A starting point for someone new to investing.
Commit to reading about investments for at least half an hour per day.
Next, commit to buying at least one share of stock that you've read about that day.
Do anything often enough and you can't help but to get good at it eventually.
My family and I are vacationing in Paris, and took a day-long baguette baking course. The master baker teaching the course has spent years training, perfecting, and re-perfecting his craft. He appreciates subtleties and processes that we might not even notice. Nor does the master baker use imprecise, judgement-rich terms such as "good," "bad" or "slightly too flakey" to describe the spectrum of baguette quality one finds across the bakeries of Paris. Instead, the master baker simply refers to baguettes as being either "correct" or "not correct."
Now there are two words that seem to transcend mere opinion, and that probably reflect a great deal about Parisians' elevated expectations when it comes to bread (among other things as well). As a Lisbon dweller, I have to admit that it's so much fun to contrast the expectations of Parisians with those of Lisbonites. For example, take the matter of parked cars blocking traffic, which is something that you see all the time in Lisbon. Thoughtlessly parked cars obstructing your garage entrance may be annoying to you, but they are utterly non-negotiable for the electricos (being as they are confined to tracks and thus unable to steer). In case you aren't already familiar with them, the "electricos" are bright yellow, wooden/cast iron trolly cars like the kind you see in San Francisco, only older. The conductor will ring and ring the electrico bell until the owner of the car eventually returns to relocate his or her vehicle (which, I'll warn you, might take a while).
Naturally, you ask whether this type of parking behavior is acceptable in Lisbon? The answer is "not in the least." But can you nevertheless expect to see it happen? The answer is "why, yes!" To understand the parking situation in Lisbon requires not only an occasional suspension of disbelief, but indeed an ongoing tolerance for a certain cognitive dissonance. You must learn to appreciate the distinction between "acceptable" behavior versus "expected" behavior.
I've noticed something over the years. Tourists will routinely and very quickly exit the electrico and walk off with shrugs of peevish amazement once they perceive the geometric difficulty of the situation. Lisbonites, by contrast, tend to remain in our seats and wait until the old lady sitting next to us casts up her hands and takes the lord's name in vain (or worse). Ah, yes. We understand. We nod. We then say the most useful word in the entire Portuguese language: "pois."
If you are not familiar with the word "pois," it means, roughly "well, don't I know it." Or "well, there you go."
Example: "My heavens. It is so complicated to do my taxes."
It means that you understand precisely what someone else is complaining about. It means that you have learned to expect even what you don't necessarily accept, and what's more, you'll just deal with it. I feel like the Lisbon attitude towards life is almost an inverse of the Parisian attitude towards life. I mean, can you just imagine the master baker in Paris, who would most certainly not inspect a grossly "incorrect" baguette, only shrug and say "pois." Oh, non! I think we can all imagine other mellifluous-sounding (yet shockingly foul) French phrases one might hear in such situations.
It was misty, so I took a stroll along the Seine one morning, and naturally enough I started thinking about investing. Specifically, I was thinking about investment temperament. How disappointed would a master baker be if he expected a stock, or the market as a whole, to behave "correctly?" When it comes to investing, the Portuguese attitude definitely gives you a leg up. One of the companies you own missed earnings estimates? Pois. No reason to get off the proverbial electrico by selling the stock. Market collapsing for no apparent reason? Pois. But do you know the key thing about a Portuguese-style investment attitude? It's patiently expecting that things. Take. Time.
Now what really struck me on that quiet morning in the mist is that you can actually make money investing in the Portuguese way. I mean very serious money, too, paid directly to you regularly and in cash.
You see, this all came about because I was thinking about a friend of mine from America. He's probably in his early 50s, married, two kids. He can work remotely, but will largely depend on a steady stream of portfolio income to make ends meet if and when his family moves to Portugal (which sounds increasingly likely each time he describes life in one of the pricey parts of California). As you read this article, it is safe to assume that my friend is at this moment learning about the different pace of life in Portugal, waiting (and waiting) for lawyers and real estate brokers to return emails, and thus starting to appreciate the utter uniqueness of America's customer-service-oriented culture.
Part of the process that my friend is going through is getting the family's money situation in order. He and his wife are successful people who managed to build up a low seven-figure net worth - most of which is currently managed by a large brokerage firm that charges .75% in annual fees. Bear in mind that those fees fall on top of the high expense ratios for each of their sundry mutual funds. When you tally up the expense ratios and management fees, over 2% of the portfolio is evaporating every single year in exchange for performance that lags the S&P 500 by a meaningful margin.
This is a situation that is no longer what the master baker would describe as, ahem, "correct." To his credit, my friend is now rolling up his sleeves and learning to manage his own investments. He is teaching himself securities analysis (I think he used the words "time-consuming" and perhaps even let slip a word such as "arduous"). And here is something about my friend that maybe you can personally relate to. He doesn't feel like he is ready yet to just dive right in and take the reins of his investments. So before building a portfolio, he is being prudent and learning about each company until he finally does feel that he knows enough to pull the trigger and start executing investment decisions in an intelligent manner.
His approach sounds very sensible at first, doesn't it?
In fact, most of us who've been at it a while probably approached investing exactly the same way that my friend is now doing. But during my walk along the Seine, I started to think that I went about my investing career all wrong. What I've learned over the years is that much of investing really does come down to personal temperament. The other thing I've learned is that you cannot really develop your investment temperament through study and objective analysis. On the contrary. You learn by doing.
If knowledge is power (which it is), then it follows that the more experience you have, the better, which brings you to a somewhat counterintuitive idea: you shouldn't wait to buy stock until you feel like you know what you are doing (I could even say that the moment you think you know what you are doing, you should quit immediately before hubris costs you your net worth). If experience is how you'll make up the bulk of your education (and the stock market will ensure that experience will certainly educate you whether you are willing or not), you should make a point of buying and holding stocks long before you are an expert.
But why don't we just set aside the logic and philosophy, because there's actually a very practical reason to learn on the job (and to get into the job ASAP). See if you agree with me or not, but I think that my friend will find that nothing incentivizes a person to read about a company more than to already have some of the hard-earned money invested in shares. And I don't just mean because he's (rightfully) scared of losing money. That's the small potatoes part. Let's skip straight to the big money part, which is getting paid to learn. I'll explain what I mean by going through the practical steps that I gave to my friend.
Step 1: He opens a brokerage account at one of those brokers that now offers zero trading commissions, like Schwab & Co. (SCHW).
Step 2: Since my friend wants to live off dividend income, I suggested that he start with a list of holdings for a dividend growth ETF, such as the ProShares Dividend Aristocrats ETF (NOBL), which tracks companies with at least 25 years of consecutive annual dividend growth. Of course, he can pick other lists to track if he wants to.
Step 3: Every single day while the stock market is open, he commits himself to buying and then permanently holding at least one share of stock. With a zero commissions schedule, doing so will cost him precisely zero in transactions costs.
Step 4: He starts at the top of the list and works his way down. Each day, he devotes at least one-half hour to reading articles and reviewing financial data for whichever stock comes up next on the list.
Step 5: After he finishes his reading session, he buys at least one share of whatever company he just read about. If he runs into a company on the list that he doesn't like for some reason, he skips it and maybe comes back to it later (in which case he then pushes on to the next company on the list).
Step 6: Return to step one and repeat. Keep doing this forever.
What's the big objective? It's this: do anything often enough and you can't help but to get good at it. The approach works because he'll be motivated to buy stock because he expects to study the company over years and years to come. At the same time, he'll be motivated to read carefully about each company because he knows that he is going to buy more shares of the stock for years and years to come. Oh, but it gets so much better!
The way I see it, my friend starts with 3M (MMM), which currently trades at around $170 per share according to CNBC. He reads SA articles about 3M for half an hour, and assuming he likes what he read, he buys at least 1 share which (according to CNBC) currently pays an annual dividend of $5.76. Based on its dividend history since 1995, 3M has increased dividends by roughly 8% per year (I get that figure using DividendChannel.com and a spreadsheet).
Let's assume 3M continues to raise dividends at that rate for the next 40 years. The future value of a 40-year payment of $5.76 per year growing at 8% equals about $1,492. Divide that by the thirty minutes that my friend will spend reading about 3M, and he's earning $50 for each minute that he spent reading. Get paid $50 a minute to read? Sign me up! Tomorrow, he will move on Coca-Cola (KO) and do the same thing, this time earning dividends of $1.60 per share with a future value of $414 (assuming Coke hikes dividends by 8% a year over the next 40 years). That would come to $13.82 for each minute he reads about the company. And the next day, on to Colgate (CL). And so on.
I've lived in Lisbon long enough to appreciate the fact that things take time. When it comes to investing, this a very good and very profitable thing.
Ah, but alas, the education won't come free. My friend must expect that the unacceptable will happen with nauseating regularity. I can't tell you how many times I have looked at an earnings report that is (as they say in Paris) "not correct," watched the ensuing stock crash, wished I knew how to really swear in French, my finger precariously balanced on the edge of the sell button before I calmly walk it back from the keyboard and say "ah, pois."
Disclosure: I am/we are long MMM, SCHW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not investment advice, and I am not an investment advisor.