How to Invest in Stocks?

Everyone wants to be financially secure. If you have a house, your house may be your biggest "asset" early on, but you will need to live in it for the rest of your life. Do you want a financially secure retirement or a vacation house in the South Pacific? You must invest your savings if you plan to retire comfortably.

1. Save. Before you can invest, you need money. Don't start investing until you have a secure job and six to twelve months of living expenses in a savings account, as an emergency fund, in case you lose your job. Learn how to budget your money and to spend your earnings wisely. Most investors have to be careful not to spend any of their profits, and to keep some aside for future use, and for retirement, as well as emergencies.


2. Read. Before you start investing, you need a basic understanding of what a stock is, what it means to invest, and how to evaluate stocks. Get some basic books in stock investing. Aim to read every book on investing you can get your hands on. Here are some of the very best books and resources for all serious investors:

• The Intelligent Investor by Benjamin Graham. Get this on audio CD, listen to it a few times, and it will make a lot of sense. Focus especially on Chapters 8 (market fluctuation) and 20 (margin of safety).
• The Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith. This is a short and concise treatise on reading financial statements.
• Security Analysis by Benjamin Graham and David Dodd. This book is considered the bible of investing and will tell you how to analyze corporate finances thoroughly. You don't have time NOT to read it. Get this book now, and master everything in this book. That being said, due to its age (it was published in 1934, just after the great stock market crash), it lacks some modern aspects; in particular, it does not tell you anything about the cash flow statement.
• Expectations Investing, by Alfred Rappaport, Michael J. Mauboussin. This highly readable book provides a new perspective on security analysis and is a good complement to Graham's book.
• Common Stocks and Uncommon Profits (and other writings) by Philip Fisher. Warren Buffett once said he was 85 percent Graham and 15 percent Fisher, and that is probably understating the influence of Fisher on shaping his investment style.
• One up on Wall Street and Beating the Street, both by Peter Lynch. They are easy to read, informative and entertaining.
• The Essays of Warren Buffett, a collection of Warren Buffett's annual letters to shareholders. Warren Buffett made his entire fortune investing, and has lots of very useful advice for real people who want to invest. Warren Buffet has provided these to read online free: http://www.berkshirehathaway.com/letters/letters.html.
• If you have some time left, you should also read Buffett's early letters to his partners from 1956 to 1969; they can (for example) be found athttp://www.ticonline.com/buffett.partner.letters.html.
• Buffetology, The New Buffetology and The Tao of Buffet, all by Mary Buffet and David Clark. These are basic books on the investment methods of Warren Buffett. The New Buffetology can be purchased on audio CD.
• For a better biographic insight of Warren Buffet, read Buffett: The Making of an American Capitalist by Roger Lowenstein. This book will tell you how Buffett refined his investment style over the years and who he is.
• The Secret Code of the Superior Investor, by James K Glassman. This is an excellent treatise on the importance of buy and hold.
• Motley Fool and The Tycoon Report, both excellent online publications.

3. Think. Warren Buffet says that after you think, then think again. Warren Buffet says that if he cannot fill out on a piece of paper several reasons to buy a stock, then he will not buy it.

4. Practice. Trade stocks on paper before actually trading stocks with real money. Record your stock trades on paper, keeping track of dates of the trades, number of shares, stock prices, profit or loss, including commissions, taxes on dividend, and short or long term capital gains taxes you would have to pay for each trade. It is also helpful to record the reasons for each buy or sell decision. Calculate your net profit or loss less commissions and taxes for a meaningful period (1 year or more) and compare your results with the market index, such as the S&P 500. Do not start trading with real money until you are comfortable with your trading abilities.

5. Open a stock brokerage account with a discount broker. No specific recommendation can be offered here, as the stock brokerage business is a rapidly changing field. Trial and error is probably the only way to find a good broker, but you should do your own due diligence by checking out their site and looking at reviews online. The most important factor to consider here is cost, namely, how much commission is charged, and what other fees are involved. Discount brokers generally charge commissions of less than $10 per trade, some as low as $1 per trade, and some offer a limited number of free trades per year, provided you meet certain criteria. Other than costs, you should also consider whether dividend reinvestment is offered (which is the best way to build up your positions), what research tools are offered, customer service, etc.

6. Build a small portfolio of 10-50 stocks. Blue chip stocks are stocks of market leading companies known for quality, safety, and ability to generate profit in good times and bad, although they are generally fully priced and difficult to buy at a bargain price except in a severe bear market. Choose stocks of companies with proven records of profitability with at least some earning in each of the past ten years, pay at least some dividend in each of the past 15-20 years, at least 30 percent EPS growth over the past 10 years (using 3-year averages to smoothe out variations, for example, average EPS for years 2008-2010 compared to average EPS for years 1998-2000), low debt to equity (less than 1), and high interest coverage (at least 5).

• Stay up-to-date with different value investing websites such as Motley Fool or Fallen Angel Stocks to see what kind of deals are out there.
• If you do not have the time or inclination to learn about individual stocks, buying and holding no-load, low expense index funds forever using a dollar cost averaging strategy is best and outperforms most mutual funds, especially over the long term. The index funds with the lowest expensive ratio and annual turnover are best. For investors with less than $100,000 to invest, index funds are usually best. If you have more than $100,000 to invest, however, individual stocks are generally preferable to mutual funds, because all funds charge fees proportional to the size of the asset. Even the lowest fee index fund, Vanguard Total Stock Market Index Fund (VTI), has a 0.07% annual expensive ratio. This amounts to only $70 over 10 years for a $10,000 portfolio, but $700 over 10 years for a $100,000 portfolio, and $7,000 over 10 years for a $1,000,000 portfolio. If the expense ratio were 1.50% (typical for an average mutual fund), the fees would amount to $15,000 for a $100,000 portfolio, and a whopping $150,000 over 10 years for a $1,000,000 portfolio. See Decide Whether to Buy Stocks or Mutual Funds for more information whether individual stocks or mutual funds is better for you.

7. Hold for the long term, at least 5-10 years, preferably forever. Avoid the temptation to sell when the market has a bad day or month or even year. On the other hand, avoid the temptation to take profit even if your stocks have gone up 50 percent, 100 percent, 200 percent, or more. As long as the fundamentals are still sound, do not sell. Just be sure to invest with money you don't need for five or more years. However, it does make sense to sell if the stock price appreciates too much above its value (see below), or if the fundamentals have drastically changed since purchase so that the company is unlikely to be profitable anymore.

8. Hold on to the winners and do not add to the losers without good reason. Peter Lynch said that if you have a garden and every day you water the weeds and pick the flowers, that in one year you will have all weeds. Peter Lynch said that he was the best trader on Wall Street for 13 years because he picked the weeds and watered the flowers.

9. Avoid stock tips. Do your own research and do not seek or pay attention to any stock tips, even from insiders. Warren Buffett says that he throws away all letters that are mailed to him recommending one stock or another. He says that these salesmen are being paid to say good things about the stock so that the company can raise money by dumping stocks on unsuspecting investors.

• Likewise, don't watch CNBC or pay attention to any television, radio or internet coverage of the stock market. Focus on investing for the long term, 20 years, 30 years, 50 years, or more, and not get distracted by short term gyrations of the market.

10. Invest regularly and systematically. Dollar cost averaging forces you to buy low and sell high and is a simple, sound strategy. Set aside a percentage of each paycheck to buy stocks every month. And remember that bear markets are for buying. If the stock market drops by 20 percent or more, move more cash into stocks, and move all available discretionary cash and bonds into stocks if the stock market drops by more than 50 percent. The stock market has always bounced back, even from the crash that occurred between 1929-1932.

11. Consider selling portions of your holdings as a stock appreciates significantly, at least 50 percent to 300 percent, based on quality of the stock. Use upper limit for better quality stocks. Letting your winners run as long as the story is still good will increase your long-term chance for success. Warren Buffet says that you should hold winners forever, but if the price-to-book gets too high (above 100 is definitely too high), you should consider selling the stock.

12. Consult a reputable broker, banker, or investment adviser if you need to. Never stop learning, and continue to read as many books and articles as possible written by experts who have successfully invested in the types of markets in which you have an interest. You will also want to read articles helping you with the emotional and psychological aspects of investing, to help you deal with the ups and downs of participating in the stock market. It is important for you to know how to make the smartest choices possible when investing in stock, and even if you do make the wisest decisions, to know how to deal with loss in the event that it happens.

Why Invest in Stocks?

1. Put your money where value is created, not stored

As the paper money value depreciate more each day, I’ve got a lot of inquiries asking my opinion about gold and silver. I agree that you can invest in these precious metals and make handsome profits when its price soars above the roof. This has happened for the past recent years. You should probably convert a portion of your liquid cash into gold and silver, then use the gold coins and silver bars to decorate the interior of your safety box. But would you put 100% of your net worth in gold or silver? Probably not.

The reason is pretty straight forward. These metals do you no good. It has value but it doesn’t produce value. I believe that when you invest money, you want to invest in some assets that produce value or income. Essentially, great companies use investors’ money to create goods, to produce sought-after service. These products and services inject values into other people’s life. It makes customers healthier (nutritional products). It makes your communication easier (smart phones). It lets you move faster (vehicles). It gives knowledge to searchers with a single mouse-click (Google).

That’s why Warren Buffett preaches that stock investment is going to beat gold in the long term. The key point here is that when you are investing in stocks, you are actually buying an asset that is productive and creating value for its customers. The ability to create value makes the assets valuable!

2. Easier to Own a Piece of Established Business than Building One Yourself

You see, it takes a lot of effort to build a successful business. Most entrepreneurs are workaholic, at least at the beginning they work their ass off. Undeniably, building a successful business can produce the kind of magnificent return you won’t find elsewhere. The message I want you to understand here is that building your own business take a lot of effort, time, energy, and sometimes sacrifice.

Compare the effort of building an enterprise on your own versus buying a piece of an existing established company. Relatively, it is many times easier to buy a share of a great company listed in Bursa Malaysia. Imagine that you don’t have to show up in the company you invest in, on every working day. You don’t need to deal with any issue of the business operation. You don’t even need to attend its annual general meeting! All you need to do is to cash in the dividend cheque you receive regularly. And even this is done for you if you trade using a pledged account.

3. Flexibility and Liquidity

Stock investment provides the highest flexibility and liquidity. You can sell and buy anytime, anywhere as long as it is the market trading time and you have access to Internet. Even without Internet, you are just one phone call away from your remisier or stock broker.

I would like to compare this again to running your own business. If your business go bad, you might get stuck. It is harder to close down the business because of your sentimental attachment. The process might be lengthy and miserable if a business goes bad. I’m not saying that you shouldn’t start your business. What I want you to understand is that comparing the hassle you will need to go through, investing in stocks provide you much more flexibility. You can always change your holding of stock portfolio anytime.

When company X you invested in goes bad, or simply that it is overvalued by the market, you can easily sell off the shares and buy another company share that is selling at a bargain price. This provides you the flexibility of shifting your money to different company, different industry or different country almost instantly. There are so many selection of great companies even if you are just referring to Bursa Malaysia alone. Nowadays, most securities firms also provide the flexibility for investor to invest in stock exchange at other countries and regions.

4. You Can Do It from Home

As I explained in the article Why Should You Invest in Real Estate, property investment suits extroverts, who love going out to look at properties, meet people, and negotiate the deals. Meanwhile, stock investment suits introverts, who love to stay home to read, research and think!

In other words, you can do it all at the comfort from your home. You can DIY – Do-It-Yourself!
You can do buy and sell transaction at home. You can find reports on the Internet. You can read announcement and get frequent update on the news. All these information is already sufficient to let you conduct analysis and research to find the companies that is worth investing your money.

Compare it to running your own business and investing in properties, there is no employees and tenants to manage. In fact, investing in stocks had no other people to manage other than yourself (managing your own time and money). That’s one of the best advantages of being a stock investor.

5. Enjoy Long Term Business Growth

If you’ve invested $1000 in Berkshire Hathaway in 1964, it will be worth $8 million today.
If you’ve bought 1000 share of Public Bank back in 1967 during the IPO, it will be worth more than RM1.5 million today.
If you’ve bought 1000 share of Genting back in 1971, it will be worth more than RM2.2 million today.

This shows the other advantage of buying shares of a great company – it keeps growing!!!

6. Available to Everyone

When a company is publicly listed, it is literally available to everyone to own a share of the business. In Malaysia, you can buy share at 100 unit at a time. Although it is not viable to invest hundreds of ringgit at a time due to the minimum transaction cost involved, it is easy for anyone to own a share. You can buy RM2000 worth of share at a time, or RM10k, or RM20k or whatever amount. The transaction cost is negligible when you are buying a share at a relatively large amount.

Due to the regulation and strict requirement of listing, a public company has to be transparent in the sense that a lot of information is made publicly accessible. You can download their annual report. You can also read analyst reports. You can also make better sense by visiting the business outlet to see it yourself.

In stock investment, you can definitely accumulate “one share at a time” due to the low capital required and the easily accessible public information. So the big guys and the small guys are in fact playing at a level field.