Majority of the Americans don’t invest in individual stocks and more surprisingly they don’t even participate through 401K & IRA plans. There are two primary reasons for this lack of participation:
1. Fear of losing money
2. Lack of spare cash
If you are one of the individuals who has been on the side lines then developing an understanding of these two factors is your first step towards investing.
Fear of losing money
Fear of losing money through investing is real, however, it shouldn’t be so great that it stops you from investing altogether. In fact, fear when applied intelligently to investing should make you a smart investor. When people talk about buying a stock they generally think about buying a piece of paper but in reality they are buying piece of a business. If you buy a stock of Home Depot you are not just buying a piece of paper you are becoming a partial owner of the business. Every time you buy something at Home Depot you make a part of it back as profit because you are a partial owner of the company.
Self Education is the key to alleviating this fear. It starts with defining the meaning of the word “Investor” and understanding how it differs from “Speculator”. Benjamin Graham from whom Warren Buffett learned the nuances of investing described the difference between Investing and Speculation in his book “The Intelligent Investor” as follows:
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Find a company that you are a happy customer of. Educate yourself about the company’s business. Try to understand its products or services, understand how does it make money, how does the company stack against its competitors. Evaluate the financial standing of the company – how much cash does it has, how much debt is on the books. At first this might seem to be too much work but with some practice you will see that it’s not that difficult, you will know where and what to look for when evaluating a company. Refer to the following posts for understanding how to value a company & what questions should be asked before making an investment decision.
Lack of spare cash
Returns are calculated in percentages. No amount of money is too small to invest. Start small, get into the rhythm of saving at regular intervals. Evaluate all your expenses and see where can you cut costs. Check your insurance, TV, Cellphone bills and bills for other services that you might have subscribed too. Majority of people can save money with making small changes. A couple of years ago I was able to reduce my car insurance (switched insurance company) by over a $1000 per year. Schedule auto deposits of small amount to your investment account. You don’t have to invest everyday, in fact, if you follow Warren Buffett’s advise you shouldn’t make more than 20 transactions in your life time. In one of this lectures at a college he said “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
So start educating yourself so you can make your fear your friend and start saving a small amount wherever you can. Visit the recommended books section to see the list of books that I think you should read.
Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor.
Dearest Rajat,
This website comes at a time and with a name which epitomizes my personal situation today.
I have been thinking of investing for a long time, however as you rightly pointed out, the fear of losing has been my top most reason to not go that route, coupled with the fact that there is always lack of spare cash. Haha, it’s never enough!
But you see, I have a 3rd and 4th vice, which are music and traveling and for me to keep buying my poison, I need to start investing.
Although I am pretty late in the game, I still like to believe in the saying “Better late than never!”.
Having said that, I have been thinking a lot lately about where and how to start and needless to say, you being one of the most trusted friends I have had since the day we met, (DAMN! it’s been 14 years), I will be following this blog really closely and maybe I will start to bug you more often than you can digest 😛
This is a sure shot winner of a blog. I wish you all the best and who knows, I may act as your experimental guinea pig and rack up a million dollars someday.
All the best bro, Stay Wannabe!
Hey Saheb – Thanks for the encouragement. Yes, its never too late and you can start with a small amount. Considering that you are globe trotter I don’t know what country you are thinking of investing in but my recommendation would be start with finding a low cost fund and investing in it. Sign up for a systematic investment plan so that you invest every month. Next step would be start educating yourself so that you can invest in individual businesses (assuming you are interested in doing that). Read what I have mentioned in the recommended books sections, read annual reports of businesses you are interested in. Over time you will gain knowledge & the confidence to invest in individual stocks. Happy Investing!