As we all get wiser, there are different things we profess to have learnt. In my case, some of my professions seem to inspire curiosity in others. Which brings us to the topic at hand: investing in equities (aka stocks). Here's my spiel:
Know why you want to invest because all investment comes with a measure of risk. Understand how much risk you can tolerate as a person and invest accordingly. this may sound counter-intuitive, but the last thing you want to do is buy a ton of stocks with aggressive enthusiasm and foolish optimism, then get queasy when your stocks take a dive and sell them in a knee jerk reaction ("buy high sell low" is not something you want to do).
if anything, slow down your decisions to buy / sell till you think you understand what you are doing. I personally find making a spreadsheet with relevant numbers and rationale and research before I decide to buy or pass on a security as a very good way of naturally slowing down the decisions. At the same time, it helps me build a strong case to backup my decision. If I know why I took that decision I can learn from the result: if it ends up well, I know I have hit on a method that seems to work. If not, I can analyze to see where I went wrong, what data / knowledge I lacked that could have averted my loss. Noting down when the security was bought and sold also helps in tax accounting.
I was recommended the following books, and i think i was very fortunate that i did read these before doing anything else:
* Benjamin Graham, The Intelligent Investor
* Benjamin Graham, Security Analysis. This book is HUGE and BORING. I haven't been able to get through it all, but reading the Intelligent Investor gave me a good highlight of what to expect. So now I use this as an ecyclopedia to brush up on analyzing a particular financial statement and occassionally as a sleep aid.
* Peter Stanyer, Guide to Investment strategy. This is so much info that I actually understood what this book was saying a couple of months after i thought i was done reading it. i went back to its pages when i started hearing about CDOs, CLOs, mortgage backed securities, credit default swaps, etc. all related to the credit crisis of last year. This book actually highlighted the risks with each of these categories, and to me, presaged the mess we're in.
I like these books because they try to keep the "mumbo-jumbo" like 200-day and 50-day moving averages and "trend patterns" (e.g. "higher highs higher lows", "high P/E at the bottom", "following the smart money") out of the investment. To me those "patterns" represent speculation because you don't really know why the market just did what it did, but you still go along with it because it's done so on a few occasions in the past. To me that logic is like "Mr. X went crazy last Tuesday when it was a full moon. Today is Tuesday and a full moon, so expect Mr. X to go loony today." (Sidebar: the words "lunatic" and "loony" are based on such beliefs. I kid you not. I'm sure goddess Luna looses it every time someone abuses her name thus. Maybe she does have that effect on people).
For "inspirational" reading, I like Robert Kiyosaki's Rich Dad Poor Dad. He has several others along the same lines, but none actually teach you much about investing in stocks. They talk about investment in general and how he got smart and rich investing in real estate and running his own business. Strictly bed-time reading to inspire you to want to invest, according to me.
If you have already read these and are ready to start doing homework, here's my current strategy (remember to do your own due diligence. don't "invest" just because someone you know "thinks it's a great idea"):
I look for companies with:
* Low Price to Book ratios. I like them if they're under 1. There were several of these around March 9, but are disappearing fast as the market rallies. Apparently Buffet recommends sticking to those with P/B ratios below 2.5x.
* High current ratio (CR) and quick ratio (QR). These are related to how much cold hard cash companies have on had compared to their liabilities. The higher the better. I definitely stick to above 1.5x.
* Low Debt. Also sometimes "long term debt to equity". The lower the better. if it's 0, it's got my attention, but i definitely like it to be less than 0.5x.
* Low P/E. The above estimate the value and soundness of a company. but it's stock price can move independently. P/B and P/E are my measures of "how far away from sanity" the stock prices have drifted. if the p/e is lower than the average historical p/e for the company, it's got my attention, but then i'm really scouring news releases to find out why the market thinks the price should be this low. is it because there are clouds on the horizon (lawsuits, loss of business patents, strong competition, rising costs etc.) or the market has just forgotten about this stock. I prefer it when it's the latter :)
* Dividends: i like it if the company has a strong track record of paying dividends on time. if they're increasing, even better.
that's about my current level of understanding. Each day I learn something new, and constantly look out for learning anything that scares me about the stocks i've already bought.
To make this interesting, feel free to send me your picks and i can tell you my opinion on those.
Know why you want to invest because all investment comes with a measure of risk. Understand how much risk you can tolerate as a person and invest accordingly. this may sound counter-intuitive, but the last thing you want to do is buy a ton of stocks with aggressive enthusiasm and foolish optimism, then get queasy when your stocks take a dive and sell them in a knee jerk reaction ("buy high sell low" is not something you want to do).
if anything, slow down your decisions to buy / sell till you think you understand what you are doing. I personally find making a spreadsheet with relevant numbers and rationale and research before I decide to buy or pass on a security as a very good way of naturally slowing down the decisions. At the same time, it helps me build a strong case to backup my decision. If I know why I took that decision I can learn from the result: if it ends up well, I know I have hit on a method that seems to work. If not, I can analyze to see where I went wrong, what data / knowledge I lacked that could have averted my loss. Noting down when the security was bought and sold also helps in tax accounting.
I was recommended the following books, and i think i was very fortunate that i did read these before doing anything else:
* Benjamin Graham, The Intelligent Investor
* Benjamin Graham, Security Analysis. This book is HUGE and BORING. I haven't been able to get through it all, but reading the Intelligent Investor gave me a good highlight of what to expect. So now I use this as an ecyclopedia to brush up on analyzing a particular financial statement and occassionally as a sleep aid.
* Peter Stanyer, Guide to Investment strategy. This is so much info that I actually understood what this book was saying a couple of months after i thought i was done reading it. i went back to its pages when i started hearing about CDOs, CLOs, mortgage backed securities, credit default swaps, etc. all related to the credit crisis of last year. This book actually highlighted the risks with each of these categories, and to me, presaged the mess we're in.
I like these books because they try to keep the "mumbo-jumbo" like 200-day and 50-day moving averages and "trend patterns" (e.g. "higher highs higher lows", "high P/E at the bottom", "following the smart money") out of the investment. To me those "patterns" represent speculation because you don't really know why the market just did what it did, but you still go along with it because it's done so on a few occasions in the past. To me that logic is like "Mr. X went crazy last Tuesday when it was a full moon. Today is Tuesday and a full moon, so expect Mr. X to go loony today." (Sidebar: the words "lunatic" and "loony" are based on such beliefs. I kid you not. I'm sure goddess Luna looses it every time someone abuses her name thus. Maybe she does have that effect on people).
For "inspirational" reading, I like Robert Kiyosaki's Rich Dad Poor Dad. He has several others along the same lines, but none actually teach you much about investing in stocks. They talk about investment in general and how he got smart and rich investing in real estate and running his own business. Strictly bed-time reading to inspire you to want to invest, according to me.
If you have already read these and are ready to start doing homework, here's my current strategy (remember to do your own due diligence. don't "invest" just because someone you know "thinks it's a great idea"):
I look for companies with:
* Low Price to Book ratios. I like them if they're under 1. There were several of these around March 9, but are disappearing fast as the market rallies. Apparently Buffet recommends sticking to those with P/B ratios below 2.5x.
* High current ratio (CR) and quick ratio (QR). These are related to how much cold hard cash companies have on had compared to their liabilities. The higher the better. I definitely stick to above 1.5x.
* Low Debt. Also sometimes "long term debt to equity". The lower the better. if it's 0, it's got my attention, but i definitely like it to be less than 0.5x.
* Low P/E. The above estimate the value and soundness of a company. but it's stock price can move independently. P/B and P/E are my measures of "how far away from sanity" the stock prices have drifted. if the p/e is lower than the average historical p/e for the company, it's got my attention, but then i'm really scouring news releases to find out why the market thinks the price should be this low. is it because there are clouds on the horizon (lawsuits, loss of business patents, strong competition, rising costs etc.) or the market has just forgotten about this stock. I prefer it when it's the latter :)
* Dividends: i like it if the company has a strong track record of paying dividends on time. if they're increasing, even better.
that's about my current level of understanding. Each day I learn something new, and constantly look out for learning anything that scares me about the stocks i've already bought.
To make this interesting, feel free to send me your picks and i can tell you my opinion on those.
