Just about every week, we get questions on two very basic topics. Like Tiffany in California, many would-be stock investors find themselves stuck before they even take the fist step and want to know: How do I get started? Then, like Sajjad in Pakistan, there are the would-be entrepreneurs want to know how to translate their dream of starting a business into reality.
CLUELESS IN CALIFORNIA
I am a first-time serious thinker of investing in a stock, I haven't a clue on where to begin: With whom or what company? All I know is, I want to invest. I have tried looking info up online but I am more confused that ever. Is there any way you can give me a breakdown on how to begin and what to trust and what not to trust? I am literally like the most clueless person on this; I could really use basic instructions on how to begin.
Tiffany, Murrieta, Calif.
This is one of those annoying answers that starts with a question: Why do you want to invest? Are you like most stock investors – who simply want to take on a little more risk to get a greater return on your savings? Or are you one of those few who really like the idea of rolling up your sleeves, searching through the thousands of stocks out there like a tag sale regular trying to find the bargain that everyone else passed up? These are two very different kinds of stock investing.
If you’re the former, the question of finding someone you can trust is paramount. Start by crossing off the names of anyone who isn’t registered with your states securities administrator. (You can find out how to contact your state's office, along with useful tips on spotting scammers at the North American Securities Administrators Association Web site.)
Financial advisors come in several varieties. All good advisors should the spend time to answer your questions, find out how much risk you’re comfortable with, keep up with changes in your financial life, etc. But some get paid commissions to sell you various investments. If you’re a novice, that's probably not the right person for you. Ask how they get paid.
Good financial advisors are a lot like good teachers and coaches: They listen well and give you straight answers. Unfortunately, there’s no directory that ranks financial advisors. And even if there were, it might not mean a whole lot: Often, what makes the relationship work is chemistry.
So ask around, interview as many as it takes. (You may prefer the convenience of doing this over the phone or the Internet. We’re a little old fashioned: We prefer to talk to financial advisors face to face.) Whichever you chose, ask as many questions as you like about investing. You’ll learn three things: 1) the answers to your questions 2) whether the person seems to know what they’re talking about 3) whether they have the patience to take on a novice investor. If you decide to go ahead, start slow with a small amount of money and sees how it goes.
If the answer to our original question is that you’re the second kind of investor – and aiming to become the next Warren Buffet -- you have a lot more work to do. Picking your own stocks can be extremely rewarding for several reasons. As you get good at it, you’ll make money. And you never have to worry about trusting someone else. (Though it will probably take awhile to trust your own instincts.) But learning how to pick stocks is a lifelong endeavor.
There’s a central paradox to stock investing that confuses many newcomers. On the one hand, it all looks very technical. People on CNBC talk about “industry multiples,” “short squeezes,” and “dividend yields.” There are earnings reports to read, SEC filings to decipher, and financial statements to pick apart. There’s even something called “technical analysis” that tries to predict where a stock is headed by plotting all kinds of lines on a stock’s price chart. There are lots of good books out there on securities analysis, and if you’re going to learn to pick stocks, you’ll need at least a basic understanding of what’s in them.
On the other hand, all the numbers and graphs in the world can’t tell you which stocks will go up and which ones will go down. Worse, just when you’re up to your eyeballs in discounted cash flow calculations, you’ll hear some hot-shot investor come along and say he bought a stock that just tripled simply because his wife likes the product they make.
Do “gut feelings” really matter? Yes, but not without doing the homework first. Picking a stock without looking over at least the highlights of key financial information is like buying a used car without asking any questions. Still, even if your mechanic friend says it checks out fine, you shouldn’t buy it if it doesn’t “feel” right.
So how do you make sense of all this financial mumbo-jumbo? Rather than spending hours in the library reading mind-numbing books on stock picking, many newcomers prefer to join an investment club of other like-minded souls. There are several benefits: you get to meet new people, stock picking becomes a social event rather than solitary pursuit, and you should (theoretically) benefit from the collective wisdom of the group. (To find out more about joining or starting a group, check out BetterInvesting, the Web site for the National Association of Investors Corp.)
By pooling both your intellectual and financial resources, you can invest in more stocks – and learn faster – than if you try going it alone. Eventually, if group investing isn’t to your liking, you can always strike out on your own later when you feel ready.
And by that point, you maybe ready to become a financial advisor yourself.
CHASING A DREAM
When will I become a big businessman? I'm now 21 years old and I want to achieve a big goal in my life. I want to identify by my ownself, and I want to do something in my life. But I am facing financial problems. So how is it possible that someone let me out from this finance problem and help me and also help me to introduce a new business which can fly over the sky? Would the dreams of my eyes comes true? If they are true, then when?
Sajjad R.. Karachi, Pakistan
Dreams are a great place to start. Without big dreams you can’t get very far. But how do you make the success you’re achieving in your dreams into success in the real world? That, of course, is the hard part.
There’s no one answer for this question (which we get, by the way, in various forms by the dozens.) Each dream is different, so there’s no one book you can read, or person you can ask, or advisor you can pay to make your dreams come true. (Unfortunately, there are a lot of unscrupulous people out there who claim to have written that book or possess that expertise and are more than willing to offer up their advice – for a fee, of course.)
Successful people do seem to have a few common qualities, even as they take many different paths to achieving their dreams. The first thing is that they are able to see their dream as more than that: they are able to convince themselves that the dream can and will become reality. The young entrepreneur who walks down the street wanting to be the next Donald Trump looks up at a building and can “see” himself building the next skyscraper. This takes an unusual level of self-confidence (some would call it arrogance) that not everyone has.
Once you know where you’re going, you need to figure out how to get there. Success – even so-called “overnight success” – is almost always a series of much smaller successes strung along toward your big dream. So try to break your “big dream” into a series of “little dreams.” Find others who have achieved that “little dream” and find out how they did it or, better yet, ask to meet them and tell you their story. It’s easier than you think: successful people love to talk about themselves and their success. (If you’re too shy to ask, you’ll need to overcome that.) Figure out what you don’t know that you need to learn. Find ways to meet as many people as you can who may be in a position to help you.
You’ll also have to take risks. But there are good risks and bad risks. Successful people learn how to tell the difference. Jumping off a building is a risk with no reward (other than, perhaps, the momentary thrill of descent.) Jumping off a building as a stunt man for a movie – with all the appropriate safeguards – still carries risks, but it’s more rewarding. The trick is to be ruthlessly honest with yourself about the potential rewards and realistic odds of achieving the outcome you want, to know as much as you can about the risk before you take it, and then to do everything you reasonably can to reduce that risk. If the odds aren’t in your favor, walk away.
For many people, dreams are financial: A house, a car, financial independence. If your financial circumstances are holding you back, the same plan applies. How did you get in your current financial problem? Who can help you get out of it? What do you need to do to turn it around? What do you need to learn? Make a very specific plan. If that plan doesn’t work, try another one.
And lastly: No matter what your dream, the most important element is hard work. A lot of people who don’t succeed try to skip this step. You will almost certainly need help from other people – especially those who are smarter than you. But no one will work harder toward your dream than you. People who dream big need to be able to back that dream up with a determination – some would say an obsession – to make it happen.
In the end you may decide that it’s not worth devoting that much of your life – giving up time with family and friends, or devoting so little time and energy to helping other people - to achieving your dream. To change course is not necessarily the same as failing at your dream. Dreams can only carry you so far. You may even find your life taking a path you hadn’t imagined when you were a young man. For many people, success comes from being alert to unexpected opportunities, being open enough to embrace them and then changing course.
So fly high. Good luck.