Investing is just like any other profession: we must fi rst learn the basic knowledge. We can do this by doing courses, such as those offered by Kaplan (formerly FINSIA), the premier education body for the investment industry in Australia — see <www.kaplanprofessional.edu.au>. We can also do it by learning from books, seminars, videotapes, DVDs and the internet.
The knowledge that we need will include:
Information on how stock markets work
This includes: the types of stocks and other securities available to investors; what the market’s terminology means; how the exchange trading platform operates; how the settlement and registration system works; how our broker’s internet trading platform operates; and the laws under which the stock market operates and which regulate the industry. There is a lot more to know in this area than beginners ever imagine and it is far more important than they think.
This will lead into a basic knowledge of accounting. It will also give insights into the dynamics of businesses.
This is also a far bigger fi eld of knowledge than most people suppose. Moreover, there are some unscientific and doubtful areas in it. These usually depend on what I call magical thinking, as discussed in the previous chapter. However, in rejecting them we must resist the temptation to also dismiss the ideas and insights that are firmly based in the behavior of investors. If we cannot work out a reason why some idea would work, based upon the way most people think, then we should treat the idea with suspicion.
The history of stock markets
Beginners make mistakes that have been made many times by others who have gone before them. The only chance to avoid reliving history is to know and understand what has happened in the past.
This includes the psychology of markets, personal psychology and the new field of behavioral finance. One of the most important areas of psychology for investors is how we go about making decisions. This is far more critical to success than most beginners think when they start out to learn investing. Humans are not very good at making decisions in complex situations. A study of psychology opens our minds to the myriad ways we can fool ourselves and not see reality. It makes us far more humble and less sure of most things, where otherwise we would be dangerously overconfident.
The methods that have worked for the great investors
I have learned more about what actually works from the writings by or about these people than from all the theory textbooks. From these sources, I have picked up the way they think and the aspects of analysis they actually use from the huge body of available methods. As we study their methods, we come to appreciate what are key issues and what are just minor issues around the fringes. It is the simple big ideas these great investors exploit that make the real difference in the end.
It will take most people many years to acquire this knowledge. However, there is no realistic short cut in investing, any more than there is in any other profession.