Personal Investing: The Missing Manual

Chapter 6. Stocks

Warren Buffett, one of the most famous investors ever, has this to say about owning stocks: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” If the study of individual stocks described in this chapter turns you off and you decide to follow the Oracle of Omaha’s advice, simply go back to Chapter 5 to learn all about index funds.

Buffett’s advice to investors who choose to own individual stocks is simple, though not necessarily easy to follow: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher 5, 10, and 20 years from now.” Few companies meet these succinct criteria, so when you find one that does, buy a bundle of shares.

Many people try all sorts of strategies to make money in stocks. Technical analysis is akin to reading stock price tea leaves: Its practitioners, called technical analysts, study patterns in stock prices and the volume of shares sold each day to try to forecast where the price will go next. Technical analysis has a purpose, though. Long-term investors with lots of money to invest use analysis to help choose good times to buy, because they buy so many shares that each penny counts. This book won’t get into technical analysis, because you can invest successfully without it.

Day traders, as they were called in ...