5. Investing yourself is rewarding in many different ways
But there is more to all this than just money. Hopefully, as I have found myself, you will discover it can be fun, interesting and immensely satisfying to invest personally in the stock market. It also helps you to stay humble; on occasions you can be intellectually correct but still lose money!
I agree that if you constantly lose out in your stock market ventures it is highly doubtful you will stick around to appreciate these finer points. However, most of the long-term self-directed investors I know, who follow sensible rules, make money.
So, you’ve made the decision to invest yourself, but how practical is this?
Is it feasible to invest yourself?
The good news is that it has never been easier to manage your own investments. In this area, as in many others, the internet has changed things dramatically.
On websites today there is a wealth of information and research available to make investment selection and self-management far easier than ever before. But it’s not just about being a more informed investor. The websites also provide investors with many tools that make management and investment choice much easier and quicker. You can rank companies by dividend yield, earnings growth, PEGs – and much more. Stock filters that carry out searches for you for stocks that match whatever criteria that you want are understandably popular and extremely useful (don’t worry if you don’t understand all these terms, most will be covered later in the book).
The online platforms also allow you to deal at a fraction of the cost that used to apply. Dealing from £5 to £15 flat rates are now common. On the subject of dealing, it has to be said that the use of limits, stops and trailing stop orders make dealing much more effective and reduce risk. I will devote a separate chapter to this whole subject. These platforms make effective self-management of your investments a relatively straightforward task.
In summary investing in the stock market over the long term can have a very beneficial effect on your wealth! Controlling the investments yourself and making your own decisions has never been easier and is interesting and fun. In the long-term, annual management charges made by professionals make it entirely possible for the average layman to outperform them.
Why don’t you give it a try? If you have doubts, why not split your investments and measure your performance against the professionals. You may be surprised just how good you are!
Endnotes
1 Barclays Equity and Gilt Study (BEGS) 2010. [return to text]
2 BEGS 2010. [return to text]
Chapter 2: A Common Sense Approach to Investing
The application of common sense
As Warren Buffett once pointed out, investment is not a subject in which the person with the highest IQ will do best. I for one take great comfort in this view. I have always thought that investment is a relatively straightforward subject that is best kept simple.
It constantly amazes me how many people who are successful in their business lives seem to struggle when it comes to investing money. They should analyse why they have been successful in their own fields. Very few will have been technical experts. Most will have had a general interest in the area of the market concerned and would have adopted what many would describe as a common sense approach.
It seems to me many forget these principles when they enter the world of investment or decide, wrongly, to delegate the management of their money to people who are less able than they are.
Back to basics
Let’s go back to the very basics before we draw up some simple guidelines that hopefully will help.
When you buy shares in a company you become one of the owners of that business. The extent of your ownership is dictated by the number of shares you own compared to the total number in issue. The total value of a quoted company is referred to as its market capitalisation (often abbreviated to market cap), and this is calculated by multiplying the total number of shares by the current share price.
What’s in it for you?
As the part owner of the business you are entitled to two financial benefits:
1 A share of the current capital value of the business represented by the current share price.
2 A share of the annual profits. A proportion of these is often paid out each year as an income and is referred to as a dividend.
This being the case, you should ask yourself what type of business you would like to own. If you were buying the entire business you would undoubtedly think very carefully about this. You should do the same when it comes to buying shares.
Invest in what you know
Warren Buffett talks of this as the investor’s circle of confidence. It’s obvious, and only common sense, that the investor should focus on areas or sectors that interest them and they know best. At the very least the investor should appreciate what a company does and how it makes money. Often when I speak to investors about their shareholdings they have no idea what a company they own actually does!
The American investor, Peter Lynch, had a similar idea when he recommended investors to invest in what you know. He believes that the individual investor has an advantage over the professional fund manager because he believes they have more of a normal life than fund managers stuck in Wall Street. He records the fact that he has found some of his best investments when he was just going about his normal life.
I agree with Lynch’s thinking. If you keep your eyes open and your brain turned on when just living your life, you can spot great stock market opportunities – long before the figures become visible even to the most perceptive of stock market professionals.
Examples
Let me give you a few personal examples that illustrate that good investments are not only found in the Financial Times or broker’s reports:
1. ASOS [ASC]
The first involves an old favourite of mine and goes back to April 2005. I came in from work and found my three young teenage daughters gathered around a laptop. I asked what was so interesting and they replied ASOS! I asked them a few questions about the company, more out of politeness than real interest.
I thought no more about this until the next morning when I was waiting to do a training presentation in Glasgow to a largely young female audience of new recruits. While waiting for a few latecomers, and more to break the awkward silence than for any other reason, I asked had anyone heard of ASOS. The majority of the girls put their hands up and spoke in positive terms, as my daughters had the night before, about the company’s website, the style of clothes and the prices.
After the session I checked the company out on the website and I liked a number of things about it. It also had a low PEG [explained in a later chapter], which helped me make the decision to buy some shares for 51p on 19 April 2005. I then bought some more at 77p in November of that year, and more in July 2007 for £1.23. Subsequently, on three separate occasions I sold part of my holding to take profits, but I still hold some shares – currently priced at over £18.
There is no doubt in my mind if it wasn’t for seeing my three daughters huddled around the laptop, and the reaction I got to my questions the following day in Glasgow, I would never have even heard of the company until the share price was at least eight times higher than the level at which I first bought at.
2. easyJet [EZJ]