The Illiterate Investor: Simple Strategies to Invest in the Stock Market

Preface

Investing can be intimidating, especially if you are illiterate in finances, as I once was. Don’t allow the intimidating nature of the stock market to scare you away from learning how to trade.

Learning how to trade is easy. The difficult part is overcoming psychological challenges and controlling your emotions.

Anyone can learn to trade as long he or she develops the skills and rules to do so. Like any other profession, trading requires fundamental goals and planning. Trading is based on gathering information and then executing a plan based on certain strategies.

It can be a lucrative profession when you buy and sell a stock and make a profit from its price fluctuation; however, you can lose your money if you do not have well-defined strategies or do not strictly follow your own trading rules.

Many people are interested in trading in the stock market. I would like enlighten you about the process. Through my guidance, offered in these pages, you will be able to make profits in the stock market and secure your future.

As a result of learning how to use simple trading strategies, I can now can choose when to work. This is a new freedom for me.

Trading is a business, and should be treated as such.

The Illiterate Investor should be a cornerstone in your ongoing process of learning how to manage your money to gain financial and personal freedom.

1

Introduction

Why is this book called The Illiterate Investor?

The Merriam-Webster Dictionary defines illiterate as follows: Having or showing a lack of knowledge about a particular subject.

That makes most of us illiterate investors. A large percentage of high school graduates have difficulty understanding compound interest, mutual funds, bonds, shares, or how to properly file an income tax form. This financial illiteracy is not their fault: a personal finance course should be part of any basic education program; but too often it’s missing.

We have basic knowledge about finances, or we might live paycheck to paycheck, simply paying our mortgage or rent and trying to stay out of debt. The only advice that we usually get from our parents about investment is: Don’t borrow money.

Once we become employed, we open a bank account. But instead of earning interest on our money, we have to pay the bank all kinds of fees and service charges. Often we hear the news that so and so bank made millions and millions of dollars in profits! Few people switch banks due to the inconvenience of changing accounts, and banks are aware of this fact.

Investing

Niall Ferguson, in his book The Ascent of Money: A Financial History of the World, writes:

It is a well-established fact, after all, that a substantial proportion of the general public in the English-speaking world is ignorant of finance. According to one 2007 survey, four in ten American credit card holders do not pay the full amount due every month on the card they use most often, despite the punitively high interest rates charged by credit card companies. Nearly a third (29 per cent) said they have no idea what the interest rate on their card was.

Mr. Ferguson emphasizes that this lack of financial knowledge is a widespread phenomenon.

As I was researching and writing this book, I became even more aware of how financially illiterate many people are; especially when it comes to investing in the stock market.

Mr. Ferguson presents the following example of a survey conducted in England:

Nor is this a uniquely American phenomenon. In 2006, the British Financial Services Authority carried out a survey of public financial literacy which revealed that one person in five had no idea what the effect would be on the purchasing power of their savings of an inflation rate of 5 per cent and an interest rate of 3 percent. One in ten did not know which the better discount for television was: that originally priced at £250, £30, or 10 percent. As this example makes clear, the questions posed in these surveys were of the most basic nature.

Peter Lynch, in his book Learn to Earn, writes:

Investing is fun. It’s interesting. Learning about it can be an enriching experience, in more ways than one. It can put you on the road to prosperity for the rest of your life, yet most people don’t begin to get the hang of investing until they reach middle age, when their eyes start to go bad and their waistlines expand. Then they discover the advantage of owning stocks, and they wish they’d known about them earlier.

Lynch makes the point that our present system is failing to teach basic economics, while people in other countries have fought to gain personal economic freedom. He gives the following example:

The Russians and the Eastern Europeans marched, demonstrated, held strikes, organized, agitated, and fought as hard as they could to get the economic system that we have already. Many people went to jail for this cause, and many lost their lives. Yet in our own schools we don’t teach the basics of how this economic system works, and what’s good about it, and how you can take advantage of it by becoming an investor.

On a personal note, I grew up in El Salvador, during a time of military dictatorship: a system where the military had control of almost every single aspect of the economy and corruption was the norm. In fact, you could not even get your driver’s license without paying a bribe. The easiest way to get a decent job was by getting a recommendation letter from a military person. Union leaders were jailed or killed. In our school, we watched as the army killed one of our teachers. Others were kidnapped and never found - only for the reason of being part of a teachers’ union.

Take advantage of your freedom to choose your economic future.

The pages ahead will help you begin this journey to financial freedom.

The journey of a thousand miles begins with one step.

— Lao Tzu

2

You Are the Architect Of Your Own Destiny

Knowing how to invest is an essential life skill.

It is a fact that many people are financially illiterate. I considered myself financially illiterate, until I decided to take control of my own financial future.

A revolution has taken place in the way people trade in the stock market.

Millions have assumed responsibility for creating their own wealth. Many people are now making a living by trading online. They buy and sell shares of companies through financial platforms. These platforms are provided by online brokers and are good places for new traders to begin. They offer low cost trading fees, educational tools, and basic support for the buying and selling process.

The brokerage industry has changed the way they charge commissions. Prior to internet banking, brokerage firms charged such high commission fees that it was difficult for the average person to make a profit. These conditions forced many people to buy and hold a stock for a long period of time. Once online trading was introduced, expensive commissions became a thing of the past. Now brokerage firms charge $9.99 or less per trade. The opportunity to become self-employed as a trader is much easier now than it was 20 years ago. As long as you have commitment and dedication, you can learn to trade.

Most likely, the main reason you are reading this book is that you want to be in charge of your financial future, and you do not trust putting your hard-earned money under the control of a company or a single individual. After all, it’s your money, and you should have full control over it.

If you want financial freedom, then you must be the captain of your own ship. Take control, and be prepared to take the helm. You can then decide when to set sail and when to anchor. By taking control, you will be able to act when opportunities to profit present themselves. Once you learn how to find stocks at a discount price or stocks that are in an uptrend, do not be surprised if your trading account grows steadily.

There is no magic wand that will help you find stocks.

People think that finding profitable stocks is almost impossible, or that you have to be lucky. Many think that they need something close to a magical wand to be able to find good stocks, but finding good stocks is not as difficult as most people think. Throughout this book, I will show you strategies for finding stocks to trade. There are many simple ways to locate stocks. These may be as easy as looking around your familiar environment for products or services that are in demand. For example, not too long ago I happened to read a report that a Canadian diamond exploration company had found the second largest diamond ever discovered. I happened to already own a small number of shares in Lucara Diamond, so I bought more shares before the news made headlines. The stock price doubled after the news hit the airways. As a literate investor, you have to be able to find information about stocks before the general public knows about it. As you read more, you will learn how I do it.

We all hear news reports of the latest electronic device that is selling like cotton candy at a festival, and we wish we could make money from that new product, but not many people know how to find out information about the company behind a particular device. By the time we find out, it may be already too late to invest. As an ordinary investor without tons of money, you need a simple method to find stocks that are worthy of trading.

"Whatever you do in life, surround yourself

with smart people who’ll argue with you."

—John Wooden

Trading and Intelligence

If you are able to manage basic rules of investing and have sufficient discipline and confidence to figure out the movements of financial markets, then you have the intelligence to trade. Another important requirement is emotional stability and a willingness to learn.

Many successful people emphasize that the way to change your life is by imitating what other successful people do. The most effective method of becoming successful is to follow those who are best at what you’re planning to do. That is what will change your life, both intellectually and economically. Surround yourself with people who can help you achieve your goals and dreams. Think of people you admire. What are their ethics and standards? What are their behavior patterns? Copy their attitudes and approaches to life until these became your habits.

The most successful people share similar habits: they set daily achievable goals, they are committed to working hard, and they go the extra mile every single day.

Economic success is different for everyone. To one person, success can mean getting a better job; while for another, success means being financially independent. We all define success in different terms, but it is important that your definition of success is achievable.

In order to easily identify these elements of success, read books and watch videos of successful people. They will tell you much about winning habits and approaches.

Trading is Basic Math

What level of education do you need in order to be a trader? Basically, you can trade in the stock market even if you only have a 5th grade education. Why am I saying this? Because to be able to trade, it is only necessary to know how to do addition, subtraction, multiplication, and division. By Grade Five, most kids have learned these basic math skills.

Why is trading basic math? If I buy a stock for $10 and after a week the stock increases in price to $11, I will sell it and make a profit of $1. This calculation is simply basic addition. Conversely, if the stock decreases in price to $9, then I would subtract and come out with a loss of $1.

If instead of buying only one share I bought 100 shares, then here I would do basic multiplication: 100 x $10 = $1000; the total cost to buy the shares. With an increase of one dollar per share, my profit is $100. If I want to find out what percentage of profits I took, then I would do a basic division calculation to get a result of 10% profit. If you invest $1000 and take a profit of $100, you should divide $100 by $1000 and multiply the result by 100%. That will give you the rate of profit in percentage terms.

You don’t need a master’s degree in finances to successfully trade in the stock market, but that is what high-flying financial advisors want you to believe so that they can charge you high fees to invest your hard-earned money. Then they can buy a nice yacht or BMW.

Yes, you only need basic math to trade; but it will very helpful if you also have a grasp of basic accounting. As you read through this book, you will realize that it is necessary to educate yourself by reading books and the financial pages of newspapers and magazines to gain financial knowledge and understand how the stock market