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Feature Article>TRY: A New Mindset for New Investors Part 1

By Lloyd Vermont, Contributor

In this essay, we take a brief look at the basic principle, strategies and nuances that drive the stock market in general and individual portfolios in particular. At the core of this principle is the concept that, while you are still working, you should put some of your income to work for you in instruments other than savings accounts. The idea is to build up a pool of funds into which you can tap for whatever good reason you can identity including your own years in retirement. In investing, as in other disciplines, knowledge is power.

If, as a member of the Caribbean Diaspora, you are new to investing, or you are planning to become one, you need to cultivate a new mindset (from the one in popular circulation) if you are to set the stage for your own success. This means that you must avoid the herd mentality of many investors who sometimes demonstrate and act counter to what is indicated if you use the lessons of many investing conventions as a guide. In particular, there are three unquestioned realities that you should grasp. One is that the stock market, like the seasons, comes in cycles. The coming and going of this cycle is not as predictable as the seasons but its ebb and flow is a fact of the investment landscape. The second reality that you should learn to appreciate is the wealth building capacity of time, as measured in decades. Thirdly, as a new or intending investor, you should enter the market with a long-term perspective. This means that you should realize that successful investing is a process and not a nine-day event. To the extent that you grasp these three realities, is the extent to which you will be able to better manage your emotions and mood swings as an investor. This is so because; these three realities will give you a rational perspective within which to make decisions instead of reacting to the herd mentality of others.

The field of investing, however, is a massive and complicated one. Saying that it helps if you have some knowledge about it, and how it works, does not mean that you need be an expert. It is somewhat like dealing with what the medical industry calls lifestyle diseases i.e. diabetes, hypertension, renal failure. Our doctors are now telling us that, with the appropriate lifestyle patterns, or changes, we can avoid, or significantly minimize, the effects of these diseases on the quality of our life. And these commentaries we understand, and implement, without ourselves being experts like our doctor. It’s roughly the same with investing in the stock market. You can do well if you understand the basic principle and operations strategies. If you understand how your pay slip is made up, you will understand the principle and strategies of successful investing.

BASIC PRINCIPLE OF INVESTING
A principle is the underlying law or assumption that causes something to work in a roughly predictable way. In respect of stock market investing, you could say that the basic principle is that, over time, the price of a good or service is likely to (not will) go up, even though this will not necessarily be in a straight line. Real estate is an illustration of this and which is familiar to most everyone. This means, that anyone who owns these goods and services are likely, again over time, to find their value in these goods and services going up.

The stock market, however, is a creature of many moods and emotions. It is not a precise science. Sometimes it will go off track even if no two investors will agree on the cause (since, maybe, neither of them really knows). Because of this, and despite the overwhelming evidence from financial researchers and legendary investors, many members of the Diaspora continue to involuntarily exclude themselves from its wealth building capacity. Maybe they do because; all their recall is filled with the losses of what the trade calls a bear market (one in which stock prices are consistently falling, or staying low, over a period of many months or years). If however, your investment mindset is built around the above three realities (business cycle, time as measured in decades and your own long term investment horizon) bear markets will take on a completely different image to you. You will not necessarily shout for joy about it because, low prices will impact you negatively if you are forced to sell. You will however see opportunities to build up your portfolio at basement bargain prices that you will not get at any other time!

CONDITIONS PRECEDENT
When your first child is to leave home on an extended basis for the first time (first day at kindergarten, for example) you are going to be worried and even afraid for his safety. Because of this, you will go to great lengths to prepare him, and yourself, for this major departure from what used to be the norm. This is pretty much the same fear and anxiety that you could experience when you take the decision to become an investor. This fear and anxiety is normal! We are all apprehensive about things that we either do not understand or know about. The answer is not to remain in your apprehension but to take the bull by the horn and work through the fear.

As a new, or intending investor, there are some things that you should do to prepare yourself emotionally, pretty much in the same way, and for the same reasons, that you prepared your child for his first day at school. The preparation calms his nerves and gives him confidence to deal with the challenges of his new environment. In going off to school, he knows that you are not abandoning him. Same with you as a new investor. Some of the actions that will give you confidence in your investing and allay your fears of loss of your principal are:

1. Define a reason for becoming an investor
2. Come to grips with the three realities discussed on page 1
3. Pay off all short term debts which are generally very expensive
4. Arrange access to some cash or near cash to draw on in the event of an emergency that requires some cash
5. Register in a free online service to build your investing knowledge base
6. Discuss what you want to do, and achieve, with a stockbroker or financial advisor, either or both of whom are recommended to you

This completes the core of our discussion on preparing yourself to become a stock market investor. In Parts 2 & 3 of this Essay we will look at some of the strategies that you should employ to help ensure that your chances of success are much better than just even.

The Financial Gleaner The Financial Gleaner
   

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