Timing and Buying Stocks
A question I have been getting a lot in recent times is, “Which stocks are a good buy right now?” Unfortunately, my answer for most people is none. Firstly, I am not a licensed financial advisor, so strictly speaking, I cannot tell anyone which stocks to buy. Moreover, each individual’s specific circumstance varies and so only THEIR personal financial advisor would have enough information to adequately advise them on which stock they should buy if any at all. This is not to say that the companies on both the local and international exchanges are bad buys. The majority are just bad buys right now for most people. I could simply say now is not the right time to buy some shares based on the simple fundamental rule of buying assets when they are on sale but I feel that in doing so, I would not have done you, my valued audience, justice. Therefore, here are a few reasons why NOW is probably not the right time for a novice investor to be buying stocks.
1. You haven’t learned enough…
We spend, on average, 1000 hours in school studying our craft before we are allowed to go out into the working world to practice. Normally, we don’t even start out doing the job we studied for until we have spent some amount of time working at the lower levels. Why then would we not employ the same due diligence in matters of investing? In fact, I would argue that we ought to spend no less than 5000 hours studying an asset class before we consider injecting a sizable amount of our funds into it. So what are we supposed to do with our money? Allow me to suggest two separate paths to consider in terms of what to do with money while we are learning.
These paths are dependent on age. Being in my early twenties, I would save the money. Now, before you call me a traitor to the creed of not saving currency, let me explain. If I were in my late twenties or early thirties I would loan the money out, keeping it mobile. I would do this because I could be fairly confident I would have protection for it. (If you have a means of such protection then, by all means, employ this strategy) If I do not have that confidence then I would (dare I say it) save the money under a relatively secure and liquid scheme until I have amassed sufficient knowledge to participate in the asset class I would have been studying.
I went and bought my first stocks the very day after I listened to Rich Dad Poor Dad by Robert Kiyosaki, why? Because I wasn’t yet able to buy a single-family home. Given the chance to do it over, I would probably do the same thing as I have come to place a very high value on the experience I gained from this error. You, on the other hand, have this article among others so you can learn from my experience.
See my article “Strategies for Escaping the Rat Race- The Capital Gain Strategy”
2. Lack of Financial Education
This point follows on from my first point and is broken down into more detail in my subsequent points. Effectively, financial education constitutes knowledge of five things:
Taxes and Accounting
Knowing what I now know, I know I should have studied all of these subjects for stocks and other paper assets before I jumped headfirst into this asset class. I can tell you this, I would have been a multimillionaire today had I done half of my homework (at the time of this writing my net worth is still negative)
3. No knowledge of History
I bought my first shares in October 2013. I had just listened to Rich Dad Poor Dad by Robert Kiyosaki and I was pumped. I wanted to start owning assets. I knew I did not have enough money to afford the down payment on a two-bedroom, two-bathroom home that I could then rent and start getting passive income. However, I remembered that my Supervisor had shown me the Jamaica Stock Exchange in the summer of the same year when I worked with him creating electronics lab exercises. I decided I was going to buy shares. I went to one of the financial institutions located on campus and told the Teller at the front desk what I wanted to do and she directed me to their brokerage section. Within three hours I was the proud owner of two stocks.
This is where the lesson begins. Firstly, I did not know at that time that we were still in a recession. I was an Electronics and Medical Physics major, I knew nothing of the economic status of the country or worse, the world. I did not understand that the companies I was buying were actually being sold at a premium, that they had recently undergone a stock split (I had no idea what that was at the time either way), or that they were all previously trading under one company that had just recently subdivided into three parts based on its operations. I did not study the history of the companies or of the Jamaican stock market. It was after acquiring those shares that my education began. All I knew was, I could buy shares in these companies, they would send me a check every quarter and I would effectively own an asset. Even this last part was not explicitly true, but again, I did not know this at the time.
4. I Can’t Read a Financial Statement
Every person and every entity, whether it is a business, a stock, a piece of real estate, or a block of gold has a financial statement. Sounds weird? Well, it’s true. I will prove that to you in another article. The essentials that one needs to know before he/she gets involved with stocks or any asset for that matter are these:
What are the expenses of the asset?
What income does the asset provide?
Is there any debt associated with the asset?
How liquid is the asset? (How soon can I sell it to get back cold hard cash) and finally,
How will I profit from the asset i.e. will I be getting cash flow from the asset or will I have to sell it at a higher price (capital gains through appreciation) for me to get money out of it?
All of this information, and more, is found within the Financial Statements of the associated asset but if we can’t read it then we are left to take hearsay as the grounds for our investment. This is not just unwise, it is effectively the same as gambling. Value Investors do not gamble.
Note: Strictly speaking, if something does not provide cash flow through rental, interest payment, or dividends, then it is not an asset, it is an acquisition. (See Robert Kiyosaki’s Rich Dad Poor Dad and Tony Robbins’ Money — Master the Game)
5. Everybody is Doing It.
Consider this a general rule of thumb, if something falls into the category of the hot thing to do right now and you are just hearing about it, you are too late. At the time of this writing, certain stocks on both the Jamaican and American Stock Markets are at all-time highs. These stocks are pushing higher and higher every day, they are currently the hot stocks to buy right now. Enough said?
6. I’ve Got No Security Money.
One very important lesson I learned from my early involvement in investing is this; If you are going to invest in any asset, be sure that you are using money for which you do not have an immediate need or could otherwise lose. This is particularly true when one is investing for capital gains. Anything can go wrong, even after we have done all the fancy fundamental and technical analysis. At the end of the day, we ultimately have no control over the emotional responses of the market. Further to this, Tony Robbins, in his video “Financial Freedom — 3 Steps to Creating and Enjoying The Wealth You Deserve” talks about the three buckets into which we ought to put money for investing. The first and most important bucket being Security. I concur with his suggestion. You do not want to make the mistakes I made in my first two years as a novice investor.
Let me end this by stating again that if at the time you are reading this, you have covered all the bases outlined above then you can disregard this post and purchase as many shares as you would like (consult your personal financial advisor). If not, then you know you have much work to do before you get into stocks.