Stock Market Investing for Employees

INTRODUCTION

The name of the book is Stock Market Investing for Employees . What is so special about this book? The market is already flooded with stock market books, so what does this another book have to offer? Why employees? Why not others? Isn’t the stock market risky? Can an employee withstand the bizarre ups and downs of the stock market? Is it worth the pain? Don’t we have mutual funds, bonds, precious metals, and other conservative investment options that we have to deal with the stock market?

Such questions are obvious and it’s good that you asked them. In order to condition the mind afresh, it’s important that it be emptied of that which it has had for years, and asking questions is the first step to doing so. Employees generally keep out of the stock market. The reasons given are many: riskiness of the stock market, lack of time, lack of motivation, lack of knowhow, and, maybe, lack of money. Since this book is written keeping employees in perspective, it will not only answer all such issues but also equip you with everything you need to succeed in the stock market. Why only employees and not others? Though the ideas given in the book can be used by anyone, whether an employee or not, employees have a unique positioning which gives them an edge over others. This unique advantage is their inability to get deeply involved in the stock market on a day-to-day basis. Yes, you read it right. Your greatest strength is that you can have only limited involvement in the stock market. Most of the time you will be busy working in office, trying hard to meet your targets, working through tight deadlines, attending numerous meetings in a day, reevaluating the contretemps with your boss, strategizing for office politics, and doing all that which constitutes the office life. So, you won’t have much time to be deeply involved in the stock market. The success mantra in the stock market is not active involvement in but abstinence from it.

Don’t trust my words. Just check with any iconic stock market investor and they will be happy to testify this fact. Take Warren Buffett, for example. For much of his investment career, he lived in Omaha, away from the American stock market. He hasn’t been an active user of all that the Internet and fast-advancing information technology have to offer. And yet he has recorded unparalleled success in stocks. I am not saying that you don’t use what the Internet has to offer. The Internet is indeed going to be very useful in your stock market career and I do recommend its use. The point which I am trying to bring home is it is not active involvement in the stock market which pays but it’s the conservative, passive way which is rewarding. Little surprise that Philip Fisher, another iconic investor, titled one of his books Conservative Investors Sleep Well. Your chances of success in the stock market are greater if you don’t take part in it too often. Once you have made the right stock selection, you can relax, and let the stock do its job. I understand that your mind is currently filled with many more questions than the ones with which we started this discussion and that you now have some serious doubts. I assure you that this book will answer all your queries, so stay tuned.

THE CONSPIRACY AGAINST EMPLOYEES

Employees have been repeatedly told that the stock market is risky. The entire financial community has vowed to make the stock market puzzling and complex for the layman. Just watch a business news channel and you can soon spot a well-dressed financial analyst pontificating about what you should buy and what you should sell. He will tell you how the economy is in doldrums and how his solution is Noah’s ark for the economy. He will also take help of complex graphs and talk about broken trend lines and head and shoulder patterns. He will tell you that you should sell a stock because it has made a double bottom. If he is not taking help of these complex drawings, he will tell you what he believes will happen. He will give you an articulate speech citing the order book of the company, the pertinent political and economic factors, the competitive scenario, the management quality, CAGR, et cetera. You are fully justified if you are intimidated by this spate of data, drawings, and opinions. You have every reason to believe that understanding the stock market is tough and you should stay away from it. You are not wrong if you take shelter in more conservative financial products, such as bonds, fixed deposits, and the unbeatable gold. If you do dare to buy stocks even after this bombardment of jargon, you are apt to feel iffy and uncertain about your stock-buying decision. If you take the so-called indirect route and buy a mutual fund, you have just done what the mutual fund financial analysts wanted you to do—buy their scheme. If you could make your stock-related decisions yourself, many of these financial analysts would be out of job.

Understanding stocks is easy. The opportunity called stocks is available to all of us. We all can benefit from it. Tapping this opportunity isn’t half as difficult as you may have thought it to be. All that is required is a little initiative taking. Because you are already reading this book, I would like to congratulate you for having made the initiative. I promise you that by the time you finish the book, you will have good knowledge of what stocks are and how you can profit from investing in them. You will be yourself surprised why you didn’t buy shares before. Shares aren’t as risky as you thought them to be. In fact, many stock markets have maintained an upward bias over many years. This means that if you had bought shares and held them over the long term, you had a good chance of growing your money. So, the odds are tilted in your favor. Going against the conventional wisdom, I would say that losing in the stock market is difficult.

The financial community isn’t the only one which conspires against you. The conspiracy starts when a person is born. In many cultures and even in many developed nations, the normal social preference tilts toward security. People are scripted to stay away from the so-called risky things. Many times what is seen as risk is nothing but a lack of knowledge. The cost of ignorance is very high, and the disappointing fact is that many of us keep paying this cost throughout our lives without even realizing that we are. After reading this book, you will have realized that stock market investing is not complex and it is not as much risky as you thought it to be. It is pure common sense and this is what it needs to be. If I told you that an excellent business was selling part of its ownership at an attractive price, would you be interested? It is only common sense that you would like to invest in such a business because it would grow the amount invested. And if I told you that after buying ownership in this excellent business, you need not do anything but sit back, would you be doubly interested? If you said no to this, maybe you will also say no to your favorite movie star asking you for a date. This is exactly what stock market investing is: Buy into an excellent business at a reasonable price and sit back until the market agrees to pay you a fantastic price for your ownership interest.

Well, you do need to keep a check on what the business is doing, which entails some work, but soon you’ll find this work fun. And welcome to the world of business. You are no longer merely an employee but a capitalist who owns interest in many businesses. What is generally seen as risky is actually a lifetime opportunity. How many people can claim to have created businesses as big as the ones which trade on stock exchanges? How many people will actually be able to create such big businesses even if they tried to? With the stock market, one can easily buy into big, profitable businesses and be a partner in their success.

Through this book, I want to enable you to buy shares yourself. I don’t want that you watch what the analyst on the business news channel is saying for making your stock-buying decisions. I don’t want that you get astray by the noise in the market. I want you to be buying shares independently.

WHAT PEOPLE GENERALLY SAY ABOUT STOCKS

Unfortunately, people don’t have many good things to say about stocks. The people who talk negatively about stocks fall in two camps: those who have suffered losses in the market and those who have never operated in the market but have learnt from others that the market is a horrible place. You may also be one of those who have always thought negatively about shares. Stories on how people lost their shirts in the market are very popular and everyone knows someone who repents having bought shares. The easiest way to lose your life’s savings is to buy shares, they may tell you. Many people have termed shares a form of gambling: You earn money if you are lucky. Those who think luck is behind making money in the stock market frequently find themselves to be unlucky. Those who consider buying shares gambling take pride in buying mutual funds or bonds or gold. Buying mutual funds or bonds or gold is investing for them.

For many other people, the ups and downs of the market are pointless and confusing. They don’t understand what is going on and what to do about what is going on. Some people are attracted toward the market because the market is going up, because someone they know has made a handsome profit in the market. They don’t want to learn how things work and what the ways to succeed in the market are; they just want to make a quick buck. Such people pay attention to ubiquitous hot tips. Little surprise, they lose money in the market. Once they have lost money, they go about telling everyone that the market is risky and illogical.

Then there are people who have invested money in shares and held them for the long term, yet they have lost money. Buying just any share at any valuation and then holding it for the long term isn’t a surefire formula for stock market success. For you to earn money with shares, the company you hold should be earning money as well. For you to earn money with shares, you should have bought shares at a reasonable valuation. An excellent company can also give you losses if you have bought its shares at a high valuation.

People who lose money in shares are generally the people who are leveraged. Leverage means that they have taken money on loan to increase their stock returns or they trade in options and futures (more about these later in the book). Leverage can increase your returns, but it can bruise you deeply if it works against you.

Market crashes are looked upon as a huge drawback of the stock market. Those who don’t take part in the market congratulate themselves (and deride at those who do) for not buying shares because the market has come down or the share they would have bought has crashed. Though crashes may be inherent to the stock market, I see them as opportunities to buy into great companies or to increase my existing stake.

Many people feel that the stock market doesn’t suit their personalities. Some call it wholly manipulated. Some think that the people who do well in shares have access to special information. Whatever type of person you are, you can work in the market and I shall tell you how. In current times, many countries have well-functioning stock markets, which can’t be manipulated. Governments have appointed authorities that regulate stock exchanges, thus making buying shares a safe venture. No one has exceptional knowledge about stocks. Those who do well in the market are the people who have taken time to understand the market. They aren’t someone who has descended from the heaven or someone who gets stock tips from some otherworldly body. Many stock markets have insider-trading regulations which discourage those in possession of price-sensitive information to trade it (more about this later in the book). Mature stock markets have enough depth, that is, the number of participants that a bunch of people can’t influence them.

A class of intellectuals has equated the stock market to a Ponzi scheme. The word Ponzi has come from the name, Charles Ponzi, of the person who is believed to have used the idea of a Ponzi scheme for the first time, around 1920. A Ponzi scheme is a fraudulent investment scheme aimed to deceive investors. In it, old investors are paid with the money of new investors. No investment activity takes place. Old investors are simply paid returns from the money put in by new investors. The returns made by old investors entice more new investors to put money into a Ponzi scheme. When the corpus has grown to a large size, the company or the person who is running the scheme runs away with all the money. Stock market has been called a Ponzi scheme because for you to make money in the market there has to be someone who is ready to buy stocks from you at a higher price than what you had bought them for. In other words, the stock market will give you returns only when more and more new investors keep pumping money into the market, thus driving share prices higher and higher.

I like the analogy made between the stock market and a Ponzi scheme. However, the analogy has several problems. In a Ponzi scheme, no real investment activity takes place and money simply changes hands time to time when old investors are paid returns with the money of new investors. In the stock market, real investing activity happens when you buy shares, which are ownership interest in live businesses. I shall tell you more about this aspect later. Shares pay you dividends, which come from business profits. Being a shareholder you get many privileges, such as voting rights. Stock markets have hundreds of years of history and have a purpose to serve in the economy. They operate under strict regulations, unlike a Ponzi scheme. Though it’s true that new money needs to keep coming into the stock market to take it upward, you don’t need to worry about that. Stock markets have millions of participants and it is not going to happen that everyone deserts the market and you are left alone. It will also not happen that the market shuts its doors forever. Stocks do go up and come down; investors enter into and exit from the market; people talk pleasant things and dirty things about the market; yet the market goes on. It’s a solid mechanism that has stood the test of time.

The stock market has its own issues and it isn’t a perfect place, I admit. But can you show me anything that’s perfect? There can be booms and busts in the market. There can be dry spells, when nothing seems to be happening. There can be wild swings. The stock market still remains a potent option to make money.

If you are going to buy shares, it’s important that you don’t listen to the pessimists. There is an entire school of thought that criticizes the stock market. Many influential people may do so as well. However, I have found the stock market to be a sensible place. Stock markets play a crucial role in any capitalist society. They are a means of promoting greater financial equality. They are the tools with which anyone can earn riches.

WHY YOU SHOULD BUY STOCKS

The prime reason to buy stocks is what you have just read: You want to be partner in a company’s success. As the company grows, so does your investment. All this is a no brainer. Many employees wish to be entrepreneurs but don’t want to take the risk of forgoing their paychecks in return of uncertain rewards. With stocks, you can be a capitalist and think like a businessman without having to give up your job. You also want to buy stocks because you want to counter the effect of inflation. In many countries inflation rates are pretty high and stocks provide you a way of growing your money faster than the rate at which inflation eats into your money. By the way, inflation is a rise in prices of the various things you see around yourself, from the bread you eat in your breakfast to the Porsche you have always dreamt of. You may also call inflation a loss in the buying power of your money. Many developed nations, such as the United States, have a significant percentage of their populations investing in the stock market.

Buying stocks is hassle-free. All you need to do is sit at your computer, open your broker’s website, place your order, and lo you have bought shares in a company. Alternatively, you can also call your broker and place the order. Stocks also provide you liquidity, that is, you can sell them anytime and convert them into money. Compare this with the many other financial products available which have a lock-in period. A lock-in period is that time duration before which you cannot exit from an investment. Even if you can, your exit costs you dearly because you pay various penalties for reversing your decision. Many mutual funds, bonds, and fixed deposits have strict lock-ins, which make them illiquid over at least some time.

Stocks can be tracked in real time. At anytime you can know what you are worth. Many financial portals provide free-of-cost portfolio features which help you perform many operations on your portfolio.

Above all, I encourage you to take control of your financial destiny, and stocks can be an important ally in your crusade. The chances of a financial product, such as a mutual fund, performing better than you as a stock picker are less. Why? Because you are not tied by all the rules and nuisances that such financial products are. I have myself owned a unit-linked insurance policy which gave me negative returns even after three years, which was the lock-in period of the policy. A unit-linked insurance policy invests your money in the stock market and provides you an insurance cover. When I exited from the policy after three years, I had to pay one-third of my invested amount as penalty. Negative returns coupled with penalty coupled with a waiting period of three years. Would you call this fair? I couldn’t have exited from the policy before three years because then I would have lost the entire invested amount. You might question why I bought the policy in the first place. I bought the policy because I wasn’t financially savvy that time and hence was an easy target for the insurance company sales reps. The grim truth is that many people enter into financial products which they don’t understand and which are wrongly sold to them. Not to forget the little or no or negative returns such financial products give, even after years. I now hold the helm of my financial boat and I want you to do so as well. The financial world is full of sharks which are hungry, so it’s essential that you educate yourself on financial matters.

Many employees have been conned by financial crooks in the name of tax planning, so beware. In a scramble for saving taxes, many employees unintelligently commit huge money to income-tax-saving instruments, many of which come in forms of the insurance policies and mutual funds which I have mentioned above. I have personally found this idea of tax saving puzzling. In an urge to save some money, you commit much more money to those avenues which not only keep your money away from you for a long time, are illiquid, but also provide you meager returns. Tax saving is an intelligent way in which the government channels your money in the desired direction with the help of the financial community. I have preferred to pay the entire amount of my income tax and saved nothing. This has helped me get more money in hand, which I have then used to buy stocks.

Indeed, many financial products invest your money in the stock market. If you could also do so (and more so, more profitably), why would you want to pay the fund managers? Commodities, real estate, currency, et cetera, are other financial instruments. I compare them vis-à-vis stocks in a later chapter of this book. It’s much easier to buy shares than invest in any other financial instrument. You don’t need to commit huge money to start buying shares. You can buy even a single share, which will come at a few units of your currency. You can sell the shares you have anytime. Gathering experience in the stock market is easier because you can afford to learn how things work without putting a lot of money on the table.

YOUR FIRST STOCK-BUYING EXPERIENCE

You will be thrilled when you buy shares for the first time, and you will want to check the quotes of your stocks several times a day. Inevitably, you will also come across the financial analysts who have different and disturbing ideas about the stocks you own. At this time, you will need to trust your stock strategy and stick to it. Remember, success in stocks will come not by active involvement in the market but by staying away from it. It will be necessary that you reject the many views you listen from the market experts and stick to your own strategy. Naturally, this requires certain traits, which you can also develop. I discuss the traits of a successful investor in a later chapter of this book. Sticking to your stocks doesn’t mean that you stop following what your business is doing. When you make decisions, it’s only natural that not all of them will be fruitful. To err is human, and more so you will need to make decisions with only limited information, so don’t bash yourself for a mistake. All successful investors have made wrong decisions at some point in time, but this has not stopped them from making a kill with stocks. What is important is that your good decisions outdo your not-so-good ones by a sizeable margin. And that’s possible. I have also invested in wrong companies but this has not deterred me from taking advantage of the potential of stocks.

STOCKS AS THE SYMBOL OF CAPITALISM

Capitalism lies at the heart of human development. Capitalism is the force behind development. What’s capitalism? Capitalism is the pursuit of creating more from less. Business is the instrument of capitalism. In a business, the pursuit is to create more from what has been invested. The surplus goes on to promote development. Had it not been for capitalism, human civilization would not have made much progress. We would have still been using horses to commute. There would have been no telecommunication, no Internet. Majority of people would have been working in fields. People would have been dying of ailments, such as diarrhea, which can be cured easily today. Thanks to capitalism, we have come a long way.

Stocks are the face of capitalism. You can see capitalism working in the stock market. In the stock market, you create more from less. In the stock market trade big businesses which form the base of the economy. These big businesses have brought prosperity to the lives of millions.

The critics of capitalism call it a blind pursuit of profits. On and off businesses are criticized for their greed. Stories of people who have suffered under capitalism are popular. Rich people are still loathed by the poor. Polarization of wealth is often talked about: The rich are becoming richer and the poor are becoming poorer. Many people have harbored the belief that the rich exploit the poor. It is said that capitalism has caused uneven development. On the one hand, a handful of people have amassed huge fortunes. On the other, the masses are languishing.

Mankind has often tried to find