This article is in response to a request to write something for Finance Link. It is not meant to proffer advice to the reader, wise, old or young, but is simply a quick review of the lessons I have learnt. It is the sort of advice I would give to my own kids. You, or they, may take bits here and there, at own risk, or leave it all alone. There is a saying to the effect that "Those who do not study history are condemned to repeat it." When young, most of us think we know it all. Dabbling in Stock Markets is no different. We all start off thinking we can make killings; and we all have to make our own mistakes. People in salaried employment, like most of us in PDO, by definition, value a sense of security more than a self-employed entrepreneur does. Salaried employees are averse to taking major risks, and yet many, when dabbling in stock markets, occasionally take ridiculous risks. They put a major portion of their life’s savings in companies that they know nothing about and have nil understanding of even rudimentary terms like p/e ratios. E.g. how many readers who own shares on the MSM know the current p/e ratios of the stocks they own? Others miss out altogether on the major investment opportunity of our era (stocks, whether MSM or international) by leaving their savings in banks and watching them decline in value over the years. And when the time comes to retire, they are still struggling financially. It need not be so. For youngsters starting off their careers in salaried employment I would like to relate some of my own experiences over the past decade. We all learn these lessons late. And it is much cheaper to learn from others’ experiences than from your own.

Dabbling in stock markets started for me in the mid-eighties, after a friend convinced me that it was quick, easy money. He had just returned from a stint in London and had been exposed to the ropes. So, I finally jumped in with all my savings by opening an account with Merrill Lynch in Bahrain and started trading. All it takes is a phone call. Returns were unbelievable; every month I kept telling myself that this is absurdly good! At the end of each month I made more than twice my PDO salary. It went on for some months. All at the cost of a handful of calls to Bahrain and reading the Financial Times and the Wall Street Journal (both a few days late), doing "research". It gives you a feeling of being terribly clever. Of course, it was too good to last. Around came the crash of 1987. And in three days I was thunderously down below where I had started. I.e. I had made a net loss on my savings, even though the bulk of it was still there. Thank God. You may think you'll get out fast when things crash. You won't.
First lesson: Any idiot can make a lot of money when the stock market is rising by leaps and bounds. Nothing to do with being smart, more like luck. Compare the rise in your portfolio with the stock market index, always. If you are beating the index over a year or two, then perhaps you are being clever. Please always remember, a monkey throwing darts at a list of stocks (or any random number generator) can match the index. Unfortunately most thinking people cannot.

After that sobering episode, I became more conservative by putting any new savings into Unit Trusts, in the care of professional money managers. The way I chose my Unit Trusts was by selecting a market, say, the UK, and looking through performance tables published at the back of those magazines meant for British expatriates. Most of the British in PDO receive these magazines. I picked only those Unit Trusts that were amongst the top 10 performers in their sectors in each of one year, 3 years and 5 (or 10) years. In this manner, over the next several years I bought several Unit Trusts, thinking that professional money managers with such great track records must do better than either the indices for the relevant markets or my own dabbling. Years later, I have since realized that they did neither! And for UK Unit Trusts they charge you 5 or 6% load up front, plus a percent or two annually! The nerve of it all! All of them dropped out of the top ten, most even the top quartile, in the year following my purchase of the Units. So much for track records. Most Unit Trust prospectuses compare themselves to "sector averages", not the relevant market index. Why? Because the vast majority of Unit Trust managers in that sector cannot beat the relevant index, i.e. the sector average is almost always a disaster compared to the index. It makes sense to compare themselves to their peers and appear brilliant, rather than a monkey (index tracker!) that will make them look terrible!
Second lesson: Have little faith in professional investment advisors and money managers. If they were good at it, they would not have the time to bother with small-fry retail investors, like me. They'll be too busy making money for themselves. If you really insist on entrusting your hard earned savings to professional money managers, then put it in index tracking funds. Your friends will tell you how much better they are doing with this or that fancy-named fund or their own brilliant stock picks. In the long run, years later, their super-performing funds will let them down; and you will still have that knowing smile. When your index tracker fund drops in value, everyone else's is also dropping, but at the end of the day you will end up beating theirs, because yours is doing as monkey does; consistently beating 90% of professional money managers. And the 10% who do better than the monkey are never the same 10% anyway; so how on Earth can you know which to entrust your money with today?

OK, but what if one wishes to speculate and make a quick buck? Speculation should not be confused with investment. The answer for speculation is options. Options trading is complex, and is not for the beginner. But from my own experience it is possible to make good steady money in it, even though you are always betting against the really big fish with deep pockets. Small fry like us need to moderate the risk exposure. When buying call or put options, use only money that you can afford to lose, totally; i.e. only a very tiny fraction of your savings. When selling calls, be sure they are covered calls. When selling puts, be sure the underlying stock is very sound and you would not hesitate to keep it for the next few years, even though the price may be dropping dramatically in the intervening period. Basically, do not sell puts on any stock that is not a huge, multi-national, household name. Options trading is for speculation, to give you a flutter, not for investing. But it is possible to make good steady money in it.
Third lesson: If you cannot fully comprehend the previous paragraph, steer well clear of options! There is no recipe for a quick, big buck. Always keep speculation play-money separate from your investing money. Options are a fun way to play, and you do not kid yourself into believing it is investing.

One will always remain tempted by the thought that it should be possible to do better than simple indexing. There are techniques that try to load the odds in your favor, e.g. following the Dogs of the Dow (http://www.dogsofthedow.com/) or investing Foolishly, far cleverer than the professional money managers (http://www.fool.com/ )! These methods basically follow a subset of the Dow Jones Industrial Average (4, 5 or 10 of the Dow 30 with the highest yields). In all cases, investing should always be in stocks of a quality such that you are willing to hold them for many years. If you are chasing a quick buck, then it is speculation, and you should be willing to lose a major portion of your stake. Much of the trading in our local Muscat Securities Market is pure speculation, mainly because access to meaningful company data is not so convenient to come by. Even public announcements like "dividend of 25%" are generally meaningless. They tend to refer to the nominal value of the stock (its price at Initial Public Offer, IPO) which may have been One Rial. If the current price of the stock is actually Six Rials, then that 25% translates into only 4%, which is not so spectacular. The recent massive decline in the MSM has probably rendered the valuations of many stocks highly attractive as long term investments, the only way you should buy stocks anyway. But it takes a lot of homework to identify which. Also, the MSM is not an efficient market in the sense of valuations closely tracking values, so whether indexing will work well remains to be seen. It would be an interesting market to watch over the next ten years or so.

One great advantage that youth has is the long time available for their investments to appreciate. All youngsters should save like crazy and be fervent, long term investors. It does not take many years for those meager, early savings to compound into significant portfolios. In all likelihood, within ten or fifteen years of starting, it would be reasonable to expect that just daily fluctuations in the price of their portfolios can equal their monthly salaries. Yet they may have another twenty or thirty years investment time left to go. Most people learn this simple truth too late.
Fourth lesson: Save like crazy when young, invest long term, and relax as you get older. Most people tend to do the reverse and never become "well off" simply through job promotions and salary progression. Use the time you have to tilt the odds massively in your favor. You should aim for your salary to become almost irrelevant by the time you get into your forties. Saving by putting your money in bank deposits is an awful waste of investment time. In all likelihood, over a long period, your money will depreciate faster than any interest it earns. There are generally two investment routes for the lazy people amongst us. The world's stock markets and housing. The housing market in Oman used to be great in the 1970s. Now it has a hard time competing with bank fixed-term deposits, and you still have to deal with tenants, some difficult. The stock markets long term are better than either, and the only nuisance is that they also decline every now and again, sometimes severely, and you have to suffer in misery till they recover. But just stick it out and you will be rewarded eventually.

Finally, to set up your own index fund sign up with an Internet broker. These brokers are cheap, efficient, and you do not have to waste your long distance phone calls in idle chatter with a live person trying to sell you some stock or other. The one I use is TDAmeritrade. $9.99 per trade up to 5000 shares, trades guaranteed to be executed within one minute, otherwise even the $9.99 commission is waived. Minimum account is $2000. A single trade of 5000 shares can be anywhere up to $500,000, so your trades should cost you only $9.99 each. If you trade in blocks larger than $500,000 each, why are you reading this article? There are other, even cheaper brokers, but many do not take clients outside the USA. Having a US broker does not mean that you are restricted to American companies. Most major companies, of all nationalities, are also traded in the US either listed on their own right (ticker symbol for Royal Dutch is RD, for Shell Transport it's SC) or via ADRs (American Depository Receipts), so the world is your oyster.

One could ask how much should one save? There are so many commitments... I believe that a reasonable target for a young person is 30% of his gross income (including allowances). Sounds tough? Not really, since if you take a PDO housing loan you get 25% of your basic salary deducted anyway, so you have to save only a bit more each month. It is important not to kid yourself though. Paying for a car is NOT saving; it's sheer consumerism. If you borrow from a bank to build a house, then only the repayments on the principal are savings, interest payments do not count. On the PDO housing loan, all your repayments are on the principal, pure savings. It's a great deal. Get the drift? Let us examine the case of two chaps both aged 30 and earning R.O.10,000 p.a. One has a low CEP and his salary progression grows at around 3% p.a. compounded (including promotions, inflation, whatever). The other has a Letter Category CEP (i.e. a "high flyer") and his salary progresses at around 8% p.a. The Dow Jones Industrial Average has compounded at around 10% p.a. since 1984 (oldest data I managed to obtain). That excludes an extra 2% or 3% dividend in addition, to make up for a string of lousy years, or lack of diligence in putting aside the full 30% of salary, consistently over decades. So what can our two chaps look forward to, saving 30% of their salaries for the next 30 years?

                Salary     Savings       Curtailed Savings*
Low CEP
Year 15            15,000        112,000          112,000
Year 30           24,000        644,000        469,000

High CEP
Year 15            29,000        151,000          151,000
Year 30            93,000       1,108,000        630,000

*Curtailed Savings refers to a situation whereby our chap decides that after 15 years he has enough investments accumulated that he can afford to spend 100% of his salary from then onwards; and he just leaves his investments to accumulate further, i.e. he feels wealthy enough not to scrimp anymore. Actually by then the stock dividends alone give an extra couple of hundred Rials per month to splurge away. The future salary figures may look absurdly high today, but with inflation, they are in line with what happened in the past. It's also interesting to note that at the end of 30 years' saving and investing, the daily fluctuations in the stock portfolio can be expected to be larger than the monthly salary. Talk about nerves! Are the forecasts above realistic? From past experience, emphatically yes. So go forth and save that 30%, from this month on. But do not think you can replicate the above by putting your savings in a bank account. Inflation will eat it all away. Start dabbling. But remember that stock markets do go up as well as down. If you think you have the nerves for the downs, here are the simple steps:

1. Get yourself a convenient e-mail address. The best is probably a web-based address that you can use anywhere in the world; on holidays, on cross-posting, on anybody's computer, PC or Mac. I use hotmail. Just go to http://www.hotmail.com/ and sign on. It's free.

2. Open a brokerage account. I use TDAmeritrade. It's also free. You just fill in their form on the web, wait a couple of weeks for the paperwork to get sorted out by snailmail and then wire them the money you wish to start with. Even if you do not actually purchase any stocks, your money will earn interest and remain available to you at all times. You can also access your account, trade, transfer money, whatever, from anywhere in the world, from anybody's computer, PC or Mac. You can also write US $ cheques to all and sundry, and over-draw your account by up to 50% of the value of your stock holdings with nil formality at a very reasonable interest rate (7.5% p.a. as per January 2000).

3. You are now ready to trade. For index based investments, just pick a country or an industry sector that you wish to index-track and go to http://www.ishares.com/ Get the stock ticker for the index of interest. This is a very convenient, cheap way of indexing. E.g. to index-track the S&P 500, just buy shares with the ticker symbol SPY, to track the UK buy the ticker EWU, Netherlands EWN, Japan EWJ, etc. For individual shares outside the USA that trade via ADRs (presumably every Brit wants to own shares in Marks & Spencer one day), just go to http://www.adr.com/ and take your pick of country, industry, whatever. By the way, the ticker symbol for ADRs of Marks& Spencer is MASPY  ;-)

Just do not get too greedy. Always remember that one way of making a small fortune in the stock market is to start off with a large one. Probably not quite what you had in mind. And anyway, is anybody taking all this advice? Well, here is my youngest daughter getting into the spirit of Fool.com!

Disclaimer: The reader should realize that the above is wholly a matter of the author's personal opinion. It is NOT professional financial advice (you already have my views on that one!), nor is the author in any way responsible for the soundness, integrity, reliability or otherwise of any of the firms or websites mentioned.

Added in October 2005:

Since the above article was written it has become much easier to obtain, in a reasonably timely fashion, the quarterly financial reports of Omani companies from the website of the Muscat Securities Market. In the intervening 5 years it's also noteworthy that the MSM Index has gone from around 2000 to around 5000 currently. Yes, even that monkey referred to earlier could have multiplied its investments a factor 2.5x ! Is the MSM currently over-valued? Not really, by international standards. One can still find companies that have steady earnings and that trade at P/E ratios well under 10. There are also companies that are growing at a brisk pace that have P/E ratios well under 15. Yet, somewhat disconcertingly, the local public remains mesmerized by a few companies that have P/E ratios well over 20 and many speculate feverishly on these companies. An oft-used rule-of-thumb is that a company selling at a P/E ratio of, say, 25 is fairly valued if it is growing at 25% annually over the next several years. Growth rates and P/E ratios should be intricately linked, but much of the time the P/E ratios here and elsewhere tend to be linked to pure speculative buzz. Remember what happened to the tech bubble, Tokyo real estate...? On the other hand there are a few well-diversified Joint Investment Accounts (Funds) that regularly trade at significant discounts to their Net Asset Values, sometimes in excess of 20%. These discounts sometimes continue right through to the days when the units are due for redemption.