How to start investing if you don't know anything at all

Lately, many people have approached me asking, "I want to start investing, teach me how." To which I ask, "How much do you know?" And the replies will always be, "I know nothing, teach me from scratch."

So I figured that there might be many more people like you out here, who have zero knowledge about investing but want to start. Thus this post, on how to start investing from ground zero.


The stock market and other investment vehicles

In economics, there is an impossible trinity whereby (1) a fixed foreign exchange rate, (2) free capital movement and (3) an independent monetary policy cannot all exist at the same time. In investing, we also have an impossible trinity.

This trinity comprise of (1) low risk, (2) high returns and (3) high liquidity. There can be no liquid investment vehicle giving high return with low risk. If you see one, it is probably a scam.


For example, a bank's savings account gives high liquidity (you can withdraw at any time without any penalty) and low risk (capital protected) but the returns are super low (around 0.1% currently). The stock market gives high return and high liquidity but is high risk (capital is not protected).

How to tell a bad investment vehicle

It's hard to say which investment vehicle is the best, but you can definitely spot a bad one. Remember the impossible trinity? You will always have to compromise on one aspect. But if you find yourself losing two or even three aspects, then you're probably shortchanged.

Let's run through an example on endowment plans. By signing up for such a plan, you commit for a long period of time (at least 10 years) to get about 2-3% per annum interest. In this case, you have low returns (bad), poor liquidity (bad), but low risk (good), which means you're getting a poor deal.

For investment-linked policies, you get moderate returns (due to the fees charged, bad), high risk (bad), and moderate liquidity (bad). Now you can see why ILPs are getting slammed all over these days.

Enter the stock market

The stock market has been proven to be the best hedge against inflation in the long run, beating all other investment vehicles including bonds, cash, and even gold. The stock market gives high return (good), high risk (bad), but with good liquidity (you can sell anytime you want).

https://thunfinancial.com/investing-and-financial-planning-for-foreign-nationals-in-the-united-states/

So how do you invest in the stock market? Many newcomers would try to pick individual stocks, but do you know that even 80% of all fund managers don't beat the market? You certainly can try, but the odds are not in your favour.

By the market, I refer to the S&P 500 for the US market, the STI for the Singapore market, and basically any index that tracks the average movement of the target market. So for newbies, I would recommend just investing into the market via an index fund.

Read this two posts for a better idea:

If you really want to beat the market...

Well, I can't fault you for trying right? Even after saying that the stock market returns around 7-8% per year on average, some people have asked me how to beat the market. This is despite them having no financial, investing, or stock market knowledge or experience.

But of course, I will still detail it here. There are many studies done, and various investing legends have proven that there are ways of picking stocks that can give you a better return than just buying the index. For example, these are the list of investors who have documented their returns:

Benjamin Graham: ~20% per annum (Graham-Newton Corp, 1936-1956)
John Neff: 13.7% per annum (Windsor Fund, 1964-1995)
Warren Buffet: ~24% (Berkshire Hathaway, 1965-present)
Peter Lynch: 29.2% (Magellan Fund, 1977-1990)
Kenneth Fisher: 13% (Global Total Return Fund, 1995-2007)
James O'Shaughnessy: 18.52% (Cornerstone Growth Strategy, 1954-1996)
Joel Greenblatt: 30.8% (Magic Formula, 1988-2004)
Joseph Piotroski: 23% (research paper, 1976-1996)

Each of these investors have a method of screening for stocks and then investing in them. I would recommend you to pick up their books to start reading. See below for the books they've written, also detailing their investment strategy. Some books can be even found online on Google.

Benjamin Graham: The intelligent investor
Warren Buffett: Buffettology (written by Mary Buffett, divorced former daughter-in-law of Warren Buffett)
Peter Lynch: One up on Wall Street
Kenneth Fisher: Super stocks
James O'Shaughnessy: What works on Wall treet

And if you want a summary of all of these books, check out this: The guru investor by John Reenes.

Conclusion

So first we started with identifying what is a good investment vehicle, and what is a bad one. Then, we went on to learn how you can invest in the stock market, probably the best investment vehicle out there. And lastly, if you want to beat the market, how you can do it.

Some parting words. Once you start on a strategy, stick to it. Long-term investing reaps rewards but switching in and out (due to emotions) only incurs fees and lower returns. I wish you all the best in your investing journey!
Previous
Next Post »

2 comments

Write comments
skrochey
AUTHOR
6 August 2017 at 10:26 delete

I began in the stock market by understanding technical analysis, Then went into fundamental analysis. Fundamentalist do not believe in timing the market. So this is for long term investors. But I am a market timer. If I see a stock I like, I will time it, be it a slow moving stock or a speculative one. Then I sit and wait.

Reply
avatar
cherryjoy
AUTHOR
13 June 2018 at 20:35 delete

Great post about stock trading!! Also a beginner can learn a lot from this blog. For trading like a professional, one must check out the stock signals. what you think?

Reply
avatar