Welcome to investing for beginners podcast. this is episode 63 tonight we’re going to continue our discussion on personal finance, this is personal finance 104 and tonight we’re going to talk about designing your investment lifestyle.
We’re going to talk a little about picking an investment strategy and different areas of that and I know Andrew had some things you wanted to start off with so when I turn it over to him.
Andrew: yes so last week we talked about budgeting the next natural step is figuring out what to do once you have that extra money. so like they have mentioned you’re going to want to have to pick an investment strategy you want to look around and really try to understand you not just pick a strategy just off the onset just because it sounds good.
But try to understand what’s going to fit so that might that might entail looking at a couple different things before you really make a decision and I’ll kind of explain why.
But there’s a lot of different ways you can invest money we covered this in our back to the basics part 3 or we talked about stocks versus other investments we’ve talked in the past about how we’re both adamant value investors and why we kind of why we tilt that way and why we recommend that investors try to model portfolio a base approach trying to buy low trying to buy businesses that are trading at a discount to their intrinsic value.
I don’t have what episode that is off the top of my head but we did talk about what kind of options you have as versus any other sort of investment I also talked about like value machine versus growth investing versus whatever other kind of strategies are out there so those are two episodes to help a broader base and a broader sense of kind of what all your options are out there.
I wanted to start off though with a couple of things that maybe if I talked about it will help give like a mindset shift on why it is important to pick a strategy in this way and to kind of understand and conceptualize what I’m about to say.
Basically when you break down investing there’s two forms of it you have passive investing and active investing. So passive investing is the type of vesting that’s usually recommended by investment professionals if you go see a financial advisor they’ll usually recommend that as well and basically what that means is you’re just buying stocks and then not touching them that’s the best way to do passive strategy.
And it usually entails buying like an index fund and just passively holding it and not touching it so if a passive strategy fits your personality if it’s something you’re able to stick to then it can be a very great option for you.
The other side of that is active and what active means is you’re trying to pick stocks you might be selling in and out you might not be a buying hold forever and although at least personally I really try to talk about buying stocks and holding them as long as you can ideally forever. I also understand that stocks go bankrupt and so that’s why I always talk about the bankruptcy research the negative earnings discussions I went to sell.
But in general you want to try that hold your positions as long as possible so that’s what active is you’re buying individual stocks you’re making stock selections that way then you’re also making decisions on the opposite side of how long you’re staying in these stocks when you’re getting now how long when you’re getting down when you’re staying in and all those sorts of things. And I do believe like for the majority of investors that having a passive strategy is the best way to go.
However I see a huge problem and I’ve kind of talked about this before but a huge problem with the idea that you’re just going to tell people just buy and hold forever and just by saying that that they’re going to follow it so I’ll give you two examples like I said two metaphors.
My dad so my dad tried to get me into cars not like pushed me into a super hard but we do simple stuff in oil I mean how to change a flat tire right or check your fluids big job before so basically like I have enough of a general what’s the word like not expertise but general skillset when it comes to working on cars where I have like the basics down.
I remember a particular thing where he once told me and this obviously I was like super knew how all of this stuff when he told me this but he said make sure you’re using the right tool size so you’re not stripping the screw or the nut or the bolt or whatever you call it and I remember just kind of brushing that off and being like whatever it’s that’s the sound so anal know like I’ll just figure it out.
But I ended up learning the hard way that when you use like a metric system tool on what is it called metric or Imperial again I’m obviously not an expert on the car stuff but if you use like a 17 millimeter on something that should be like a 3/8 you’re going to strip the screw if it’s not an exact fit. I learned that the hard way I ended up having to take my car to the mechanic because I stripped the screw and I couldn’t get it out once I did that.
I’ve had something somewhere happened with like cooking right where there’s this one dish called adobo that’s a Filipino thing and people loved it like even Americans white people they loved the Filipino adobo dish it’s just one of those things that everybody loves.
She mentioned when she was trying to kind of like teach me this recipe she said make sure you use a certain type of soy sauce and again I’m like that’s so such a like a thing that I don’t want to have to worry about right and then ended up cooking it with the wrong soy sauce and realizing that she was right and that was actually a huge deal it was a minor detail I was actually huge. Because it made the whole taste like completely different and not that it wasn’t good but it wasn’t nearly as good as it usually is.
Well the reason why I’m telling you these two kind of metaphor slash story stuff is because it relates to investing in a big way like if I never gotten my hands dirty quote on quote trying to work on the car or trying to cook this this Filipino dish and then if I never got their advice at the onset then I probably would have still made the same mistake with stripping the screw I probably still would have cooked it wrong with the wrong soy sauce.
But I probably would have assumed that it’s just me who’s terrible at doing these things right like I’m a terrible cook when it comes to Deb or I just and not cut out to be somebody who can work on cars. When the reality of it was that a I needed to get the information and be there are certain behavioral details that you need to fine-tune in order to in order to really get the thing right.
It would have been something that I would have ended up maybe outsourcing to somebody else when I was perfectly capable of doing it myself I never had the advice and I never I never took the time to get my hands dirty to really master the little details. And so that’s a huge thing with the stock market especially when you talk about if you’re going to be a passive investor and if you don’t get your hands dirty.
I’d say it’s going to be extraordinarily difficult for you to continue to hold unless you can just be somebody who somehow just never looks at the news never looks at your brokerage account track your network doesn’t track your net worth on a spreadsheet it’s going to be very difficult for you if you’re not consuming good content about investing if you’re not actively kind of trying to invest your money through a brokerage it’s going to be very difficult for you to keep your portfolio on the right track when things go south.
And if you’ve ever learned about the history of the stock market before you’ll know that every could be five years ten years even 20 years but eventually these things cycle. And it’s not as much as the news tries to make a sound without to be where this president’s amazing and this president isn’t a lot of it has to do with like where these presents are placed on the cycle and there are just booms and busts and the economy just expands and it contracts and that’s just as much as a part of the market and the economy as the moon and the Sun.
And so why I at least really think that people should at least try the end to active investing and try to at least get their hands dirty a little bit is exactly because of that is because a seemingly minor detail like you need to stay invested in the market when everybody else around you selling when everybody else around you is losing their job that’s exactly one you should maybe cut your expenses but keep your investments in there.
And so that small minor detail that might sound like a little throw out advice that everybody’s giving you actually has a lot and will actually have a major impact on your final investment performance and when it comes to the stock market when it comes to investing in general the same cycles happen with all sorts of assets and commodities all anything that really has a price there’s huge cycles like that.
I think it’s worth your while even if the passive strategy is something that speaks more to your personality I think it’s definitely worth your while to look into active and maybe try your hand at it a little bit and see at least if you can increase your skill set then you’ll be much better prepared for when a like downturn happens and so that’s why I have a big problem with just prescribing people the same kind of here’s your prescription and go away and it’s all generic and it’s all the same I don’t think that does a great service for the majority of people and it doesn’t really empower people so I think what we’re talking what we’re going to talk about today and what we’ve talked about this whole personal finance series well everything we talked about in the back to the basic series I think it all can really be influential and really help your results because not only is important to kind of pick and choose what’s relevant for you but I think it’s important to try to learn as much as you can because there are going to be a lot of those details that aren’t going to be picked up necessarily the first time but might have a major impact. And so giving some of the prescriptions saying just index forever and then go away I don’t think that that really helps a lot because well there’s a solution and I’m done.
I’ve been writing emails lately on the daily emails around I’m talking about this idea that investing is something you do the rest of your life this is a skill just like cooking or just like working on your car it’s something you take with you until you die and there’s no end point.
It’s so funny to me when people talk about a one-year plan or what’s the stock market going to do in six months it’s like hello like we’re talking about the rest of your life so that’s why the principles we teach are really key I think even if you hate the idea of the stock market investing finance we’ll never understand that this is an integral part of your life and you can choose some power yourself or you can choose to just put stick your head in the sand.
I think we’ll try to talk about some different investment strategies but I think it’s very important to at least try to learn all of them.
Dave: I totally agree with all the things you were saying you made some very excellent points and I really like the analogies they were using I thought those were very spot-on.
I guess the question I have that was kind of coming into my head while you were talking was what do you think holds people back from starting?
Andrew: ah that’s tough I guess it’s going to be different depending on who you’re talking to I think probably the biggest one that I would imagine just based on some of the emails I get is just like overwhelm right.
There’s so much it’s just very intimidating when there’s so much out there so many different options so many professionals you’re competing against I’ve heard the terms analysis paralysis a lot.
It’s kind of why we try to really narrow down and make like a structured plan right that’s why at the end of the show you always hear the outro talks about the Seven Steps to Understanding the Stock Market and I wrote that so that you have like a defined path something that can really condense all of the most important things and obviously there’s like an endless supply of things you could study.
But that really helps you get started on the right path of my direction in my opinion I don’t know I would say that’s a huge one obviously having money to start with is probably a big one too hopefully some of the stuff we talked about in this series helps with that.
I don’t know if you can you think of any others I’m sure I’m sure there’s a million right?
Dave: I think one of the ones that pops into my head is fear being afraid of making a mistake and losing all your money and I know that was something that certainly was flowing through my brain when I first started this was I don’t know what I’m doing and I’m going to buy something and invest my money and you hear you hear you hear the extremes you hear the great success stories the people that hit the home runs that by Amazon when I was 14 dollars a share and now it’s a thousand dollars a share and they make just gobs of money.
But then you also hear the extreme other side of that equation where somebody throws their whole life savings into aluminum and it goes down to two cents and they lose everything.
I think there are so many stories out there and a lot of it is fed by the media because that’s sensational and it scares people and I think that they’re afraid to dip their toes into the stock market because they don’t want to lose all their hard-earned money.
Which of course is a very legitimate fear absolutely something that I certainly was afraid of when I got started was what if I make a mistake I could lose money and the way I got over that for me personally was just to invest a smaller amount to kind of dip my toe in the pool so to speak to test the waters to make sure that this is well if this doesn’t go right then okay he’ll try a different way and it just helped me overcome the fear of it I think that was what my biggest issue for sure.
Andrew: yeah fear of the unknown yeah well that unknown that’s maybe not understanding if you’re diversified the chances of you losing everything is pretty much on there with the chances of the whole world ending way so yeah.
Dave: if the whole world ends who needs the money anyway.
Andrew: exactly so you really can’t lose and that’s a big unknown is that there’s no concept of oh okay these are businesses are investing in there’s lots of them yeah ones that go on the headlines that are Enron and Worldcom are one in 501 and a thousand right if you have a portfolio of 20 of those or 20 stocks in general chances of all of them being a WorldCom where and Enron are basically zero.
Dave: right exactly and I guess the other thing that helped as I started to learn more was discovering that even guys like Warren Buffett Ray Dalio oh gosh Bill Ackman some of these very famous two well-known investors they’ve made mistakes and they’ve lost money in the stock market. And it hasn’t dissuaded them from continuing to do what they do and investing it maybe makes them question some of their decisions for sure.
But it certainly doesn’t scare them off and away from the stock market and I really like you’re referencing the Seven Steps book because I know that when I first got started that was very instrumental in helping me form a foundation of really understanding where we’re are starting on what I was doing.
And when I first started getting into the investing bug I really didn’t understand that I was really buying a business I thought I was buying a stock I was buying a piece of paper or a ticker symbol and it wasn’t until I came across your book that I really kind of had opened my eyes to hey I’m actually buying a business I’m investing in a company just like I work for a company.
I’m investing in a company and it really opened my eyes and it made me understand that there’s a lot more to this and an it’s not as complicated as I first thought it was. I thought there was going to be a lot of higher math and that there was going to be tables and equations and I was going to have to break out my calculus calculator and try to remember all that from high school and it was none of that and there hasn’t been any of that.
I think to me that was one of the things that really helped me understand it and to kind of segue off of that I think where do you start how active versus passive and I I really like what you were saying about passive and how you cannot look at that money that’s building up if you dollar cost average into an SPY or some sort of ETF for the next 40 years how I don’t know a lot of people that can just do that and not check the balance or as the economy is taking a hit or news in the world is going bad to see that stock how can you differentiate your take away that emotion?
I don’t know and I just I think that that to me would be such a difficult route to go and I guess that’s what I think we need to discuss.
Andrew: yeah that I think behavior starts and haven’t start from an understanding first so we were kind of like investing nerds right so we love to talk about stock market education and all sorts of things but they really are key if you want to ensure that you’re holding for the long term.
And so if you understand why like for example when I always say a hold long term will get why is because since the early nineteen hundred’s the stock market has averaged a 10% return the entire stock market.
And so lots of things have changed if you haven’t been paying attention lots of things have changed since the early 1900’s and that’s not just been in the last decade it’s not just the internet it’s not just blockchain it’s not just social media.
The 1920s I just did a video on this today on YouTube the 1920s everybody remembers like the Great Depression but like not a lot of people remember that the 1920s had the advent of the radio enough is the I was the commercialization of the radio the automobile and there was one oh and then the airlines.
Yeah that was the 1920s huge technological changes right and huge things that changed the world and then the stock market it reacted they had what was called the roaring 20s and then it was so roaring that we had a hangover that lasted for like two decades with a Great Depression.
And if you think that that that’s happened before and that’s just a one-off thing and we can’t learn from it and you think that that ten percent returns from since before then I mean I think it’s reasonable to say they will continue at least somewhere in that range give or take a couple percentage points continue indefinitely on and I don’t see a reason why that would change.
That’s why we say hold for the long term, but the problem is like we kind of talked about a little bit you’ll hear the media and the media loves to make headlines.
They’ll say something like well the Dow Jones dropped two thousand points make it sound more scary than it is instead of saying I dropped half a percent or they’ll say maybe a more in-depth article from my fortune or Barron’s or something will say this is the worst time to buy and hold if you look at our returns over the last 20 years returns are at 6% and compare that to bonds or compared to something else or compared to emerging markets and look at emerging markets has been so much better.
Well cherry-pick these time periods and make it sound really bad and that’s going to make it very hard for you to not bail out of stocks and go into some other asset that’s had better five-year performance That’s why if you don’t understand the beginning part which was the stock market has historically averaged ten percent a year and so that’s why we’re going to continue to hold because we expect that moving forward or at least something similar.
You don’t understand that part then you’re not going to be able to talk yourself off the cliff when a couple articles come out being very short-term focused and not having a long-term focus and so that’s why your behavior can kind of sway just like the rest of the crowd.
So that’s why we say knowledge precedes behavior because it will give you that confidence when you need it.
Dave: yeah that’s exactly right and we’ve talked about this before knowledge is power and learning the more the better you’re going to be able to do and you’ll be able to make more informed decisions and you’ll rely less on the emotions of things that are going on around you.
You and I talk a lot about our buddy Buffett and one of his favorite quotes is be greedy when people are fearful and be fearful when people are greedy and that is so apropos and that’s really one of the best ways that you can make money and you alluded to that when we started off this conversation.
I guess one thing that I’d like to I guess kind of get back to a little bit is kind of the difference between the active and the passive and really where you can start kind of learning more about that and one of the things that a lot of people will talk about with active versus passive is the going in and out of stocks and there’s two ways of thinking about the active part of this.
One is you can think like a mutual fund manager where you’re buying the latest and greatest hottest thing and you’re moving in and out of lots of different companies all the time as a small guy that’s really hard for us to do because of one very big thing and that is transaction fees.
Every time you buy and sell a company with Ally Invest it’s going to cost you four ninety five and if you do that a lot during the course of the year that could he evaporate any gains that you make during the course of the year or the course of your lifetime of your investment.
I think what Andrew was talking about and this is what I think about when I think about active investing is being actively involved in making decisions on what you buy. Not being active as in having lots of activity of buying and selling buying and selling and buying and selling.
Because that is where you’re going to just going to lose your shirt the Ally Invest is going to love you but your investment accounts going to be like dude what are you doing you’re killing me here.
And whenever you get caught up in the mania of the hot new thing or whatever the new fad is that is really where you can really burn yourself and so being active in the sense that we’re talking about is being involved in what you’re doing and making learning as much as you can about your investments before you make the investments.
Having a great foundation like Andrews ebook is a great place to start and just learning some of those basics you can start really kind of getting a grip on what it is that’s going on with a company and finding good companies to buy.
That is so key to what we’re talking about and to me that’s really more about the active part of it is reading the 10-K’s every year or at least looking over them and understanding what’s going on with a company and not just like kind of wandering off into the woods and not paying attention although that’s not necessarily a bad thing either.
Buffett has always talked about if you buy a company today a would you be willing to still own it five years from now or another one that he likes to talk about too is if you bought the company today and the stock market shut down for 10 years would you still own that be happy owning a company in 10 years and I think when you put a company that you’re going to buy under those kinds of criterion I think you’re going to find that it’s going to narrow down a lot of things.
Because if something is the hot new thing the greatest new ice cream or the greatest new music band two or three years from now where is it I mean let’s think about the Dixie Chicks I’m dating myself when I say something that but where are they now nobody knows who they are anymore and Andrew you probably don’t even know who they are.
So yeah exactly see the killing you killing me yeah but I guess my point is that I guess where I’m coming with this is really the thought is being involved in what you’re making your decisions and constantly learning and that is something that you can do and like Andrew said this is a skill you’re going to learn for the rest of your life this is something that you can do from now until the day you die and age does not matter.
I mean our buddies Buffett and Munger how old are they now 92 ish?
Andrew: yeah I think Buffett son is like mid-eighties and Mungers like 92 or than anything.
Dave: yeah so I mean they’re still sharpest tack. So yeah that’s I guess that’s my thought.
Andrew: I love it I mean yeah just what you said learn and understand that’s it’s a lifetime thing I think that’s perfect.
Dave: all right folks well that’s going to wrap us up for this evening I hope you enjoyed our discussion on the differences between active and passive investing and the continual quest for knowledge the more the better you can do and Andrew and I are here to help you learn as much as you can.
Andrew and I are very much learning fiends and we love to learn new stuff and that excites me every single day.
So without any further ado you guys go out and invest with the margin of safety emphasis on a safety have a great week and we’ll talk to ya’ll next week.
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