This is quite a common question, especially after a long bull market, where everyone seems to make money in the markets. It is great that people realise that their money can work for them, be compounded, in order to generate a small fortune. However, since few professional money managers can outperform the market consistently over the long term, a newbie on the markets is for sure not going to outperform. Especially not in risk adjusted measures.
I believe there are a few different steps of investing, depending on how much time and energy the investor wants to pour into it. This post will deal with how to clear the first step, and prepare to approach the second step. Each step is blocked by considerable hurdles, and going from zero to one takes time and effort, as does going from one to two. Note that most people just need to clear the first hurdle in order to have a decent financial position.
Step 1
Here is a three point list on how the vast portion of people should invest in stocks:
- Select a low cost global index fund
- Buy it each month or quarter
- Repeat
That’s it. Doing this, over a long period of time, lets you take part in the economic growth of the stock market. Depending on your broker, I bet this is something that can even be fully automated, so you don’t even have to do it manually. Here’s why this very simple strategy works:
- Diversification
- Low fees
- Dollar-cost averaging
- Long time horizon
Step 2
So, after realizing that the most important thing is to spend less than you earn, and investing the difference in an index fund, if you are interested in learning how to invest here are some recommendations.
First of all, consider this list of things to consider:
- Most investors don’t beat the market, especially not on a risk adjusted basis.
- You are up against professionals, dedicating all of their focus on investing and research.
- Understand that a stock is a small piece of a business.
- Understand that business, how are they making money, and where is the money going. How much are they earning on each dollar of sales, will sales grow or decline, will additional capital be needed to fund the growth. These are just some of the questions that should be considered during this phase.
- Understand what you are paying for the business. Use whatever method you like, a multiple of earnings, cash flow, operating earnings, or you could try discounting all future cash flow from the business.
- Decide when you are going to sell. This is equally, if not more, important as knowing the business and the valuation. When do you decide to take the profit, and when do you throw in the towel and cut your losses. This point is incredibly important and incredibly difficult.
If this is something that intrigues you, then I HIGHLY recommend reading Howard Marks book The Most Important Thing. It is probably the best book written about investing, and I can’t recommend it enough. When you are done reading that, I (and Mr Marks) recommend Nassim Talebs book Fooled By Randomness. It is a great book about one of the most important subjects that we as investors have to deal with, Randomness. Apart from being extremely important, it is also widely and grossly misunderstood by most people. These two books are probably a great foundation for any investor.
After that, it is time to start learning, for real. I believe investing is something that can only be learned through hands on experience. The next step is to start investing. Remember the brief list of points above, remember the wisdom of Marks and Taleb, and start digging for stocks. I personally recommend learning how to find investment ideas, maybe from Twitter, from screening, or from simply looking at the world around you. Read the annual reports to learn what the businesses are actually about, what they do, and how much money they earn. Then decide if you think it is trading at a price that is lower than the valuation YOU think is warranted. If it is, then start buying, if not, move on to the next idea.
I also recommend going back to Marks and Taleb. these two books are great for re-reading, and if you like the way Taleb writes then you are lucky. Start digging through the rest of his books in the Incerto-series. Otherwise, I can recommend reading Joel Greenblatt’s books: The Little Book That Beats the Market, and You Can Be a Stock Market Genuis, and Common Stocks and Uncommon Profits by Philip Fisher. I also think Chris Mayers book 100-Baggers is a good read, and it’s quite a quick read. Finally, I do also recommend Benjamin Grahams book The Intelligent Investor, but don’t get the longer annotated version. Even though it was written several decades ago, the core wisdom of Value Investing is just as true now as when Graham wrote the book.
A final word of advice, investing is a process based sport. Meaning that the process is the most important part of investing. Develop a sound process, and your returns should follow. Unsound investing methods can in the short run make money, but in the long run the better investment process wins. It is also based on learning. In order to be a good investor, one has to love learning. Learning about businesses, learning about other investors and their traits and methods, and learning to know yourself and your weaknesses. I suggest writing a personal blog, or Twitter threads as a tool for your own learning. Putting your thoughts down in writing is incredibly powerful for learning, and it is a great source of feedback to publish your ideas publicly. It is also great for going back and looking at your decisions, were you right in your decisions, and in your reasoning? If not, why not?
ValueTeddy 