All investors start at the beginning. They know very little, maybe nothing, but they see the stock market can make them money, big money. It can also take all their money and never even say thank you. If you're just starting out as an investor, follow these guidelines to help you minimize your mistakes and maximize your money.
First, understand that you are stepping into a world where many have spent decades deciphering. You are a novice. You know nothing about the landmines that lie beneath. There are many and will explode at any moment, usually the moments when you least expect them. Investing is fraught with danger like bankruptcies (even huge companies....see GM), crooked management (very rare but when caught, very expensive...to you), and many other disappointments that will cause sleepless nights. Scared? Good. You should be. Now you're in the right frame of mind.
Be defensive. Believe that you just might lose all your money if you buy a stock or any other investment (except Treasury debt). With a defensive mind set, you won't quickly buy a tip you hear on TV or radio or from a friend or that wicked smart cab driver. Being defensive means looking for conservative investments, ones that have the odds stacked in your favor, ones that have consistent management that delivers solid earnings quarter after quarter, year after year. That's also true of mutual funds. Pick the ones that have the most conservative strategies, have good diversification, and have shown years of solid returns, no matter what the stock market has done.
Start slowly. Don't be in a rush to throw your money into the market. Take it a small step at a time. After you've paid your credit cards to zero and saved enough to live for 6 months or longer, then look at buying an investment. A good first move is to buy a little of a mutual fund, maybe even a money market fund. Just to get your toes in the investing pool. To learn how to buy and sell online. To watch your investment.
Keep reading, studying, researching. You can never know enough about investing. There are literally thousands of books on investing. Some of the better ones are by Benjamin Graham, the father of fundamental investing, guru to Warren Buffett. Others are by Peter Lynch. There are many more. (Modesty forbids me from recommending mine.) Read daily business papers like the Wall Street Journal which is also available online or Investors' Busines Daily, also available online, especially for new companies. Read magazines like Business Week or Forbes or Fortune. Do research at Web sites like MarketWatch, Yahoo!Finance, AOL Personal Finance, Google Finance. Read research reports from Standard and Poor's or Value Line at your local library. There has never been a better time to find information on companies. It is every where and most of it is free. Make this a daily habit.
Venture out on the risk path, carefully, very carefully. Eventually, you'll feel like your mutual fund or money market fund just isn't moving fast enough toward your ultimate goal of extreme wealth, even after taxes. So you'll want to buy individual stocks. Buy the ones that go up. If they don't go up, don't buy them. (Originally spoken by Will Rogers.) When you buy individual stocks, you're taking much more risk than picking a mutual fund because if your one stock tanks, you've lost a great deal of your investment. That's why buying an individual stock shouldn't take up more than 10% of your investing dollars. Tread lightly. Tread carefully when you start buying stocks.
Build for the future. When you buy your first stock, think of it as the beginning of your portfolio. Make it a conservative, long term investment, one that pays a dividend, one that has growing revenues and profits, one that has a history of good management. It's your first one but it's not the last. Think about adding another when you can, from another industry with all the same attributes, keeping in mind that you're putting together investments that will diversify your risk.
You will make mistakes. Everyone does. It's what you learn from them that matters. When I was first began buying stocks, I only looked at the potential (at least the potential I thought it had), never at the fundamentals. I thought with my glands, not my brains. (Originally said by Warren Buffett.) I lost a lot of money. Let your brains do your thinking, not your greed. Stay away from stocks that only have promise and no profits. Later, when you've established a core portfolio of stocks, you can venture out in the high risk territory of "promising" stocks with a small amount of money. You'll make fewer and less costly mistakes that way.
Is this all you need to know? Of course not. But if you follow these simple guidelines, you'll avoid many mistakes most investors make and be on the right path to investing wisdom.
- Ted Allrich
January 18, 2011