Rodney Hobson, author of Shares Made Simple: A beginner's guide to the stock
market, talks to Kenny of www.tradersdaytrading.com.
Shares Made Simple is one in a series of Rodneys books which sets out to give the beginner small investor a helping hand by taking the reader, step by step through some of
the most basic concepts of stock market investing.
Rodney, who is also registered with the FSA, is a highly respected financial journalist and author who has held many senior editorial positions in his time, positions held include spells as:
? News Editor for the Business section of The Times
? Business Editor of the Singapore Monitor
? Head of News at Citywire
? Editor of Shares magazine
? Deputy Business Editor of the Far Eastern Economic Review
Kenny: Hello Rodney and thank you for taking the time to talk to Tradersdaytrading.com as it looks as though you have been extremely busy. A new book out each year, one out this year already and another on its way....as well as the columns that you write for, how do you find the time?
Rodney: I enjoy my work and much of what I write flows naturally. The stock market is so exciting that there is always plenty to write about so I am never struggling for ideas.
Kenny: Shares Made Simple is described as a beginners guide to the stock
markets. Who do you write for, who is your typical reader?
Rodney: I write first and foremost for beginners and unsophisticated investors. I realised from the phone calls I received when I worked on on the City desks of The Times and the Daily Mail that many people who acquired shares through privatisations and the conversion of building societies to banks simply did not understand what shares were or what rights they conferred. Thousands, perhaps millions, of investors in this country just need some basic help and guidance.
Kenny: How much appetite is there these days for individuals to take control of their own finances and to become a private investor?
Rodney: I'm sorry to say that most people are just too scared. That is a pity because it is possible for anyone who is literate and numerate to invest in their own right. The playing field is not entirely level but it is not difficult to compete with the professionals if you have a little basic knowledge.
Kenny: Is it as popular a choice as it once was, has the number of people becoming private investors increased or decreased in recent years, and why do you think this is?
Rodney: I think that the number of private investors has grown over the years for several reasons, most notably the arrival of cheap online investing and the spread of well presented information in newspapers such as The Daily Telegraph, The Times, The Independent and The Daily Mail.
Kenny: What effect, if any, has the events affecting the markets over the last few years had on the mindset of small private investors?
Rodney: Unfortunately, every time there is a dramatic fall in share prices a lot of investors are scared off and we take a huge step backwards. Yet this is the time to be looking to buy in, while shares are cheap. I have been trying over the past four years to persuade private investors to buy on the dips and go for solid companies paying a solid dividend. I believe that this message is getting across.
Kenny: Why do you think that people want to become self investors, what are their motivations? Wouldn't it be much easier just to let a trained financial advisor make the tough decisions?
Rodney: It is much easier to hand over your cash to an adviser than to make your own decisions but you lose out on all the fun and the sense of achievement and satisfaction.
Kenny: What are the main benefits to be enjoyed from making our own investment choices?
Rodney: Only you know what you want from your investments, how actively you want to invest and what level of risk you want to take. Even if you don't do quite as well as the expert you are saving on the fees the adviser charges, so you can end up better off. An adviser may put you into investments that pay him or her an introduction fee, which is great for the adviser but is not necessarily best for the investor.
Kenny: What about the main pitfalls, what are the most common mistakes that individuals make?
Rodney: Buying at the top of the market and selling at the bottom is the most common mistake. There is a great temptation to hold back for too long then to pile in too late. Have the courage of your convictions. Failing to do a bit of basic research leaves you vulnerable although I think that taking it all too seriously, poring over facts, figures and charts for
half the night, is counterproductive.
The other big mistake is to think that rises and falls in the stock market are the be all and end all of investing. Dividends are far more important as they give you bigger gains in a rising market and offset your losses when shares fall.
Kenny: OK, I have no real knowledge of the markets other that what I see on the news and have read in the newspapers, but I have heard that there is a lot of money to be made from trading in the stock market - where do I start?
Rodney: Buy a beginner's guide to the stock market. Naturally I hope you will choose my book Shares Made Simple but there are other guides on Amazon.
Learn the basics BEFORE you start to invest. Talk to any friends who invest in shares and ask them how they go about it and would they recommend their broker, just as you would ask about plumbers or electricians. Otherwise set up an online dealing account. You can find them on the Internet and you can compare charges. They charge a fixed fee per trade, often £10 or less.
Kenny: What I really want to know most of all - how much money can I make?
Rodney: Hang on a minute. Don't set off in a spirit of sheer greed. Look for solid, unspectacular investments, particularly when you start out. The greater the risks you take, the more likely you are to lose money. Think in terms of what you can earn in dividends over the long term rather than quick fire gains. Your aim should be to make more money buying and holding shares than you would putting the money somewhere else, such as in a bank account.
Kenny: How do I know what to invest my money in?
Rodney: There are no easy answers. You should decide what you want from your investments and look for shares that fit the criteria. Ask yourself whether you are looking for income or to build wealth over a period of time. How much risk are you prepared to take? Do you want to be an active or fairly passive investor? As a general rule, look for solid companies that provide goods orservices you understand and which make consistent profits and pay consistently rising dividends.
Kenny: How do I know when to buy or sell?
Rodney: Nobody knows the answer until after the event, when it is too late. People construct all sorts of methods and theories but it is simply not possible to foresee with absolute accuracy the top and bottom of the market. Every investor gets it wrong sometimes. The important thing is to look carefully at each company you consider investing in and treat it on its merits. If you are buying for the long term, as most private investors are, it is not so important to get the timing spot on. Where you do hold shares
in a company you should watch for signs that the company is running into difficulties, such as adverse trading conditions. The warning signs are explained fully in my book Understanding Company News.
Kenny: I don't want to put all my eggs into one basket, should I invest in a lot of stocks to spread the risk?
Rodney: You are absolutely right to spread the risk, not only by building a portfolio of shares in several companies but by trying to pick the best ones in a range of sectors. A portfolio is simply a list of all your investments. Conventional wisdom suggests that a portfolio of about ten shares is right for most private investors because it is large enough to spread risk but small enough for you to be able to keep an eye on all the companies you have invested in. Don't be hidebound by numbers, though. I started with a portfolio of about five companies and added others one by one as I saw an opportunity. I also bought more shares in existing holdings as I went along.
I now have shares in a dozen companies and feel happy to expand further but each shareholder should have as small or as large a portfolio as they feel comfortable with.
Kenny: How much time does it take to be a private investor, how often do I need to monitor my investments?
Rodney: Don't become obsessed with your portfolio but don't just close your eyes and hope for the best. You will probably find yourself checking share prices of your investments several times a day at first but your confidence will quickly grow with time. I check share prices of my investments every morning and read through the financial pages of a serious newspaper to see if anything untoward has happened or if a new buying opportunity has arisen. A few minutes over breakfast every morning is quite sufficient.
Kenny: I am checking my investments and I find that one of my stocks has taken a big hit and dropped by nearly 20%. What do I do now? I don't want to make a loss, should I sell right away or should I hold on to see if it goes back up again?
Rodney: In these circumstances it is vital not to panic. Don't worry about what has already happened. The important thing is to take a rational decision on what will happen next. Try to find out why the shares have fallen. Has the whole market tumbled or is it just your company? Has the company issued a profit warning? As a general rule, if the whole market is down and your company looks okay then you might as well hang on for a
recovery in the long term, collecting dividends in the meantime. Where an individual company slumps in an otherwise stable stock market you should certainly consider cutting your losses. Do your homework and take a calm decision. One very important point is that warnings on falling sales or profits are usually followed by another warning, then another, with the shares taking a fresh tumble each time.
Kenny: Your new book due out later this year is called The Dividend Investor, what is a dividend and how important are dividends to my portfolio?
Rodney: Shareholders jointly own the company and are entitled to a share of the profits. The dividend is the distribution of profits to the company's owners, including you. The amount of dividend you receive each year for every £100 you invest in the company is known as the yield and is expressed as a percentage. It is the equivalent of the rate of interest you receive on your savings account. The higher the yield, the more you earn on your investments. You can find the yield for each company in the share price tables in newspapers or on financial websites.
Dividends are the whole point of investing and are far more important than rises and falls in share prices. Over time, in good years or bad, you will make far more money from dividends than you will from trying to buy shares cheaply and selling them at a higher price.
Kenny: So, couldn't I just buy the stocks that pay the best dividends, why doesn't every one just do that.....wouldn't it be as easy as that?
Rodney: It is a very good policy to pick companies making solid, rising profits and paying solid, rising dividends. You should, however, be wary of companies with much higher than average yields. It is a sign that investors are worried that the dividend is unsustainable and could be reduced or suspended.
Kenny: Rodney, I could talk to you all day about this. You have given us a fantastic introduction to the basics for stock market beginners. thank you so much for talking to us today.
Good luck with your new book The Dividend Investor when it is released
later this year.