Essentials of Investing
The maze of financial markets is sinuous enough to stump investing tyros. There are the arterial highways (equity market, debt market, mutual funds), crisscrossing streets (currency derivatives, futures and options, exchangetraded funds), and twisting bylanes (short-selling, put option).
These daunting routes deter most people from investing in the market for they are rife with peril; one wrong move and you could lose a large chunk of your hardearned money.
A handy primer to navigate your way through the markets is the Essentials of Investing by Mark Skousen. The author doesn't offer instant, get rich formulas. In fact, he scoffs at the money managers who promise astronomical returns within a short span, say, a few months.
THE FOUR STAGES OF INVESTMENT PSYCHOLOGY
Stock market and commodity crashes create panic among investors, who sell out at any price, usually resulting in a loss.
Investors are cautious during an upswing or downswing, preferring to wait until the momentum picks up.
Investors enter the market when good news begins to filter in and stock prices rise, but they miss out on initial profits.
As the indices touch their peaks, investors begin buying randomly in huge quantities, paying more than the true valuations.
The idea is spread across the book as Skousen goes on to prove that such tall claims cannot hold true in the long run.
Instead, he advises readers that the only way to choose a good stock is to understand its true value and, as long as the company fundamentals are sound, they should stick to it.
He charts a plan that is easy-even for beginners. Skousen devotes the first eight chapters to ways in which investors can identify value. He also elaborates on the stock price fluctuations.
In the chapters, 'A Rocky Marriage' and 'The Perversity of Mr Market', he explains why the stock prices of fast growing companies rarely rise, whereas the companies that are yet to record good performances witness a high demand for their stocks.
It is such insights that make the book equally relevant for experienced investors as well as beginners.
Veteran investors often believe that their mass of experience will ensure they make a killing every time.
However, Skousen's list of financial gurus, who have occasionally made wrong predictions, is meant to drive home the point to such complacent investors.
He shrugs off technical analysts who swear by statistics; after all, the markets have often proved them wrong. Even the indices haven't been able to time their decisions correctly, he says.
Take the churning in the companies of the S&P 500, which Skousen highlights in the chapter 'The Growth Trap'. If the index had held on to its original set of firms (inception in 1957), the returns delivered by it would have been higher than those generated by the continually updated version. He also cautions investors to stay away from initial public offerings, saying that these are skewed towards promoters.
Skousen's tip to score a bull's eye in the stock market is to invest in stocks that yield high dividends. He considers it a win-win strategy as these stocks provide a regular income and, because the company is disciplined enough to pay dividends recurrently, this ensures that it has a healthy balance sheet.
Skousen clarifies that though such companies seem stodgy compared with the flashy ones that grow at a faster rate, they deliver much higher returns. The chapter 'The Strategy' highlights valid arguments that support Skousen's contention.
Once you become more confident about the markets, Skousen lists other avenues that you can invest in depending on the amount of risk that you are willing to take.
So if you are a seasoned investor, you can go directly to the chapters 'My Favourite Investment Choices' and 'Bonds, Real Estate and other Income Investments'. It isn't as if Skousen has unearthed a hidden mound of wisdom.
Every piece of advice he espouses has already been proferred by experts and penned by successful celeb investors. Yet, the facts that he underscores, the data that he highlights and the financial gurus he quotes extensively make this insightful book a worthy read. Besides, the simple language and lengthy, patient explanations are bound to help novices tread the investing path with ease.
Here are two personal finance Websites that can help scale up your investing acumen.
THE MOTLEY FOOL (www.fool.com)
The online arm of Motley Fool, a multimedia financial services firm, is a veritable bank of investing knowledge. Its personal finance section has a plethora of 60-second primers and step-by-step guides.
The ace up the Fool's sleeve is the range of calculators (nearly 100) that can help you compute credit, savings, real estate deals, etc. Other useful segments include Foolsaurus, a glossary that readers can edit, and Fool Radio, wherein you can download and listen to interviews with renowned business personalities.
An informative and fun section is the discussion forums, which cover everything related to money, from investing strategies to politics. And, of course, it's all free.
As the Website's name plainly suggests, it is an investing encyclopedia, which makes it a good starting point for beginners who find it hard to deal with financial jargon.
It is as good a platform for the more evolved investor as it spans topics ranging from stock market and corporate finance to forex trading. The tutorials are designed well and are divided according to one's financial acumen-beginners, experienced investors, active traders, etc.
The short, educational videos help cotton on to difficult concepts, such as return on equity and balance sheets. A good way to hone your trading skills would be to try the stock simulator, which lets you buy and sell equity virtually.