How to start to "do your homework"?Feb 22, 2018
By Puah Soon Lim
Some twenty years ago, while sitting in front of my Bloomberg terminal, I remarked to my colleague sitting beside me that “doing your homework” is tough for an investor. Back then, I was already working in the finance industry for a few years and with my Accounting knowledge from my undergraduate days, and CFA Program, I was still grappling with “doing my homework".
My colleague, who was a veteran bond trader, agreed wholeheartedly. He remarked, “Young man, you have a lot to learn.” Since then, I have always wondered how the rest of the retail investors cope with this task of “doing their homework.”
Since then, I have always wondered how the rest of the retail investors cope with this task of “doing their homework.” We are advised by the experts to do our homework, study the report, and arrive at our buying and selling decisions. That is fine for some, but in my opinion, it is absolute nonsense for most. How can I be so presumptuous as to criticise advice that sounds so plausible and is so widely espoused?
First, because I’m limiting the meaning of the word “homework” to stock-specific research, that is, learning all you can about a particular stock. This type of research is mostly a waste of time, especially for the novice. I was once a novice and still consider myself one after twenty-five years in the game. We, novices, have no clue how to interpret numbers. And even if we did, and we knew everything there is to know about a stock, there’s no way we can know how the market will respond to what we know, not to mention the fact that others know what we know before we know it.
To make matters worse, most of us have a limited amount of time we can devote to “homework.” I contend that time can be more productively spent reading a great investment book that stood the test of time or the easily available annual letters to shareholders from Warren Buffett. Advisers mean well when they say, “do your homework,” but in my view, learning cash flow ratios or inventory turnover or studying stock exchange filings is unrealistic. Most novice investors just don’t have the ability and do not know how to proceed. Warren Buffett, the legendary value investor, once weighed in on this issue by saying, “You have to understand accounting, and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn the subject of accounting -- how to read and interpret financial statements – you really shouldn’t select stocks yourself”.
That aptly summarises how one should approach this “doing your homework” issue. You should start by getting yourself acquainted with the language of business. Unfortunately, accounting is a boring subject. Most books on accounting are written in a very dull manner. For the novice, I would recommend "The Accounting Game: Basic Accounting Fresh from the Lemonade Stand", by Judith Orloff and Darrell Mullis. The intermediate learner can proceed to "How to read a Financial Report: Wringing Vital Signs Out of the numbers", by John A. Tracy. Besides accounting, you also need to learn about finance.
I will be running a workshop for the Society of Remisier here, in Singapore. It is titled "Six Numbers Every Investor Must Know". I will also make this available as an e-course after the live event. If you are still struggling with doing your homework, I highly encourage you to sign up for this very affordable program.
In my training video, I listed CAGR (Compound Annual Growth Rate) as one of the most important numbers that every investor must know. Additional foundational financial math concepts are the time value of money, the rule of 72, and the principle of compounding and discounting. Other concepts like inflation, interest rate, and risk measurement are also important.
Start with a small circle of competencies and slowly expand from there. You will realize that your investment reading becomes more meaningful and easier once you establish a proper foundation. Like your investment return, your knowledge of investment can develop even more only if you take the time to build a proper foundation.
To those who sign up for our early access list, I’m giving away one additional three hours' coaching class for free, personally inviting them to our private Six Numbers Facebook Group and keeping them many steps ahead of everyone else with exclusive pre-publication content.
I’ve seen the formula work. I know it will work for you, too. Don’t wait to get the results. Start right now!
(If you're interested to know more about "Six Numbers Every Investor Must Know", click on Register and be the first to learn from Soon Lim this wonderful technique)
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