I’ve been asked on a number of occasions, and recently so, what advice I’d offer to someone interested in getting into stocks, into “investing”. Funny thing, though. I am not an expert, not even good at picking stocks. Yet, people ask me for recommendations on what to study, how to pick stocks. So, now that I’ve cleared the air, that I am no expert, here’s some advice I’d offer aspiring stock pickers, stock investors…
- Know the difference between “trading stocks” and “investing”. In short, trading is chock full of risks. Few can succeed at trading. Whereas investing is also chock full of risks. Few can succeed at investing. So…go visit a FINANCIAL PLANNER who is CERTIFIED. An accredited Financial Planner will have all kinds of resources and staff behind him or her that you never will. Be just as proud, and brag about, finding the right certified financial planner as you might be about that one in ten thousandth stock pick that might go up.
- STUDY constantly.
- Learn the difference between technical tools and fundamental tools. You will need to apply both, sometimes together, and sometimes separately. Be warned, often neither works well. Be always cautious and flexible in your choice of tools. Adapt, test, back test, experiment, adjust the tools and your choices as conditions change.
- Click over to my section on this website, “Explaining Our World”, and carefully read my nugget titled, “Layperson’s Guide to CASH FLOW“. It’s important to understand cash flow when measuring the fundamental value of a particular company.
- Try to buy stocks when they are low and try to sell when high. No joke. If you are entering a stock market about now, (November 2015), when stocks are near their all-time peaks and the stock market is near an all-time peak, you are likely not going to be able to pick a breakaway stock that will make you a fortune. In all likelihood, since “what goes up comes down”, if you are at the peak, you may need to be extremely careful to avoid losing money on a stock that is destined to decline.
- The C-A-N S-L-I-M method, “…is the best method devised…for individual investors, whether new or experienced.” [HOW TO MAKE MONEY IN STOCKS, 2nd Edition, by William J. O’Neil. McGraw Hill, New York. p. ix.]
- “Investors…make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And…by buying good stocks in the upper reaches of bull markets.” [“Current Problems in Security Analysis” by Benjamin Graham. September 1, 1946. p. 146.]
- “[Benjamin] Graham admitted that the single most important factor in determining a company’s value was its future earnings power: …intrinsic value.” [THE WARREN BUFFET WAY by Robert G. Hagstrom, Jr. John Wiley & Sons, New York. 1995. p. 35. ]
- “…it is well in trading to cut losses short and let profits run…” [“Three General Lines of Reasoning” a chapter about by Charles H. Dow in A TREASURY OF WALL STREET WISDOM, edited by Harry D. Schultz & Samson Coslow. Investor’s Press Inc., New Jersey. 1966. p. 8 ]
- “The majority of people who buy stocks lose money in the end. Why? Because they guess, follow newspaper dope, fake tips, or inside information. They do not make safe investments…they nearly always buy near the top, and, [HOPE that] nothing can keep them from losing.” [TRUTH OF THE STOCK TAPE: a Study of the Stock and Commodity Markets with Charts and Rules for Successful Trading and Investment, by William D. Gann. Financial Guardian Publishing, New York. 1923. p. 3 ]
- UNDERSTAND THE BUSINESS. This is my cautionary warning since too few people take the time to understand the dynamics of the company they want to invest in. What contributes to their costs? How can they reduce costs? What markets are most opportune and are they participating in those markets? How clever has management been? What recent innovations set this company apart from its competition? You get my drift?! If you can’t understand the business, its competition, the market space in which it is participating, then either avoid that stock/company or raise your antennae and do a lot more study until you can be comfortable. I call this “mastering the business model”. If you don’t know how and why a shoe company can succeed, then you are likely best to avoid investing in shoe manufacturers. You must have at least an appreciation for what success factors must exist and how your targeted company is tracking today in achieving those success factors. Likewise, read of its plans for the near-term future and be certain those plans make sense to you according to the key success factors.
- One last tip. MY TIP. I’ve watched pundits, experts, and even academics argue over the past decade that the “markets” are one of the best functioning components of capitalism. Why? It is argued that the “markets” are “efficient”. By “efficient” those spokespeople argue that, left up to its own devices, there is an equitably functioning mechanism between buying and selling and therefore, prices reflect the most reasonable all-in value at any given time. That everything investors collectively know is reflected in the current price. If there are lawsuits looming, challenging competition, plans for expansion or contraction, whatever, these pundits will argue that the “efficient markets” theory prices everything into the price of the stock and therefore reflects everything known by everybody. This “efficient markets” belief often leads traders and investors to abandon close financial scrutiny of a target company and, instead, turn strictly to technical analysis, that is, the study of price charts. So, here’s a strong word of caution…technical analysis works very well IF there exists an efficient market. My opinion: no such thing anymore as an efficient stock market. Because of politicians being able to legally buy and sell on insider information; because of the influence and outright manipulation from the US Federal Reserve through money printing and clandestine/unpublished purchases of US Treasuries and US Bonds to protect the US Dollar; because banks are awash in cash and have no place left to stash that cash; because of the runaway practice of big banks using “high frequency trading” in which they profit from thousands of transactions in milliseconds to push stock prices up or down at their whim; and plenty of other elements that disrupt any practice of “efficient” markets, YOU almost DON’T STAND A CHANCE of participating in anything remotely resembling “efficient markets”. So, carefully consider MY strong belief, MY HYPOTHESIS/opinion: “efficient markets theory is dead and gone and a thing of the past”.
If wanting to invest or trade by yourself in today’s highly biased markets, be aware of the dangers. Else, go talk to a professional, certified, financial planner and let him or her worry about growing your precious savings.