How to Start Investing in Shares

Mr Smith, my high school maths teacher, insisted that trigonometry was something every young man needed to know. Yet I was more interested in buying and selling shares.

But the only place I could do this – we’re talking the early 90s, before broadband, when mobile phones were the size of Bert Newton’s noggin – was the guidance counsellor’s office. I would sneak in and use his (free) phone to call my broker.

When I tell people this story, they instantly understand why I never went on a date in high school. They also begin asking me lots of questions about how they can start out in the share market.

So let’s answer some of them.

The Top Five Questions:

  1. Why bother investing?
  2. How much does it cost to get started?
  3. Isn’t investing something I should get a professional to do for me?
  4. How do I know which stocks to buy?
  5. What if the stock market crashes?

Why bother investing?

Let me give you two reasons. Let’s start with the carrot – compounding.
Albert Einstein said “it’s the easiest way to get rich without having to don a necktie, sit in a cubicle, and make small talk all day with Sue from accounts”.

Or maybe he said compounding was one of the greatest wonders of the world. Either way he was a fan. Here’s why.

Let’s say you stash away $50 a week and invest it into the share market each time you get to $1,000. Assuming your shares earn 9 per cent a year, in 30 years you’ll have $442,000, but have invested only $78,000 of your own dough. That’s compounding.

So that’s the carrot, now let me hit you with the stick – inflation.

Practically everywhere I look these days I see prices rising – at the petrol pump, at the supermarket, and (over the last few years at least) at auctions. This means that the dollars in your pocket are losing value – they buy less stuff.

If today you have $100 to spend on groceries, in 30 years that amount will be only worth about $40. So if you have your dough stashed under your mattress (or for that matter, in a transaction account), you’ll soon be eating lots of mouldy bread.

The only way you can outrun inflation is by earning a higher rate on your money than is being eaten away. Historically, the best way to do that is by investing in the share market, which has been averaging around 10 per cent per year for the past 20 years.

How much does it cost to get started?

Provided you don’t have any credit card debt or any other consumer credit (pay those suckers off and nab a guaranteed 18 per cent return!), you can get started in the share market with as little as a thousand bucks.

Isn’t investing something I should get a professional to do for me?

That’s exactly what the mass financial marketing machine wants you to think.

Most retail managed funds are about as good as the financial planners who flog them – they overcharge and under-deliver. Figures this week from Morningstar show the average fund manager underperformed the market in 2010. Worse, most still slugged investors with high fees for their failure.

If you’re only planning on this being a one-off transaction (‘boo, hiss’), stick with Barefoot’s best buys: two listed investment companies (LICs) I always recommend are AFIC and Argo Investments.

Think of them as the smart person’s managed funds, which is precisely why most financial planners have never heard of them.

How do I know which stocks to buy?

It’s easier than you think. Start by investing in just one company (with a view to building a diversified portfolio over time).

Here’s you: “But I don’t know anything about the share market!”

Here’s me: “Relax, you don’t need a crystal ball. The best investors focus on becoming part-owners of good businesses.”

If you’re just beginning your investment career, buy a copy of legendary fund manager Peter Lynch’s classic One Up on Wall Street.

Lynch explains that small investors have an advantage over professional money managers because they can invest in companies that they know and deal with every day – and many times they can do it before these companies hit the radar of the big investors.

Here’s a real-life example.

Many years ago a graphic designer mate of mine asked me what I thought about investing in Apple – which for many years had struggled.

He explained that he didn’t really see himself as an investor so much as an Apple tragic who believed the company was turning the corner after the successful launch of the iPod. So he snapped up some shares.

Apple went on to become the biggest company in the world, and, as a part-owner in the business, he went along for the ride.

When you’re just starting out it makes sense that your first investment is in a business you already know and are interested in: the company your work for, in an industry you know well, the manufacturer of a product you love – you get the idea.

Over the next few weeks we’ll be looking more closely at how to analyse a company, but your first step is to get comfortable with the idea of investing.

What if the stock market crashes?

It will. That’s one thing you can count on.

Share markets – like life – have their ups and downs. The world’s an uncertain place: there’s the risk of war, recessions, oil price hikes, Bieber-fever. But if history is a guide, the stock market will still be the best place to invest to for the long term.

Repeat after me: “I will not invest money that I’ll need in the next five years.” To soothe their nerves, smart Barefooters have a couple of grand stashed away in their Mojo account so they don’t have to sell when everyone else is.

So if you’ve been putting off dipping your barefoot into the stock market, the time to begin is now. Like any skill, you get more comfortable the more you do it, and it’s one hobby that can definitely pay big dividends.

While I can’t remember much from high school maths, the lessons I learned from buying businesses have stayed with me till this day.

Tread Your Own Path!

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