Since you’re reading a blog called My University Money, I’m going to assume that you’re in your 20s, have some sort of career, probably are fresh out of university or college and have a bit of disposable income, even after making the payments on your student loans. Whoa, I just peered into your soul a little bit there, didn’t I?
What’s that? You’re a 34 year old who works a blue collar job, without any post secondary education and you’re student loan free? Well, in my defense, I’ve never met you. The good news is most of you will be able to relate to this post, no matter your age, education level or indebtedness. We’re going to talk about investing.
That sound you hear is everybody clicking the back button simultaneously. Wait! Don’t go! I promise, it’s possible to read about investing and to be entertained at the same time.
For the purposes of our discussion, let’s divide investing into two categories, passive investing and active investing. Passive investing, as you’ve probably figured out, is investing via mutual funds or exchange traded funds. All you do is buy a basket of stocks, a basket that either a professional manager chooses or a basket that attempts to track a certain index. (like the TSX Composite or the S&P 500) Active investing, meanwhile, is picking individual stocks to put in your portfolio. Knowing your interests (remember when I peered into your soul?) I know you’ll want to put all your money into MGM Grand, WWE, Budweiser and Philip Morris. Sounds like a fun time!
Should you be buying individual stocks? Of course you should, assuming that’s something that interests you. If you view investing as a chore, you should probably be sticking to passive investing. Why spend more time than you have to on something you don’t like? Before you go out and open several online brokerage accounts though, let me offer a few tips to increase your chances of being a successful active investor.
Learn To Real Financials
Unless you’re a real loser intellectual type, the idea of learning all about financial statements isn’t going to be on the top of your to-do list. Have you looked at a balance sheet lately? It’s boring! There’s no pictures or any dirty words. There’s only a bunch of numbers that look all complicated. How is anybody supposed to garner any information from it?
Wait, there’s two more financial statements? The cash flow statement and the income statement? This active investing stuff is tough.
There’s all sorts of information an investor can garner from looking at the financials. There’s basic stuff like whether the company actually makes money, how much debt they have, and how much they’re paying out for a dividend. This stuff is important to know if you’re going to be plunking cash on some shares.
It gets even more complicated. There are literally hundreds of financial ratios, and there are people who do nothing but look at financial statements all day long. (And get paid quite well to, assuming they know what they’re doing) There are financial ratios that I’m still convinced are made up.
Nobody is expecting you to get to that level of knowledge. But, until you can read financial statements, you shouldn’t be putting capital at danger investing in individual stocks. You can still lose money even after learning the basics of financial statements, but you’ll increase your chances of actually making money.
Expand Your Horizons
One mistake rookie investors make is investing only in companies they’ve heard of. They own a Mac, an iPhone and an iPod, all products they love. So what do they do? They run out and buy shares of Apple, simply because they love the company. Financials? Who cares!
There are approximately 8000 different individual stocks that trade on North American exchanges. You’ve probably heard of 250 of those companies, most of which market directly to consumers. By doing a little research, you can discover stocks that have attractive financials or attractive business prospects that everybody hasn’t already heard of.
You can also use your professional knowledge to help your investing. Say you work in the oilfield, like so many young men in my neck of the woods. If you combine your knowledge of oil companies operations with your knowledge of financial statements, you can maybe translate that into a successful investment.
Don’t Go Nuts
If you do end up investing in individual stocks, do yourself a favor and diversify your holdings. Sticking all of your cash into one stock is a bad idea, no matter how confident you are in it.
In fact, I’d recommend you keep the majority of your cash in passive investments (preferably ones with low management fees) and just dabble in active investing. That way you can learn about investing, have a little skin in the game, but not be wiped out if you pick the wrong stock. You will lose money at some point if you’re an active investor, but diversification will minimize that loss.
Do any readers have experience investing in individual stocks? Feel free to share with us.