I have had several emails from first time investors on what is the most important thing for a first time investor. Now let me ask back - Why is there a stock market in the first place?
It is a place to allow entrepreneurs to raise funds for their businesses while allowing those with savings to participate in the growth of a company. Of course trading is allowed and stock market has become a very complex place. It has become a field for very smart people taking advantage of herd followers or apprentices who are just learning their trade. As in some of the shows (e.g. Star Wars) there are apprentices whom have become masters but yet there are apprentices who remain to be apprentices throughout their life or many in fact dropped out.
Stock market can be a place for hostile takeovers, more friendly mergers and acquisitions, fraud to take place and of course for some controlling shareholders, a place for them to treat the public company as their own despite the company being a PLC.
However, if one is to be involved in the stock market, the person should not lose sight of what stocks are for. It is in the stocks of the company where the shareholders are participating in the ownership or for growth and ultimately hoping for capital appreciation and dividends.
Hence, when one is buying a stock, he is buying a business or participating in the business. Given the choice to participate in a business, let me ask what does a person look for - the most important thing?
Trustworthiness of the management - One has to question whether you as the investor, do you trust the management? If you cannot trust the management despite how good or smart the manager can be, how can you invest in him / her? The manager can show you his success in managing or growing a business but some of them have taken shareholders for a ride. Let me ask the same question in another manner. Given that there is no intermediary to trade stocks and you are investing in him and the business in a private market (hence most of the time the most logical way to get back your return from investment is from dividend or sell back to the major shareholder) - would you invest in his pitch, if you do not trust the person?
This goes back to knowing the business and people behind the company. If we are not able to contemplate what the company does, can we be for sure that the business will do good in the future. We rely on others? Professional managers - mutual fund managers, trust fund managers? Yes. But, again the same thing - for many who invest or put their money with a unit trust fund, do you even know the fund manager or their track record, or is it just because we do not know where to put our money and be that follower mentality? We trust on just merely the word - a unit trust fund (with license)? Do you know their track record?
Back on investing into a company - to find out about the managers and the business, it can be a daunting task. How do we check out about the management. Read! And learn from experience as well as other people! This place can be one of the place :)
However, when I write I have to be careful as I can only say based on facts but a lot of times, the managers whom we have doubts on - you will have to have the gut feel based on what you see (from Annual Report) and based on their track record. What they have done before, or rather what have they done before...I cannot explain this in words sometimes, frankly. Its a gut feel.
Sometimes, as an investor, I myself lose focus and concentrate on just the numbers (i.e. data, ratios, trend, profit track record). But investment is much more than that. If it is just numbers, then it is very easy. But how do we explain on companies with 30x PE, just average growth, but yet has gained the trust of many investors - current or prospective?
Stocks is about business and people. Start learning on that, read on that - think, see, hear, mix with (the right) people whom have proven some success in stocks investment. If the person do not like to read, listen watch and think about business, he / she will not be able to do well in investment. Reading and analysing financial records can obviously help (this should not be missed), but surely it is not the only thing to look for.
