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Imagine I want to buy shares of companies and hold them for a long time. Ideally, the valuation of these companies and/or the dividends they pay will increase over time.

I asked a friend what skills are required for this type of investing and he told me this:

  1. Ability to read and understand the health of the companies based on publicly accessible data (e. g. annual reports).
  2. Ability to evaluate whether or not a company's products will be demanded.
  3. Detecting trends (e. g. if electric cars are selling like crazy, and in every of them is a battery, it may be a good idea to buy shares of companies, who a) manufacture batteries or b) supply them with raw materials).

If I wanted to learn these skills really thoroughly, how could I do this? What kind of teaching vehicles could you recommend?

  • 3
    Personally, I would avoid this entirely (unless you're interested in it for its own sake), and invest my money in mutual funds. – jamesqf Jul 30 '17 at 17:40
  • I would expect the valuation (e.g. things like price to earnings) to go down over time as a company gets bigger because its growth rate is going to drop. – Bob Jul 30 '17 at 23:36
  • @Bob 'Valuation' typically means the value of the company as a whole [or perhaps the value of a single share]. Whether any particular ratio drops over time, if we would always expect a company's value to drop over time, then the stock market as a whole would consistently lose money - it doesn't. Historically the stock market returns an average of something like 7% annually, after adjusting for inflation [with a lot of volatility between bad years and good years]. – Grade 'Eh' Bacon Jul 31 '17 at 13:17
  • @user31652, yes, no one should ever learn about something they don't already know, ever. – quid Mar 12 '18 at 22:14
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As foundational material, read "The Intelligent Investor" by Benjamin Graham. It will help prepare you to digest and critically evaluate other investing advice as you form your strategy.

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I feel that OP's question is fundamentally wrong and an understanding of why is important.

The stock market, as a whole, in the USA has an average annualized return of 11%. That means that a monkey, throwing darts at a board, can usually turn 100K into over three million in thirty-five years. (The analog I'm drawing is a 30-year old with 100K randomly picking stocks will be a multi-millionaire at 65). So to be "good" at investing in the stock market, you need to be better than a monkey. Most people aren't.

Why? What mistakes do people make and how do you avoid them?

  • A very common mistake is to buy high, sell low. This happened before and after the 08's recession. People rushed into the market beforehand as it was reaching its peak, sold when the market bottomed out then ignored the market in years it was getting 20+% returns. A Bogle approach for this is to simply consistently put a part of your income into the market whether it is raining or shining.

  • Paying high fees. Going back to the monkey example, if the monkey charges you a 2% management fees, which is low by Canadian standards, the monkey will cost you one million dollars over the course of the thirty-five years. If the monkey does a pretty good job it is a worthy expenditure. But most humans, including professional stock pickers, are worst than a monkey at picking stocks.

  • Another mistake is adjusting your plan. Many people, when the market was giving bull returns before the 08's crash happily had a large segment of their wealth in stocks. They thought they were risk tolerant. Crash happened, they moved towards bonds. Then bonds returns were comically low while stocks soared. Had they had a plan, almost any consistent plan, they'd have done better.

  • Another genre of issues is just doing stupid things. Don't buy that penny stock. Don't trade like crazy. Don't pay 5$ commission on a 200$ stock order. Don't fail to file your taxes.

  • Another mistake, and this burdens a lot of people, is that your long-term investments are for long-term investing. What a novel idea. You're 401K doesn't exist for you to get a loan for a home. Many people do liquidate their long-term savings. Don't. Especially since people who do make these loans or say "I'll pay myself back later" don't.

  • If you take a sufficiently large random sample of a population, it's characteristics will be similar to the whole. – Lan Mar 14 '18 at 12:49
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Far and away the most valuable skill in investing, in my opinion, is emotional fortitude. You need to have the emotional stability and confidence to trust your decision making and research to hold on down days.

1

The key to good investing is you need to understand what you are investing in. That is, if you are buying a company that makes product X, you need to understand that.

It is a good idea to buy stock in good companies but that is not sufficient. You need to buy stock in good companies at good prices. That means you need to understand things like price to earnings, price to revenue and price to book.

Bob

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I would say that the three most important skills are:

  • Ability to analyze the effects of various costs, including taxes. This is the most important thing! Under the efficient market hypothesis, there is no other way to obtain better return without increasing risks, than to reduce costs.
  • Ability to diversify. So, you shouldn't have most of your money in a single company. Similarly, you should not have most of your money in a single industry. Or in a single country. Thus, if you're in the United States, don't buy just US companies.
  • Ability to tolerate risk. There is no easier way to become wealthy other than to bear equity risk. If you choose to bear only partial equity risks (like having 50% stocks), your returns will suffer compared to the approach I recommend, going all in into stocks (perhaps sans a small emergency fund).

Note that some costs are hidden. So, for example, a mutual fund investing in other countries than where you live in may mean the investment target country charges a certain percentage of dividends going to the mutual fund. The mutual fund company doesn't usually want to tell you this. There may be clever financial instruments (derivatives) that can be used to avoid this, but they are not without their problems.

If you diversify into equities at low cost, you will have a very wealthy future. I would recommend you to compare two options:

  1. Build manually a well-diversified portfolio of 30-40 stocks. Ok, you could have more, but after some point diversification doesn't buy you anything anymore.
  2. Invest in a low-cost index fund (mutual fund or ETF)

...and pick from these options the cheaper one. If your time has a high value, and you wish to take this value into account, I would say it is almost always far better option to choose an index fund.

Whatever you do, don't pay for active management! It is a mathematical truth that before costs, actively managed investments will yield the same return than indexed investments. However, the costs are higher in active management, so you will have less total return.

Don't believe that good historical return would imply good future return. However, if for some reason you see an index fund that continuously loses to the index more than by the amount of stated costs, beware!

0

I'm going to go out on a limb here. I think that the ability to think scientifically, and validate theories of what works, and what doesn't is more important than the ability to follow a particular strategy well. ETF's and index funds will work beautifully until they don't. See the "Nifty Fifty" (1973-1974) for one classic example of the large cap index components getting taken out back. If you are 30, or 50, or even 50, you have such a long time horizon that it is probably more valuable to learn how to think about investing, and do better in the long term.

Or, decide you have no interest in it, buy a basket of 3-5 index funds that do not overlap (one US large cap, one US small cap, one international), and don't look back. One thing, though: Bonds terrify me. If you are looking at them short term, they are in a bubble, with historically low interest rates (high prices). If you are looking at them long term, historically over decades, they on average do worse than stocks or land. Yes there has been a long bond bull market from 1980-present, but in the span of centuries that is an aberration.

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