Monday, October 13, 2014

Bullythebear's 3 Steps Guide to Stock Market (for newbies!)

There’s a lot of people in this last quarter of the year on how they can start investing in the stock market. I always tell them to read up and I’ll get back to them. If there’s a market truism that you need to remember, it’s this:

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." 
Alexander Elder

You must not expect the market to give you money without working hard for it. In most cases, the worst thing that you can do to yourself is to make yourself some money without any knowledge, then proceed to throw your entire savings into it only to lose that initial profit plus a lot more. Without ill intent, I always wish stock market newbies to have small failures initially, if only to learn the lesson that the stock market is not your mother who is that to provide and give.




So how do you go about doing it? You can try Bullythebear’s three step method for newbies listed below. I think reading is extremely important in learning how to invest/trade the stock market. If you can’t sit through a reading because it’s very boring or ‘technical’, then maybe you are not ready to delve deep into the subject matter. You might, to borrow the Marine’s jargon, get up and ring the bell to signify that you give up and call it quits. There’s a season for everything.  Perhaps for you, it’s not now.


1. Learn Accounting

If you want to enter the stock market, you cannot help but read. If you do not have the discipline to read, then you might as well just do a dollar cost averaging and keep buying STI ETF.  Whether you are going fundamental or technical, you always need to read. That’s the source where information is passed from one to another.


Why accounting? Accounting is the language of business. If you can’t differentiate between a balance sheet and cash flow statement, then you owe yourself to learn how to do that. But you’re not trying to be an accountant, so learn the basics but ultimately, your job is not to consolidate accounts or trying to balance your accounts. Your job as an investor is to interpret and analyse the company’s health and prosperity by the 3 statements: balance sheet, income and cash flow statements.


If you can’t sit through reading it, maybe you should ring the bell and call it quits from here.


2.Learn FA and TA

There are two branches in stock market. You can be one or the other, or even both. But you need to learn how they operate. If you’re new, you should read up on both to see which side you lean towards. Unlike Harry Potter, we don’t have a magical hat to tell you which ‘house’ you belong to, so you've to learn both to find out your own inclination.


If I’ve to summarise in one sentence what fundamental analysis (FA) is, it’ll be this: The analysis of financial statements and business in order to derive a valuation of a company’s worth to aid in the decision of buying/selling the shares of a company.


Similarly, if I’ve to summarise in one sentence what technical analysis (TA) is, it’ll be this: The use of market psychology in the form of charts and/or indicators to derive the direction and trend of how the price of a company’s shares will move in order to aid in the decision of buying/selling the shares of a company.


Still blur? Read up on both. If you can’t sit through the reading and find it too tedious or boring, maybe you should ring the bell and call it quits from here.


3.Learn stock market terminology and rules

When I started, I struggled to find information regarding the mechanics of buying and selling in SGX. I remembered I was ridiculed by a broker when I told him I wanted to get like 10 shares, because I didn’t know you need to buy 1 lot (which is 1000 shares but going to be 100 shares next year). Little things like this that everyone knows but nobody says it.


That’s why I compiled a list of newbie's FAQ here, in the hope that it’ll one day help others who also walk the same journey as me. I should have update it but I didn’t find the time (and effort) to do so. But these days, with information so widely available, and even local writers publishing books, it’s hard not to find the information you need. There’s a dearth of local books in the past when I started, which always makes me wonder whether the information stated in the book is applicable in our local context.


Here’s another useful FAQ from SIAS, based on local context that I find it very useful for beginners.


As mentioned earlier in the two points, if you don’t want to read, you’ll be severely disadvantaged. If you find it hard to read ‘technical’ financial jargons, just start somewhere. The journey of a million miles begin with by putting one foot ahead of another. Eventually as you read more and more, you’ll soak in all the jargons and can rattle off terms like a pro. But really, just soak up the information whether you understand it or not. You'll reach a critical mass whether things just connect.


Having more knowledge doesn’t mean you’ll make a killing in the market, but having no knowledge will definitely get you slaughtered.

Here's a few books (that I've read) to get you started:

On accounting
(seriously, any books that teaches you how to read and interpret financial statements will do, but I'll highlight the ones that leaves the best impression on me)

1. Accounting Demystified: A self teaching guide - Loita A. Hart
2. Financial statements: A step by step guide to understanding and creating financial reports - Thomas R. Ittelson
3. Financial statements for non-financial people - Ron Price
4. Warren Buffett and the interpretation of financial statements - Mary Buffett & David Clark

On fundamental analysis (FA)


On technical analysis (TA) 


8 comments :

temperament said...

My 2 cents is:-
Yes you have to:-
Read & read like you never ever going to stop reading after you think you have read enough of the books.

But really the first thing is to know why you want to invest, who you are and what you are. With out first knowing who and what you are forget about the the why invest.
Investment is like taking a cross disciplinary subjects for life not in U or Poly but in your U of life.
i can tell you , because i am still doing all these things. Still learning leh.

la papillion said...

Hi temperament,

When I first started, I also don't know who am I nor why I want to invest and what I'm capable of. I just want to make money. I'm not sure asking those questions that you've put out will work for someone who had never investing. You can fill in all the risk profiles forms but you'll never going to find out your real risk profile until you've suffered a 50% bear market.

For those questions, I think we have to learn through doing haha! You can learn all about swimming by reading and taking a degree, but you'll never knowing how to actually swim without jumping into the water!

Felix Leong said...

Start off by reading some good investing books
I would recommend

Rule #1, one up wall street and the 5 rules for successful stock investing

Cheers

la papillion said...

Hi Felix,

I caught you not reading the whole article, orh!

I actually wrote down in the post, somewhere at the bottom of the post :)

Teenage Investor said...

Haha oh my god! You nicely summed up in 1 post what I took 3 posts to say... T.T and your elaboration was much better. The difference in experience is clear

Singapore Man of Leisure said...

LP,

"There’s a lot of people in this last quarter of the year on how they can start investing in the stock market"

If they are teenagers just starting out, it's not a problem as their bones heal fast.

If these people are in their late 30s and above, when asked, I will say invest in yourself - like what you have done.

But in my heart, I will ask:

"Where were you in 2009 or 2010?

la papillion said...

Hi TI,

Haha, no lah, you'll get there one day too :) You do have a lot of people in your own age group that follows your blog, and that's the one that you should target at :)

la papillion said...

Hi SMOL,

Most are in their 30s..only one is a young chap . I also don't know why they have a sudden interest in the stock market. Maybe the low interest rates really gets to them now. But usually that's an alarm bell for me to be careful of the market.

It's these group of people who had been working for 10+ yrs with a huge amt of bullets at their hands that are the most worrisome.