Although engineers are usually good in technical know-how, some of them don't think they can do well in stock investing. So, can engineers invest in stocks?
Engineers can do well in stock investing. In fact, many engineers have good logical thinking and research skills that are much needed to be successful in long-term stock investing. However, some engineers may be hesitant as they struggle to justify their stock investment decisions.
There are two types of research that must be carried out in order to be successful in stock investing. Unfortunately, many engineers find it very hard to justify one of the research. However, they are ways to mitigate it.
Why Engineers Can Invest in Stocks?
Engineers, by nature, are good in research skills and there are two types of research that must be done in the process of picking a good stock to invest in; a) quantitative research and b) qualitative research.
Quantitative research involves the study of a company's annual report, revenue, cost, profit and other financial metrics to justify if the stock is a good investment.
On the other hand, qualitative research is what most engineers struggle to find proof and evidence to support and justify their stock investment decisions. Basically, qualitative research involves the study of the company's management team, predicting the future of the company and identifying the competitive advantages of the company.
As you can see, qualitative research has a lot of guessing work, prediction and estimation. It hardly has any number that we, as an engineer, like to use to back our claims. Hence, many engineers see stock investing as gambling rather than proper investing.
However, engineers may sometimes forget that they are indeed doing estimations and predictions on a daily basis. For example, cooling load calculation is always an estimation. Besides, pipe sizing, duct sizing and cable sizing are also involved certain degrees of estimations and assumptions.
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So, the skills needed for stock investing are kind of aligned with the work that engineers are doing every day. Besides, engineers possessed the following advantages that aid stock investing:
1. Engineers Have Good Research Skills
As mentioned earlier, engineers generally have good research skills. Most of them did research one or more times during their college or university life. In stock investing, the ability to conduct good research is extremely important.
Stocks are essentially companies and every company is a business. A good business to invest in often has the following characteristics:
- Potential market size is huge – Products/services sold by the company is suitable for a very large group of people. For example, Apple can sell their iPhones to people around the world.
- High profitability – Products/services sold by the company have high profit margins. In other words, the cost of making the products/services is very low compared to the selling price.
- Good leadership and execution – Talk is cheap. Plans are ideal. However, it takes courages, skills and strong leadership to execute thereby fulfilling promises and grow the business.
- Has long-term competitive advantages – The growth of a business can be hindered by competitions. Hence, having long-term competitive advantages ensure that the business can propel in the long future.
The above characteristics are merely the tip of the iceberg. There are many more metrics we can look at to determine if a stock is a good buy. As you can see, with good research skills, more information can be gathered for analysis later.
Furthermore, engineers are taught to check the source of information. With that, we are one step closer to getting the most out of the research.
2. Engineers are Good at Finding Patterns for Predictions
When it comes to qualitative research, certain degrees of estimations must be made in order to build a thesis or conclusion. Fortunately, engineers are good at finding patterns and thus, it helps them to connect the dots better as well as aid them to draw a map for their stock investing journey.
Stock investing is a journey. People who are looking for shortcuts and quick money are usually doomed to fail in stock investing. Instead, we need to develop a good understanding of the business we intend to invest in.
Through research, engineers can find patterns and trends lying behind the business and the industry as a whole. With that, they can forecast the revenues and profits of the business thereby increasing their probability of success in stock investing.
Long-term, the growth of a business is always tied with its stock price. In other words, the better the company did, the higher its stock price. However, it is neither linear nor directly proportional.
So, we need to identify key metrics and make educated guesses on whether those metrics are going up or down in the future so that we can better predict if the stock price is going up or down in the future as well.
For example, Facebook's daily and monthly active users have been increasing every year in the past but they are flattening recently. Hence, it is reasonable for us to say that Facebook users may have reached the peak (saturated) or people are not using Facebook as often anymore. So, our educated guess is that Facebook may not grow as fast as before and its stock price has a higher chance to decline in the future.
Remember that stock price is always reflecting the profitability of a company in the future, not the present. So, if the future of the company is less than ideal, the stock price will fall at present.
Although we can never use numbers and facts to support our qualitative research, we still need to form an opinion so that we can take action and progress in stock investing.
Therefore, predictions are inevitable in stock investing but engineers have the potential to be more accurate when the right patterns are spotted and analyzed.
3. Engineers Have More Spare Cash for Investing
Compared to jobs such as accountant, marketing executive, business executive, project executive, graphic designer and programmer, HVAC engineers (and also MEP engineers) usually have more spare cash for investing.
As an HVAC engineer, especially when you are working at the construction site as a project engineer, your monthly salary is the sum of your basic salary and allowances. Usually, allowances are not deducted for tax, retirement fund and social security purposes. So, your net salary received in your pocket is more than others.
Relevant post: Project Engineer Salary (Construction) in Malaysia.
With more cash, you can start investing earlier. Besides, you also have more capital which makes your return on investment more appealing in terms of monetary figures.
As you might have known already, compounding interest is very powerful. Let's say you managed to save $100 every month when you first started working at the age of 24. In a year, you invested $1200 in a stock that has an average return of 8% per year.
Since then, you continue to invest $100 every month on the same stock. 10 years later, at the age of 34, your stock investment is estimated to have a value of $20k. For 20 years (44 years old), the same stock will have an estimated value of $60k.
Now, assume that you managed to save $150 instead of $100 every month starting at the age of 24. In a year, you'll have $1800 to invest. Given that the average return is the same, in 10 years, you'll have $30k and $90k in 20 years.
So, you can see how significant the additional $50 per month made. If you have a plan, squeeze as much cash as you possibly can to invest as early as possible to take full advantage of compound interest.
4. Engineers Find Reasons to Justify Their Decisions
The reasoning is important when it comes to quantitative research. Profit margin, cost of revenue and debt are financial metrics that don't lie.
Generally, good stock shouldn't have a lot of debt. In other words, the company should not borrow too much money to expand and grow. Leveraging other people's money is wise but over leveraging can kill a company entirely as well as its stock price and your investment.
Next, a good stock to invest in has a certain degree of growth rate. Usually, a stagnated company either yields a small return or loss. To grow your money efficiently, it is advisable to invest in growing companies. But, the associated risk is higher, of course.
However, not all growth stocks are risky. In stock investing, we need to view risk as a relative. In other words, how risky is a stock compared to other stocks?
In a sense, not conducting research before buying the stock of an established company is often riskier than buying the stock of a young and growing company with plenty of research done. In short, the more research you conduct, the less risk you'll have.
As an engineer, we always calculate and design based on certain standards. We use other people's experiences to justify the result of our calculation and design.
The same principle needs to apply in stock investing. Before you proceed to buy a stock, ask yourself what are the reasons that made you decide to buy that stock and not the other stocks.
A wise and successful investor once said, if you can't explain why you want to buy a stock to a 7 years old child in a minute or two, you are not fit to buy it.
5. Engineers Have Interest in Math and Excel
While doing research on stocks, calculations and records are essential. Just like how we used to do when designing HVAC systems, excel spreadsheets are very useful.
By just reading annual reports, we can't really gauge the quality of stock unless you are a veteran. So, we need to write down key numbers and analyze them to determine if the stock is worth our money.
Not only that, investing starts with personal finance. Most engineers are not refrained from using excel spreadsheets. Hence, they often record their income and expenses on an excel sheet which is very good for tracking and keeping the savings.
If you are not managing your personal finance, you won't have savings. Without savings, there are no stock investing activities. The earlier you start, the better.
Do Engineers Invest in Stocks?
I'm sure there are plenty of engineers who invest in stocks. Perhaps, many of them did very well in stock investing. Personally, I'm leaning towards stock investing rather than other forms of investing.
As of writing, I've been a stock investor for about 7 years. There are ups and downs and I've learned a lot from my past experiences. So, yeah, engineers do invest in stocks.
Relevant post: How to Invest as an Engineer? (Basics of Investing).
What Should You Invest in as an Engineer?
Apart from stock investing, there are other forms of investing like property, crypto, art and collection. Nonetheless, stock investing and property investing are the two forms of investing that most people start with.
So, is stock investing suitable for engineers? What about property investment?
Personally, I think property investment is not as appealing as stock investment. First, buying a property is a huge commitment. Second, the overall return on investment for property is not as appealing as stock investment.
Especially for young engineers, stock investment is a wise decision because it is a high liquidity investment. In other words, you can cash out very quickly compared to property investment which could take months to process.
Again, as an engineer, we are somewhat equipped with the ability to do stock research, analysis and calculations which allow us to have a higher chance to be successful in stock investing.
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