Buying your first stock is both exciting and intimidating at the same time.
With a single click, your hard-earned money is left at the mercy of the stock market.
That is why, if you want to make money in the stock market, you should always do your homework before you invest.
But what exactly does that involve?
How much research is enough?
Or more directly, how do you know when you are ready to buy your first stock?
Your investing touchstones
Before we start, there are three investing principles to keep in mind.
Call them touchstones, or reference points you can go back to throughout your journey as an investor.
Firstly, when you buy a stock, you are becoming a joint-owner of a business.
For example, if you buy shares in CapitaLand Integrated Commercial Trust (SGX: C38U), you are getting a slice of the rental collected from popular Singapore malls such as Raffles City, Bugis Junction, Plaza Singapura, and more.
Your reward is the dividend which the stock pays every six months.
Hence, as a business owner, it follows that you should be interested in how the business is being run, and what its plans are for the future.
Secondly, the stock price does not always reflect the value of its underlying business.
The moment you click buy, the stock market will immediately tell you how much you made or lost through the price movement of the shares you bought.
Pay no attention to these short-term price fluctuations.
These day-to-day price wriggles represent what people are willing to pay for a stock at any one time. Sometimes, the crowd is optimistic and will mark up the stock price. At other times, the mood will turn sour, and the share price will fall.
Whether you made the right decision to buy a stock does not hinge on its short-term price performance.
Instead, what’s important is the long-term growth of the underlying business.
And here’s where the third principle comes in.
While stock price movements in the near term are irrelevant, over the long-term, the stock price will reflect the value of its underlying business.
Take Apple (NASDAQ: AAPL) for instance.
Since the start of 2010, the iPhone maker has grown its earnings per share (that’s profits divided by the number of shares) by 20 times. Incidentally, over the same period, Apple’s share price has grown by around 26 times.
In other words, the growth in business value, represented by the increase in profit, is reflected by the rise in its stock price.
Finding the right way to invest
As you can gather, there are two main ways to make money from a stock, namely dividends, or the growth in its share price (that’s called capital gain).
Every successful investor views investing differently.
A good analogy can be drawn from the world of cooking.
In this case, there are many ways for chefs (“investors”) to prepare good food.
For instance, there are popular schools of thought such as French cooking. There are also cooks who specialise in a single dish. Then, there are chefs who delight in creating distinct cuisines by focusing on obscure ingredients.
In many ways, investing has a similar variety of styles as cooking.
For schools of thought, Warren Buffett is a popular figure in the world of investing. Hence, his many followers seek to emulate his style of investing.
But there are other successful investors who do not follow Buffett’s approach.
Just like cooking, there’s no one-size-fits-all approach to investing. Budding investors need to discover their own style — an approach that resonates the most with themselves.
At this juncture, there is a critical point you shouldn’t miss.
You can’t devour all this financial knowledge at once.
Trying to read every investing book out there before you invest is like trying to read every cookbook and master every cooking technique in the world — it’s not just overwhelming, but unnecessary too.
You’ll never know what approach matches your own personality until you invest in your first stock.
So, by all means, read as much as you need to find the right approach for yourself.
But it’s more important to get started.
You’re never ready for your first stock buy
There are things you can learn from books, and there are things you have to learn by doing.
Don’t be afraid of making mistakes when you buy your first stock. No one, even Buffett, gets it right the first time. You will not be an expert right away in any business but you can be an expert if you do one thing: pay attention.
Follow the developments of the underlying business every quarter.
Take notes on what the management plans to do and whether they follow through with action. Track the financial results of the company over time, giving the business ample time to show you what they can achieve.
In my experience, if you can follow a business closely for at least three years, you will know more about its operations than the average investor.
The key element here is time.
Time for the business to fulfil its potential. Time for the stock price to reflect the growth in the business, and most of all, allowing enough time to pass before judging your success or failure in investing in the stock.
To support this process, don’t be ashamed to start small.
It’s your own hard-earned money you are putting into the stock market, so don’t be tempted to invest all of your savings at one go.
Take your time.
As a rule of thumb, if you took two years to save up the money, then take at least half the time to invest — in this case, at least a year.
Your focus at the start should be about learning.
By keeping your investment small, you achieve two things. First, you have skin-in-the-game, which will help any lessons you learn stick in your head. Second, you will not be pressured to sell at the first sign of trouble.
Instead, you can focus on learning.
The faster you learn, the faster you can get better results in the future.
Get Smart: Your North Star
What should you expect to gain from stocks?
Historically, the US-based S&P 500 (INDEXSP: .INX) has delivered an average annual return of around 10% per year. Back home, the Singapore Straits Times Index (SGX: ^STI) has historically generated about 6.5% per year in gains.
If you achieve a higher return than these benchmarks, you would have beaten the market return.
Having said that, the most important thing is your personal financial goals.
In my mind, stocks are a vehicle to get you to where you want to go. Hence, you are successful when you achieve your own goals and not because you beat the market or did better than your peers.
That may well be the most important thing, call it your North Star for all your decisions.
Good luck in your journey ahead.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of CapitaLand Integrated Commercial Trust and Apple.
