Investing from a stock market

Over the course of your life, you will probably invest at some point or other in the stockmarket. It is important to understand what the stockmarket is and what it is not. I will outline some very basic ideas below.

The stockmarket is a risky investment. If you invest in a broad-based way (that is, covering many types of companies in many sectors), you have lower risk because while some of these may do badly, chances are that others will do well. At the other extreme, a single stock by itself is quite a risky investment.

The risk also reduces over time. If you think you may need your money at short notice, the stockmarket is not the right place to invest it. Put money in the stockmarket only if you don’t mind leaving it there for 5-7 years.

Beware of people who promise to invest your money for you claiming that they will get you better returns than the market. Even if you escape the Madoffs of the world, remember this: it has been proven that most money managers are no better at picking stocks than monkeys throwing darts. And unlike the monkeys, the money managers don’t work for peanuts!

Be even more skeptical of business newspaper columnists. If they knew how to predict the markets, they’d be retired! I read everywhere these days that “this is the perfect time to buy a house”. Haha, this is definitely some PR money at work.

The only way to possibly beat the market is to develop great understanding and intuition about how things will evolve. Not many of us will get there. A few people like Warren Buffett have managed to beat the market on the average, but even they are wrong once in a while. This is why they do not go and bet all their money on a single outcome. They know that at the future is always a gamble and they gamble wisely.

The investor who is most dangerous for himself or herself is the person who first invested when the market was in a bull run, i.e. rising continuously. He or she does not have the experience of markets that go down and stay down for years. That is why I am warning you – you are lucky to grown up in a time of resilient markets that cannot be kept down for long. But that may also prove unlucky if, by the time you have money to invest, you start to believe that markets will always give you supernormal returns.