Starting Out in Investing, Part 1.
Starting out in the world of investing can be a daunting task. There is a
ton of dry terminology and formulas to wrap your head around. On top of
that, there are literally dozens of websites that have their own experts,
telling you what you should and shouldn’t do—not to mention all the talking
heads on CNBC, Bloomberg, etc. Everyone has an opinion and they aren’t
afraid to share it. This is not necessarily a bad thing, knowledge is power
after all. The problem is that when you’re starting out, this can be
information overload and literally overwhelm a person to the point where
they quit before they start.
You are here because you have reached a point in your life where you can
afford to invest some of your hard-earned money in the stock market.
Congratulations! The fact that you have earned (and continue to earn) this
kind of money is a sign of intelligence, and as such you should find success
in the stock market a little ways down the road. The key part of that
sentence is “down the road”. The stock market can be a cruel mistress, and
she will not hesitate to take all your money if you are unprepared. The
first, and perhaps most important, lesson is: Take Your Time. We’re talking
about your own money here, money that you can surely lose if you are
unprepared. Which brings us to the next tidbit: Only Invest What You Can
Afford to Lose.
It’s very important that you understand going into this game that you 100%,
absolutely *can* lose your money. There’s no such thing as a “sure thing”. A
quick look at some of the worst performing stocks of 2011 will quickly
emphasize this point: Netflix, RIMM (the makers of Blackberry) and
Sodastream all lost over 50% of their value in a single calendar year. Their
stock holders got crushed. And that’s just a few of the companies that
crashed and burned. There are countless cautionary tales of companies that
were riding high and had the rug pulled out from under them. Penthouse to
the Outhouse. Things can and do happen fast in the stock market, making
preparation vital. If you spend enough time researching, you will
significantly reduce the risk of having this happen to you.
Once you’ve resigned to the fact that patience is key and that you should
never invest what you can’t afford to lose, you’re ready to get into the
nitty-gritty of investing: Doing Your Homework. This part, quite frankly,
isn’t fun. It’s also what separates the winners from the losers, so you have
to decide for yourself which side you want to be on. There are many factors
to consider when researching a company:
• Their financial situation: are they making money? How much money did they
make compared to the previous quarter/year? Are they displaying growth or
are they stagnant/losing ground.
• What kind of shape is their industry in? For example, in times of economic
downturn, discount retailers (dollar stores) tend to thrive, while luxury
retailers may suffer. If the housing market is down, you might want to stay
away from construction companies, etc.
• Who is running the company? What are the backgrounds of the CEO/CFO? What
companies did they work for in the past and what type of results did they
generate? Management can make or break a company—don’t overlook this.
• Did they give any guidance when they released their latest financial
results? Public companies release their financials once per quarter and will
often times accompany these results with a conference call (that you can
listen to) and/or release a written statement where they discuss the past
quarter and offer their thoughts on the future. This can be very telling—if
the CEO is warning of possible a slowdown in business, this could be a red
flag and might something to avoid.
I’m just scratching the surface of the kind of homework that is required in
order to properly gauge whether or not you should buy a particular stock. As
mentioned previously, there is no shortage of experts online and on TV that
will tell you exactly what you should be paying attention to. The bottom
line is this: there is no magic formula for analyzing a stock. You can
perform all sorts of complex mathematical equations, analyze charts,
research until your head explodes—anything can and will still happen. The
point is this: before you buy stock in a company, make sure that you are
comfortable with the decision. Do what *you* think is the right amount of
homework, no one can tell you the right amount. As long as *you* believe
you’ve put the work in, that is what matters most. Of course, there are
still other things to consider before actually pulling the trigger and
buying stock. Check out
for more thoughts to help you maximize your