The Pros and Cons of the Five Basic Investments | Part 5 Stocks

 

In the previous segment of our five part series we got to learn about – Bonds and how buying a bond can guarantee you return after a fixed time. Not only that but we also got to learn about the merits and demerits of buying bonds in general through the help of the years of experience of Mr. Peter Lynch. In case you haven’t read then you are most welcome to check out our previous blog post.

As we have mentioned earlier in our previous segments, we will post an excerpt from the book ‘Learn to Earn’ by Wall Street investor and Hedge fund Manager, Mr. Peter Lynch, where we understood there are five basic ways to invest money- by putting it in a savings account or something similar, buying collectibles, buying an apartment or a house, buying bonds and buying stocks.

This segment will cover the fifth investment strategy and the most popular one - ‘buying Stocks’ which will give us an insight to what happens when you buy a Stock(s) or Share(s) and the related Pros and Cons.

Have a good read.

STOCKS

Stocks are likely to be the best investment you’ll ever make, outside of a 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.

When you buy a bond, you’re only making a loan, but when you invest in a stock, you’re buying a piece of a company. If the company prospers, you share in the prosperity. If it pays a dividend, you’ll receive it, and if it raises the dividend, you’ll reap the benefit. Hundreds of successful companies have a habit of raising their dividends year after year. This is a bonus for owning stocks that makes them all the more valuable. They never raise the interest rate on a bond!

You can see from the chart below that stocks have outdone other investments going back as far as anybody can remember. Maybe they won’t prove themselves in a week or a year, but they’ve always come through for the people who own them.

 

More than 50 million Americans have discovered the fun and profit in owning stocks. That’s one out of five. These aren’t all whizbangs who drive Rolls-Royces like the people you see on Lifestyles of the Rich and Famous. Most of these shareholders are regular folks with regular jobs: teachers, bus drivers, doctors, carpenters, students, your friends and relatives, the neighbors in the next apartment or down the block.

You don’t have to be a millionaire, or even a thousandaire, to get started investing in stocks. Even if you have no money to invest, because you’re out of a job or you’re too young to have a job, or there’s nothing left over after you pay the bills, you can make a game out of picking stocks. This can be excellent training at no risk.

People who train to be pilots are put into flight simulators, where they can learn from their mistakes without crashing a real plane. You can create your own investment simulator and learn from your mistakes without losing real money. A lot of investors who might have benefited from this sort of training had to learn the hard way, instead.

Friends or relatives may have warned you to stay away from stocks. They may have told you that if you buy a stock you’re throwing your money away, because the stock market is no more reliable than a casino. They may even have the losses to prove it. The chart on page 110 refutes their argument. If stocks are such a gamble, why have they paid off so handsomely over so many decades?

When people consistently lose money in stocks, it’s not the fault of the stocks. Stocks in general go up in value over time. In ninety-nine cases out of one hundred where investors are chronic losers, it’s because they don’t have a plan. They buy at a high price, then they get impatient or they panic, and they sell at a lower price during one of those inevitable periods when stocks are taking a dive. Their motto is “Buy high and sell low,” but you don’t have to follow it. Instead, you need a plan. 

Conclusion 

Here, Mr. Peter Lynch has given us a glimpse of the world of stocks. He has described the perks of buying a stock which not only ensures return but also increases in value through the passage of time. He has also made us aware of the mistakes that investors make and one should have a plan before buying a stock.

We hope that you have got an insight into how the stock market works and all the benefits of buying stocks. We wish you all the luck in your investing journey.

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