Years after my initial interest in the stock market in high school when I was assigned to follow some stocks for a few months to see how they performed, I took my next big step into learning about investing: I joined an investment club.
Some people at work had started an investment club a few years earlier, and invited me when an opening came up.
Like many types of clubs, our investment club was a way for about a dozen members to learn together about the stock market through education and pooling our investment dollars. I was a member for about three years before my learning curve with the group plateaued.
Here are some of the best financial lessons I learned from the investment club:
Learn before you invest
Investing in a stock can be a spur-of-the moment decision based on the news of the day. I’ve done that a few times, but for the most part, studying a company before investing in it has paid off better than not looking into it deeply and buying anyway.
Using analytical tools that are basic to investing, club members each month were responsible for researching a company and giving a report. With a table full of members asking you questions about past performance of the stock and the CEO’s background, among other things, it was enough encouragement to do your best and research it well.
Learning about a company before investing in it is a fundamental step, and the club help me learn the groundwork required.
What’s a P/E?
This can sound like a minor thing to long-term investors, but before I joined the investment club I didn’t know what a price-earnings ratio, or P/E, was.
I won’t go into all of the detail of what a P/E is here — I wrote an earlier article about it — but it’s a simple calculation that helps determine if a stock is worth its price.
What’s a good P/E? The lower the better, with the most recent S&P 500 ratio at 25.
When a stock price has increased, its price has risen faster than earnings and may not be so much of a good deal. As a frugal investor, I’m looking for good deals, and P/E helps me find them, which leads me to my next lesson.
Investment club = long term
I’ve had my share of short-term investments, and most of them don’t turn out so well.
One main goal of the club was to invest for the long term and not look for short-term gains. We were thinking five to 10 years out, not a few months, when picking stocks.
This helped me learn about dividend reinvestment plans, or DRIPs, where people can buy stock directly from a company without a stockbroker and have the dividends automatically reinvested in fractional shares.
DRIPs make it easy to be a long-term investor, and I contributed monthly to my DRIPs for years during and after I was a member of the investment club.
Only spend what you can afford to lose
This is another basic tenet of investing, and one I took seriously after joining the investment club.
I’ve never used money set aside for bills to invest in the stock market, treating it like I would a trip to a casino: Only spend what I can afford.
In other words, if it was money I didn’t mind losing, then it could be spent buying a stock.
I can remember at least two companies I’ve invested in going south, and it’s not a good feeling. Still, it was money I was prepared to lose, so the sting wasn’t so bad.