The first thing that you need to consider when you want to learn the basics of investment is that almost every investor is a saver down below. You will never be rich by spending your money on lattes at Starbucks. The only way to become rich is to begin to save regularly at an early age – the earlier, the better. In this article we will therefore lay out the basics of investment and give you a few tips on books to read to begin with.
If you have trouble with spending money spontaneously and want to learn the basics of investment here’s a little tip that you can use:
If you are going out shopping, decide in advance what you want to buy and estimate the approximate cost of the things you want to buy. Then bring that money along plus a little extra, but don’t bring your credit card. Leaving your credit card at home will prevent you from shopping many unnecessary things.
When that is all out of the way, let’s get into some of the specifics.
Sure, you can be rich by speculating, but chances are that you won’t. Successful speculation involves buying and selling securities at the exact right time and that is very difficult to do consistently. Therefore, what I suggest is to look into companies with a steady cash flow and a good dividend yield. The cheaper you can get them, the better it is.
How cheap a security is, is determined by the price to earnings-ratio. If, for instance, you have a company that cost 100 $ while at the same time earning 10 $ then the P/E-ratio is 10.
If you want to buy apples on your local market, you know that the cheaper it is, the better. Somehow that quality does not apply when people are buying securities. Instead the more a stock falls, the more people tend to sell it instead of taking advantage of the opportunity. The facts are indisputable, the cheaper you buy a security, the more value you get. Similarly, when prices have gone up it means that you receive less value for your purchase.
Therefore, always look at the predictability of the cash flow. Are the company’s earnings something that you can count on or do they fluctuate? Is the dividend yield increasing over time? If it is it is generally a sign that the company does have enough cash to pay out to shareholders. Otherwise you can go in and look at the company’s free cash flow – which is defined as the operational cash flow minus CAPEX-spending – and see if they generate enough. The free cash flow is the money that is readily available to the company to pay out dividends. Otherwise they have to borrow money, which disturbs their debt structure.
The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks. This book is full of praise for defensive investing which may prove to be the soundest piece of advice that you can get.
This is a short top three list of our own favorite financial books in order to learn the basics of investment. Don’t just read them, but also try to learn the wisdom that they are teaching. That way you are almost guaranteed to become wealthy one day.