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A letter to a new investor

Reported by Scott Phillips
Thursday, March 8, 2012
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Super-rich getting richerThe world's super-rich could actually be wealthier than anyone first thought.

In this space yesterday was an article entitled ‘Why don’t you invest?’ We often have reasons – real or imagined – that keep us from making what could be one of the most profitable decisions of our lives… to start (or keep) investing.

With that in mind, and whether you’re starting out, resetting your investment goals, or well on the way but could use a boost, here’s an edited letter I sent to a subscriber recently:

Dear Sir,

Welcome to investing! I’m pleased that you’ve decided to start your investing journey.

The most important step is the one you’ve just taken – getting started. Compound interest is your greatest ally in investing, and you need to give it time to do its work.

The team here at The Motley Fool have put together a series we’ve called ‘Your 13 Steps to Financial Freedom‘. I’ve already given you the gist of Step 1, above, but taking some time over a coffee to read the 13 Steps is a wonderful place to start. By the way, Step 12 gives you some ideas about when to sell, which is something many people struggle with.

My suggestion would be to take your time – read and re-read that series before you move on.

Curiosity… and reading

Once you’ve made your way through it, an enquiring mind is your best asset. If you have the inclination to understand more about what makes businesses tick – and be successful – you’re off and running.

There is plenty of investing wisdom that has been committed to paper (and eBooks) over the past few decades, and it’s some great stuff. I don’t want to overwhelm you with options, but here are some good places to start:

  • Fool.com.au. Okay, so maybe I’m biased, but exposing yourself to news and opinion on our main site and on the Share Advisor pages will give you a great background on how to understand business, and how to understand investing. There are obviously other finance sites to check out, and the business sections of the quality papers (and their websites) are good places to visit.
  • The Motley Fool Investment Guide was written (about 10 years ago) by the founders of The Motley Fool. It’s written for a US audience, but the lessons are almost entirely transferrable
  • Warren Buffett is the world’s third richest man, and the Chairman and CEO of Berkshire Hathaway. His annual letters to shareholders are a well written, easy to read (mostly) overview of business and investing. For a Buffett primer, check out The 25 smartest things Warren Buffett ever said
  • (If you decide you’re enjoying the letters (and don’t mind paying), you can buy The Essays of Warren Buffett. It’s essentially the same content, but organised by topic rather than year, which you might find easier to follow)
  • Peter Lynch is a famed and successful fund manager. His classic book One Up On Wall Street is a really interesting read, and a great perspective for new investors
  • Another great option is Common Stocks and Uncommon Profits by Philip Fisher. It’s a little dated in style, but as with the others above, completely timeless in its application

As an aside, Warren Buffett said he was a better businessman because he was an investor, and a better investor because he was a businessman. If you have an interest in business, I would also recommend:

  • Jim Collins’ well researched but easily-read Good to Great. It’s a business classic, and hopefully will help you get a better handle on what makes a great business – because it’s hard for a lousy business to be a great investment

There are many more books worth reading, but the list above will give you a good place to start. (By the way, some of the links above are for Amazon.com. Most, if not all, of the books are available elsewhere – I’ve just used those links so you can read more about them.) There are other investment classics that are more technical in nature and/or for more experienced investors. For example, Benjamin Graham is known as the father of share analysis and his books are investing ‘bibles’ – but they can be a hard slog when you’re starting  out!

Real businesses

If I can impress one thing on you, it would be to avoid seeing your shares as three-letter codes on a screen. Instead think about share investing as what it really is – buying very small pieces of real businesses. The share prices will jump around, often for no reason that has anything at all to do with the company itself.

Share prices will rise and fall – avoid feeling too chuffed when they’re up and too despondent when they drop. Falling prey to that mentality is easy if you’re not prepared, and leads to buying high and selling low – exactly the opposite of what you want to do.

If you’ve chosen the business well, the share price will reflect that value in the long run. Choosing the business well is a skill that the books and websites above will help you develop.

Foolish take-away

I’ll leave you with two Benjamin Graham quotes and one from Buffett:

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” and “In the short run, the market is a voting machine but in the long run it is a weighing machine.” – Benjamin Graham

and

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

Congratulations again for getting started – we look forward to sharing the journey with you.

Fool On!

Scott.

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Scott Phillips is a Motley Fool investment analyst. Scott owns shares in Berkshire Hathaway. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

02/09/2014 16:43Sydney, Australia. 2 September,2014
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