07 Jan Where to Start in the Stock Market
â€œHey Matt, I want to make money in the markets. Where do I start? What should I buy?â€
For years, that has been the most commonly asked question from my friends, and people I meet when out socially. I love the fact that so many people want to dive into the markets, but at the same time, there isnâ€™t a simple response I can give that will have that person walking away with an enthusiastic attitude and clear objective.
Yes, Iâ€™ve been doing this for 20 years. And yes, I could give you my opinion on industry I think has growth potential; of stocks I have researched and believe will continue to be profitable companies; and of my view of markets and economics. And as boring as that might be (especially at a social event), that doesnâ€™t necessarily mean you are going to walk away and make some money in the markets.
I really wish it were that simple!
There are a few broad areas that need to be considered before you can run off and buy your first stock. So as a way of saying to friends at a BBQ â€œthis is what I think you should doâ€, Iâ€™m writing this blog! From here on in Iâ€™m going to send people to this link, and that way we can have more interesting conversations and banter with very little meaning and more laughs!
(TBH, I love the random conversations about markets and investing. Problem is, I think I start to bore people!)
Investing shouldnâ€™t be a Gamble!
I get why the uninitiated see the markets as gambling. Fact is, no-one knows what the markets will do today, tomorrow or any time in the future. Analysis, experience and interpretation/opinion will result in decisions that will either be right or wrong. Success then derives from how you manage your portfolio.
Beginners donâ€™t know this. Most beginners think making money from the markets is all about choosing the best stock that will make the most money in the shortest period of time. Thatâ€™s one way of approaching it, but it is a very hit and miss (gambling) way of viewing the whole experience of investing or trading in the markets.
So here are a quick (broad) few steps on how you should think about what you will do to invest in the markets:
- Allocate funds. Donâ€™t use borrowed money â€“ especially as a beginner. And donâ€™t have the view that you need to live off this money. Investing is about taking disposable money and making it work for you.
- Have a Plan. As previously mentioned, the markets are not just about what you Buy. Yes, this is very important, but so are the other factors. Your plan should involve the following:
– Will you diversify your allocated funds? Money Management is the difference between success and failure!
– Do you want to â€œBuy and forgetâ€ or will you periodically (actively) review positions to take action
– Define what you want to buy. Below I have outlined pros and cons of various different stock market investment vehicles. Itâ€™s not just buying companies you know â€“ there are many ways of investing.
– Form an opinion. You also need to define how to choose what to buy. If you donâ€™t have the experience, you can find a reputable source (broker; newsletters; online subscription services)
– Have an exit plan. What will you do if â€¦. Markets go up, they go down, or if they go sideways?
– Time is not infinite. At some point you will want the money you have invested (or are trading), either to spend or to reinvest. And economies and markets change dynamics. No stock endlessly rises (or falls for that matter), so define what sort of time frame you intend to hold positions. Even if only as a guideline for you to then review
- Execute and Manage. Mistakes can be costly. Not being attentive can be costly. You need to make sure that you have the discipline to follow your plan, irrespective of what your â€œthoughts and feelingsâ€ might be. If your thoughts and feelings prove right, you can take that into consideration at the next step.
- Revise and Evaluate. You do not improve unless you understand your decision making process for both success and failure. Conditioning your decision making process to interpret what is going on in the markets will save you money, and make you money.
- Own it! This is your money. Even if someone else is managing your funds, own the result â€“ good or bad. By blaming others, you will fail to take action when it is needed. Sure, a change in events beyond your control will cause gains or losses. But you control your thought processes and you control the action you take. Always own it!
Do you want to be Rich overnight?
Of course you do! Many people think my trading success happened overnight. One day working for the man and slogging away, the next day doing things my way and having the free time to do what I want.
But that was a 20-year overnight success!
If you invest/trade with the dream that the next stock you buy will make you rich; you could quick work; pay off the house; etc, you are setting yourself up for failure!
Fact is, success in the markets is not a lottery ticket. To be successful, you have to work at it. You donâ€™t have to work hard â€¦ itâ€™s not like you are spending 8 hours a day digging trenches! But you do need to adopt a sound process that suits where you are starting from now; what time/money/experience you have; whether or not you intend to be active; and whether or not you just want to invest or learn to take control yourself.
â€œThe markets are the hardest way to make an easy dollar!â€
Opportunity is boundless, and over the last century there are countless people who have proven that you can make money in the markets.
Rather than looking for a stock tip that will make you rich, if you consider the steps Iâ€™ve taken you through today and look for the answers/information to complete these steps, you will be successful in the markets.
Itâ€™s just a Process!