How Can I Stop Speculating and Start Investing?

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker respond to a great query from a millennial with a Robinhood account who says that, so far, he has been buying stocks speculatively. But now he realizes that picking investments based more on their real values might be a better move, and he's in need of some tools that will help him in that quest.

A full transcript follows the video.

This video was recorded on Sept. 25, 2018.

Chris Hill: Question from Jay in Atlanta. "I'm a 24-year-old millennial investor and I own a Robinhood account from which I hold my primary stock portfolio. Unfortunately, most of my investing has been mostly speculative up to this point." Oh, Jay! Oh, Jay, what are you doing, speculating like that? "I want to do a better job at quantitatively analyzing the companies I'm about to invest in. Do you have any tips or advice for me in how to do so? Any tools or platforms or suggestions that y'all have that could help in such endeavors?"

You're someone who researches stocks for living. Any suggestions for Jay?

Bill Barker: Yeah. Actually, what I'll focus on first is, you took a pause, and said, "What are you doing, speculating?" But I think that the good news here is, Jay has identified not only that what he has been doing is speculation, but he starts the sentence with "unfortunately." He recognizes that this is not who he wants to be. When you recognize what your own weaknesses as an investor are, you're ahead of most. Recognizing the problem, to an extent is -- I'm not saying this is a big problem. People do speculate on stocks, especially when they first get involved with investing. Checking prices multiple times a day, thinking, "This has moved up a little bit, should I sell?" Speculating.

Hill: You and I have seen that in a couple of significant periods in our lifetime. I'm thinking primarily of the late 1990s, when people started investing online. You can speculate and do well, and you draw the wrong conclusion. The wrong conclusion is, "You know what I am? A phenomenal investor! Everything I buy goes up! I'm just that good!"

Barker: Unfortunately, a lot of focus goes into things which are best categorized as speculation. You take the marijuana stocks right now. You take Bitcoin. Tremendous amounts of attention because the movements are so dramatic in such a short period of time. If not every part of those stories is speculation, a large chunk is. I just wouldn't get started on things like that. If you know that you want to have some fun with a small portion of your money, have your speculative portion of your portfolio to massage that part of your attention, that's fine.

Getting back to the latter part of the question, tips and advice on how to analyze companies. Of course, our site. By "our," I mean The Motley Fool site. We always recommend to get some ideas and follow people that are interested in sharing ideas about stocks. I would read Jack Bogle's work. Anything by Jack Bogle, which focuses on the long-term, focuses on the appropriate expectations to have for investing, and also the importance of keeping costs low when you do so. But none of what he writes about really gets at buying individual companies. I don't want to just plug the fool.com site, but it's always been a good one for that.

Hill: I'll throw another one out there. This goes for Jay, this goes for anyone listening, particularly if you're just starting out. It's been my experience, and I think a lot of people's experience, that the stocks they tend to do the best with are the businesses that they understand. I would say, look at your circle of competence. Look at what are things that you understand? Some people are really smart when it comes to science. Maybe they have a college degree in that. They're far better equipped to look at biotech stocks, pharmaceutical stocks, etc., than I am.

What I would say is, wherever you find your interests gravitating toward, I can promise you there is absolutely not just a general business news site like fool.com or CNBC's website, Bloomberg, etc. out there. There are also trade publications. We were talking earlier about Sonic being acquired. You look at QSR, you look at Restaurant Business News, that sort of thing. There are trade industry publications for whatever industry you're interested in. That can be a really great resource, as well.

Barker: I think books are a good resource.

Hill: Books?!

Barker: Books, yes. [laughs] Books! Peter Lynch's books are a good place for a young and new investor to start reading, with some of his stuff. I think the numbers are somewhat outdated from the time that he was writing. You're not going to find a lot of stocks at the valuations that he was able to write about and where he made so many great investments in his money. You have to make certain adjustments to a market that doesn't offer obvious steals the way he was able to write about. But, just going through his thought process, I think, is good. The Warren Buffett Way is a good book for actual learning about valuation. It's not by Buffett but about Buffett and how he was finding stocks. It was written a couple of decades ago, but I think the math is still good there.

Hill: And speaking of Buffett, if you go to the Berkshire Hathaway website, you will find two things. One is, you will find a website that appears to have been built in 1997. Second, you will find the annual letters from Buffett. You can just pick any one of the recent years and just read those. Very insightful, and it will take you a lot less time than reading a book. I don't want to come off as anti-book. I feel like I am.

Barker: Yeah. [laughs] A little.