2.) Capital Appreciation

Capital appreciation or Capital gains are simply profits made from the increase of the market price of a stock.

To understand this let me give you an illustration. Suppose you went into business and put up a lemonade stand. Your initial capital is P 500.00. You bought some lemons, some ice, some cold water, cups etc. At the end of the day deducting all expenses, you made a net profit of P 500.00. Now all in all you have P 1,000 including your initial capital. Suppose you plow it back to your lemonade business and the next day you made P1,000.00. Now you have P 2,000. So from an initial capital of P 500.00 your capital has now grown to P 2,000.00. The growth in your capital is made possible because your business has grown and expanded.

Capital appreciation in stocks has basically the same concept. Since stocks represents businesses, as time goes by a good business is sure to grow and expand. If you own stocks in a business you are one of the owners of the business so therefore you benefit from the growth of the business. In other words your capital (The amount of money you used to buy stocks) will appreciate. If you later on plan to sell your stocks of course you will not sell it for the same price that you brought it. The business has already grown and surely you would not sell for the price that you bought it for. This just makes business sense. The difference in your selling price and your buying price is your profit.

Aside from the natural business growth that the company will be experiencing as time goes on, another factor that contributes to capital appreciation is the over valuation of the stock market of certain stocks. Sometimes the market acts foolishly and starts to value stocks based on flimsy projections and not so much on the actual business fundamentals but on the anticipated price that a certain stock might reach oftentimes, rumors and the general “bulish” outlook of the market also contribute to this “over valuation” of stocks. (To further understand this read my latest post entitled “How the market really works”)

To understand this, let me cite an example. Let’s say I hold (Philippine long distance telephone company) PLDT stocks today worth P 2,500 per share. Then you come along, you heard a rumor that PLDT will be bought out by AT & T and that the share price will reach P 3,000 per share within a month. You want to buy it from me at P2,800. Since your offer looks nice and I haven’t heard the rumor I sell it to you at P2,800. A month has passed and you are holding the PLDT stock which you bought at P2,800. You realized that the rumor was not true at all. Worst is that two bad news breaks out. First is that PLDT has not reached its quarterly sales target and second is that a rival telecom company has started to gain more subscribers than PLDT. You start to worry, the market prices PLDT at only P 2,750. Sensing that the price might slide down further, you decided to sell at a loss at P 2,750. Another person by the name of Juan Delacruz does a company evaluation and hears a rumor that PLDT will be merging with MERALCO (Manila Eletric Company) and that the two companies will be doing an internet via electricity deal.

Juan Delacruz estimates that the price of PLDT will reach P 3,500 in a month’s time. So he buys your PLDT shares at P 2,750.00. True enough after a months time the rumor came true. PLDT merged with MERALCO and the market values the stock at P 4,000 per share! Happy days are here again. When other stock market players hear of Juan Dela Cruz‘and other market player’s huge gains in PLDT, they jump into the band wagon pushing the price further to P 5,000 per share until the price reached P10,000.00 per share! And everyone lived happily ever after! (Unfortunately the ending is not as happy as that because the bubble always pops and the market later on realized that it has overvalued stocks so the price goes down later the sad story of course is the subject of another post)

Now this may sound very simplistic but this is what moves the price up. Stock market players oftentimes over value the price of stocks. Some of them do this intelligently, that is they base their decision on sound business valuation of certain stocks however some if not most stock market players do this without any regards for the business that the stock represents. They just do it out of too much greed. They just buy, buy, buy without regards to what the stock is really worth from a business perspective.

A perfect real life example of an over valuation of a certain stock done by the market is the BW (Best World Gaming and Entertainment Corporation) scandal of 1999 which almost crashed the Philippine stock market. (And caused a lot of people to loose their shirts) Fueled by speculation and rumors the stock traded for more than 30 times book value and jumped from a mere Php0.80 (US$0.0166) to Php145.00 (US$3.01) in just a year’s time! (October 1998 to October 1999) An astounding 18,025% increase! (This despite the fact that a quick look at the company’s fundamentals reveals that it is not a good investment if you use good business sense)

This foolish and greedy “over evaluation” of the stock market of certain stocks from time to time further adds to the gains that can be made from the capital appreciation of stocks.

Come back for “How you can make money through stock market investing  - Part 3″

The scenario I just described to you was a movie wherein there was a stock market scene. I grew up wondering what that hulla bulla was all about. The stock market intrigued me. I was so fascinated how people could make money that way. That thought stuck to my mind until I formally learned what the stock market is all about. I was just given a glimpse by Hollywood on how to the stock market really works.

The stock market is a very unique market. It is probably the only type of market where there is so much emotions involve. You don’t see people shouting and panicking in the fish market just because there is a huge storm coming. You certainly don’t see them selling their fish in panic because the price of fish will go down by virtue of some external event. In the fish market or any other market they might do a mark down sale because of low demand. But you certainly don’t see people doing a panic selling or buying like crazy whenever somebody projects that the price of fish will go up because of some reason.

The stock market is dictated by two things, FEAR and GREED. When there is so much fear in the market the prices goes down. People start to panic and dump stocks irregardless at what price they bought it. When there is so much greed in the market, people go crazy over stocks. They buy without regard to the financials of the underlying business that the stock represents. They just want to be in the market. The market is driven by so much emotion that most of the time the decision most stock market players make are often irrational, illogical and just plain dumb and stupid.

In order to give you an insight on how the stock market really works. Consider this illustration given by the late Benjamin Graham, Warren Buffett’s mentor, otherwise known as the Dean of Wall street, father of securities analysis and value investing and author of the masterful treatise, “Securities Analysis” and “The intelligent investor” both considered as classics and the bible of investing.

In “The Intelligent Investor” Graham gives a powerful illustration on how the stock market really works. He writes:

“Imagine that you own a small share in a private business, which you purchased for $1,000. One of the other owners of the business, named Mr. Market, approaches you to tell you what he thinks your share of the business is worth. And everyday, he offers to either buy your share of the business for that price, or, to sell you an additional share of the business for that price.Each day, however, he quotes you a different price from the day before. Sometimes the price he quotes sounds about fair. Sometimes it’s high. Sometimes it’s low. If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”

The point that Graham is making is that you as an investor should not regard the whims and caprices of Mr. Market in determining the value of the stocks you own. You should learn to profit from market folly instead of participating in it. Graham concludes that the investor is better off concentrating on the actual performance of the underlying business which a stock represent, rather than being too concerned with the wild gyrations of the market.

Sometimes you cant believe how such smart, financially savvy and intelligent people could be dictated by fear and greed and in the long run make ridiculous and irrational decisions. Well it does happen and it has been happening for the past centuries ever since the stock market has existed.

To understand how the stock market really works and how the market makes such irrational decision consider watching this youtube video on how the stock market really works. This dramatic dialogue is played by the comical duo of Bird and Fortune, two British stand up comedians that satirized the 2008 world financial meltdown. The second half of the video is a satirical yet profoundly true reason on why the sub prime mortgage crisis happened in the  United States. The first half of the video gives a funny yet true reflection of how the stock market really works.

There are four ways wherein you can make money through stock market investing. These are through Dividends, Capital appreciation and Stock rights. We will discuss these things in great details one by one.

1.) Dividends – Dividends refer to the profits given to stockholders. It is but logical that the reason why companies go into business is to make profits. Eventually part of the profits will end up being distributed to the owners of the company. When you buy shares of stocks in the stock market, you are a part owner of the company hence you get a share of the profits.

Types of dividends

There are three types of dividends, first you have Cash dividends, which is the most common type of dividend being distributed. Secondly you have the Stock dividends. If you are given stock dividends, this means that you have increased your interest or ownership in the company. The last type is Property dividend, which is rarely being given.

How dividends are computed

So how is the distribution of dividends computed? Cash dividend is computed by multiplying the number of shares held by the cash dividend rate declared. So for example if you hold 100 shares of TEL (Philippine Long Distance Telephone Company – PLDT) and the company declares a P 200.00 per share dividend, (As it did for the whole year of 2009) you get P 20,000.00 as dividends. (100 shares x P 200.00 per share). Stock dividend is computed very much the same way. Usually the company will declare a certain percentage as stock dividends, all you have to do is multiply that by the number of stocks you are holding and you get the number of stock dividends due to you.

Are companies required to declared dividends every year?

Another important question that is worth considering is do companies declare dividends every year? Are they required to do so? Actually the answer is a yes and a no. But the general rule is that it is up to the companies if they declare dividends or not. This is a business and operational strategy that is within their discretion. However there are several factors to consider.

First of all, take note that ideally dividends are to be declared from the “profits.” So logically if a company does not make any profit, than there is no point in declaring a dividend. This just makes business sense. Frankly the board of directors of a company that does otherwise is plainly stupid, incompetent or outright dishonest. Can you imagine taking out a loan just to declare dividends? (Sadly this is happening in some corporations) Secondly, most corporation laws like in the Philippines, require that companies declare dividends subject to certain rules. (The Corporation code of the Philippines states that Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock. Meaning they must declared dividends if this threshold is exceeded) However this is subject to certain exemptions. (See Sec. 43 of the Corporation code of the Philippines for more on this)

In actual practice, most companies listed in the stock exchange do declared dividends. This is to make them more “attractive” to investors. The question as to whether or not you should buy a company that always declares dividends or not, or whether you should buy a company with a higher dividend rate than others will be the subject of a different topic. (An interesting side note: Warren Buffett’s holding company Berkshire Hathaway has only declared dividends since the 1960s !)

In conclusion, in some way dividends are a great way to make money in the stock market. Buying a stock that generates a lot of cash from its profits and has a high dividend rate every year certainly beats putting your money in time deposits! For example if you bought PLDT in 2008 for only P2, 000 per share and you had 100 shares, you have a P200,000.00 stake with PLDT. Since PLDT declared dividends of P 200 per share in 2008 you made P 20,000.00 in dividends. That’s about 10 % return in dividends alone! Certainly beats putting your money in time deposits! (Remember the Rule of 72?)

Watch out for part 2 of this exciting series on “How you can make money through stock market investing – Part 2.”

Saving in my piggy bank to buy a company is not a complicated process. I usually start at January every year. Every time I arrive home, I empty my pockets for loose change. I sort out the ten pesos, Five pesos, one peso and twenty five centavos. (These are the only coin denominations we have so far in the Philippines) I then deposit the fives and tens in one piggy bank. The one peso goes to a “sinking fund.” The sinking fund is used to for emergency purposes like sari-sari store (mom and pop store) purchases or used as fare for my household helps. The twenty five centavos just goes to a jar which will be deposited into a bank once it reaches a certain level.

For the five and ten pesos alone, the average savings I can accumulate in a year is somewhere from P 5,000.00 to P 10,000. For the year 2009, I raked in almost P 7,000.00. For the year 2010, I am will abolish the “sinking fund.” I will instead place the one peso in another piggy bank.

There are three reasons why I always break the piggy bank at the end of the year. First is to comply with the law on hoarding coins. It is government’s policy to promote the free circulation of coins to have an ample supply of coins in circulation. Secondly, I want to somehow give myself a pat on a back and see for myself how much I have saved just using spare change and coins for the entire year. The last reason is of course to use the money that is to buy a company.

So how do I buy a company with my P5,000 or P 10,000 ? Of course I do it buy buying stocks in the stock market. As I have always ranted in this blog, when you buy a stock, you are buying a portion of a business. Buying stocks makes me a “part owner” of the company I buying stocks from. Instead of spending the money on stuff that just comes and go, I further grow the money in my piggy bank by buying businesses. When the business grows, my money also grows with it.

So that’s how I buy companies using money from my piggy bank! I like forward to writing a post someday on “How I made millions from my piggy bank” heheehhe Why don’t you try it? Starting saving in your piggy bank today and learn stock market investing.

9.) You should only engage in stock market investing when the overall economic and business climate is good

The most basic and ideal rule of the thumb in investing in the stock market is to “buy low and sell high.” Ironically what most stock market players try to do is to “buy high and sell higher.” Unfortunately they end up “Buying high and selling low.”

It comes as no surprise that this happens to most stock market players because they succumb to “market” sentiment. Their buying decision is dictated by fear and greed. When the overall market sentiment is fearful then most market players stay out of the market. This usually happens when times are tough or when the economy is in bad shape. However when the overall economic and business climate is good, most market players jump into the stock market.

I remember sometime in early 2008 when the world economy seems really going to hell. I was telling a friend to open an online stock market trading account. She told me that when she went to the bank to open her account, a bank employee asked her why she wanted to get into the stock market when the world economy is such in a bad shape. This is the typical response of the “misinformed.” This is what I call as seeing the glass being half empty. I told her, this is precisely the perfect time that you should get into the stock market ! This is the time to see that the glass is “half full.” Value investors dream of times when the economy is doing so badly that the stock market is giving stocks away. I just couldn’t believe the bargains that were available during that time. Stocks of blue chip corporations are even sold way below book value! I grabbed the opportunity and loaded my portfolio with such stocks. Almost a year later, the price almost doubled in value and I ended pocketing a near 80 % return on certain stocks.

Lecturing to a group of students at Colombia University, Warren Buffett who was then 21 years old said “I will tell you how to become rich. Close the doors. Be fearful when others are greedy.

Warren Buffett is notoriously famous for selling out certain positions when the economy seems very rosy, the overall market sentiment is that of greed and that the market is at its all time high. He does exactly the opposite when the general sentiment is that of gloom and doom. It is during these times that he acts greedily and snaps great companies when the stock market is giving stuff away.

At the bottom of the bear market in October 1974 a Forbes article featured an interview with Warren Buffett. He was asked how he feels about the bearish market. Buffett wisely replied “Like an oversexed guy in a whorehouse. Now is the time to invest and get rich.”

Warren Buffett’s greatest buys were not done in times when the overall economic and business climate is good. They were executed when the overall economic and business climate are in their worst.

10.) Investing in Real estate or other vehicles of investment is more profitable than stock market investing.

When prompted to invest in real estate by a friend Warren Buffett is said to have replied “Why should I buy real estate when the stock market is so easy?”

In the post entitled “Investment vehicles that yields 15 % return,” I have extensively discussed and pointed out that investing in a business is much more advantageous and profitable than investing in Real estate or any other vehicle of investment.

Investing in the stock market is investing in businesses. As a value investor and as a follower of Warren Buffett’s methods, I subscribe to the mindset that when you buy a stock you are buying a business. Without a doubt, investing in businesses is more profitable than investing in real estate or any other vehicles of investment, hence the belief that Investing in Real estate or other vehicles of investment is more profitable than stock market investing is purely a myth.

Now that all of my deadlines are done, here are the next two myths.

7.) Investing in stocks is too risky

In anything that we do in this world, we take a certain kind of risk. Day to day activities like simply crossing the street or trusting that the food you eat or the water you drink will not make you sick do require that we take some kind of acceptable risk. Well admittedly, there is a certain risk involved when investing in the stock market however the risk I am talking about is not the same kind of risk that most people think.

If you view the stock market from a business perspective, the only risk that you have to take is the kind of risk that comes from being in business. Besides, as I have stressed out before, stocks are merely fractional ownership of businesses. All business ventures have a certain kind of acceptable and calculable risk involved. Since stocks are merely fractional ownership of business, they come with the risk that comes with operating a business.

The “risk” that most people fear in stock market investing is the volatility in the stock market. Some people call it the “roller coaster” ride of the market. At times people get so excited with a stock that they drive the price insanely high to the point that they do not care what the fundamentals of the underlying business is anymore. Sometimes they price stocks ridiculously and insanely low that it is as if people are giving stocks away like crazy even if the real value of the business is way above what they are selling it for. This manic-depressive behavior of the market caused by fear and greed is what makes the stock market seems risky since no one can absolutely predict when the market will be at its peak or at its bottom.

As you can see, the risk that most people fear in the stock market is not caused by the underlying fundamentals of the business; it is the “risky” behavior that people take in the market. People do stupid things in the stock market because of fear and greed.

If you approach stock market investing from a business perspective, you will be more prone to avoid risky behavior. This way, the risk you take is only the risk that comes with operating a normal business.

Also take note that the “risky” behavior taken by other people because of fear and greed can be utilized to the advantage of those who approach the stock market from a business perspective. When asked the question on how to get rich in the stock market Warren Buffett simply replied “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” I’m sure you would like me to expound more on what he meant by that, but that would be the subject of another post.

8.) Investing in the stock market is best left to the professionals

Now before I am accused of bashing professional fund managers in general and before I make an enemy out of those who are in professional money management, let me just categorically say this, there are professional money managers who are very good at what they do. They give you a higher rate of return and have been successful at beating the market for a long period of time.

However there are only a handful of them. Unfortunately, it will take the ordinary layman-investor some digging in to find out who the really good professional money managers are, and I tell you this is not an easy job.

So is stock market investing really best left to the professionals? Is it really true that to get a higher rate of return in the market, you will have to let the professionals take care of your investments? Is it possible for the ordinary investor to get a higher rate of return in the stock market than the professionals?

While it is true professional fund managers have years of experience in investing in securities, the sad truth is that most professional money managers do not give a high rate of return to their investors nor do they beat the market for a lot of reasons. Warren Buffett lamented once about this sad state of professional fund money managers, “Professionals in other fields, like dentists, bring a lot to the layman, but people get nothing for their money from professional money managers.”

It’s not that full time money managers are dumb. Reasons ranging from hyperactivity (too much buying and selling), wrong investment strategy (pure technical trading), holding stocks for the short term, having a “lemming like” behavior (following the crowds) and charging exorbitant and unreasonable management fees are probably among the few reasons why most professional fund managers fail to give investors the best value for their money.

I’ve let professional fund managers handle my funds before and sadly the returns they gave disappointed me. I got more value for my money when I started to handle my own funds instead of entrusting it to them. I do not have to cite statistics on how many people got burned in the stock market by entrusting their money to the wrong kind of professional money managers.

Take note of this interesting quote by Warren Buffett “An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities – at full prices they couldn’t buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.”

It is of no wonder that instead of entrusting your money to the “professionals,” Warren Buffett gives this advice to the ordinary layman instead, “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”

With that quote the master investor himself proved that stock market investing isn’t just for professionals. In fact professionals get beaten a lot of times by seemingly ordinary investors.

Now I want to emphasize again that the point of this post is not to bash professional money managers. The point here is that investing in stocks can be done by the ordinary layman. True that some professional managers are very good in giving you the best value for your money but there is also truth in the fact that ordinary layman-investor can beat the professional money managers and that the statement that “the stock market is best left to the professionals” is simply a myth.

Up next – Ten myths of stock market investing Part 4.

4.) The stock market is manipulated

This is my brother’s favorite excuse. I don’t blame him; the truth is that despite strict and tight regulations; there are still stock manipulations that had happened in history and in stock markets all over the world.

However take note that if you study the stock manipulations that has happened in history, you will discover that these only refers to individual stocks and not the entire market. Also most of these stocks are stocks of company that seem to pop out of nowhere, had little or no history of being profitable and yet people bought them based on rumors.

So even if there are stock manipulations that have happened this does not mean that the entire stock market is manipulated. The manipulations happened to several individual stocks and stock markets all over the world have taken action to stop the manipulation. They have also installed measures to somehow prevent future manipulations from happening. Besides, news that a country’s stock market is manipulated is not good for the stock market of that country. So each country’s stock exchange will do their best to prevent manipulations.

5.) Only people who have insider’s information will succeed in the stock market

Just like stock market manipulations, trading in the stock market with insider’s information is a reality. It happened before and it will happen again. However this has only been done by a few individuals and a few stocks. Stock exchanges all over the world have very strict rules on insider trading. In highly industrialize nations; stock trading using insider’s information has been successfully prosecuted.

It is true that some people who invest or trade in stocks got rich through obtaining illegally acquired insider’s information, but these are only a handful of people and some of them have been successfully prosecuted. There are hundreds if not thousands of individuals that has been successful in their stock market investing endeavor even without insider’s information.

Publicly listed companies usually provide enough information and disclosures to the public any corporate activities that the stock exchange thinks will affect stock prices, so ideally there is no need for insider’s information.

Warren Buffett, the world’s greatest stock market investor has this to say about insider information “”With enough inside information and a million dollars, you can go broke in a year.” If Warren Buffett does not need inside information to get rich in stock market investing, neither do you.

6.) Stock market investing is merely a calculated gamble

To gamble is to take a risky venture or to make a risky act for possible monetary gain. Unlike in sports and other games wherein the outcome of the game is mostly controlled by the person playing the game, in gambling, most of the outcome of the game is left to pure chance or luck. There are two elements of gambling, risk and luck or sheer chance.

If you examine the above definition closely it is far from what stock market investing really is. I will talk more about risk on the next point.

Unlike gambling, your performance in the stock market is not left to pure chance or luck. You have control over what stocks to buy and at what price you are suppose to buy it. You study the data if a company will continue to be profitable base on its management and financial data. If you approach the stock market from a business perspective you are engaging in a business and being in business is never gambling.

The only people gambling in the stock market are the pure stock market traders. They don’t care about the intrinsic value of the business or the management of the business. All they care about is the price. If the price goes up and keeps on going up, then they keep on waging bets on the company leaving it up to chance or sheer luck that sometime somehow the prices will keep on going up so that they will make a killing. What they are doing is very risky indeed. They are relying on the sentiments of other individual investors which are very unpredictable. For these people stocks are cards, chips, dice or pieces of the game that you play around with. The stock market for them is the world’s largest casino.

Stay tuned for the last part of the post “Ten myths of stock market investing – Part 3”

People have a lot of misconceptions about stock market investing. Most of the time because of these reasons they end up not investing in the stock market at all thereby missing a great opportunity to take advantage of probably the greatest money machine man has ever invented. Because of these reasons also, people miss some great market opportunities wherein prices are so cheap. These opportunities could only occur once every 3 to 5 years. Also, because of these misconceptions, people end up getting burned and end up vowing to themselves never to get involved in stock market investing.

There are lots of myths and misconception on stock market investing, and I am only presenting ten of them since I feel that these are the most common. These are sorted according to popularity.

1.) You need lots of money in stock market investing

This is probably the number one reason, why people don’t invest in the stock market. They think that stock market investing requires lots of money. This is really not true. With the advent of the internet and online stock market brokerage, stock market investing has become cheap in terms of transaction cost and the minimum amount required for investment. When I first started out, I remember I only shelled out P 5,000.00 to start engaging in stock market investing. P 3,000 was for the opening of the savings account which is considered as my settlement account, while the P 2,000 was for my trade account. Now it gets even better, my online broker has lowered the maintaining fee for my stock market trading account to only P 500.00 !

To start buying stocks, of course the bigger the amount you have, the better it will be since if you have a bigger amount in you trade account, you can buy more and take advantage of opportunities especially if the prices are low. The amount required for investing in stocks will vary depending on the price. Also there is a required minimum of shares that you can purchase. This is known as the “board lot.” To know the minimum amount required to purchase a certain stock, simply multiply the board lot by the current price per share. As to what is the board lot of each a stock, you can see this information at the stock information page of each stock at the Philippine Stock Exchange website.

So, what is the estimate minimum amount that is required to purchase stocks? Well believe it or not you can start purchasing even if you have only P 5,000.00! To give you an example, the board lot for Jollibee foods corporation (JFC) is 100. The current market price is P 50.00. So 100 X 50 = P 5,000.00.

As you can see, you do not need lots of money to start investing in stocks.

2.) Stock market investing is complicated

Not really, but I have to admit, it requires some work, for what endeavor that promises gain doesn’t require work?

People get the impression that stock market investing is complicated because they see the pundits reading charts (Can you see the shoulders in the candles? or something like that), discussing esoteric theories and principles (Elliot wave, Fibonacci expansion) and speaking in lingo (terms like resistance, consolidation etc.) that ordinary people cannot understand.

There’s good news for you! You don’t need to learn all that junk!

Now don’t get me wrong. Some high sounding words, principles and theories in stock market investing have been used in the fields of finance, economics the sciences and mathematics. These were developed by brilliant people who are respected in their own fields. Some of these theories and principles are good for investing and some of them aren’t. The stock market is just too volatile and too sentiment driven to be guided by solid scientific principles. As Isaac Newton once lamented when he lost a fortune in the South Sea Bubble, “I can predict the motion of heavenly bodies, but not the madness of crowds.”

What I want to emphasize is that you don’t need all of that to start investing in the stock market. What you need to learn are simply business principles and have some down to earth common sense. You will need to learn to read a financial statement though. You don’t need to go through the entire gamut of accounting principles and theories. What you need is a basic understanding about financial statements, some business sense and some down to earth common sense.

3.) Stock market investing will make you an overnight millionaire

The best way to approach the stock market is to approach it from a business perspective. After all buying a stock is buying a business, since a stock represents a portion of a business.

If you take this view, then you understand what I mean that stock market investing does not make you an overnight millionaire. You can’t expect to start a business today and sell it for a million pesos tomorrow or next week. Businesses needs time to grow in value. Similarly to get constant solid returns in the stock market, you need to wait for it to grow in value.

The stock market may be the greatest money making machine invented by man, but it’s a machine that takes time to work. If you want to be an overnight millionaire than the stock market is not for you. Better pack your bags and head to Vegas, where you will be the single lucky overnight millionaire that is if you will not end up loosing your shirt with thousands of other people who are also still recovering from their hangover.

Watch out for the continuation of part 2 of the “Ten myths of stock market investing.”

]]> http://www.stockmarket-investing.com/ten-myths-of-stock-market-investing-part-1/feed/ 0 http://www.stockmarket-investing.com/hitler-furious-for-selling-stocks-prematurely/ http://www.stockmarket-investing.com/hitler-furious-for-selling-stocks-prematurely/#comments Tue, 09 Feb 2010 14:06:35 +0000 zigfred http://www.stockmarket-investing.com/?p=72 We take a break in our very serious discussion on the stock market. Investing in the stock market may be serious business but it could also be lots of fun and you could get lots of laugh from the mistakes and the stupidity that stock market players exhibit from time to time.

Amidst all of the laughter a lesson can be gleaned. The mistakes of others need not be your mistake in order for you to learn a lesson.

If you learn from the mistakes of other instead of learning from your own mistakes it will not be too costly for you. A way to do this is to learn stock market investing by reading books and listening to the experiences of others who had already been in stock market investing for a long time.

However be advised to always maintain your own independent judgment as there are those who recommend certain investing strategies that might work for them but not for you.

Anyway, i’ve been entertaining myself with Hitler parodies in youtube lately. Some parodies are so funny that I can’t stop laughing while watching them alone. I wondered if there were any parodies on the stock market. Surprisingly there are some and I will be featuring them here from time to time.

In this youtube video, Hitler gets mad at his staff for missing the Bull Market and for prematurely selling his stocks. He recommends that they study Warren Buffett’s long term investment strategies on holding stocks as long term investments. (Which I am recommending) He ends up blaming Bernie Madoff.

The lesson of the video? Nothing, its just for laughs ! However if you do find one, I’m sure its this as Buffett said, Be fearful when others are greedy and be greedy when others are fearful.

A serious note, I am not recommending the ad at the end of the video and the website as featured in the youtube video. I have not tried their products and I do not know what its all about.

7.) Investing in the stock market the proper way is more stress free and gives you more free time than most day jobs.

When you hear the phrase “stock market investing” what comes to your mind? Well for most people, they picture geeky people staring on computer screens like zombies all day, trying to plot graphs and charts and it seems that they never get off the phone. The only channel they get to watch is either Bloomberg or CNBC or the local business channel. (Can’t even turn on Cartoon network for 5 minutes cause there might be a breaking news that comes in!) It really does look very stressful.

So why do I say that investing in the stock market the proper way is more stress free ? Majority of us think that the stock market is stressful because of all the volatility that is happening in the markets and that the pundits describe it as a roller coaster ride. Well it’s true, that is if you are a short term investor and that you are like most people who “trade” in the stock market. However in the long term the stock market is quite simple. No need to have your eyes glued on the t.v set all day. No need to even watch the ticker except when you are buying. No need to even do those lousy graphs.

I am not saying that you don’t have to work hard to succeed in stock market investing. You might have to do some heavy reading on annual reports, books, business news and other stuff that might update you about the companies you are buying. Heck you may even watch CNBC or the business news channel as you might get some great information, but you can still watch cartoon network or your favorite movie. You may have to work hard, but you will enjoy it and it isn’t as stressful as you imagined. I promise you, you will get a full sleep at night even during the times when markets crash. This will only happen of course if you do stock market investing the proper way. So how do you do it the proper way? Well that’s what this blog is all about.

You think that Warren Buffett who is the world’s greatest investor and is the world’s richest person would have a very hectic schedule and a very stressful life ? Well he once said “I really like my life. I’ve arranged my life so that I can do what I want.” If done properly, stock market investing is a fulfilling experience and is more stress free, more rewarding and gives you more free time than most day jobs.

8.) Investing in the stock makes you more sharp mentally

Investing in the stock market makes you more sharper mentally. Since news makes sense to you, you become more alert of the events that are happening in the world that you live in. Your mental processes start to work and you will learn to tap into your brain power more than the average human being. You start to pick up isolated facts that you picked up along the way as you progressed in your life. These are the stuff you learn in school, the book you read, the speeches you have listened to and your experiences. As you read and apply what you have learned, you start to put them into a certain form, a usable mental model that will guide you in every investment decision that you make.

Well when you read the above, it might sound like I am trying to pull your leg, not to mention funny. You might think I picked it out of a self help book or something. Well, this is actually what Charlie Munger said. Charlie Munger is Vice President of Berkshire Hathway, Warren Buffett’s partner and best friend.

Munger describes this as a “Latticework of mental models.” Munger once said “You’ve got to have models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head . . . And the models have to come from multiple disciplines – because all the wisdom of the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads. So you’ve got to have models across a fair array of disciplines.”

When you invest in the stock market the proper way, you spend more time learning more not only about stock market investing but about business, management, economics finance, accounting, law and even philosophy and the sciences. This will help you build your mental models and sharpen your thinking. As we go along in this blog, I will discuss more resources on how you can help augment and construct your “latticework of mental models.”

9.) Investing in the stock market forces you to set aside money to invest more

Some people complain that they can’t force themselves to save because once they get their salaries they are tempted to spend it. My advice is why not try investing your money in the stock market. It helps you set aside money to invest more.

When you approach stock market investing from a business perspective, you become excited when your stake in a great company grows. As you read more about the company you become excited about its potentials. You want to buy more of this great company so you set aside more money from your income in order that you could buy more at the right price. Investing in the stock market certainly forces you to set aside money to invest more.

10.) Investing in the Stock Market helps build the nation

Of all the reasons I discussed about investing in the stock market, this is probably the noblest one.

Take note that the main reason why companies want to get listed in the stock exchange is to infuse capital into their business, the reason for such among other things is so that they could further expand the business.

More capital translates to more business which in turns translates to more jobs. This also means more taxes for the government.

So when you invest money in the stock market you are actually doing something very noble and that is help create jobs and generate more taxes for the government. In other words you are helping increase economic activity which is very helpful in nation building.

So there you have it! These ten reasons certainly make a compelling argument as to why you should invest in the stock market. So why not try investing in the stock market today! If you are Filipino, they try our very own Philippine stock exchange. To learn proper stock market investing, make sure to drop by this blog from time to time.

In the next post we will be discussing the top ten myths of stock market investing.