This is part 2 of the How to Invest in the Stock Market series.
How to Get Started
I found that getting started was the hardest part simply because I just didn’t know where to begin. But I soon found out that learning how to invest is the same as learning anything else. i.e. you have to crawl before you walk and run. There was no shortcut if I wanted to do it properly.
After reading many news and stock tip articles off the internet, everything still made no sense and I remained clueless after spending so much time reading. So I did what we all do when we start learning about a new topic. Identify the basics work up towards the intermediate level followed by advanced techniques.
Basic Level Investing
The following sites will guide you in why you should invest, what should you invest in, how to invest, the different types of stocks, what causes price changes etc etc.
These two sites alone will provide you with more than enough information on the basics. I spent a considerable amount of time trying to read everything. I still consult Investopedia to this day.
Once the basics were down, I had a strong desire to understand the financial statements and what each line and term meant. I knew by this point that a thorough understanding of the accounting terms and financial ratios was required. With no prior education in accounting or finance, it went over my head at first, but as I kept referring back to it over and over again, it slowly started to make sense.
- Introduction to financial statements
- Beginners guide to financial statements
- Understanding financial ratios
However, you can get a all this information in a clear and concise format in the book Financial Statements: A Step-By-Step Guide to Understanding and Creating Financial Reports. I also wrote a review of the book.
Intermediate Level Investing
After coming to grips with the basics and finally understanding what stocks and investing was all about, it was natural to try and figure out what companies I should buy.
It was at this point I stumbled upon a forum post by Joe Ponzio of F Wall Street and was introduced to the concept of owning a business. Although I had read about a stock being a business in The Intelligent Investor, Joe has to ability to explain it in a clear manner that helps us to visualize the whole process.
It was mind blowing and it completely flipped everything else I was reading on its head. I truly believed that I had to know the technicals and tricks like selling in December and buying in January would produce greater returns.
I came to understand that;
- buying a stock was owning a tiny piece of the business
- I had to think like a business owner
- If you owned your own corner grocery what would you consider important? Is it your EPS is for the quarter or how much cash you have generated for each day? Would you splurge on jets, cruises or pay your cashier $100 an hour? Or would you rather cut useless costs and seek to grow the company?
- Since we own parts of the business, it is important to identify whether the company you own follows your own ideas of business. e.g. I don’t invest in biotech because I have no knowledge about the industry or business and therefore would be a clueless owner. I also have yet to put my money in financials because I do not understand how one operates.
- A business owner is also passionate about their business. Are you passionate about your companies?
- I wanted to be an owner of high quality cash generating businesses
- there is a price for everything and came to understand fair value or intrinsic value
F Wall Street has an outstanding series of valuing the business which really puts everything in perspective. I have read every single article ever written on F Wall Street which is over 100 and it has been better than any book. (Note that I pre-ordered Joe’s book from Amazon). Visit his How to Value a Business series.
The book I most highly recommend at this stage: Pat Dorsey’s The Five Rules for Successful Stock Investing.
Both F Wall Street and The Fives Rules book introduce the concept of Discounted Cash Flow which was also the starting point of the ongoing investing spreadsheet project available for purchase or free download on this site. I spent hours going through calculations, ratios and formulas and this hands on experience is what I believed to have helped the most.
Then came this blog. I had to force myself to write clear and organized content since it would be scrutinized by all. If I was going to write about something, I had better know what I was writing about. The best thing is, I received constructive criticism which I took to heart and the discussions with fellow like minded readers have helped immensely.
The point is to get involved wherever you can, except Google and Yahoo Finance since it is so abused. Comment and ask questions on high quality content blogs. Discuss with other readers. Start your own blog. The best students were always the ones actively involved.
We’ll be looking at what is involved in advanced investing topics in the next post. Don’t worry it isn’t really advanced.