Hey. This is going to be a collection of articles on how to invest if you have no prior knowledge or experience in the subject matter.
We do however advise you to have an understanding of the following prerequisites:
- A concept of economic principles
- A good grasp of mathematics
- Understanding probability and risk in statistics and game theory is advised.
Lesson 1
Principles:
- The difference between investing and trading is time
- Mr. Market has bipolar.
- value investing tries to find the intrinsic value of a company based on fundamentals.
Lesson
Investing is the art of choosing a couple great stocks (in a nicely diversified portfolio) and sitting on them for a very long time. Investors pay very little attention to the day-to-day affairs of Mr.Market aka the stock market. This is a fairly low risk/low reward strategy. Trading is a much higher risk/higher reward strategy. Traders trade stocks usually using technical analysis and market sentiment along with the news of a stock. They have a time span between the day, a few days up to a month even.
I mentioned Mr. Market earlier who was the companion of Benjamin Graham in his writings and is often referenced by Warren Buffett, both are two of the great value investors of all time. Anyway Mr. Market is a very wierd person; he often gets really sad and angry and then jumps up to be really happy over a period of minutes, days and weeks. This volatility is pretty scary and in many people's opinions makes trading too much of a gamble. If Mr. Market were human he would most likely receive a diagnose of Bipolar because of his extreme behaviors in the short term.
Value investing exploits Mr. Market over time. In the short run know one knows what he's going to do. But when there is a big difference between the real value based on the fundamentals which is known as the intrinsic value (what the company actually is worth) and the share price of a company we buy and hold.
Eventually when Mr. Market recovers you, the value investor, shall have your reward. That is the principle of value investing.
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.