Stock investing is a great way to build, hold, and sustain long-term wealth. As of now, I earn regular dividends in 8-9 months each year from my stock portfolio. I also have co-founded DividendVault.com, where I’m “manufacturing” investors, who could build and manage their own dividend portfolios independently.
Such ability to build and manage portfolios is “true freedom” for investors.
Aside from recurring dividends, the “abilities” acquired allow investors to invest without needing:
- Stock tips
- Market predictions / forecasts.
- Buy-sell recommendations with target prices.
- Charting softwares / technical analysis tools.
- Validation from friends, family members, colleagues and gurus … etc.
- and so on and so forth.
All of the above becomes irrelevant once “real abilities” are mastered.
Today, you may be new to stock investing. That’s great. I believe that you’re one who might have a desire to become wealthier and hence, you’re exploring. So if that’s you, read on. I’ll list down key pointers that could allow you to get started in stock investing as a complete beginner.
Let’s begin:
1. The First Thing You Should Know is …
not on:
- which stock brokerage account should you open?
- what stocks to buy?
- when should you buy or sell stocks?
Those questions come later.
Instead, the #1 thing you should know is the difference between a speculator, a trader and an investor. You see. Not everyone, who buys, holds, and sells stocks in the stock market, are “investors”. There is confusion when a speculator refers to himself as a trader or an investor. So, if you are a newbie, you must learn and understand their differences and choose who you like to be in the market.
Simply put, a speculator buys into stocks that “he believes” could grow in prices in the short-term. Such beliefs are backed by emotions like greed, rumours, and recommendations. A trader uses price charts and technical tools to trade stocks for short-term profits. Simply put, both speculators and traders want faster and quicker results but speculators rely on “luck” while traders use “technical tools” when executing their trades.
Investors are totally different as they are “businessmen”. They aim to buy, hold, and accumulate shares of good quality businesses in the long-term. The famous and notable investors are Warren Buffett, Charlie Munger, and Phillip Fisher. So, to these investors, their “wealth” lies not in the buying or selling but in their art of waiting, keeping and accumulation of good businesses for decades.
So, which of the three would you like to be?
If you want to be a speculator or a trader, this article ends here for you. The key reason is this – “I’m not a speculator or a trader and I believe the above two are not suitable for me to build long-term wealth in the stock market.”
But if you aspire to be an investor, read on.
2. Power Skill #1 – Accounting
My secret power in stock investing is “accounting” which is the ability to read & interpret financial statements of a stock. Such ability allows me to to find stocks that could deliver:
- Income: Growth in revenues.
- Expenses: Control costs and thus, maintain good profit margins.
- Profits: Growth in shareholders’ earnings.
- Assets: Expansion in business assets
- Liabilities: Reduction of control in debt or debt repayment capabilities.
- Equities: Expansion in net worth.
- Cash Flows: Growth in operating cash flows.
So, “accounting” helps me to identify winners from losers in the stock market & builds my watch list (all consisting of winners).
I can’t imagine buying stocks in the stock market without this skill. That’s risky. I believe when one says that “stock investing is risky”, what he actually meant is – “Buying stocks without reading financial statements is risky.” Since most people in the stock market don’t read financial statements, that is why “stock investing is risky” to them.
As a matter of fact, they aren’t investing but trading or speculating.
3. Power Skill #2 – Valuation
Once I build a watch list, I use my “Secret Power #2 – Valuation” to evaluate, if a stock is undervalued, fairly valued or overvalued. Such ability could allow me to do the following:
- Undervalued: Buy and accumulate.
- Fairly valued: Buy and accumulate.
- Overvalued: Hold.
- Superbly Absurd Overvalued: Sell to realise capital gains.
The methods I use to value a stock is based on the stock’s actual productivity. In essence, productivity is about earnings, dividend payouts & operating cash flow over the long-term. So, the common tools I use to value stocks are:
- P/E Ratio: value stocks against earnings
- Dividend Yields: value stocks against dividend payouts
- P/OCF Ratio: value stocks against operating cash flows.
Without this super power, there is no way to tell if a stock is cheap or expensive based on its trading price.
But since most people don’t read financial statements (Super Power #1), what’s happening is – they can’t do proper stock valuation. Because of that, they might need to look at charts, technical tools, buy-sell recommendations, guru’s advice and so on and so forth to make stock buying or selling decisions.
So, investors base their decisions on “value”. The others focus on “price”.
Huge difference. It is profound and important to appreciate this in investing.
4. System
Today, I build and manage my stock portfolio with systems, which are processes and steps to answer questions as follows:
- What stocks to buy?
- What prices should I buy?
- How many shares should I buy and keep?
- What’s the weightage for this stock in my stock portfolio?
- The price of my stock has increased. What should I do?
- The price of my stock has declined. What should I do?
- and so on and so forth.
I built my systems with both “accounting” and “valuation” skills. With them, my portfolio can be managed logically without panicking or worrying about the ups and downs in:
- Stock market.
- Interest rates.
- Oil prices / commodity prices like crude palm oil.
- and so on and so forth.
But, when one doesn’t have a system, he or she tends to worry and could make stock buying, holding or selling decisions largely based on “emotions”. Such can be ad-hoc and they are quite detrimental to wealth building in investing.
5. RM 25k Portfolio – The Pivotal Moment for Any Investor
There is a process to becoming a good investor.
It is not so much about “money” but the “mindset” that matters.
Looking back, I started with little capital, knowledge and experience. For me, I’d focus on the latter two for I know that capital would eventually be raised either via work or business. So, what I did was to educate myself on investing and also to be committed in the long-term process of such learning.
My “moment of transformation” happened when I had built a stock portfolio as a newbie investor worth RM 25k. RM 25k wasn’t much but it was meaningful. It is pivotal as I have learnt how to:
- Raise capital to invest via work or business engagements.
- Build a watch list of fundamentally solid stocks (accounting).
- Do stock valuation to select undervalued stocks (valuation).
- Earn my first few dividend income.
- Experience stock price volatility and how I deal with them emotionally.
- Admit mistakes made and derive lessons out of them.
Such lessons propelled me to build a larger portfolio in subsequent years.
I attained bigger dividends + capital gains, after learning from my past mistakes. So, the first RM 25k is important to me and I believe it is for you too.
But, here’s the thing.
You would only appreciate from this RM 25k experience if:
- You are committed to be an investor (not a trader or speculator).
- You learnt about “accounting” and “valuation”.
- You built a watch list and invested only in fundamentally solid stocks.
Once you hit RM 25k, you’ve graduated as a beginner and you could move onto building bigger portfolios (RM 50k, RM 100k or even RM 1+ million) in different stock markets with better quality stocks in the near future. So, if you are new to stock investing today, your focus is to learn, gain experience, and aim to build & manage a portfolio worth RM 25k (for a start).
To get you started, you may check out the following resources:
Books:
- The Complete Dividend Investing Guide that Works!
- Once Upon a Time in Bursa
- Rich Dad’s Guide to Investing
Free Webinars:
