I have been active on the stock market since 1985, and during all that time I have gone through all the ups and downs of the economy. I have probably made all the mistakes – but over time my investing in stocks has always paid off. I have used stocks to buy a family home and to finance early retirement. Over the last months a few people, especially ‘juniors’ have asked how to start investing. Instead of having to repeat my personal ideas over and over, I summarize them in this short and (hopefully) easily digestible blogpost. Feedback highly appreciated.
What are the basic elements that you will need to consider as a newbie investor?
- You will need to open a brokerage account. There are many, many options available. I think you will need to consider two parameters: the scope of what it delivers to you versus the cost of the account. Some brokerage accounts are free, and even every transaction is free (or at least very cheap); whereas other brokers ask for a high yearly fee and the fees for buying and selling stocks is expensive too. Think about this: free brokers will focus on scale, so you may get less personal help (e.g. no news letters, no support hotline etc etc). Expensive brokers may provide more support, but at some point you may start to wonder where all your fees end up. Lazy as I am, I have chosen the simple way. My bank is very virtuous as it is a (non-for profit) cooperative bank, and I decided to use its broker service too. This turned out to be a good choice, as it is a middle way between the two options described above.
- Your brokerage account is live, and you can start to buy and sell stocks. But before you start spending your money, you will need to fine-tune the reason WHY you are investing. You should define what type of investor you are. Do you want to… (1) Use stock investment as an alternative to a savings account? (2) Retire at 40? (3) Experience the thrill of the market? (4) Steadily increase your wealth? (5) Build a house or buy a car? If you pick #3 from the list, you may be a day-trader kind of person (I am not, so I can‘t help you much with that strategy. Day-trading is a profession in itself). If you pick #1 or #4, you may be a value investor. If you select #2 or #5, you may be looking for tenbagger stocks that provide very strong returns within a well-defined time horizon. In any case: it is important that you define your personal strategy and wishes.
- Before you buy any stocks, it is better to save some money, personally I would say 500€/$ would be a minimal amount. The main reasons are (1) buying stocks may cost a transaction fee, e.g. 10€/$ per order. (2) you will need some money as a buffer for your daily life. Always critically compare any debt that you have with your invest in stocks. It doesn’t make sense to have a credit card debt costing you 10-20% per year and at the same time earn 10-20% (or less!) through stocks. I always lived by the golden rule that debts are like lice: you want to get rid of them, pronto. It’s only when the tide goes out that you discover who’s been swimming naked: if an economic crisis occurs you may quickly end up in dire straights! I only invest “extra money”, money that I do not depend on.
- So where are you going to put that initial sum? There are two approaches for your first (or actually any) investment: (1) get advice from someone who is knowledgeable about stocks. This could be a clever aunt whose been active in the market for 50+ years, a cousin, your banker, a taxi-driver, a guy in a bar or even your spouse. Or (2) educate yourself about the best stocks to pick. I would wager that (1) NEVER works out, for the simple reason that it is easy for any individual to give advice about OTHER people’s money, in this case YOUR money. Don’t trust any of these people, as their interests may be completely opposite to your personal interests (that man at the bank gets a commission for the funds that he sells to you; he doesn’t care one iota whether it makes you money). Thus, strategy 2 is the one you want to follow. Investing is a constant learning process, you will want to understand the difference between an ETF and actively managed funds and trusts, you will want to know what Earnings-Per-Share EPS means and why it matters, and you will want to understand an annual financial report (example).
- If you are overwhelmed at first, don’t worry. The before-mentioned ETFs are a good way to get your feet wet. ETFs represent bundles of stocks, some covering regions (e.g. the world, emerging markets, or the USA), others cover industries (e.g. precious metals, robotics), etc… ETFs are not actively managed, and therefore have lower costs and fees than funds. Here a small selection to illustrate this topic: JustETFs or Vanguard (these are commercial sites, with which I am not associated. You can also find more neutral information in wikipedia – with which I am also not associated ;-) also see my disclaimer at the bottom of this post). ETFs have an advantage/disadvantage: consider an ETF that contains stocks from 30 companies. Some of these companies will do great on the market (e.g. stocks #1-10), whereas the rest is doing not so well (e.g. stocks 11-25) and some are actually doing very poorly (#26-30). You will agree that is would naturally be better if you as an investor would actively pick the stocks #1-10, and ignore the rest. Now, as the ETF investor, you don’t need to worry about this; since as long as the whole bundle of 30 stocks continues to increase in value, you can be happy. But as you become more stock market savvy, you may want to get rid of the ETF and start focusing on individual stocks instead, and optimize your strategy (you could say that you start creating your own personal ETF – or portfolio). I only invest in individual companies myself, and sold my last shares in ETFs a dozen years ago.
- So now you are up and running, and you have seeded your brokerage account with your initial ETF or some interesting, hand-picked stocks, perhaps a solid company that pays out some dividends too. But HORROR and DAMNATION! Suddenly the market starts a down-turn, people start selling off their stocks, the market plunges and the newspapers and news reporters go CRAZY. CORONA Covid-19 outbreak alert! Personally, I am in the market for the long run, my favorite holding period is forever. I attempt to pick companies that have a strong competitive advantage, an economic moat, as Warren Buffett puts it. Such invests usually bounce back after a crisis, usually to higher levels than before (whereas many other companies will disappear… and not just from the stock exchange). This is illustrated e.g. by a historical view of the Dow Jones Index. Still, as an investor you will need to consider that markets not only rise, but that downward corrections will happen. Are you willing/prepared to sit out the crisis? If you are very unlucky, it may happen that you enter the market at its height, and that it goes down or stays level for 20 years (example Nikkei Index). There are a few stock market truths that you should consider when it comes to crises: (1) Time in the Market is Better Than Timing the Market. This means that we private investors are very poor at picking the best moment for buying (during a hype phase) and selling (during a downturn). You will for sure loose money by ad hoc decisions. (2) Buy on bad news, sell on good news. During a crisis, stocks will be cheap. As a crash occurs, hold your breath and wait, then start buying small portions again over the months that follow. (3) Sell and buy, buy and sell, your money ends up on the road to hell. If you keep on shuffling stocks about, you will continuously have to pay taxes, fees and increase the risk that you buy some losers and at the wrong time too, also due to poor research.
I hope this post provides some insights; have fun investing!
I mentioned Corona Covid-19 above. If you are interested in an exiting thriller about a global pandemic creating absolute havoc on Earth, take a look at my novels Two Journeys and Fields of Fire. Available in ANY internet store, e.g. also at Amazon.
More extensive disclaimers can be found under “contact”.