Some readers emailed me privately wanting to know about stocks and financial statements. Here is my two cents worth.
I remember two things that my financial planner made me do so I will not be overwhelmed by stocks (well) and so that I can understand it:
1. He asked me to look at the business page of the newspaper everyday, the Stock Exchange page to be specific, and to choose at least 10 stocks that I will track and follow day after day after day.
He was right. This gave me more than what I thought it will give me. At the beginning, yes, there was confusion, and then after some time (six months… and going), illumination. I had a “feel” of the market, and somehow, my “gut” was developed. I would know if stocks are on the rise, or if it is on freefall, which is the time to buy. The green and the red arrows in the newspaper actually meant something, but only as supplements to the general, wonderful, engaging world of numbers. And when I recently had a report on my stockholdings and saw a 5% growth rate per month, I knew why a lot of other people play this game, and why they become greedy.
But I have a talisman against greed. I only buy blue chip stocks and play long term. Blue chip stocks takes out a little of the guesswork and this is what the noted stockmarket geniuses, like Warren Buffett or Kiyosaki, do. It’s great, I think, that I have not developed a taste for speculative (mining) or penny stocks or tech stocks because I do not really understand them. I have some tech stocks that I bought, though (a cellphone company), because it is part of my daily life. I guess you should get a mix of what you live with and the companies you admire but then again I am an investment trader as opposed to an active trader and like I said, I play long term. I guess you have to know your “risk appetite” and play the stocks by that.
Salve Duplito of MoneyStories, a friend, also swears by Morningstar.com to increase investing and financial intelligence but truth be told, I am still trying to get the hang of that website. It is a little too difficult for me, but who knows, one day I will crack it – whatever it is I need to crack to understand that site.
2. My financial planner had us in tow when he went to see a fortune teller (Madame Auring!). He had her tell his and our fortunes. I actually wrote a guest post about this in MoneySmarts.
My financial planner’s point with this whole exercise is that it is guesswork – and in relation to stocks – the stockmarket is guesswork. No one really knows when a stock would go up, or when it would go down, or what world events would propel it to its rise or its demise. I guess in a way he was telling me to go easy, to try and understand, to play it by ear and not be bound by rules or what people say.
I continue my education. I still read the stock pages everyday. I have not forgotten what Buffett said: Buy when people are afraid, stay away when they are excited. When reading, I am trying to gauge when people are afraid or excited, and then go for the jugular (ehrm).
On Financial Statements
Financial Statements are public documents filed annually with the Securities and Exchange Commission as a report on the financial health of registered corporations.
Financial Statements tell a story. Aside from the income and expense of a company, it would list its balance sheet, future plans – which may include expansions, mergers, acquisitions and other things which are of special interest (and concern). Pay particular attention to the Notes to the Financial Statements, which appear at the end. This gives the beautiful (or ugly) details. It lists down what the company owes, its receivables, the bonus its directors get, its spending (or overspending) and everything you need to know about the general health and wealth of a company, including secrets (but you have to keep your eyes open).
A Financial Statement completes the picture and in making an investment (including purchase of stocks), this part seals (or breaks) the deal, or should.