Guest Columns

By Steven Rosales

I am a new investor. What does that mean? Simply that I do not have much experience investing. While I had read books about investing and was aware of the stock market, I had never given much thought to investing.

I saw the stock market as a competition where I was at a disadvantage; investing involved too much risk for the potential reward. Therefore, as of January 1, 2006, I had never purchased a stock. But that has changed. It changed because I reached a point in life where I had funds to invest and needed to make some decisions on how to invest them.

Now many people think that the best way to invest is to place your money with a mutual fund. I was one of those people up until November 2005 when I read John Bogle's book on mutual funds. Two things about this book stood out to me. The first was that whether the fund increases or decreases my investment, the people who are running it get paid, and that these “fees” impact my investment results (if I am up 10% on the year, and I have to pay a total expense fee of 1.5%, I have actually only made 8.5%).

The second point that stood out to me was the fact that the vast majority of money managers do not outperform the stock market. In his book, Bogle points out that most people would be better off just buying the market in an index fund. These are funds where essentially every stock is part of the fund and your return is guaranteed to match what the whole stock market does, good or bad.

When I read this I realized there were actually two distinct risks in mutual funds. First, that I only had a 15% chance of picking a mutual fund that would do better than the market as a whole, and second, that this mutual fund would then have to do a lot better than the market as a whole to outperform index funds after all the mutual fund's fees and expenses had reduced its performance. For example, if the market goes up 10% and it costs me 2% to be in a mutual fund, than the mutual fund has to earn 12% just to stay up with the market.

So with this sobering thought I began to ask myself whether there might be a better way for me to invest my money than just handing it off to a mutual fund. Could I find a way to participate in the stock market and avoid having to do it through mutual funds, and at the same time not increase (in fact, hopefully decrease) the risk associated with investing in a mutual fund?

The answer to those questions is what this series of articles is all about. As a new investor I have set off on a journey to discover if a reasonably intelligent individual who is willing to devote a sensible amount of time can learn to successfully invest in the stock market.

Steven Rosales began investing about a year ago. His goals are simple: preserve capital, grow capital, and invest with a margin of safety. Steven is the author of Value Blog Review, a website devoted to presenting and discussing the best blogs, websites, and books for new investors.