The Stock Market for Beginners

I’m in the process of putting together a beginner’s guide to the stock market for a new website that I’m working on and I thought I might let you check it out too. I hope the few articles I write (I am planning three) are not too insulting to you, dear reader, but I hope they also contain a nugget of usefulness.

Before we begin, I should point out that these will not be like any other “beginner’s” page I’ve ever seen. This is why …

I have been fascinated by investing since I was a teenager. Most teens read the sports pages, I read the finance pages. I bought my first shares at 18 years old. In adulthood and became a financial advisor at the great 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 thinking life interested in investing.

I have been involved in a UK based stock club and did a lot of the club analysis. At 23/24, I was involved in managing a portfolio 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 about 10-15 hours a week.

Again, when he was in his early 20s, he used to help a close friend, sadly now deceased, with his holdings and investment decisions – his portfolio had over 100 holdings in the UK and was worth several million pounds.

The point I’m going to get to here is straightforward. No matter how hard you study and work, investment markets are huge and have so many variations that no one will dominate them all.

I have friends and clients who work as economists and they don’t really understand investing. I have friends who work in investment banking who categorically do not understand investing.

In fact, as far as I know, 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 smart people, but in general, the only thing they understand about the financial world is the area in which they work or in which they have previously worked.

They can analyze the water industry or whatever specialization they do, but ask them what they would buy if they invested their own money now and they have no idea. I can think of a couple I have 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! May heaven help us all!

You could have asked a mechanic, barber, or bricklayer and got better financial advice than that.

So here’s the rub … 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, they only trade for themselves. This makes sense. Does Warren Buffett or George Soros offer advice to people? No, they don’t, not at any cost.

People who have the kind of understanding of market movements that I am writing about usually 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 comes 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 may sound, I wouldn’t be surprised if it’s actually correct. I imagine that of 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 in technical analysis. That is, a few thousand on earth.

It is such a difficult and time-consuming skill to master, that once mastered it will take hours every day to pour onto charts and graphs that the individual must let dominate their life. Mathematics 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’m sure 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 am saying is that it is very, very difficult to manage money successfully in the medium and long term. Hell, even a chimp that throws 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 various financial or investment advisers over the years. I suppose now there will be more than 100. It may not seem like a large number, but they probably each had between 80 and 150 regulars. Between them, then, these advisers were helping some 15,000 families plan their finances.

Advising the 15,000 families in the region about money is a pretty serious responsibility. The truth is that helping a single family is a great responsibility. Trust me on that.

The vast majority of these advisers specialized in mortgages and the financial aspects of buying a home. That is very understandable as most real estate markets have reliable property billing and therefore a reliable source of business and income for the advisor.

However, all such advisers should be able to sit and pass annual investment-related examinations and, on rare occasions, provide advice on the subject. I don’t think I’m being harsh in saying that only 2 of the advisers could competently give investment advice.

In short, if you want good quality and competent investment advice, you must do one of two things. Either get lucky and have an advisor who’s really an expert on the subject or pull out your checkbook and pay for quality.

Please do not get me wrong. I’m not trying to be mean to these fellow professionals. I’m just trying to make a very direct point: there is so much information about investing that a person can never “know it all.” In fact, it is almost impossible to know much.

First of all, I think we should start by realizing it.

The stock market is rarely a place where someone “gets rich quick.” At first glance, I don’t know where someone does that, but certainly not in investing. Sure, some stocks and occasional stocks will rise 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 must be rich to make a lot of money. If you invested a thousand, you just “earned” a thousand. You are not rich or rich yet.

The second understanding is this … It is not 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 thinking. Not everyone has the will or the stamina to do it. I know mine wavers from time to time. Who does not suffer setbacks and confidence blows?

Third, although it may be a “hobby”, it is not “fun.” The investment world is dominated by investment banks and their bankers. They do all the big deals, they float companies, they issue bonds, they trade stocks, bonds, currencies and commodities and they make a lot of money. They employ some of the world’s brightest young MBAs to discover new and improved for-profit companies. They do all this because it is 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. Here’s tip number one: If you’re interested, go ahead and read a bit about Benjamin Graham. Buy your books 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 one can still make money investing. I know what I do. I’m not rich and I don’t make a fortune, but everything helps. Why can’t you do something similar? It is difficult for large funds to invest in small companies, perhaps that gives you an advantage. Money managers are often so busy working their 15 hours a day 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 an edge over analysts. If that approach sounds good, you might like to pick up a book by Peter Lynch: it offers guidance on how to find winners, or as he puts it, “tenbaggers.”

If you really want to make a good investment in the stock market, then you need to approach it as 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 require a monthly payment. Sign up for one! There are magazines that follow and report on the stock markets and stocks every week – subscribe to one!

If you initially start reading and trying to understand what the hell those guys are talking about … you will progress. It is better than investing blindly.

A stock exchange, 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 really get it right.

For more information on this topic, you can find me at www.StockExchangeSecrets.com