One of the things I’ve done over the years is learn about the stock market – what it is, how to invest, the differences between investing and speculating, the risks, the rewards, and how do you sort the good information from the stock market from the bad? Where did I begin, and where do I recommend you begin if you want to learn about investing in the stock market?
My journey to learn about the stock market and start investing in stocks has been long and wandering, with many stops along the way. I hope that by sharing my investing story, I can shorten the process for you.
Learning about stock market investing – technical analysis?
Almost 20 years ago, while I was busy with babies and toddlers and had no outside full time job, I wanted to spend part of my time on something else. I needed an outside focus. I did some freelance science educational writing from time to time, and I could make a good hourly rate. The problem was that the deadlines were tight, and random. This meant they were always at inconvenient times.
So one of the ideas my husband had was tried to get me interested in was learning about the stock market.
There wasn’t as much information on the internet back then, and the only access to the internet was with a desktop computer. (Remember those behemoth’s? Not easy to port around as I chased toddlers!) So my best form of reading was going to be with books – they were more portable.
I ordered a selection of stock investing books – among them was a book by the Motely Fool, which is really good at explaining investors to beginners. Looking back I would say that all the books I ended up reading this time around believed in Modern Portfolio Theory. In short, a stock is worth whatever the next guy is willing to pay for it. The books also covered technical analysis, meaning you can learn to figure out what a stock price is going to do by watching the price movement on a chart and recognizing patterns. (See more resources below.)
At the end of the books, they had done their job. They had gotten me excited about the possible returns – the money to be made – investing in individual stocks. But, always skeptical and always thorough, I went on-line to do more research and come up with some concrete examples and numbers.
Reality, and math, discouraged me as I tried to learn about investing
From the books and my research, I found that there are some super star investors who double their money fairly quickly! Could I do that? I mean why do it unless I can really do it well. I might as well shoot for the stars!
Okay, forget about whether or not I could be really, really good. It’s important to understand what even “really phenomenally good” is. You need to know the upper limits of success, even if that success level is a low chance you’ll make that much, to decide if it’s worth the risk.
One of the investors I found, cited as a phenomenal success by the authors of one of the books I had studied, had used technical analysis to buy and sell stocks. He started with $100k. And as I recall, he was getting 50% returns. Which in case you have no perspective, is phenomenal. (The famous investor Warren Buffett made a greater than 30% return each year over more than 10 years when he was starting out.)
Here is what 50% annual returns means, in real numbers.
- Since he started with $100K, the first year he made $50K.
- The next year he reinvested his now 150K, and he made $75k.
- The third year he made $112k off that new total of $225k.
Not bad! By the third year he was making over $100k. Except…
It’s not like you could draw it out as a salary. You have to keep investing the returns to keep making more. And you have to keep getting phenomenal returns…
Percent can also be deceptive. The actual amount 50% represents of course changes, depending on what number you’re looking at 50% of.
I decided to do some math with concrete numbers.
If you started with 10k, then you would only make 5k the first year.
How much can you expect to make each year investing in the stock market?
After reading a few books about stock market investing, the possibility of getting a 50% return every year, based on technical analysis, is what got me excited about investing in the stock market. And that’s of course what the books are trying to do. They are trying to show you what’s possible, to get you excited. If they didn’t convince you that you could be successful, well, you probably wouldn’t read the book and buy it. But I’m not very good at sales (as the size of this website shows). I’m always skeptical. I wanted to look at reasonable numbers.
A more reasonable, but still considered incredible high return, of a very successful investor, seemed to be around 15% a year. (The stock market is said to average a 7-10% return per year. It has been in the high end of that range lately.)
Not wanting to be overly optimistic, I settled on a reasonable expectation would be to make 10% a year, even if the stock market didn’t do that well. (I was doing these calculations back in 2002, when stock market returns were lower. And it makes the math easy.)
I wanted to think in terms of salary, so if I were making 10% a year with investing, how high could I theoretically go in “salary?”
By that calculation, if I were to make 10% per year investing, to earn a salary of $100,000 a year, I would have to be investing $1 million per year.
Obviously I would be investing nowhere near that much. I couldn’t even imagine starting with more than $10,000.
That means that with a 10% return on $10,000, I would only make $1,000 for the first year. Even with compounded interest, if I stayed in, kept putting my earnings back in, and kept earning 10% per year, at the end of the 10th year I would still only be making around $2,500 a year.
Even if I started with 100,000, I would still only be earning a salary of $25,000 by the end of ten years.
I certainly did not feel confident enough to risk $100,000 and after 10 years work to still only be making $25,000 a year made it seem even less worth it. This convinced me that my time would be better spent pursuing another type of career. So we left our savings in ETF’s and Index Funds (funds that have diverse and broad range of stocks).
If you’re discouraged at this point, so was I. But you don’t have to give up. Instead of waiting a few years, just go ahead and fast forward and learn from my experience by reading on!
The biggest reason I gave up on learning about investing in the stock market
So part of my problem was that I was too impatient to think about the compounding effect of returns. More on that later.
But the most discouraging thing was that the way I had learned about investing, investing in the stock market just felt like moving paper around to make more money. You bought “paper” (a stock market share) and you tried to sell it to someone else for a higher price. And I didn’t feel good about that.
What was the purpose of just moving paper around to make money? How did it add value to the world?
Ironically, moving money around to make money is essentially what caused the mortgage crisis of 2007-2008, as I learned later. So my instincts were right to steer clear of that! (The best way to understand the crisis of 2007-2008, the collapse of the housing bubble, is to read The Big Short, or to watch the movie The Big Short. They are both entertaining and surprisingly easy to understand. But note that the movie is rated R, for many good reasons.)
And the stock market crash of 2007-2008 is also what made me want to learn about the stock market. The stock market was way down, and we were confident it would go back up. We would have liked to have bought more stock. The problem? All of our money was already in the stock market, and went down with it!
Learning about stock market investing the right way
The second time I started learning about investing, just by luck, I started down a different path.
With our two oldest kids in high school, and still no meaningful career, I decided to throw myself into doing more volunteering at our kids’ schools. They would be in college soon, so then I could get back to working on developing a career.
The school year started, and volunteering at the school, I promptly broke my wrist. (I slipped on water. There are more fun ways to break your wrist!)
I was unfortunate enough to have a bad break on side of my dominant hand (it still has not fully healed), and getting back to even one-handed typing was slow. I will spare you from a long list of things that it seems like you could do with one hand, but actually are difficult and painful. But after a few months, I decided to give learning abut investing a try again. This time, due to my limitations, through podcasts.
I opened up my podcast player and search something like “investing AND stock market AND NPR.” (NPR was my favorite source for well-researched podcasts.) And the Invested Podcast, with Phil and Danielle Town, came up first.
I have no idea what that happened, because the Invested Podcast is not associated with NPR, but I’m so glad it did! It is still my favorite investing podcast, and I have listened to tons of investing podcasts.
Learning how to value stocks, not just look at price – fundamental analysis of stocks
In the Invested Podcast with Phil Town teaches his daughter, and you, how to value a company, and it’s stock, like it’s a private company. Maybe valuing a company is something you learn if you earn a business degree, but it is not something they teach chemistry majors. Valuing a stock like a company is called fundamental analysis.
This way makes so much more sense to me than buying a stock and just hoping someone will pay more for it. It’s buying a stock by first calculating what the stock is worth, and then buying it when it’s on “sale,” at a great price.
If you want to start learning about investing, I think that the Rule One Invested Podcast, on your favorite podcast app, is a great place to start.
Resources to learn about investing in the stock market
I am not an investment professional. The information here is for educational and entertainment purposes only. I have not considered your personal financial situation as your financial advisor. Before making any financial and investment decisions, consult a professional.