Everybody ought to be rich - Mantas Skardzius

“Everybody ought to be rich” - this was John Raskob’s (one of the most outstanding figures in Wall Street in notorious 1929) cry in late twenties. His plan was simple: to invest 15 bucks every month in common stocks and this should result in 80 000 dollars fortune in twenty years (whereas contributions would constitute miserable 3 600 dollars). Though this idea turned out to be rather far-fetched, more and more people recognize pluses of investing these days. It might be surprising how fairly little knowledge about it can result in pleasantly high returns. I will try to explain those merits of investing and how to achieve them.
First of all, I should explain the differences between speculation and investing. Usually, investing in stocks is unduly viewed as something like melting pot: stressful, extremely knowledge/time consuming and so on. Well, if films “Wall Street” or “Boiler room” are your sources of knowledge about investing, you are wrong. Investors don’t make millions of trades a day (unlike speculators), they don’t lose or earn millions of pounds in ten minutes. That sort of thrilling ride is suitable just for handful of devoted people. Whereas investing, in turn, is long-term sort of saving – alternative to bank account.
So, what actually you forgo by choosing to keep your money in a bank account rather than investing in stocks? Let’s compare those returns. A number of studies have found out that average return from stocks in the past century was around 6% over long-term risk-free bonds (for example, 20-year UK government bonds). Roughly, you can expect to get give or take about 5% per year if you keep your money in a bank account. What is the result? 20-year UK government annual bond yield is 4%, interest for your deposit in a bank account – 5% and annual return from stocks 10%. How do these returns affect your long-term savings’ performance? As you can see in this graph, if you invested 100£ in risk-free bonds/ bank deposit/ stocks, those return differences would result in significant variations in final level of savings in twenty years. To be concrete, investment in stocks would multiply your initial sum over six times. Bank deposit and government bonds would only double your money (though deposit’s performance would be slightly higher).
How to get those impressive returns? Basically, there are two ways: investing by using your own knowledge and your techniques or investing your savings in some sort of mutual fund (in this case, you will have to pay for someone to manage your funds). I will try to explain both ways.
Are you determined to seek for higher returns as well as to sacrifice considerable part of your time for searching for good stocks? Then you should understand that colossal work is waiting for you. If you are determined to invest yourself, there are two main ways of analyzing and picking stocks that suit your preferences: technical and fundamental analysis. Technical analysis, in essence, is trying to predict future movements of stock price by looking at the past. Actually, this sort of analysis is usually applied to short-term trading. Nevertheless, it can be used to detect most profitable points to invest in or sell particular stock. Experienced investors usually keep an eye on various charts to notice sell or buy signals. In this example, you can see stocks performance in recent two years. Have you noticed that red line? Technicians call that sort of line resistance/support (depending on price movement). In essence, this level of price prevents price from keeping initial trend. How could you use this line? For example, you could wait for price to penetrate that line because, as you can see, once price fails to penetrate it, it has to set back a bit, before trying to turn upwards again. Once resistance level is penetrated, this line acts as a support for existing price. That is, it prevents price form going down. Apart from this fairly simple use of support/resistance levels, there are many other measures to analyze any chart, such as, various indicators, Fibonacci studies, Gann lines and so on. Surely, there is no way I could explain all the logic and rules of technical analysis here, I have just wanted to show you one of its applications and how it can improve your investment decisions. Though this sort of analysis requires considerable amount of time to master, it pays off in practice as you can get in/out of particular stocks more accurately.
Another way of searching for lucrative stocks is to delve companies’ financial statements, trying to calculate various ratios, to evaluate company’s long-term position, whole industry’s position. One of the strategies is to compare book value to market value and then take appropriate actions. It is called Value investing. Of course, I should mention that Warren Buffet, second richest man in the world, uses this strategy. Another strategy is to search for Growth stocks. This was extremely popular in 90’s, when dotcom
(“.com”) companies were viewed as of limitless opportunities. In that way, stock valuation is highly influenced by investors’ future expectations. You can even apply sort of mixed analysis: I have formed virtual portfolio of around 10 stocks listed in London Stock Exchange by searching for stocks with low PEG (http://www.investopedia.com/terms/p/pegratio.asp), P/E (http://www.investopedia.com/terms/p/price-earningsratio.asp) ratios and high growth expectations. My portfolio has grown about 5% in three months so far. Undoubtedly, there are many more strategies to follow – it is up to you to chose, which one is the best.
Alternatively, if you prefer to have more free time (of course you will have to pay for it), you can choose from great variety of mutual funds or index funds. That means, you will hire (indirectly) experienced professional fund manager to manage your funds. It is no surprise that mutual funds have become increasingly popular these days, since many people are not so confident with investing or simply feel lack of time but, however, they want to benefit from impressive market movements. Thus, the idea of someone looking after your savings to yield income sounds attractive, even though you will have to pay fees for that manager. Or you could buy index fund’s shares. This sort of fund is simply replication of certain index. For example, index fund can track FTSE 100 or Dow Jones Industrial Average. In that way, your savings will almost identically (don’t forget about the fees) reflect general market’s performance.
To sum up, the art of investing simply can’t be explained in one article. There are thousands of books that delve this way of saving your money. I have just tried to outline this activity briefly so that it could be your starting point for further progress. What I could recommend, if you find this topic both lucrative and interesting, is to try to read number of articles in www.investopedia.com. Those articles will provide you with more in-depth knowledge about it. Of course, to gain true understanding you should read respective books. In my opinion, those worth reading are these (I have got no doubts that there are many more):
• “The intelligent investor” by Benjamin Graham (bible for value investing)
• “Technical analysis for the financial markets” by John Murphy (great book about technical analysis)
• “Intermarket technical analysis” by John Murphy (this book explains how all markets (equities, currencies, commodities, debt markets) are related and how to use those relationships in your investment decisions.