Learn to Earn – Buying Stocks
“Learn to Earn” – Peter Lynch
The junior high schools and high schools of America have forgotten to teach one of the most important courses of all. Investing. This is a glaring omission. History we teach, but not the part about the great march of capitalism and the role that companies have played in changing (and mostly improving) the way we live. Math we teach, but not the part about how simple arithmetic can be used to tell the story of a company and help us figure out whether it will succeed or fail in what it’s trying to do and whether we might profit from owning shares of its stock.
Patriotism we teach, but we talk more about armies and wars, politics and government, than we do about the millions of businesses, large and small, that are the key to our prosperity and our strength as a nation.
Communist Block citizens have risen up and overthrown governments in the hope that someday they can improve their lot in life, desiring democracy, freedom of speech and freedom of worship. But right up there with the Bill of Rights freedoms, they also want free enterprise. That included the right to make things, sell things, and buy things in stores, the right to own a house, an apartment, a car, or a business, which until recently, perhaps half the world’s population was not allowed to do.
The Russians and the Eastern Europeans marched, demonstrated, held strikes, organized, agitated, and fought as hard as they could to get the economic system that we have already. Many people went to jail for this cause, and many lost their lives. Yet in our own schools we don’t teach the basics of how this economic system works, and what’s good about it, and how you can take advantage of it by becoming an investor.
Investing is fun. It’s interesting. Learning about it can be an enriching experience, in more ways than one. It can put you on the road to prosperity for the rest of our life, yet most people don’t begin to get the hang of investing until they reach middle age, when their eyes start to go bad and their waistlines expand. Then they discover the advantages of owning stocks, and they wish they had known about them earlier.
In our society, it’s been the men who’ve handled most of the finances, and the women who’ve stood by and watched men botch things up. There’s nothing about investing that a woman can’t do as well as a man. Also, you don’t get the knack for it through the chromosomes. So when you hear someone say, “He’s a natural born investor,” don’t believe it. The natural born investor is a myth.
Money you keep in a piggy bank or a cookie jar doesn’t count as an investment, but any time you put money in the bank, or buy a savings bond, or buy a stock in a company, you’re investing. Somebody else will take that money and use it to build new stores, new houses, or new factories, which creates jobs. More jobs mean more paychecks for more workers. If those workers can manage to set aside some of their earnings to save and invest, the whole process begins all over again.
Those who save and invest for the future will be more prosperous in the future than those who run out and spend all the money they get their hands on. Why is the Untied States such a rich country? At one point, we had one the highest savings rates in the world.
We’ve been told that it’s important to get a good education, so you can find a promising career that pays you a decent wage. But they may not have told you that in the long run, it’s not just how much how much money that you make that will determine your future prosperity. It’s how much of that money you put to work by saving and investing it.
The best time to get started investing is when you are young. But this introduction to finance is not only for young people. It’s for beginning investors of all ages who find stocks confusing and who haven’t yet had to e chance to learn the basics.
People are living much longer than they used to, which means they’ll be paying bills for a lot longer than they used to. If a couple makes it to sixty five, there’s a good chance they’ll make it to eighty five, and if they make it to eighty five, there’s a decent chance one of them will reach ninety-five. In order to cover their living expenses they’ll need extra money, and the surest way to get it is by investing.
The word “company” comes from a Latin word that means “companion.” The formal name for a company is “corporation,” from another Latin word “corpus,” meaning “body.” In this use, the corporation is a body of people who join together to conduct business.
In this country you’re innocent until proven guilty, but you pay the lawyers either way.
Although there are more private companies than public companies in America, the public companies are generally much bigger, which is why most people work for public companies.
When a company sells shares, it uses the money to open new stores, or build new factories, or upgrade its merchandise, so it can sell more products to more customers and increase its profits. And as the company gets bigger and more prosperous, its share become more valuable, so the investor are rewarded for putting their money to such good use.
The first and the smartest early economist was a Scotsman named Adam Smith, who lived at the time of the American Revolution. The “Wealth of Nations” was published in 1776, the year America declared independence. Benjamin Franklin, John Locke, Thomas Paine and other revolutionary thinkers argued that political freedom was the key to a just society where people can live in peace and harmony. But they didn’t say much about how to pay the bills – but Smith did. He made the case for economic freedom. Smith argued that when each person pursues his own line of work, the general population is far better off than it is when a king or a central planner runs the show and dictates who gets what. That was a novel idea in Smith’s time, that millions of individuals making and selling whatever they pleased, and going off in all directions at once, could create an orderly society in which everybody had clothes, food, and a roof over their heads. What is 99 out of one hundred people decided to make hats, and only one out of one hundred decided to grow vegetables? The country would be flooded with hats, and there would be nothing to eat. But this is where the Invisible Hand comes to the rescue.
There wasn’t an Invisible Hand, of course, but Smith imagined one working behind the scenes to insure that the right number of people grew vegetables, and the right number of people made hats. He was really talking about the way in which supply and demand kept goods and services in balance. For instance, if too many hat makers make to many hats, hats would pile up in the market, forcing the hat sellers to lower the price. Lower prices for hats would drive some hat makers out of the hat business and into a more profitable line of work, such as vegetable farming. Eventually, there would be just enough vegetable farmers and just enough hat makers to make the right amount of vegetables and hats. In the real world, things don’t work out quite as perfectly as that, but Smith understood the basics of how a free market works, and they still hold true today
The Invisible Hand keeps the supply keeps the supply and demand of everything from bubblegum to bowling balls in balance. We don’t need a king, a congress, or a Department of Things to decide what the country should make, and how many of each item, and who should be allowed to do the manufacturing. The market sorts this out, automatically.
Smith also realized that wanting to get ahead is a positive impulse, and not the negative that religious leaders and public opinion makers had tried to stamp oft for centuries. Self-interest, he noticed, isn’t entirely selfish. It motivates people to get off their fannies and do the best they can at whatever job they undertake. It causes them to invent things, work overtime, put extra effort into the project at hand.
Smith said there was a “law of accumulation” that turned self-interest into a better life for everyone. When the owner of a business got richer, he or she would expand the business and hire more people, which would make everybody else richer, and some of them would start their own businesses, and so on. This is where capitalism created opportunities, unlike feudal agriculture, where a small number of big shots owned the land and kept it in the family, and if you were born a peasant, you would live penniless and die penniless, and your children and their children would be stuck in the same rut forever.
Americans stashed so much cash in the banks that from the Civil War to World War I they saved an amazing 18 percent of the country’s total industrial output. Because the cash was used to build better factories and better roads to transport the goods from the factories, workers became more efficient. They could produce more goods for the same amount of work.
Once new machines were invented, somebody had to invent more machines to make the new machines, plus parts and tools to repair them. Instead of machines putting people out of work, as many critics of the machine age had predicted, they actually created work. For every job lost to a hunk of metal, a couple of jobs were opened up. Factory-made goods were cheaper to produce than handmade goods, and in many cases more consistent.
When the twentieth century rolled around, it was obvious that something was wrong with the way capitalism was going. It had started out as a free-for-all when anybody with a good idea had a chance to succeed. It was turning into a rigged game dominated by a few giant businesses. These were called monopolies.
The first person to understand that monopolies posed a threat to the future prosperity of the world was Adam Smith, the author of the Wealth of Nations. Smith realized that competition was the key to capitalism. As long as somebody else could come along and make a product better and cheaper, a company couldn’t do a lousy job and expect to get away with it. Competition kept companies on their toes. They were forced to improve their products and keep their prices as low as possible, or they’d lose their customers to a rival.
Capitalism works best when a company that’s losing money had a chance to try to turn things around, and if that doesn’t happen, it can put itself out of its misery. That way, unproductive businesses can die, and the workers can go on to some other industry that’s healthier. But when a company has a second role as the doctor, teacher, and caretaker for its workers, then it may have to stay in business just so its employees can continue to get all their benefits.
In a Communist economy, all the resources – everything that’s made, bought, or sold – are controlled by a small group of managers. In a capitalist economy, if there are too many steel plants, we’ll have an oversupply of steel, the price will go down, the steel companies will lose money, people will stop buying steel stocks, and the banks will stop lending money to the steel companies.
Whether a stock if good or bad depends entirely on the time frame.
Fear of crashing: We have not yet gotten over the 1929 stock market crash. It’s the most pernicious collective phobia on record, and it has kept millions of people from buying stocks and making a profit they could have used. Looking at the positive side, a crash is a unique opportunity to buy stocks cheap.
Most historians will tell you the Depression wasn’t caused by the Crash of 1929, although it gets blamed as the cause. Only a tiny percentage of Americans owned stocks at the time of the time, so the vast majority of people didn’t lose a penny in the Crash. The Depression was brought about by a worldwide economic slowdown, coupled with the government’s mishandling of the money supply and raising interest rates at the wrong time.
We’ve had nine slowdowns since WW II and in all cases, the economy has come back.
History doesn’t have to repeat itself. When somebody tells you that it does, remind him or her that we haven’t had a depression in over than a half-century. People who stay out of stocks to avoid a 1929-style tragedy are missing out on all the benefits of owning stocks, and that’s a bigger tragedy.
Many people wait until they are in the thirties, forties, and fifties to start saving money. By the time they realize they ought to be investing, they’ve lost valuable years when stocks could have been working in their favor. One of the best ways to avoid this fate is to begin saving money as early as possible, while you’re living at home. When else are your expenses going to be this low? You have no children to feed – your parents are probably feeding you. The more you salt away now, while you’re on the parental dole, the better off you’ll be when you move away and your expenses shoot up.
Money is a great friend, once you send it off to work.
On average, you’ll double your money every seven or eight years if you leave it in stocks.
America was once a nation of savers. A country with a high savings rate can pay for roads, phone lines, factories, equipment, and all the latest innovations that help companies make better and cheaper products to sell the world. For example, Japan was nearly ruined by World War II, but it managed to bounce back and become a great economic power. They started out making plastic toys and trinkets and “Made in Japan” was something to laugh at, but soon enough there was a Japanese car in one out of three driveways and Japanese TV sets in two out of three American houses, and “Made in Japan” meant high technology and high quality.
Even though it’s called “buying a bond,” when you purchase one, you really aren’t buying anything. You’re simply making a loan. The seller of the bond, also called the issuer, is borrowing your money, and the bond itself is proof that the deal happened.
Stocks are likely to be the best investment you’ll ever make, outside of your house. You don’t have to feed a stock, the way you do if you invest in horses or prize cats. It doesn’t break down the way a car does, nor does it leak the way a house can. You don’t have to keep it mowed, the way you do with real estate. You can lose a baseball card collection to fire, theft, or flood, but you can’t lose a stock. The certificate that proves you own a stock might be stolen or burned up, but if that happens, the company will send you another one.
Invest for the long term: You don’t have to be a math whiz to be a successful investor in stocks. You don’t have to be an accountant, although learning the basics of accounting may help. You don’t have to be a Phi Beta Kappa or a member of the national honor society or Mensa. If you can read and do 5th grade arithmetic, you have the basic skills. The next thing you need is a plan.
The stock market is one place where being young gives you a big advantage over the old folks. Your parents or your grandparents may know more about stocks than you do – most likely, they’ve learned the hard way, by making mistakes. Surely, they’ve got more money to invest than you do, but you’ve got the most valuable asset of all – time.
Have you heard the old expression, “Time is money”? It ought to be revised to “Time makes money.”
If you’ve decided to invest in stocks above all else, avoiding bonds, you’ve eliminated a major source of confusion, plus you’ve made the intelligent choice. When we say this, we’re assuming you are a long-term investor who is determined to stick with stocks no matter what. People who need to pull their money out in one year, two years, or five years shouldn’t invest in stocks in the first place. There’s simply no telling what stock prices will do from one year to the next. When the stock market has one of its “corrections” and stocks lose money, the people who have to get their money out may be going home with a lot less than they put in. Twenty years or longer is the right time frame. 11% a year in total returns is what stocks have produced in the past. Nobody can predict the future, but after twenty years at 11%, an investment of $10,000 is magically transformed into $80,623. To get that 11 percent, you have to pledge your loyalty to stocks for better or worse – this is a marriage we’re talking about, a marriage between your money and your investments.
Its not always brainpower that separates good investors from bad; often it’s discipline. Buy share in solid companies with earning power and don’t let then go without a good reason. The stock price going down is not a good reason.
Anybody who sells stocks because the market is up or down is a market timer for sure. People also think it’s dangerous to be invested in stocks during crashes and corrections, but it’s only dangerous if they sell. They forget the other kind of danger – not being invested in stocks on those few magical days when prices take a flying leap.
So get the most out of stocks, especially if you’re young and time is on your side, your best bet is to invest money in stocks through thick and thin.
That’s why mutual funds were invented – for people who want to own stocks but can’t be bothered with the details.
This is less risky than owning only one stock, which if you’re a novice investor might be all you could afford.
Since small-cap stocks are generally more volatile than large-cap stocks, a small-cap fund will give you more extremes up and down than other types of funds. But if you have a strong stomach and can take the bumps and stay on the ride, you’ll likely do better in small caps.
Investing is not an exact science, and no matter how hard you study the numbers and how much you learn about a company’s past performance, you can never be sure about its future performance. What happens tomorrow is always a guess. Your job as an investor is to make educated guesses and not blink ones.
Capitalism is not a zero-sum game. Except for a few crooks, the rich who do not get that way by making other people poor. When the rich get richer, the poor get richer as well. If it were really true that the rich get richer at the expense of the poor, then since we are the richest country in the world, by now we surely would have created the most desperate class of poor people on earth. Instead, we’ve done just the opposite.”