Investing in the stock market
Stock markets, as we know, rise and fall, at times dramatically.
Nonetheless, historically there has been no better way to make your money grow, with average yearly increases over the 20th century – of around 11%. The key word here is average.
That century includes horrors like the Wall Street crash of 1929, Black Monday and the dotcom crash.
It also includes periods of sustained growth, Bull markets. These included almost the whole of the 1990s, and a strong run from 2003 to 2008.
The bear markets, when share prices fall, are shorter lived. We had a bear market between 2000 and 2002, in the wake of the dotcom boom.
More frightening for investors are the dramatic crashes. On Black Monday, in 1987, it lost a quarter in just a few hours.
Close up, the falls look a terrifying rollercoaster ride. From a distance they appear merely ‘corrections’ in an upward climb.
An investor who held tight through Black Monday saw shares back to their previous level a year later.
So we know shares beat other investments over time. We have seen spectacular rises in property in the last decade but that’s changing.
Since the 1950s, UK property has risen 3% a year on average, shares 11%. We know that most managed funds, such as unit trusts, will only match the market at best. To outperform the market you need to do it yourself.
If you’re going to pick stocks though, you need to learn your stuff.
Rule 1 is research. The more you learn about the companies or sectors you specialise in, the better you’ll become.
You need to be able to read and understand their balance sheets. Otherwise you might as well join the mug punters in the bookies, putting your money on a horse because you like the name.
So although you might eventually develop a supernatural sense for rises and falls – don’t count on it just yet.
There are thousands of companies, on a growing number of stock markets (several in London alone). It’s an idea to trade on what you know.
If you’ve knowledge of software, sugar beet or mortgage broking, then research companies in those areas.
You also need a clear strategy on when to buy and sell your shares – otherwise you risk getting blown all over the place.
Share price falls and surges aren’t to do with a thousand brokers coolly making rational decisions – many of them are panicking or getting overexcited – following the herd.
Remember too that just because a share falls it doesn’t mean it’s a dog. If you’re still convinced a certain stock is sound, it can make sense to buck the trend.
It also means you buy cheap. Think about it. If you do what everyone else does, then you might as well invest in a tracker fund. It’s a lot less time and work.
You need to understand what a company’s share price means. You’re going to need to read company reports.
If this sounds dull, then going it alone isn’t for you. But remember top investors don’t rely on inside information (that would be illegal) but on information gleaned from assiduous reading of published data.
That doesn’t mean City-style number crunching on super computers – just a brain and a pair of reading glasses.
Back to your strategy. You need to ascertain the value of a share. ‘Cheap’ alone isn’t good enough.
Classic measures include price/earnings ratio, earnings per share and price to earnings. What investors call FUNDAMENTALS.
You’ll be picking a smaller number of shares than the big funds. That means your ride will be rockier – one share losing 30% of its value overnight can make your portfolio look very sickly.
Can you cope with the rollercoaster, AND hold your nerve that you know what you’re doing?
It’s a long game. You might do all the homework and STILL underperform the market and the fund managers.
Conversely, if you do well, don’t get carried away. Anyone can look good in a rising market. And ask yourself … are your shares possibly now OVERVALUED?
Finally, although you want to stick to your strategy, be open minded.
Learn! If your stocks aren’t performing, you need to be honest with yourself. It’s not the stocks’ fault, it’s your fault.
Ask yourself what went wrong and why? Did you do your homework? Can you take that setback as a useful lesson?
And if you need inspiration, look at not just the Warren Buffets, but the thousands of small investors who make a good living and get immense satisfaction by outperforming the pros. It can be a scary ride but an exhilarating one.
