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How much money do you need to start investing in stocks? Probably not as much as you would think.
In 1942, Warren Buffett bought his first shares by investing $114 in three shares of a company that no longer exists.
Adjusted for inflation, $114 in 1942 is equivalent to $2,256 (or about £1,790) today. While that sounds like a lot of money for a schoolboy (Buffett was only 11 at the time), it was money he had been saving since he was six.
At 93 years old, he continues to invest and is the sixth richest person in the world.
It's not about how much money you start, but how soon you can put that money to work. And even 500 pounds is enough.
Invest in what you know
One source I found useful when I started investing was the classic book One up on Wall Street (1989) by Peter Lynch. He was the former manager of the Fidelity Magellan Fund, which swept the market for years.
Written in an easy-to-understand style, the book is packed with common sense stock trading tips. A timeless lesson that I think can help new investors is to invest in what you already know.
This approach involves finding public companies whose products or services you understand and are familiar with due to personal experience. The idea here is that we can leverage our everyday observations to identify investment opportunities.
Lynch highlighted that it would then be crucial to combine this knowledge with a careful analysis of the company's finances to make an informed investment decision.
Open eyes
So what would this look like in practice?
Well, let's say that 20 years ago an investor was spending (along with his friends) increasing amounts of money on JD Sports Fashion.
They found the store's product selection and customer service to be second to none. So they dug into the financial statements, liked the growth story that was developing, and bought some shares.
This would have been a powerful example of on-the-ground research that led to a very rewarding investment.
The stock's return over 20 years is 6.177% (not including dividends).
The ears also open
It doesn't even have to be your own experience. For example, my friend did a paid clinical trial at London's FluCamp a while ago. Based on his positive impression, he said the underlying company was worth investigating.
He was right. the company is called hLIVE (LSE: HVO) and conducts human clinical trials on behalf of global pharmaceutical clients.
This is a very specialized space in which the company has increased its profits considerably. It has an immaculate balance sheet and generates a lot of cash. It is encouraging that hVIVO has just started paying its first dividends.
Management is targeting revenues of £100m by 2028, up from £48.5m in 2022. To support this growth, it will open a new state-of-the-art facility this year to meet growing demand for its specialized services.
Now, this is a small-cap stock, which means it can be volatile and potentially not suitable for novice investors. But this was one of my best-performing investments last year, which highlights just how powerful Peter Lynch's approach continues to be.
Maybe you're impressed with your dog's grooming or vet service (Pets at home?). Or watch how your busy local pub attracts both students. and pensioners (Wet spoons?).
Sometimes these types of observations can lead to fruitful investment opportunities.
