By Ryyan Chacra
The summer after my first year of college, I worked as a caddy — my first paying job. Seeing my excitement at making my own money, my parents suggested I invest my earnings in the stock market. Although I was still financially dependent, my parents thought I should learn how to save and grow money in order to support myself in the future.
The idea of investing intimidated me. I had a vague understanding of stocks, but trading seemed like it was reserved for mid-career professionals and Wall Street investment bankers. I expressed these concerns to my parents, who were sympathetic, but they urged me to do some research and give investing a try.
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Wanna Bet? Put Your Money on Vegetables, Not Perfume
Of course, there is risk involved in investing. The fluctuating value of a shareholder’s shares is largely out of her hands. It is subject to decisions made by the company, relevant economic shocks and shifts in demand for the company’s product. The only power a shareholder has is to decide which stocks to purchase and when to buy and sell them. In this way, purchasing stock is like making a bet. You want to invest in the company you think is most likely to prosper; if you choose poorly, you probably will lose money.
So which industries offer both reliability and the promise of growth? On my parents’ suggestion, I turned to the guidance of legendary investor Warren Buffett, who recommends the book The Intelligent Investor by Benjamin Graham.
Graham suggests that the most successful and reliable investments are often made in staple industries such as energy and natural resources, because demand for energy is sustainable over time and companies in these industries are well established.
With the immense wealth of Warren Buffett in mind, I was surprised by Graham’s suggestion to invest in staple industries. I expected him to advocate a complex approach to identifying obscure companies on the brink of taking off. I thought investment success came from somehow magically picking the winners among the swell of tech startups like Facebook and Tesla. However, Graham warns against trying to pick stocks based on their glamour and speculative potential. While some of these flashier prospects do succeed, most are hyped up and underperform. As a way to remember this principle, Graham says to pick stocks like vegetables, not perfume.
Picking My First Stocks
I took my first few hundred dollars from caddying and went with my dad to a brokerage firm to open my account. I was given online access to my account and all of the tools the bank offers for researching and buying stocks.
I began to look at companies like Chipotle and Tesla, as well as other big names such as Amazon, Apple and Google. I quickly grew skeptical that I would be able to make meaningful investments with only a few hundred dollars. Many big-name companies’ ticker prices exceed $300 a share.
But then I recalled Graham’s philosophy of purchasing stocks like vegetables rather than perfume, and decided to look into staple industries such as energy and chemicals, which tend to be more affordable. I compiled a list of companies that seemed like strong investments based on recent news, expert analysis and my own opinion: Suncor Energy, Noble Energy, Newmont Mining and Dow Chemical. At the end of the summer, I bought a few shares of each and started tracking their performance daily.
Doing Your Homework
So, you’re ready to get started, but where do you begin researching which stocks to buy?
- Financial news: News articles about companies and market trends give you a sense of a corporation’s current financial health in terms of their supply chain costs, public demand for their product, earnings relative to industry standards, and expert opinion on the company.
Example: An article about an electric car company opening the world’s largest lithium battery factory may lead you to consider investing in a graphite stock because graphite is used to make lithium batteries.
- Personal observations: Personal observations about the service a company provides, and how well it provides that service relative to competitors, offer an intuitive understanding of the demand for that service and therefore the current and future potential of the company.
Example: Personal observations in the early 2000s about the quality and demand of a certain fast-casual burrito chain restaurant relative to its competitors may have led you to purchase stock when the company went public.
For more on getting started, get the free download 20 Keys to Being a Smarter Investor.
Learning to Lose (For Now)
For those who have followed oil prices since August 2014, it will be obvious how my investments in the energy companies performed over the next few months. Between August and November, oil prices fell from roughly $95 a barrel to $65 a barrel thanks to a significantly increased supply of shale oil from U.S. oil producers and a decrease in oil demand from China. By March 2015 crude oil hit as low as $46 a barrel. The fall in oil prices led to a 20 percent drop in one company’s stock price and a 30 percent drop in the other’s (low oil prices predictably crunch oil companies’ profits).
Though I hadn’t invested a lot of money to begin with, my relative losses were substantial. I was discouraged. I had done my research and I was confident my picks would perform well, but I neglected to look at the oil market as a whole. As usual, I discussed my frustration with my parents, who shared with me the golden rule of investing: Patience is the key. While it’s tempting to sell shares of companies when stocks are falling, holding out for recovery is usually better.
Consider these words of wisdom from industry veterans:
“It is very significant that stocks, in contrast to bonds or bills, have never delivered to investors a negative real return over periods lasting 17 years or more. Although it might appear to be riskier to accumulate wealth in stocks rather than in bonds over long periods of time, for the preservation of purchasing power, precisely the opposite is true: the safest long-term investment has clearly been a diversified portfolio of equities.”
— Jeremy Siegal, Ph.D., professor of finance, Wharton University
“If you hope to have more money tomorrow than you have today, you’ve got to put a chunk of your assets into stocks. Sooner or later, a portfolio of stocks or stock mutual funds will turn out to be a lot more valuable than a portfolio of bonds or CDs or money- market funds.”
— Peter Lynch (considered one of the most successful stock market investors of all time)
“… the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing…one of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom.”
—Jack Bogle, founder of the Vanguard Group
The bottom line is, when investing in “value-priced” stocks (stocks based on the value of a company’s product and financial health), patience over a decade or more has a very good chance of yielding positive returns.
This insight dramatically changed my outlook. I realized that I’d been thinking about it all wrong: Investment success doesn’t take days or even months — it takes decades.
Waiting long enough (with investments in solid companies) almost always yields positive returns, so the earlier you start to invest responsibly, the more successful you are likely to be. If all the investments I made in August yield positive returns in 15 years, I will have grown the money just in time for my early thirties, by which time I probably will have completed my education and settled down.
So if you are able to set aside a couple hundred dollars and commit some time to doing the research, I encourage you to consider investing. It may well be worth overcoming a little intimidation. I don’t know how my investing experiment will turn out, but I’m optimistic. Check back with me in 15 years.
[The views of the author are his own and do not represent financial advice. Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]