Investing is not "playing the market" or "making a killing".  Investing is often an acquired skill and comes to some naturally while painfully to others. I often run into people who earlier used to regale me with stories of stock market success and now will acknowledge that they have not done so well after all. My question to them is the same, "what is your expected rate of return and how much are you making?" The response is, " I have not calculated that yet or I made 30% on "X" investment but when I ask for the total return on their portfolio, they don't have any idea". If all of this is Greek to you, it is time to take a primer in Investing.

 Why do you need to learn "Investing?"

                        It is not enough to say I made a lot of money on my house I sold or my friend "made a killing in High tech". All this is meaningless unless you can show me what this person invested over how long a period of time and is now worth how much and how it is based on his/her investing acumen not just luck of being at the right place at the right time or wrong place at the wrong time. I have committed a good many of investment follies myself, so don't be embarrassed to acknowledge that you don't know much.  And then may be you know and have somethings to teach me. Please do. 

We need to have a common language to assess what we are talking about:

                  Investment in contrast to "making money" involves taking a calculated risk at buying or selling an investment that you expect to get more than you paid for or you believe it will be worth less in future than now so are selling it. The risk however is sometimes but not always proportional to reward. To put it simply you may lose all of it or part of it over a period of time.  So you say it is a game or a gamble! In a way, those who know, play the game better because they have superior knowledge or better ability to tolerate inevitable losses or a clear vision of the future will do better. There are people who consistently make money while others consistently lose and most do both. The question is; was the effort worth it? Given the nature of this enterprise most people vacillate between FEAR and GREED. We buy something of value from someone because we think it will fetch more in future and we sell because we think it is less attractive compared to another investment or that this is best it is going to do and will probably decline in value in future. This inherent drama is enacted in each decision to buy and sell we undertake whether we are aware of it or not.

                                       Therefore making money involves foresight (it will appreciate in value in future), conviction (of reasons why you undertake the investment) and ability to reevaluate your decision and the ability to stick to it. Luck aside this requires the skills of going against the prevailing judgment, emotional stability to stick with your decisions and humility to admit when you have been wrong.

Do you possess these skills? If you don't, then you are gambling and your probability of success is limited and you can end up rich but more likely sorry.

If you don't have the skills, acquire them by reading, attending investment seminars not sponsored by the industry, following a plan you have devised and reassessing its success periodically. 

Where to acquire it?

                 Internet Resources:

Vanguard

American Association Of Independent Investors

                               If you don't want to put in the effort, you need to develop an overall financial plan with the help of a certified financial planner (fee based only not commission based), then seek a professional to manage your money.

 

How to choose a professional? 

Questions for your stockbroker: 

1. Where do you invest your money?

2. How much have you made, can I see evidence of your return certified by an independent   agent?

3. What is your anticipated goal of return and what do I compare it with? (for example, do you promise to beat the return of DOW or Treasuries?

4. What will be your commission?

5. What will be my after tax return? 

                    The daunting questions although quite simple are most likely to strike fear in the heart of an average broker and you will not get another call or you may have the sophisticated talker with an armful of data. Now you need to know how to decipher it. The simplest way is to ask them to furnish the performance for say last 5 or 10 years of their investment compared to SP500 (most brokerage houses have it and are required to furnish it). This means they promise to beat the market (most never do and never will, other do it for a period of time and then give it all back). If they say they do beat the market ask them if they will beat the market after taxes and commissions. None can, at least not consistently except for the few such as Warren Buffet (too old to give your money), George Soros (you don't have enough money for him to consider you)

 

What is the point?

                  It is cheaper, easier and simpler to buy market index funds and leave them alone for 10 years or more, you will do better than most of the professionals (See Bogle).

 

Characteristics of Good Investments 

1. You expect it to appreciate in value over a reasonable period of time, say your lifetime!

2. The reward is proportional to the risk you are assuming, e.g., you loan money to your friend who has a habit of not paying anyone on time

3. You can explain your investment idea to a 10 year old

 

So you have done your homework and are ready to Invest

  1. It is important to give your idea a trial run if you can such as a mock stock portfolio or mock real estate portfolio.

2. Run it buy someone who will not steal it from you and is himself/herself a good investor.

  If you have passed these tests :

3. Ask yourself are you willing to give it the time and effort it requires.

4. Ask yourself another question, what makes you think you can do better than others?

 

If the answer to all these questions is an unqualified Yes

 

You are an INVESTOR