Hi Reader,

Welcome to the 2nd edition of Stockstartr. In today's letter, we discuss the difference between investing and speculation, how consistency helps your investment success, and how much investment capital you need to start investing.

Fundamental

Investing vs. Speculation

Many people active on the stock market think of themselves as investors. More often than not, it is far from the truth. They are speculators, engaging in short-term price prediction and market behavior rather than concerning themselves with business fundamentals and long-term value.

The investor mindset requires understanding the company's fundamentals, maintaining discipline, and aiming for long-term profits through cash flow generation and value appreciation.

On the other hand, speculative behavior involves predicting price movements often driven by greed and fear. They ignore the underlying business fundamentals. Recommendations from 'experts' on cable news, TikTok, or paid Telegram channels are the primary sources of information.

This behavior will likely result in poor long-term performance and huge financial losses when the market bubbles burst. Speculators use stocks, coins, art, or any other commodity (economic good or resource, like coffee beans) to make bets.

You find speculators everywhere, even among professionals. They need short-term results, or clients will switch to a competitor bank or fund for better market returns. So, the fund manager focuses not on outstanding results but on not having a worse performance than competitors.

Investors know the market is unpredictable and don't waste time pursuing predictions. They have the investor's mindset and expect to profit from stock investments in at least one of the three ways:

• Free cash flow from the business. It will reflect in a higher share price after dividend payouts or share buybacks.
• An increase in what investors are willing to pay for the business.
• The narrowing gap between the business value and the market value.

Are you the investor or the speculator?

What you should do to become the investor: engage in the business fundamentals. Look at their balance sheet. Do they have more assets than debt? Does the company have sufficient free cash flow, and is it likely to grow? What about the reported profits in the income statement? Do these increase over time?

If the company sells a product, ask yourself if you like the product. Do you use the product? If they have stores, visit one. Is it pleasant for the customer to walk around in the store?

What you shouldn't do: stop following recommendation channels. Most recommendations only reach you so the early buyer can offload the securities on unsuspecting retail speculators.

Besides, recommendations cost too much of your precious time. You buy a speculative asset, you are glued to the price chart. The emotions of fear and greed you go through correlate with the market direction. Constantly checking the price reduces your productivity and adds to your stress level.

Investors experience the opposite: analyze the company, buy the stock cheaply, and occasionally check the price. When it is lower than the buy-in price? Great, they can buy in even more at a lower price. When it goes up, they are also happy as they profit from their research. The stress level is low to non-existent for investors.

Conclusion: adopt the investor's mindset for successful investing with long-term gains and have a non-existent stress level.

Principle

Consistency is Key

Consistency is repeating your defined investment process over and over. Investing success relies on doing research for every company you have an interest in. You should only invest in a company if you at least know its financial health or products and services.

How to maintain consistency? Pilots follow a checklist in the cockpit before every flight. You may take a similar approach. Create a checklist for yourself. Include questions you would like to have answered about the company before you feel confident about making an investing commitment. If you can't answer or don't like the answers, don't invest and move on to the next company.

Remember, every industry has different metrics. Thus, adapt your checklist to the industry. Successful investors like Warren Buffett and Peter Lynch advise investors like you and us to know the industry. What are the industry's standards, and how does it perform? It is then easier to rank the company's performance within the industry. Understanding the industry allows you to look for specific industry metrics within a company.

By rigorously following the checklist, you will automatically disregard recommendations from unreliable sources. Of course, you can research the recommendations by following your checklist. However, it is likely that the stock price far exceeds the price you are comfortable paying for.

Glossary

Market Bubble

The asset undergoes a rapid price increase utterly detached from the underlying value and is usually driven by market behavior. The price surge is often followed by a stark decrease, referred to as a 'crash' or 'bubble burst.' Examples are the Dot-com bubble, the U.S. housing bubble, and the various Bitcoin bubbles.

Question

How much money do you need to start investing?

Nowadays, most stock brokers have no or very low minimum deposit requirements. Usually in a 50 to 100 dollar range.

Stock prices range from $1 to $500 for a single share. Despite what most people think, investing requires little capital to begin with. $500 allows you to buy one or more of your favorite company. You become a partner and share the profits.

Do the reality check when you set money aside for investing, ask yourself the following 2 questions. Do you have an emergency fund? And did you pay off your credit card debts?

The emergency fund contains savings worth 3 to 6 months of salary. It is a precaution to keep you on your feet till you find new work. Because of the savings, you don't need to dip into investments to raise money, which would have tax implications.

When a credit card debt bears 21% interest and with sensible investing, you gain 10% annually, then the net profit is -11%. You read it correctly! The best investment when you have debts is paying it off as fast as you can. After that, you save up a couple of $100 and start your investment journey.

You don't have to save up to $5.000 as initial capital. Just start as soon as possible. You put the first $500 to work, and over time, you add more capital. It generates a gain while you are saving further!

Thanks for reading Stockstartr. For questions, suggestions, or feedback, please reply to this email. We will gladly take the time to listen to you. Please ask your friends and colleagues to sign up.

No investing advice is given at any moment. The newsletter is purely for informative purposes only.​
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