There are some myths about investment, many of which are perpetuated by finance industry insiders. Myth one is that financial assets and markets are hideously complicated and confusing. Myth two is that you have to pay large sums to ‘experts’ who will then make far greater returns on your money than you could achieve on your own.
In truth the most important things you need to know about investing are simple. They are based on common sense and can be understood by anyone with a modicum of intelligence. It is just that the jargon and the detail obscure the view of outsiders peering through trying to see what it is all about. This book, in a step-by-step way, first explains the simple essence of investment and the functioning of the financial markets. It allows you to focus on what is really valuable, discarding grand-sounding but unimportant layers of mumbo-jumbo. It then goes on to explain the practicalities of investing, such as where to find a broker and how to go about buying shares. It explains the variety of financial securities you can place money into, from bonds and unit trusts to traded options and exchange-traded funds. It also has a key section providing tools allowing you to analyse companies.
As for the argument that you need to employ an expert to run your investments – well, this is complete nonsense. For a start, the majority of professional fund managers underperform the stock market. This has been observed year after year. You haven’t heard about this? Well, of course you haven’t. It is not the sort of thing that fund managers publicise. Some researchers even asked various fund managers to pit their wits against an ape in the selection of share portfolios. The subsequent portfolio performance was noted most carefully. You’ve guessed who won. Even on a random basis we should find that 50 per cent of professional fund managers beat the market and 50 per cent do worse, but they don’t even manage that.
Don’t misunderstand me: some professionals, in some circumstances, have their uses. But to imagine that the private investor is generally at a disadvantage to the professional and should always defer to their superior insight is just plain wrong.
Sure, you need some basic knowledge (which this book will help with), and you need some dedication to the task, but please don’t be browbeaten into believing that the pinstriped suits have a competitive advantage over you, with your down-to-earth focus on what really matters and some sound investment tools. Share investment is about businesses – when you buy a share you buy a portion of the ownership of a business. Let me emphasise that a share is not a gambling counter in a short-term random game of chance. It represents ownership of something that will probably outlive you, and its value depends on what will happen to that company years from now. It is not too difficult for you to become more knowledgeable about that business than a fund manager stuck in London who has a portfolio of shares in 200 different companies.
Once you have a grounding in the principles of investment you will free yourself from the assumption that the professionals know best and that you could not achieve a good return without them. You will be aware of a range of alternatives to simply handing your money to, say, an ISA manager. Sometimes the financial service house can do things better and cheaper than you could on your own. But, quite often, you end up paying huge fees for atrocious performance. This book will help you decide when to manage your money yourself and when to employ others.
A third myth is that only wealthy people can afford shares and other financial assets. In reality people of relatively modest means invest in the stock market. It is possible to start with only £20 per month. In Chapter 2 there is an example of a woman who stretched herself to put £100 per month into shares over a 20-year period. The sacrifice was worth it: by the time she retired the fund had grown to be worth millions of pounds – all for £100 per month. And this was achieved by gaining the same annual returns as the UK stock market as a whole – it wasn’t that she bought all the best shares on the market and with perfect foresight ignored what turned out to be the worst ones.