Question for Lion Investor
Dear Sir,
I would appreciate some advice for a complete idiot in stock investment who wants to take the first step in stock investing. What are the “must have” knowledge that one must pick up before taking the plunge?
Thank you.
Frank
My Comments
Before you even start to invest, you need to make sure your financial position is fundamentally strong. This means having a few things:
- A postive cash flow every month.
- Putting aside some cash that will tide you through in case of any emergency. Typically, this is 3-6 months of your salary or expenses.
- Money you don’t need in the short to medium term that can be used for investing. We shall call this your investment fund.
Once you have your investment fund, you have to decide on an optimal asset allocation for it based on your needs. This will detemine what percentage of your investment fund goes to stocks, bonds, alternative investments, etc. You might want to do some reading on the topic “Asset allocation”.
Let us look more at stock investing since you asked about it here. There are two main schools of thought when it comes to stock investment.
The first group of people are the traders. To them, the stock market is like a casino.
Traders focus more on price movement more than anything else. If you intend to become a trader, you need to read up on technical analysis and trading methods.
The second (and smaller) group of people are the investors. They treat buying a stock as buying a business. If you think about it, that’s what a stock market essentially is. It provides a secondary market for the buying and selling of shares of companies.
At any one point in time, the quoted prices might be worth more, less or equal to the intrinsic value of the business.
The returns you receive will thus depend on both the performance of the company you bought, as well as how it’s price changed relative to its business value.
If you are going to focus on being an investor, a good place to start is to read Warren Buffett’s annual letters to his shareholders. They contain a chuck of his investing insights and ideas.
You will also need to be familiar with accounts so that you can analyse the financial reports of the companies you are researching.
For both groups of people, some economics macro background will also be useful.