There’s a good deal of ignorance around investing in the stock market. Many people see the market as one big casino : these people are not investors. Should they make money in the market they put it down to chance and not as a consequence of any planning on their part. Others invest, but pull out in a panic when the market goes down.
As this is a sure way to lose money they then shun the market and advise others to do the same. Many will never enter the market again. What do these two groups of people have in common? They have the wrong market paradigm. Yes, it is possible to make quick money on the stock market but for all that the market is not a casino.
Unless you have invested in a bad company, a drop in prices shouldn’t send you into a panic. It is the nature of the market to go down as well as up. Were it not for that volatility day traders would never make a living.
There is a name for people who invest in businesses as opposed to those who speculate in the market : they are termed ‘value’ investors and the concept of value investing was introduced by Benjamin Graham, who taught Warren Buffett at Columbia University. A value investor knows what’s happening with his companies, he invests for the medium- to long-term (upwards of five years) and will only pull out if he has reason to believe that his capital is no longer secure or productive with a particular business.
What makes a good investor
So how should one approach the stock market? It is important to distinguish between market sentiment, which moves the market on a day-to-day basis, and good businesses, which sustain the market over the long-term. A value investor will be interested in putting his money into a good business. To do so he will have to do some homework. This will involve finding out all he can about the business to which he wants to commit his money : how it’s managed, whether it is debt-free or not, its income generation, its dividend track record.
A potential investor may also want to study the methods of some of the world’s best investors so a visit to the financial section of the local library will not go amiss. A good place to start would be Graham’s ‘The Intelligent Investor’ which contains a wealth of theoretical and practical information on the nature of investing in stocks. For Buffett, Roger Lowenstein’s ‘Buffett, the Making of an American Capitalist’ makes for fascinating reading.
Why does investing matter?
People are living longer so their money needs to go further. Indeed, it may need to sustain them for up to twenty-five years past retirement. Those years needs to be planned for. Investing is one way of doing that. Historically, returns from the stock market have outperformed all other asset classes, including property. In that context investment makes sense and the sooner one starts the better.
Sources :
The Intelligent Investor : A Book of Practical Counsel. Benjamin Graham.
Buffett, The Making of An American Capitalist. Roger Lowenstein.
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