Book Excerpt for Stock Market Investing for Beginners

Stock Market Investing for Beginners -- Extract

How Anyone Can Have a Wealthy Retirement by Ignoring Much of the Standard Advice and Without Wasting Time or Getting Scammed

Richard Stooker

Cover graphic design by Drew at idrewdesign on Fiverr.com.

The right of Richard Stooker to be identified as the author of this book has been asserted in accordance with Sections 77 and 78 of the Copyrights and Patents Act 1988.

Except for use in any review, the reproduction or utilization of this work in whole or in part in any form by any electronic, mechanical or other means, now known or hereafter invented, including xerography, photocopying, and recording, or in any information storage or retrieval system, is forbidden without the written permission of the author.

All characters in this book have no existence outside the imagination of the author and have no relation whatsoever to anyone bearing the same name or names. They are not even distantly inspired any individual known or unknown to the author, and all incidents are pure invention.

Chapter 4

What Does It Mean to Beat the Stock Market?

This book does not promise to teach you how to beat the market for many reasons, which will be clearer by the time you finish.

However, it is a concern of many investors. And many new investors ask how they can do it.

What does that even mean?

Officially, to beat the market you must have a portfolio of stock shares which rise in price more than the market as a whole, on a risk-adjusted basis, and in the long run.

That "risk-adjusted basis" is an important qualification.

There are stocks which can be "high flyers." Given a good market, they'll go up a lot more than the market.

Yet in a bad market, they often fall even lower than the market.

Heck, you can take all your money to a casino, find a roulette table and bet it all on one number.

Sure you'll probably lose it all. But if 100 people do it, two to four will win and get paid $35 for every dollar they bet.

100 people do the same thing. Several of them win big while everybody else loses. Can we say the winners "beat" the roulette wheel -- or just were the lucky ones?

That's the nature of risk. You can win big, but you'll more likely lose.

And beating the market for real means doing it in the long run.

In any given year roughly half the money managers in the world will beat the market. Most of them will underperform the market next year.

Flipping a coin and getting heads two or three times in a row does not make you a skillful coin flipper.

Fortunately, it's not necessary to beat the market.

It is necessary for you to be clear on what's called your investment horizon or timeline.

Chapter 5

What is Your Investing Horizon?

A lot of investing books and financial advisors make a big deal out of what's called your investing "horizon."

That comes down to, how long to you plan to keep your money invested?

In some ways it's an important question, but in another way it isn't.

Some people's "horizon" is ten minutes -- certainly under one day.

Those are day traders. All their trades are short-term. They close out all their stock positions when they shut down for the day.

Other people are speculators who hope to make a profit from a stock within a week or several months.

Others are willing to hold stocks for a few years before they sell for a profit.

True "investors" are building wealth for the long-term, to fund their retirements or to leave their families a large estate. They are looking ahead twenty, thirty, fifty or even more years.

This can make a big difference.

A stock of a promising company can appear to have a great future for the next several years -- but be going downhill today because of some bad news about a product launch.

The day trader is selling while the several years speculator is buying.

Sometimes you will hear people talk or write about how there are two sides to every trade, and only one is right.

But this really isn't true. The day trader selling a stock they sees going downhill today may be just as glad to get out before it goes down further as the several years speculator is glad to pick up the stock at a low price today so they can sell it at a higher profit (they believe) in two years.

Both buyer and seller can be happy, and meet their trading goals, if they have different horizons.

So what is your investing horizon?

That depends on your investment goals.

Chapter 6

What are Your Investment Goals?

Are you learning about stock investing to save up money to pay for a house?

Go on an expensive vacation?

Put a child (who's already out of the third grade) through college?

Have an emergency fund in case of a lay off, illness or other family disaster?

If so, I have one thing to say to you --

Don't.

The stock market is much too volatile and unpredictable to use it to fund anything within the next ten years, and preferably more.

(That's why I qualified the "child" as being out of the third grade. If your child is still ten or more years away from college, you may consider putting those funds into stocks.)

It's be a shame for you to work and scrimp and save and be just about to pay for that round the world cruise, and then see half your savings wiped out in a fast crash. It could happen.

Many financial experts claim stocks have always made money in any given 20 year period during the 20th century. I don't believe that's totally true -- after the 1929 crash it took stocks over 25 years (from August 1929 to November 1954) to regain the ground they lost.

But it is true for most 20 year periods. But in some of those 20 year periods -- the ones ending in bear markets -- it's BARELY true. Stocks made money, but only a little.

And you're not planning to take 20 years to save up a house downpayment or for a vacation.

And to put your emergency fund in the stock market is downright foolish.

As I write these words in October 2011, the Dow is at 11,577.

The mainstream media would have you cheering because it's up a lot since the March 2009 bear market bottom.

But it first reached 11,500 in very late 1999.

Therefore, the stock market has gone exactly nowhere for the past dozen years.

Yes, you may remind me, it went up to over 14,000 in October 2007, but that's past and gone. Over. Finished.

Nobody knows when it will reach 14,000 again.

And not too long ago, the market was around 10,700, which it first reached in 1998.

If you'd put a lumpsum of cash into the market in 1998 when it was first at 10,700 and sold the stocks in September 2011, you'd just about broken even.

The stock market can make you fabulously wealthy, but NOT overnight.

It's for long term wealth, and "long term" is not one year. It's 20 or more.

Besides, there is a way to get wealthy from the stock market even when it does not go up in price. We'll get to that in a later chapter.

The lesson for this chapter is stock investing is for the long haul -- retirement or very distant expenses (such as college while your child is still learning to read).

Short term money belongs in a money market account, savings account or certificates of deposit.

When you realize the stock market is only for long term money, you keep your short term money in a safe place, and you are miraculously free from worrying about the stock market in the short term.

But almost everybody else does, which is a mistake.