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10 points in response to a question from an 18 year-old who is new to investing

July 29, 2017

I recently fielded a question from an 18 year-old looking to get into stocks. The person had little or no investment experience, and was asking for advice about where to begin. The following is what I told her (included here on the off chance that you too might find the topic interesting):

  1. Stay focused on the long term. I know it is exciting that stocks offer the possibility to get rich very quickly, but try your best to ignore this. People who focus on the near term will miss out on the spectacular long-term returns that the best stocks offer.

  2. Hopefully you are not investing a huge sum of money (most 18 year-olds are not). Everybody has to start somewhere, and so I think it is great to get into stocks at a young age. Just bear in mind that the wrong stock can cause money to go bye-bye quickly. As you gain experience, you will gain confidence to invest larger sums.

  3. Read all the books you can by Peter Lynch, Phil Fisher, and Ben Graham. These legendary investors won’t pick the stocks for you, but their books will guide and inspire you. Peter Lynch’s books are especially good for beginners. They are a few years old, but the wisdom is still relevant today.

  4. Read Warren Buffett’s letters to shareholders (found on Berkshire’s website).

  5. Learn basic accounting (what is an asset vs. a liability, etc.). There are a number of “Accounting 101” books out there. Accounting is the language of business, so it is important if you are going to buy a small piece of a business (aka “a stock”). If you need book recommendations, let me know.

  6. Understand the “time value of money” concept. This will help you evaluate what a business is worth.

  7. If you do not already do so, start reading business literature, such as the Wall Street Journal. After reading about business for a while, you will begin to understand how the various pieces of the “business universe” fit together. You may gain insights that lead to investment ideas.

  8. When you are out and about, be constantly on the watch for good businesses run by good managers. If you find a product or service that you like, find out if the manufacturer or provider is a public company (traded on the stock market). There’s no simple way to find good investments. You simply have to look at a lot of ideas. Look at a hundred, and you might find one worthwhile investment. It pays to keep your eyes open.

  9. Figure out what you know and what you don’t know. Be honest. Try to avoid stocks of companies that you don’t understand. Remember: there are experts who are selling, so how can you outsmart them if you don’t even understand the company whose stock you are buying? You don’t have to own all the stocks that go up – you only have to own a few. Let others make money from the “incomprehensibles.”

  10. Always learn, learn, learn. Business is so interesting, and there is always something to learn. This is what makes investing fun!

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