Ask Colin

How do you come up with choosing a quality stock because there are so many stocks to monitor?

The detailed question was:

I am about to enter the stock market for the first time and have read up on the stock market and the main impression i have come up with is to always follow the trend. But it still confuses me. There are so many stocks to buy and I tried to read up what's going on with the economy and the market but there are so many things to read. I have saved really hard for my little amount hoping that I can invest for the future. How do you come up with choosing a quality stock because there are so many stocks to monitor?

I do not want to discourage you. To the contrary, what I do is to encourage and teach people to invest. However, I need to start with a caution. The general thrust of your question is that there is a lot of reading and study to do. I am afraid that this is true and that it will not go away with time. You will get better at it and maybe it will take you less time, but it is just as probable that it won’t.

I would like you to remember that what you are taking on is a job that is normally carried out by a professional funds manager. He or she will have at least one university degree and probably a higher degree as well. He or she will also have post-graduate learning behind them. Even more important, they will have many years experience. There is no way to short-cut this learning and experience task. So, if the work fazes you, think again and consider letting trained people invest your money for you.

Having told you the downside, let me pick you up again by saying that my experience is that investing in shares is one of the most endlessly fascinating occupations. I never expect to stop learning. I read the Financial Review in detail every day, read articles from several magazines and the Internet and try to read one book about investing every month. If you find this game as fascinating as I do, then it will not seem like work, because you will be motivated to do it as though it was your hobby – it was mine before it became my main source of income and capital appreciation.

Now, to comment on some of the things you said and asked:

Question
 I am about to enter the stock market for the first time

Answer
Alright. So, why have you chosen this time? Is it because you have at last saved some money? Or is it because your study of the Dow Theory market phases has indicated that it is a good time to start? Unless it is the second of these, I suggest you study the six phases of bull and bear markets before you start.

Question
The main impression I have come up with is to always follow the trend.

Answer
This is good. The old saying that the trend is your friend will keep you out of a lot of trouble. But it is not enough. You need to know when to buy. You also need to know when to cut losses and when to take profits. You need to know money management, which is just as important as analysis. You also need to understand investing psychology. Investing is a process of decision-making and the decisions are made in your mind, which is open to psychological traps and biases.

Question
But it still confuses me.

Answer
Yes, because, as I just explained, you only have some of the picture. In fact the more you read and learn the more confused you are likely to become. Everyone goes through this. It is only with study and experience that the confusion starts to settle into a clear investment plan to which you are committed. In my experience it will take you about 10 years to get to the stage where you become a good and successful investor.

Question
There are so many stocks to buy and i tried to read up what's going on with the economy and the market but there are so many things to read.

Answer
I see this as one of the great things about investing. If you find it to be a burden, then you may be in danger of not being prepared to put in the hard yards needed to match the professionals. If you don’t, they are likely to eat your lunch.

Question
How do you come up with choosing a quality stock because there are so many stocks to monitor?

Answer
I have explained this completely and in great detail in my book Building Wealth in the Stock Market. My objective in writing the book was to pass on what I have learned over 35 years. Hopefully it will save you some time, and some effort.

In particular, in the book, I explain how to use investment software to deal with the amount of data. However, if your investment funds are small, it may be best for you to use free or low-cost internet tools until you have more capital saved. I did it without software for fifteen years. It can be done.

Finally, please be aware that what I do is the exact opposite to what the marketers of courses on trading do. They tell you what you want to believe. I tell you how it really is and try to help you on your investment journey.

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