but certainly not in investments. Sure, some occassional stocks and shares will rise quickly making their owners money, but rarely will you become rich. Bear in mind that if an investment doubles in one year (which is pretty rare) you needed to be already wealthy to make a lot of money. If you invested a thousand, you will have just ‘made’ a thousand. You aren’t wealthy or rich yet.
Second realisation is this … It isn’t easy. If everyone could become a billionaire by investing, Warren Buffett would not be famous. It takes time, study and effort and most importantly – independent thought. Not everyone has the will or stamina to carry that through. I know that mine wavers from time to time. Who doesn’t suffer setbacks and confidence knocks?
Thirdly, though it may be a ‘hobby’, it isn’t ‘fun’. The world of investment is dominated by investment banks and their bankers. They do all the big deals, float companies, issue bonds, trade stocks, bonds, currencies and commodities and make lots of money. They employ some of the world’s brightest young MBA’s to figure out new and improved profit making ventures. They do all this because it is a business, with real money and real profits. Nobody is playing around.
If you want to be successful, you too need to view it as a business. Here is tip number one: if you are interested, go and do some reading about Benjamin Graham. Buy his books and digest. It will take a while, but it is the proper place to start. It was Ben Graham that first coined the idea successful investment is businesslike.
All that said, the little guy can still make money investing. I know, I do. I’m not rich and I don’t make a fortune, but it all helps. Why can’t you do something similar? Big funds find it hard to invest in small companies, maybe that offers you an edge. Often, money managers are so busy working their 15 hour days that they miss wider discoveries in society. Just by going to the mall or supermarket, you might spot lines selling well and get a head start on the analysts. If that approach sounds good, you might like to grab a book by Peter Lynch – he offers guidance on how he finds winners, or as he puts it ‘tenbaggers’.
If you really want to do well in investment on the stock exchange, then you need to approach it as if it were your own business. A part-time business perhaps, but still a business. That also means taking your information sources seriously. There are many portfolio tracking systems online, some free and others require monthly payment – get registered to one! There are magazines that follow and report on stock markets and shares each week – subscribe to one!
If initially, you just start reading and trying to understand what the heck those guys are on about … you will make progress. It is better than investing blindly.
A stock exchange, for beginners can be a daunting way to make a second income. Fear not, with time, you can