When I looked at my email this morning, I noticed that, for the first time in a while I had a request from Quora. The question I was asked to answer is, of course, the question in the title of this post. I can’t say I was ready to answer first thing on Saturday morning and, for technical reasons1 I’m not going to go into, I’ve decided to post my response here rather than on Quora.
Answer: Technically, you really only need to know your social security number, mailing address and how to sign up for an online brokerage account.
Of course, the question they really wanted to ask was:
“What do I need to know to start investing in the stock market successfully?”
The “successfully” part is where it gets tricky. Now, I’m not exactly sure what possessed this person to send a direct request to me to answer this question, but the fact that they asked tells me two things:
- This person is smart enough to not just rush in without any research.
- They clearly have not yet developed enough of an understanding of the basics to realize why this is an incredibly risky question to ask some random person.
It’s not that he/she will not get plenty of involved answers when they as such a question, it’s that they will get a considerable amount of potentially harmful advice. For whatever reason, a vast number of people believe they have investing all figured out and they are happy to tell everyone how to do it. The majority of such people can’t tell their ass from a hole in the ground when it comes to finance/investing/economics. How so?
Honestly, it all comes down to the fact that asking what you need to know about the stock market is sort of like asking what you need to know to understand quantum electrodynamics. Seriously, investing isn’t a simple subject2 and it’s hard to convey this point without sounding like a condescending asshole. I’ve been studying the markets one way or another both in and out of school for about 3 years now and I had no idea when I started learning about finance how complex it would be. I currently am in the “holy shit, people are complicated” phase of learning about the markets.
My Actual Answer
Alright, so enough about how hard it is and what this person doesn’t know. Here’s my answer:
First, before anything else, the most frequently overlooked part of any discussion about investing is why the hell you’re investing in the first place. Are you at a stable job and looking to save for retirement? Maybe you’re middle age and didn’t start investing earlier. Maybe you want to save money for a trip around the world in 10 years or so. The point is, you need to understand your goals because there’s no such thing as a perfect portfolio and what you will want to invest in will depend on your situation and objectives. All too often, “invest in the stock market” translates to “I want to get rich in the stock market.” That’s fine, but just make sure you are not kidding yourself about your objectives.
This is a good time to point out that you shouldn’t trust me. Or anyone who talks about investing. Why? Plenty of reasons, too many to list, in fact. To start with, other people have their own unique life situations and goals that are going to be different from your own. Therefore, they are likely focused on investments that very likely will not fit your risk profile/time horizon/whatever except by sheer luck. Unless they are a financial advisor to whom you’ve explained everything about your situation and goals, they aren’t thinking about you when they talk about investments. For example, I play around with a few virtual portfolios and sometimes post about them. Implicitly, I built those portfolios to somewhat match what would make sense for the scenario I wanted to analyze. Even if I did meet my objectives with that portfolio, odds are it wouldn’t work for anyone else. And honestly, that assumes that the portfolio does what I intend it to do…
…Which leads nicely into the next point. WTF makes you think I have the slightest clue I know what I’m talking about3? You don’t know how much people on the internet really know about this stuff. You should start by learning the very basics about how the markets work (e.g. how trading happens, how the order book works…) so that you can start to tune your bullshit sensor. Also, the last thing you should do is read any of the mainstream financial news sources (Bloomberg, WSJ or god help us Yahoo Finance). With a few exceptional individuals aside, the financial media will only make you stupider. YES, IT’S REALLY THAT BAD. I’d suggest reading the finance blogs I have on the sidebar, they’re all people I trust to some degree (to a much lesser extent in the economics category).
Honestly, most of the bloggers I provided links to are much better able to answer this question than I am. I lack experience and I’m still learning about the topic myself. I will make one further point before leaving you alone in the vast void of uncertainty. If I could say that there’s one key thing to never forget as you try to learn about the markets and investing it would be this,
It is NEVER that easy.
This rule is fairly easy to apply. If someone puts forward a suggestion that sounds great, maybe even perfect, then you know you’re missing something. This isn’t easy, there’s a ton of important details (many such details are boring). You fill constantly find contradictions. There’s rarely widespread agreement and that can be as bad as it can be good. If it sounds too good to be true, it is4.
Related Reading
- Tips For Individual Investors
- Politically Agnostic
- Dow 20K And The Wall Of Worry
- Financial Media Wakeup Call: The Big Disconnect
- Everything on Best-Of at The Reformed Broker
- Get your daily reading at Abnormal Returns
- Gold Brings Out The Cranks
- 12 Rules of Goldbuggery
- Understanding the Modern Monetary System
- For an inside look at investment banking: Table of Contents
- And in particular about IPOs: Go Ask Alice and Size Matters5
1. If you really must know, Quora has implemented a name policy and now requires users to use their real name. That's not a problem for me except that Quora doesn't seem to think my name is my name. 2. The fact that investing is actually hard seems to come as a surprise to many people. Seriously, if you asked most people to study anything else of that complexity most of them will tell you you're crazy and they don't want to put the time and energy into it. 3. According to me I know what I'm talking about. 4. I do know a secret to guarantee that you will make money on your investments. No, I'm not making it up, I'm serious. Cheating works. Why do you think people are tempted to do insider trading? It's easy and pays well, if you don't get caught...if you lack the integrity to be an honest person. 5. On a side note, it appears The Epicurean Dealmaker is not doing a great job of quitting. I can't complain, I haven't found a replacement yet.
