Investing for Beginners
So you have been hearing about the term “investing”. You may be clueless or have some idea. You may have some money saved or expecting some money or no money at all and want to get started.
This quick 5 minute read will help you get all the basics you need. This is the article I wished someone have written for me when I got started. You see years ago, I saw my friend lost their hard earned money to the Lehrman brother crisis. My uncle was the hardworking type who saved every penny, never eat out and kept all his money in fixed deposit or mutual fund. And he invested in an index fund that went down.
I understand how anxiety inducing the talk about money and investment can be for some of you. You might be thinking I might lose my money. The truth is not doing anything, you are definitely losing money. Here’s why
Let’s say if your mother had $10, in 1960s. She kept it. If she kept the $10 under his pillow or he could have walked out and bought something to eat for her family of 5?
In 1960, you can buy 47 burgers. With just $10, you can fit your whole family of 5, for several days. In fact, 8 dinners. Because in 1960, an average burger cost only 21 cents.
In 2022, you can barely buy 5 burgers, at $2.29 each.
With the same $10
1960 – you can have 8 dinners of a hamburger each for family of 5
2022 – you can have 1 dinner for the same family
IF you kept the $10 for retirement in a bank, you will need to have grown and invested your $10, to an amount of $91.60 to afford the same lifestyle or goods you have in 1960, that is to have 8 dinners for your family of five. Else you only get 1 dinner for your family with the same $10 in 2022. So you lose buying power, but you still hold on to the same $10 note.
Therefore if you kept $10 under your pillow, and did nothing with it, you will still have the same $10 note, but it will be worth a lot less, 7 times less. That’s in very simple terms, inflation and how inflation is invisible and how it robs you of your money without you knowing.
So you are going to lose money, you lose buying power even if you did nothing with it.
You want to learn about investing because you are worried about inflation, or you have heard of Amazon or Tesla.
In 2018
2018 – Tesla $67
2022 – Tesla $1100
So that means if you put in $67,000 in 2018, you will have $1,100,000 – 1.1 million, making you a millionnaire.
2018 – Amazon $1305
2022 – Amazon $ 2799
If you left $13,050 in Amazon in 2018, you will have $27,990 today
There are many many other examples of Netflix, Google etc.
So you decided you want to learn about investing but like me many years ago, you are afraid of losing your money.
If you are new to investing or is not from a finance background, investing can really make you turn back and just do nothing about it. I get it. When I first started, I asked myself
“How do I buy a stock?”
“Do I just go to Amazon.com and click buy?”
“Do I need to buy a minimum of 1000 shares?”
“How much is one share?”
“Do they require a minimum amount?”
“How much money do i need to get started?”
“What if I lose all my money?”
“Isn’t investing only for finance people and I should leave it to them?”
“Isn’t investing risky and I can lose all my money?”
“Can I just leave it in a bank and earn interest?”
“How do I get started?”
“When is the right age?”
If you started working, you will know your employer has asked you about 401K, or hear friends talk about ROTH IRA. Is it too young for you to think about this when you haven’t even have the money to pay rent or save up for a house? When is it a good time? Or if you are already indebted with a mortgage, you have a family to feed, and you have little savings, you wondered if you can even think about investing?
The answer is simple, start small but start. Learn early, but take action now.
Even if you don’t have any money to spare, you can start learning.
The earlier you start, the less likely you will become a victim of what i called the “evil system” set up to rob all of us, or the people who worked hard and know nothing about finance.
Because we are in 2022, the unfortunate time when banks no longer pay interest of 17% and we can sit on bank deposits to beat inflation and earn a handsome return.
“Can I just leave it in a bank and earn interest?”
Today, banks are only paying about 0.02% to 3%. Real inflation, is between 6% – 10%. This means your money worth is losing value faster than what you are earning. No banks will pay you more than the inflation. If they do, they are probably another Lehrman Brother, selling you junk bonds. There is no free lunch, there is no sit back and do nothing type of investment that gives you good return. You have to learn and read. It’s painful I know. But I have seen friends and family lost all their savings during the Lehrman brother crisis and now in their 70s are still struggling and working to pay back their mortgage. You don’t have to be that person who loses money the “system”, even though the “system” is designed to rob you, the hardworking person.
What is an investment?
In very simple terms, it is something that put money in my pocket.
My mother always have urged me to invest in property and not stocks. I did and I learnt investing in property, you can make a lot of money and you can lose a lot of money too. Not everyone makes money.
For example, my friend bought a house in Chicago for $200,000. He paid 10% down, $20,000 before subprime. The bank lent him $190,000 which he paid $1000 monthly over time.
Unfortunately the value of the house went down, in 2008 and the house was worth just $150,000. The bank now wants him to top up $50,000, the difference in the value he borrowed against versus the actual value. He couldn’t get anyone to rent the house, and pays $1000 for mortgage plus property tax and have to fork out money to repair the house for leaks. So it is not always that you win in property. In the end, he couldn’t afford the $1000 monthly payment and the bank foreclose his house. They fire sell it (meaning to sell it quickly), and it was sold for just $80,000. Now without a house, he still owes the bank $110,000 ($190,000 he borrowed less the sale price $80,000) and all the legal fees.
So what if you have a great house that you rented out and receive more money than you pay the bank? That’s what I have. But I have to say, I wasn’t ready to be bombarded with maintenance calls, property tax, lock change, tenant viewing, liaising with agent for rental. It’s a lot of work.
Therefore, I favor share investing.
What is share investing and why would companies or the market give you money for it?
Basically imagine, Steven Jobs, he has apple inc. He needs money to hire engineer, marketing, pay for ads and rent. He runs a great company, in 1980 called Apple. You invested in his company by buying shares. He has 10 shares. He offered you 1 share at just $2 a share. You paid him $2, and now you are a 1 share holder. At the end of year, he sold many MacBook and made $1000. You have 1/10 shares of profit, so you get $100 of dividend. Because many people believe Apple will continue to grow, they want to buy that 1 share from you for $20. You sold your share at $20. You paid $2. You made $18. That’s why people want to invest in companies. For dividend (profits distribution), and capital gain (when price of the share go up and you sell).
So why are people so afraid of shares investing? Well, at some point, Apple was doing very badly. They couldn’t sell any computers and Microsoft and Dell computers beat them. They nearly bankrupt. And their shares that was $2 each, could be worth only 1 cent. So you lose all your money if they go bankrupt.
And we have all heard of that one Uncle who invested in shares and lost all his money. I should say, gambled or traded instead of investing. Investors normally put their money in for 5-10 years and gamblers or traders, buy high and panic sell when there is a crisis.
What I wish someone had told me before i started investing?
Size matters.
You don’t want to invest in tiny companies with little capital, that can easily be manipulated. The companies I invest in, are big Standard and Poor 500 companies.
Why size matters? Bigger is like a bigger ship, can withstand larger storms. It doesn’t mean they wouldn’t collapse, but they have that much more of capacity to take on big storms.
Bigger means it is harder for one or two players in wall street to buy up everything and dump shares, driving prices down using derivatives.
And of course, bigger means, they may most likely (not always the case), have institutional investors. These are investors who are not your mum and dad investors. Why is this important?
In time of a crisis, big ships with big institutional investors, don’t get their shares dumped. Mum and dad investors tend to panic and dump their shares, resulting in the shares of the company plummeting out of purely retail investors sentiment. However if you have Berkshire Hathaway, Warren Buffet company as your investor, they hold on to their investment even during bad times. This makes the ship more stable.
US only shares
Investing only in high quality stock with a good management culture and governance, and not getting distracted. That means US companies running in New York Stock exchange or NASDAQ.
Although no one can predict which company will not have fraud, chances of that in a good quality US company is lowered by a set of high quality regulation (say the SEC as a regulator). High quality stocks have real profits, they are audited and they are so big, they have controls and systems in place so fraud is much less likely. You don’t want a company that is from China, or anything China. Yes you see they make big profits but will the profit ever surface to a little investor like you or get siphoned away? I choose an American company, run by americans that has real products and services in US, than any other companies because historically, a lot of bad stuff has been cleaned up and transparency of profits is there. So remember, just because a company is profitable, doesn’t mean you will end up with the profit through dividend or increase in share price. The culture of the management and system of policing these companies matters. Do not invest in companies you have never bought from, or never heard of.
Think Long Term
This one is very simple. Do not become a trader or gambler of the markets, think long term. Hold your investments for a good five to ten years, do not panic sell. Recessions come and go. If you hold on to good quality stocks, it will bound back.
Here’s a quote from Warren Buffett
You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it, as long as you’re comfortable with the holding.
Warren Buffett
BERKSHIRE HATHAWAY CEO
Invest only in things you bought or know.
I invest in the things I use everyday.
Let’s make it simple –
I wake up with an alarm on my iphone (apple). I turn on my Gmail, (google) to check my emails as I have my coffee.
I open my macbook (apple), check the markets and type some thoughts out.
I walk to a nearby cafe, swiped my Visa card (VISA) to buy a bagel for breakfast.
I remembered I have a friend whose birthday is coming, I ordered something on amazon prime (AMAZON) for my friend as a gift over my phone.
I pass by an electric car, parked along the road Tesla, (TESLA) and stared at it.
I bought an accessory for my work online using paypal (Paypal).
I ordered shampoo from P&G (Berkshire Hathaway’s portfolio The Procter and Gamble company), some Kraft Cheese (also Berkshire Hathaway).
Walked to my bank and withdraw some cash (Bank of America held by Berkshire Hathaway).
Back to my place, watched the news on my FIRE amazon tablet as I finished my bagel.
Before you invest consider the following
Debt
Pay off your credit card debt that is 20% – 30% interest. No matter how you invest, you cannot get a return of 30%. Even Warren Buffett consistently is only getting 10-20% per year.
So if you let your credit card run on interest, it will balloon out of control.
Emergency Fund
Save up 8 months emergency fund, so in case you lose your job, you don’t have to liquidate your shares at sometimes the worse market conditions. Yes, when it starts to rain, it pours. When the stock market sinks, it is normally the time you lose your work and insurance, and can’t pay rent and have to go to hospital with out of pocket. Things can happened fast.
Risk
Don’t risk money you cannot lose. For example, if you borrowed from relatives to gamble on the stock market. Or if you have to access the funds within the next five years. The way to make money on the stock market is not to time it. Timing market is bad. Buy and hold for a good five to ten years, and your chances improve significantly.
Investment rules
Do not time the market. Yes there are dips but even the most prolific investor, cannot predict the trough. But as common knowledge, when everyone is in euphoria, market is going up, it’s not a good time.
Do not invest for short term and panic sell.
Invest only things you actually use and is a good quality blue chip stock.
Hold your shares directly if you can, instead of going through a fund.
The Problem with Investing with S&P Index Fund
I have a personal philosophy of not handing money to a fund, as far as you can.
If you buy into VISA, you own a share in that company. You can attend the Annual General Meeting of that company. You can vote. But when you invest through a fund, even if it is an index fund, you own that fund.
Fund managers managed your money. They invest and assign the percentage of shares in shares you cannot really see even if you read the financial statements.
Can the index fund go bankrupt?
Yes. the fund can go bankrupt, and you can lose all your money. Of course if you hold individual shares, you can also lose all your money if say VISA go down, or if Coca Cola go down.
But I am not for fund holding fund, investing your money.
Who is investing my money in the index fund?
You wouldn’t know. You handed your money over to a fund. The fund hires an investing manager, that will invest in the S&P 500 (major 500 companies) and allocate the percentage of investments. Of course you will get a report.
You lose 1-2% in fees, considered low fees in performance fees, management fees, administrative fees.
How do I get started?
To get started, you need simply a phone, ID, and a brokerage.
Fill in your address, your ID, upload a photo and identify yourself.
How much do I need to start investing?
$50. You can start with as little as $50. It’s important to start early to get to try the entire platform and understand the process yourself.
You need an app on your phone or a computer to get started.
Top Brokerage firms in US
Vanguard
Charles Schwab
Fidelity Investment
Etrade
TMAMERITRADE
Etoro
Interactive Brokers
- Charles Schwab is a leading U.S. stock brokerage firm with $4.04 trillion in client assets and 12.3 million active brokerage accounts.
- Fidelity Investments has $11.1 trillion in total customer assets, 38 million active brokerage accounts, and is a good choice for customers who want to invest in Fidelity ETFs and mutual funds.
- E*TRADE is an online brokerage pioneer, well-known for its full-featured mobile apps, top-notch options trading tools, and customizable user experience.
- TD Ameritrade is our best overall choice for beginners, strength in providing investor education, and ease of use.
- Etoro is an online platform, that allows you to copy trades and operate it over an app.