There's nothing worse than hearing a friend's tales about unimaginable gains only to invest in the company yourself and lose a lot of money. It was one of my first investing mistakes.
I told a friend about a company which I had bought because I heard about the amazing new technology revolutionising the energy industry. Safe to say it didn't happen and I lost $5,000 within 48 hours. My friend also lost out.
BBQ advice – that's what I like to call it – is an informal conversation about investing. It could be over the dinner table at a restaurant, on the bus, or after a few-too-many at a local bar. It's a recipe for disaster that could result in the costliest hangover you've ever endured.
It usually starts with someone bragging about a company's gains and when asked why it's a good investment, the bragger will say something like, "coz I said so." Everyone nods in acknowledgement.
There's no cure which removes the pain from a poor investment decision, but there are preventatives available for free. A tried and trusted remedy that's still in use today. It's called knowing what you own.
It's the only sensible way for would-be shareholders to look at investing and its starts ever so simply. With reading. Peter Lynch, a very successful money manager, is often quoted in pieces like these, he lived by a few simple but extremely successful strategies. Perhaps the most important is: "Know what you own and why you own it."
Stock codes aren't just random letters attached to a stock price, price-earnings ratio and name. According to Lynch, many everyday investors sometimes forget this.
For example, everyone knows Telstra Corporation Ltd (ASX: TLS) and Rio Tinto Limited (ASX: RIO), but does knowing their brands make them good investments? No. But it's a good place to start.
Scouring over annual reports (which are readily accessible via company websites) is often the best place to start learning about the businesses, such as where it derives its profits, who controls the company and growth initiatives.
Charlie Munger, vice-chairman of Berkshire Hathaway and lawyer, believes he has, "never met a wise person who didn't read." Seems like simple but promising advice from a man who made billions of dollars throughout his life.
It's vital you learn to control your expectations in the stock market. Charlie Munger and his partner Warren Buffett have made billions over the course of their lives. Not in one, two, or 10 years, but over their whole lifetime.
Good stocks to start researching
There are many strong companies on the ASX which you could get to know relatively easily. Companies like SEEK Limited (ASX: SEK), Tassal Group (ASX: TGR) and Westfield Group (ASX: WDC) are businesses which any person can understand and familiarise themselves with and not need to know any complex financial jargon.
Foolish takeaway
Prospecting for good companies listed on the stock exchange and gaining an understanding of the likelihood of their success in the future can be enjoyable. It's also financially rewarding. However, there's no substitute for hard work and research. After years of doing it myself I've never found a "get-rich-quick" scheme that worked, nor have I ever heard successful financial advice which ended in, "coz I said so."
