How to invest in stocks
As you go around the internet looking for investment advice, education and just to get an understanding of this ecosystem you are going to find some terms and none of them have a broader meaning than investor or trader, look for the trader article soon.
Investor: a person or organization that puts money into financial plans, property, etc. with the expectation of achieving a profit.
There are many different kinds of investors, but I would like to focus on stock market investors. You could be investing for a retirement account, for additional income or to grow capital.
There are varying ways to invest regardless of your goals, you may have a similar investing strategy as someone else with different goals, and vice versa. We are going to go over some different ways and strategies to invest.
This article will not delve into trading, but investing for longer periods of time, usually a retirement investor.
Who are you?
We often hear about other investors, like Warren Buffet, Ray Dalio, Peter Lynch and others but I want you to keep something in mind. You are just a person, they are professionals who invest 100% of their time in developing and mastering a strategy.
You and I on the other hand are just people, with jobs and lives. We cannot do what they do, but we can pick apart what they do and use some of those tools.
Warren Buffet, fully understands companies, brands, economies and invests in assets that will be around for generations.
Ray Dalio flows with the global economy, investing in everything from stocks to bonds to currencies to stay with the flow of money in the world.
Peter Lynch will fully understand a company and its ins and outs and invest in highly prized companies.
Each of them are different and likely you resonate with one of them, but I am going to tell you Ray Dalio is likely out of your league, this guy eats financial information at a scale never seen before. But picking stocks and indexes and sectors that could trend could be up your alley if you like Dalio’s style.
If this all seems a bit much for you, you are in luck. Index funds are for you! In reality the article could end here for most of you. If that is you keep scrolling while you do other things lol.
For the rest of you, you have the market bug and likely are forming opinions on companies and sectors, inflation and the FED. You will soon learn how wrong you are! The market makes a fool of 99% of us in reality, at least at first, it takes time to understand how the market works because its not how you think. Look for an upcoming article to dive into this deep topic.
Some people like to pick stocks and hold them for some period of time. Most people that employ this strategy don’t really have a defined strategy, they just like the company and buy it hoping it will go up in value. But they didn’t take any lessons from Buffet or Lynch, they don’t know the financials, the sector the company operates in or the earnings it has. What about growth potential 5 years out? What is the competition? Do they have any patents expiring or about to be issued? Is the political climate favorable or not? Is it seasonal? Is the addressable market big enough? Is management capable? There are so many questions to answer prior to taking a large position in a company.
Picking stocks can be hard, the hot stock today is the not hot stock tomorrow. When a stock is low its hard to find one that will go up, so keep doing homework you have time. Look for what is up next, sometimes sectors will stay down for a long period of time and come roaring back, if you are good with sectors you may want to consider…
An ETF is a stock that includes multiple stocks, its basically a mutual fund that is traded like a stock, the ETF has a charter and buys and sells according to that charter. The QQQ is an ETF that follows the Nasdaq for instance, if you want to own the Nasdaq you can buy the QQQ, OR you can buy the 100 stocks that the Nasdaq is comprised of.
ETF’s have become huge these days, they are an easy way to buy a bunch of stocks at once and get diversified in an entire sector. If you are unaware sectors run the stock market except for the occasional unicorn. Do you want to buy airlines, semi conductor companies, utilities, auto stocks, gold, oil? There is an ETF for everything.
If you like to follow the general economy and understand the ins and outs of institutions you can invest in ETFs, if you believe that solar stocks are going to be big because Biden won the presidency you could buy a solar ETF. That is an investment thesis! If Trump wins in 2024 you may want to sell because your thesis is no longer valid.
Netflix dropped 25% the other day, is that good for you? Is your interest piqued? You may be interested in value investing,
Value investing is Warren Buffet’s bread and butter, or was. He sees extreme value in companies and will buy entire businesses if the price is right. He even buys stocks that are not in the dirt if he sees value. His investments in railroads and Apple stock shows he can pull the trigger on stocks that are not at basement prices.
So value investing doesn’t mean buying everything that drops, because in reality not everything comes back. Some ‘value investors’ will buy the Netflix drop without giving it a second thought, is that wise? Shouldn’t you know more about the core business of Netflix and the growth rates, subscriber count and industry trends?
Value investing is just like any other kind of investing and just as risky, keep this in mind. If a stock is down a bunch why would they sell it? If you can’t come up with a good reason it is worth more research.
Similar to ETF investing an Index invests in a basket of stocks, but usually not just in sectors, an Index is generally an entire basket of stocks like the S&P which has all sectors in it, or the Nasdaq which has the hot growth sectors.
How many stocks win?
That is your answer, there was a study done and since 1932 4% of stocks are responsible for ALL of the gain in the stock market. That is 1,000 companies over nearly 100 years. When you dig into this number it kind of makes sense, there aren’t that many companies that haven’t been bought out, closed, or are relevant to a wide audience to survive.
So if you are going to pick a stock it better be one of the 4%.
In subsequent article we will go deeper into markets and how they function and REALLY work. Not how its portrayed on TV, they get it right some times but don’t cover it much…stay tuned…