Investment ‘Advice’

I’ll probably be much criticized for giving investment “advice” here that doesn’t correspond exactly to the conventional guidance that you can read elsewhere, but the fact is that the usual advice you will find assumes you have a decent amount of money to invest, like say, £5,000 or more. But what if you only have, say, £200, or maybe even a tiny amounts, like £60? What then? Can you still make money on the stock market? And lose it?

Well, of course you can! I’ll show you how in this article. But note strongly: this article does not consist of any sort of official investment advice: it is purely my opinion. I am not a licensed trader or financial adviser of any sort. I am not out to take money off you for myself, as they are. I am not an officially recognized financial ‘expert’. I take care of my own money, badly or well, as the case may be, and am responsible for my own outcomes, as are you with yours.

The Biggest Dangers When Investing

I take it I am not talking to children who need their hands holding with patronizing warnings about the dangers of unskilled investing, but still a few words need to be said that, for the most part, you won’t find elsewhere.

Wall St Lays An Egg

Headline from Variety, October 30th, 1929

Many people consider stock market and other such investments to be a form of gambling and so steer well clear of it. While there is a significant germ of truth in that idea, the fear of it may also prevent people from making any real money: they stick with a tiny percentage of interest in a bank somewhere and hope for the best, forgetting that in the long run, the stock market returns an average of 8% a year – and you can do much better than that. Plus, people’s pensions and life plans are invested in the stock market anyway, whether they like it or not. Why? Because that’s where the real money comes from in our screwy capitalist system. The stock market represents the fruits of other people’s labours, ultimately. It represents the net wealth of almost our entire business system. When the system is getting richer, or bigger, the stock market tends to go up. That’s basically why it is so much higher now than it was, say, two centuries ago. Business has expanded and speeded up enormously since then.

It is also worth adding that there is no way not to gamble with your money. If you stuff it under a mattress in your house, you are gambling that it won’t be stolen, or lost in a fire. If you leave it in a bank, you are gambling that it won’t be embezzled, or the bank fail. If you are relying on government promises to protect your savings, you are gambling that when a big crisis hits, the government will keep its word (historically, governments do not keep their word in a crisis. For a recent example consider that in the EU, Cyprus investors have lost 47% of their savings despite government guarantees). In fact, I wouldn’t trust a government promise as far as I can spit. The historical evidence of their dishonesty, stupidity and spinelessness is overwhelming.

Of course, the stock market is probably more volatile than simpler kinds of investments. The market can crash at any time; individual companies, even gigantic ones, can unexpectedly collapse overnight. It happens all the time. Recent examples of company failures from Britain and the USA include Enron, RBS, City Bank, CF Bancorp, Jessops, Comet, JJB Sports, Woolworths, Allied Carpets… the list goes on, and on. These were big household names in their day, but now they are gone, along with most if not all of the money invested in them. The key is not to avoid gambling – you cannot – the key is to gamble intelligently, and as safely as you can.

Diversify!

Certainly if you have £5,000 or more, you can afford to diversify your investments: with such amounts, you should never have all your money in one company’s shares – always try and split it between different companies, in case one crashes out unexpectedly. This happens all the time in the stock market, so you need to accept the reality of it and plan accordingly. With £5,000 you might well have £1,000 in each of 5 different companies in different market sectors, for example.

If that is all of your money though, you are still taking too many chances.

Rule No. 1 of Stock Market Investment

Never invest money you cannot afford to lose.

That is a simple rule, isn’t it? Take it to heart. If you will suffer material hardship now or in the future from losing some money, you must not take undue risks with it. Preserve your money first, invest second.

To do this, you must diversify both inside and outside the stock market (and other markets like bond markets, government savings schemes, and so on). What is strongly recommended, by myself and others, is when you can, to have a cash reserve set aside. These days, you have to be relatively well-off to have even a months’ living expenses set aside, but you should be aiming at having at least 3 months’ living expenses set aside eventually. Start from where you are, of course, but keep your eye on that goal. If you have no cash reserves, you will be forced to sell your investments every time some unexpected expense crops up (sickness, car problems, tax bills, and so on), and that will cost you money. Or, you might be forced into debt.

Most people don’t track their ‘emergency’ expenditure, but if you do, you will find that little ‘emergencies’ crop up just about every month. Keep them covered with easily accessible cash! It may be frustrating to be not investing this money, but believe me, it is better than sliding further and further into debt with each unexpected expense that crops up. I would further add that you should try to avoid taking out a loan to cover emergencies. You may not be able to stick with that, but at least, don’t go to expensive specialist loan companies like the payday lenders, credit card companies and other loan sharks that have cropped up like a rash before and after the latest recession, or you risk being mired in debt for the rest of your life. Go somewhere cheap like relatives, friends, and credit unions if you can join any near you.

Most advisors recommend not investing until you have your emergency fund in place, but I don’t go for that myself. If you only have a tiny amount of money you can afford to lose (£60 say, which was all I had), then I personally would prefer to get started. As bits of money come in, keep some in simple savings to build up the reserve, and invest something when you can – maybe every couple of months. Another reason to have a bit of cash handy is to use in case some good investment opportunity appears. As I’ll mention later, it is pretty-much true in the stock market (and to some extent elsewhere), that:

Rule No. 2 of Stock Market Investment

The opportunity of a lifetime comes along every couple of weeks.

So don’t worry if you miss one, but have some cash available to grab another when you can.

If you are in debt and paying interest, pay down the debt after saving some cash, but before investing. Interest rates are so high that beating that with investment profits, while possible, is very risky. If you are not paying interest, still try and get rid of the debts, but maybe save and invest too, if your creditors don’t mind (or aren’t aware of it). If you are in trouble with debts, read my debt management page and download the free e-book.

To summarize the above, your priorities should probably be like this, in this order:

  1. Get a cash reserve built up as rapidly as you can (1 month’s total living expenses, or more – ultimately at least 3 months’, including rent/housing costs);
  2. Keep your cash reserve but use any further surpluses to pay down interest-bearing debts and debts to friends and relatives;
  3. Invest!
  4. Pay down non-interest-bearing debts.

A minimally diversified portfolio may include a selection of each of the following, I suggest.

  • Cash in an immediate access savings account;
  • Cash in some tax-savings scheme like an ISA (in the UK), etc;
  • Shares in a number of companies in different sectors;
  • Government bonds (in the US, US Savings Bonds);
  • Silver coins (if the currency collapses, use these to buy food);
  • Gold coins (if everything collapses, use these to store/hide wealth for the recovery, or for your escape).

You might think the last one is a little drastic, but think about this: In the 20th century, only 5 countries in the whole world managed to avoid violent change of government from war, revolution or other violence. The economies of all countries went into deep crisis several times over this period as well. The world is not a safe place. Invest accordingly. And, I would suggest, ignore any laws that make it illegal to own gold and silver. Theft is not a morally acceptable law. But keep your mouth shut, too.

The above minimal diversification is not counting pension schemes (401K in the USA). Many people can’t afford these at the moment, or are too old to even think about beginning, so if that’s you, well, all you can do is shrug your shoulders and try to make your own pension from your investments. If you can afford a pension scheme and are young enough for it to be worthwhile, by all means go for it if you think the brokers can invest better than you, and if you think they won’t rip you off for investment fees. Or anyway, as a bit of insurance against your own efforts which might not, after all, turn out so well. That is the essence of diversification. If you can’t afford all this, then for now, at an absolute minimum, get some cash set aside for emergencies and stick a tiny amount in one stock. You have to start somewhere, after all.

Later, when you have some decent amounts of money available to risk losing, you can look at investing in:

  • real estate ownership and buy-to-let;
  • small businesses.

But for now, let’s not get ahead of ourselves. You have, say £60 to invest. What to do? Well first, you have to make yourself aware of this:

Rule No. 3 of Stock Market Investing

If your decisions are influenced by fear or greed, they are probably wrong.

We’ve all seen it in the news. The stock market crashes and everybody is selling out like crazy, panicking. Their behaviour is driven by fear. Are they wrong to sell out in a crash? Well… probably. While each person’s position will be different, in general it is a mistake to panic. Sometimes on the other hand, it is right to cut your losses and get out. Sometimes, it is a mistake because in a year or two the market will recover anyway. Mostly the market recovers from a crash in a couple of years. If your strategy is Buy & Hold, there’s no reason to sell. Then again, in 1929 it took about 25 years to recover. If we’re heading into a depression now, it is anybody’s guess how long a recovery might take. You never know. Mostly though, selling in a panic is a mistake.

Then people make another mistake. They grit their teeth and hang on through the panic, hoping the market will turn around in a week or two. The market turns up… then it turns down again… then up… then down… and so on: it is a full-on bear market (a market that is trending downwards). It never moves in a straight line, but overall the direction is downwards. Still they hang on, and hang on… and eventually they can take it no longer and sell out. Right at the bottom of the market. Now that all the weak holders have been squeezed out, the next bull market begins (a market that is trending upwards) but these ex-investors have lost most of their money and have to start from scratch. Most such investors just give up. What they should have done is simply stay in the market. Don’t sell. Wait a couple of years, or maybe five, for the recovery. In the long run, despite the disasters along the way, the market has always moved upwards. As long as civilization itself doesn’t collapse, and as long as business keeps improving methods and profitability, and as long as capitalism is the preferred system, that trend will continue. However long you have to wait, you can wait. If civilization does collapse, well, you’ll have other worries. Hide or dig out your gold coins, as appropriate.

In general, whatever the herd is doing, especially during the heady greedy days at the top of a boom or in the fearful days of a crisis, will be wrong. If what you’re contemplating is making you sweat, either with fear or greed, don’t do it: the odds are, it’s a mistake.

So, to minimize the influence of fear and greed, you must be objective. You must:

    a) measure your profits and losses accurately (use something like this Investment spreadsheet of mine in Excel 2010 or Open Document format);
    b) decide how you will react to market highs and emergency collapses in advance;
    c) when the SHTF, grit your teeth and stick to your plan;
    d) actively think about the results and make a better plan next time;
    e) whenever you find you’re fearful or hostile towards hearing the truth – listen carefully!

The spreadsheet is my attempt to keep a basic record of gains and losses – you might prefer to devise your own. I made this after I realized that online methods were not showing me my losses properly. At the bottom is a tab called ‘Example’ where you can see a sample filled in – purchases on the left, sales on the right, net totals calculated at the top right. The cells have formulas in them to do the calculations so you only fill in the dates, names, prices and costs and leave the rest up to the spreadsheet itself. You don’t have to buy and sell on the same row: they are organized by date not by stock name. If you’re buying, leave the selling columns empty, and vice-versa. Note when buying and selling to get the currency right. $1 is entered as 1, but 15c is entered as 0.15, and so on. And if you buy some as $, some £, some € then you’ll need to convert them all to the same format. Ideally your stock trading company will let you view statements in your own currency.

Strategy, or Why To Invest in a Particular Way

There are probably as many strategies as there are people and companies, but I personally like the three listed below. But first:

Rule No. 4 of Stock Market Investing

There is no perfect strategy.

If there were a perfect stock market strategy, everyone would use it and it would cease to work. When you make money on the stock market, someone has to pay you that money. Your aim, unfortunately, is to take money from people who are less careful, less professional, or less lucky than you are. While there is real growth in the markets too, you can’t get away from the basic way the capitalist system works: it transfers money from the financially unwashed to the financially savvy; and from the poor to the rich. Capitalism also penalises the stupid, and fast. You must make sure, especially when you are poor and ignorant, that you take measures to ensure you stay on the right side of that equation as much as possible.

You do that by staying very conscious of what you are doing, and why, and what your plans are, exactly. And by not being swayed by greed or fear, because your plans allow for them too. Plus, make sure you listen carefully to news you don’t want to hear. You will not always be right.

Is it immoral to take money from other people in the stock market? Well, it is a bit of a mixed bag. You can’t do much good in this world without money, for a start. You can do a little, but with money, you can do more (ask Bill Gates). Secondly, other investors are in the market knowingly too, like you. Even pension fund holders. The risks they take are up to them. Thirdly, the system allows business to get much-needed capital from shareholders, allowing those businesses to invest in greater profitability at relatively low risk (for them). Without the stock market, we’d still be living in a basically agrarian 17th Century society, with hardly any decent medicines, labour-saving gadgets, communications technologies or much else besides. So, yes, the system isn’t perfect, but it does work… kind of. You can’t fix the system, but you can put yourself on the receiving end of some of its benefits, if you’re careful, and you can do some good with that money if you want to, once you have some of it.

The same rationale applies to investing in questionable companies like, say, tobacco companies. If people insist on setting fire to their money, well, doesn’t it make sense that they give some of it to you first? The addiction is terrible, but you’re not going to cure it by doing nothing. It is up to them, and society at large, to find ways out of their problems. It is up to you to sort your own life out, and taking money from people who are wasting it is as good a way as any to get started, it seems to me.

Having said that, I’m uncomfortable with investing in weapons companies, where the aim, after all, is directly to kill people. These products are sold to warmongering politicians who shouldn’t be allowed to run our countries or to start wars, but we routinely let them do so. Ultimately the same logic applies but personally I don’t accept that it should be applied to the point of risking the destruction of my life, civilization and even the world itself at the hands of psychopathic loons, thank you very much.

Strategy No. 1: Buy & Hold

Aim: Dividend Income

The Strategy: Buy shares in good solid companies that you believe are going to be around for the long haul. If you want dividend income, pick companies that pay good dividends. Don’t sell them unless the situation changes significantly.

Many consider that the Buy & Hold strategy would probably have been the most profitable strategy for the past 100 years and more, if you had picked good companies in the first place, of course.

For this strategy, you are looking for companies that are providing essentials that people are going to need or be addicted to for a long time to come: food, washing materials, fuel, utilities, caffeine, expensive credit, and so on. These companies are often boring household names that you know from your own high street, so you can see how well they’re run by how well they run their businesses in your area, and how many customers seem to like or need them.

If you find a shop on your street that is a big name, but you don’t like shopping there, or they don’t seem to have much that you need, then you know that their days are probably numbered. Sure, they may hang on for another decade or so, but in the end, if they don’t refocus their business, they are doomed, and no good for this strategy. Woolworths in the UK was a good example of such a company. Their demise was obvious from more than a decade prior to their eventual closure.

Sometimes these companies will be little-known to the general public, but if you look on the backs of the plastic bottles of liquid detergents and cleaning fluids and other essentials that you’ve been using for years (for example), you will see who they are. Similarly if you work in some particular field of business and know of big suppliers of essentials for manufacture or distribution, such companies may be right for this strategy.

You can go deeper into this strategy and find ways of assessing companies based on ‘fundamentals’ like their profitability, dividend yield and so on, but at first you can start simply with big names that you know, and that you can see are doing well, and where people are going to continue to need their products for a long time to come.

What you get out of this strategy is two things:

Dividends – the companies pay a portion of their profits to shareholders. Ideally you will reinvest this automatically to get the benefits of compound interest over time.
Growth in their share price over time – if this happens it is a bonus. Over the years it is likely to happen even so, as the economy is based on the (seemingly crazy) idea of perpetual growth. As long as this works, you can profit when you eventually sell the shares.
Shares you hold count as assets and can be used as security for business loans, for example – so rather than selling them, you might borrow against them at a lowish interest rate to set up a business. That is a risky strategy for when you are a wealthier, more advanced investor, of course.

Although Buy & Hold is good, personally, I would still be tempted to sell if I could figure out where the bull market tops are, and buy back in at the bottom of bear markets. Of course, timing the markets as accurately as that is impossible, but when you can see that prices are generally insanely high, everybody is euphoric and promoting stupid investment schemes or the latest hot investment craze and maybe you are beginning to lose sleep over your portfolio, it might be sensible to examine your holdings and convert at least some of it into cash for a while, and see how it goes. The late investment guru Bob Beckman used to say that whenever you lose sleep over your portfolio, sell 10% of it. You’ll probably be out of the market before it finally falls over, but if not, at least some of your cash may be protected.

I have since found that my suspicions about Buy & Hold are actually sensible. There is good evidence that ignoring the stock prices or values is nonsense. It may be that Buy & Hold is a bad strategy. One author suggests an alternative, Value-Informed Indexing. It is similar to Buy & Hold except you re-jig your holdings about once every 10 years – I haven’t read the details yet but presumably you ditch the ones that are overpriced and get some cheap alternatives in. You might want to read up on it, but in terms of getting long-term dividend income, Buy & Hold seems to me to be a good place to start – but with underpriced shares where you can find them. Share valuation is measured by the P/E ratio (Price to Earnings ratio). 0-17 is considered cheap to fair, above that and the shares start to look too pricey (according to this theory).

Strategy No. 2: Opportunity Picking

Aim: Short-term profit.

The Strategy: Look for big-name companies going through a temporary severe crisis, and buy in while their shares are cheap. Sell when they recover to their pre-crisis values (or some other target).

Because people panic when they hear bad news, they sell shares irrationally. When a big company like BP goes and spills a load of oil in the Gulf of Mexico and gets sued by the US government, or when Thomas Cook gets into too much debt due to overexpansion, and it is all over the mass-media, people sell those shares.

But you know that in most (but not all) cases, those companies are going to recover. They are big, solid companies and they are not going anywhere. Thomas Cook, for example, fell from a price of 200p per share in 2011 to a low of just 10p later that year. Now, they are back to 161p and still rising. Now if you had bought say, £100 at 10p, that would be 1,000 shares. Now at 161p each, your £100 would be worth £1,610 (less dealing charges of about £10). Where else will you make that kind of money for nothing?

When BP spilled a load of oil in the Gulf of Mexico in the Deepwater Horizon disaster (April 2010), their shares fell from about 650p to a low of about 305p, but the price was almost up to 500p by the end of the year. Currently they are around 470p. £100 invested at the low would now be worth about £154. Not so great, but not to be sniffed at, either. You won’t get 54% interest in any savings account around here, let’s face it. And since BP came down from 650p in the first place, maybe there’s still some mileage in those shares even now.

Sometimes, of course, it goes horribly wrong. The company will actually fail. In this case, you’ve lost your £100 or so. But of course, you’re not investing anything you cannot afford to lose, are you? Because sometimes, you will lose, and your nerve will be tested.

Strategy No. 3: Channelling

Aim: Repeated short-term profits.

The Strategy: Some shares drift up and down by a few percentage points pretty regularly: every month or two, or a couple of times a year, maybe, for a few years if you’re lucky. Buy low, sell high. Rinse and repeat.

If you are only able to invest small amounts, remember when using this strategy in particular to allow for your dealing costs. If you are charged £10 on each buy and sell, for example, and you invest £100, then remember that you have to gain £20 (20%) just to break even. Any stock that grows by less than this will lose you money. This is true of the other strategies too: the bigger the sum you invest, the less growth you have to achieve before you are showing a profit.

Finding stocks that ‘channel’ – that go up and down pretty regularly between more-or-less the same highs and lows – can be a bit difficult and tiresome. There are sites and charting software online that purport to help, but I’ve not found them much use. The only real method is to trawl through the thousands of stocks yourself, looking at the charts, and see if you can spot any. Low-priced, so-called ‘penny shares’ that have prices below £1 or $1, seem to be the best bet, in general. Fewer people are interested in them and the news affects them less (unless it concerns them or their field of operations directly).

Of course, you probably shouldn’t expect to be able buy exactly at the low and sell exactly at the high, but you can try and get in near there. Of course, expect that as soon as you start investing in them, the pattern will change a bit: that’s life. But when it works, with simple patience, it is free, regular money. And what’s wrong with that?

This strategy cries out for the more advanced technique of using put options as well, so you can profit on the price falls too, but for beginners, I would forget all that and just stick to the simpler stuff. That is quite tough enough to get right.

There are many, many other strategies: The Dogs of the Dow or Dogs of the Footsie is one that comes to mind. You might think up your own, after getting a bit of experience perhaps.

How to Get Started: Get an Online Account

Really, that’s it. Find an online trading site that will allow you to trade in the kinds of shares and markets you are looking at, send them any necessary documentation, fund the account and get started. Over time, you will learn the strengths and weaknesses of this particular site and after a while you might move to one more suited to your needs. But first, get started!

Stop Loss

If your trading system allows you, and it suits your strategy, set stop-losses for your stocks. Stop-losses are prices the computer will try to sell at automatically. So, if a stock you have purchased is sliding slowly but inexorably downwards, you have set an objective minimum at which you don’t want to hang on to it any more. In a crash, a stop-loss will sell too, and not necessarily right on time, and maybe way below the price you set, many hours later when the trading system has caught up with the backlog of trades. In a crash, a stop-loss might, or might not, suit your plans, depending on whether you plan to sell out in a crash, as I have discussed earlier.

A stop-loss can also be used to lock in gains. As a stock rises, you can set a stop-loss some way below the peak so if it slides down but is still above the price you purchased it at, you sell out but still have some gains locked in.

A Final Word About The Media

Let other people take the media seriously. You only listen to it to see what stories might be scaring people or encouraging their greed, and which stocks that will affect. Even the financial press, for the most part, print rubbish most of the time. Why? Because they have pages to fill, so they have to print something. That results in stories full of speculation, or back-fitting explanations to the facts (the market/your favourite share went up/down yesterday because of X). Remember that in science and when practising rigorous thinking, what you have to do is predict what will happen based on your best theory, not explain it afterwards. If your prediction is right, your theory may be right. If your prediction is wrong, your theory is wrong. Back-fitting the explanation to the facts is sheer balderdash almost all the time.

Dilbert Warns on Stock Market Investing

Dilbert Warns on Stock Market Investing

Honestly, about the only paper I can think of that tells the truth most of the time is the Financial Times of London and there’s far too much information in there for anyone to realistically absorb. The rest really are largely full of hot air designed simply to fill space and sell advertising. They are good, though, for considering what will be influencing other people. This includes papers like The Wall Street Journal, and Barron’s weekly magazine. My personal view is that there is little need to read any of these papers closely. By all means, keep an eye on them, but if anything important happens that is relevant to you, you’ll hear about it anyway. The rest is just meaningless random noise about this or that crisis, argument, government bullshit, booming markets, criminal scandals and other such nonsense. They, or the advertisers, just want your money. If you watch the papers you will see how the mood varies up and down from one day or week to the next with no rhyme or reason; they are just messing with your brain. Don’t take those idiots seriously, please.

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