Making your first investment in a (publicly traded company’s) stock
Whenever I talk with someone about “buying” stock who has never bought stock before, usually the first thing I hear is “I don’t know what to do or how to get started?” — “Thats why I never bought a stock before. “
And thats a valid reason!
So this article and the ones that follow are for you! The person who has never bought a stock before but who wants to get started. But first ——
How I got started
My own personal story begin when I was a 13 year old kid. I had no idea what to do or how to get started. I just wanted to start buying stock and investing. You see, I was that kid in school walking around reading the Wall Street Journal in school. I had also started reading Kiplingers and Money magazine – having really no idea what I was reading but just trying to learn. (I’ll talk more about the importance of reading and learning in another article).
I had about $100 saved up and I wanted to buy Coke-Cola (KO) stock. I mentioned this to my Mom who was a teacher in the Detroit Public School System. She had never owned or bought a stock in her life, however like any parent who wants to help their kid she went out and found a “broker” for me. He showed me how to purchase one share of Coke-Cola stock (KO) and I was on my way. The sad truth is he wasn’t very helpful after wards (probably because he made no money on my purchase). Thats one of the reasons I started my youth financial literacy program – Wall Street Wizards. I wanted to help young people who were my age learn about investing and finance.
Before you pull the trigger
In his lectures and writings, the legendary investor and chairman of Berkshire Hathaway, Warren Buffett, often discusses the concept of a “circle of competence.” This circle of competence consists of all the businesses with which the investor is familiar and thoroughly understands.
As a professional money manager, I believe it is possible to estimate a range of the intrinsic value for a company based on its financial statements and filings. This valuation cannot be done, however, if you do not understand how a company makes money. If, for example, you know nothing about biotechnology and infectious diseases, you shouldn’t invest in ImmunoGen (Nasdaq: IMGN) Why? Unless you understand the company’s products, market, competitive strengths, and weaknesses, you won’t be able to project the future cash flows.
For example, an investor who has spent 10 years as a checker at a supermarket would have an advantage when analyzing the financial statements and business model of a grocery store chain; he or she would be able to pin-point strengths and weaknesses of the business, evaluate the competitive climate of the industry, and compare the performance of a prospective investment against those of an excellent grocer.
The size of an investor’s circle of competence isn’t as important as clearly defining the borders. If you are unfamiliar with the insurance industry, don’t even attempt to evaluate the performance of a property and casualty company. Straying from the circle of competence leads a would-be investor into the land of speculation.
Some additional thoughts
To get started as your own portfolio manager, first realize that there is no perfect way or time for you to start. And there is no perfect product for you to start investing in. The best investment choices for your portfolio are the ones you are comfortable with and the ones you have researched for yourself and understand. With that said, you can always choose better investments as you become more experienced. So once you get started as your own portfolio manager, keep practicing. The more you do it yourself, the more experience you’ll gain. In the beginning you might lose some money along the way – but don’t quit.
As your portfolio grows, so will your knowledge of investing. Start simple (with concepts you can easily understand), try your ideas on paper or online first, not using real money, and as you learn and your portfolio increases in value, expand and diversify the types of investments you have. There are thousands of choices that you can make but the important thing is to get started now! It really is never too late.
Here are a few sites where you can create a sample portfolio and stock watch list.
Before You Even Begin Investing
As an individual investor, it is paramount that you learn to manage your own money and control your own financial destiny. Drawing on my experience as a financial analyst and professional money manager (managing both institutional and individual money), I intend to teach you the skills used by professional money managers, the people responsible for investing a fund’s assets, implementing its investment strategy, making the investment decisions, picking the investments in the fund, and managing the day-to-day portfolio trading.
Investing, like most other things, requires that you have a general philosophy about how to do things in order to succeed, achieve your goals, and avoid careless errors. To think like a professional money manager or portfolio manager, you need to understand the time value and compounding effect of money, determine your goals and needs, and develop an investment strategy.
Next article – Step #1: How do I really get started!