Welcome to the "Finance Storyteller" series!
This video covers 7 tips for stock market investing.
Actions speak louder than words.
I am going to show you what I strongly believe in,
which is the same as what I have actually
invested in.
After all, if you think you have great ideas,
show that you're serious about them by putting
your own money at risk.
That's called skin in the game.
Tip number 1: avoid the risk of ruin!
The existentialist philosopher Jean-Paul Sartre said
"existence precedes essence", which in
the context of stock market investing means:
make sure you don't go bankrupt, otherwise
there will be no portfolio to pick.
Here are some key actions to take care of right now:
Pay down creditcard debt.
Simplify your life by limiting the number of creditcards
you have, and be aware of their high cost.
If you annualize the interest rates you pay, you will
find out it's an expensive form of financing.
Pay down part of or all of your mortgage debt.
It's great to own a home!
Maybe even a home with a garden,
and some flowers and butterflies.
It feels even better when it's all yours,
without a big loan from the bank looming over you.
That makes you sleep a lot better at night,
in case you would ever lose your job, or if you are
an entrepreneur in case your order book dries up.
Pay your taxes on time.
Don't get in trouble with the government,
it is a waste of everybody's time and resources,
and besides, the salaries of your local school teachers
and fire brigade need to be paid
from the tax revenue that you cough up.
Beware of the bull trap!
In the days of "irrational exuberance", financial products
were sold with advertising campaigns
promising "Triple Profit".
Financial advisors failed to explain what was
really happening: investing in a limited
number of shares with money borrowed
at high interest rates.
When the stocks subsequently dropped significantly
in value, investors were left with triple
losses rather than triple profits.
What did we learn from the financial crisis:
leveraging can be toxic!
Don't borrow money to invest.
Don't invest in things with cryptic acronyms
that you don't understand, they might blow
up in your face!
Does anything in this structure sound
like Japanese to you?
A key thing to remember:
if it sounds too good to be true, it probably is.
Now that we have covered the risk management
and the things you shouldn't be doing, let's
turn to what you could or should be doing
in building your investment portfolio!
Tip number 2: Invest in what you care about.
When I deliver "finance for non-financial managers"
training at my clients, I notice I am more passionate
and engaged when the
success of their company and
my personal financial success are aligned.
One third of my stock market investment portfolio
is in shares of customers, I hope they will
do well, for their sake and mine!
And for the record: no, I was not in possession of
material non-public information when making
these investments!
If you are an employee of a publicly listed company,
you could invest some of your money
in shares of your company.
Be careful not to invest too much, though,
you don't want to get into a situation where
you're suddenly out of a job after a big restructuring
because the company isn't doing well, and
your shares are dropping at the same time.
You could also invest in causes or industries
you care about.
Are you fascinated by clean energy
or technology gadgets?
This is your chance to morally and financially
support them by buying the stocks.
Tip number 3: Be humble &
try to learn from your mistakes.
Chances of "outsmarting" the market are minimal.
Investors tend to overestimate their own skills
and abilities, and underestimate the influence
of randomness.
Morningstar is a research agency that reviews
performance of investment funds.
They publish overviews on a regular basis that is often
very humbling: the % of outperforming
funds is very very low, only around 25%,
which is worse than a random coin toss.
You could even argue that having a monkey
selecting stocks for you by throwing darts
at a newspaper has the same or better odds of success
as active investment management
by a highly-paid fund manager.
My personal experience is that I was once defeated
by a toy giraffe in a stock market
investment contest!
Since then, I have put my money more and more into
ETF's (exchange traded funds, or trackers):
these trackers just passively follow an index
and charge fairly low management fees.
Currently 45% of my investment portfolio is spread
over 6 ETF's.
Hindsight bias, overconfidence, black swans,
and the turkey problem.
Are these terms that are familiar to you?
If not, then you should read the Holy Trinity
of modern psychology and philosophy:
Kahneman's "Thinking Fast and Slow",
and Taleb's "The Black Swan" and "Antifragile".
A key learning from these books:
Don't look for causality where there isn't any.
Instead, use a lot of trial and error.
Tip number 4: Minimize transaction cost.
A bit of commission for your broker on each
buying and selling transaction does not sound
like a big deal, but if you make many trades it does
add up to a material amount and transaction cost
could start to eat up significant parts of your returns.
My strategy on this one is to go for "buy and hold",
making only infrequent trades.
Tip number 5:
Don't expect your stock portfolio to make you happy!
Joseph de la Vega wrote one of the very first books
on stock market investing, published in 1688.
Joseph was a Jewish exile living in the
Republic of the Netherlands during the Golden Age,
just like the great philosopher Spinoza.
Joseph de la Vega describes how
investors suffer emotionally.
If you buy stocks and they go down in value,
you will be unhappy you bought them.
If you buy stocks and they go up,
you wish you had bought more.
If you sell stocks at a nice profit, but the stocks
keep going up, you regret selling them too early.
If you don't buy a stock and it goes up, you
regret not buying them.
If you hold on to stocks that go down, you
wish you had sold them earlier.
In short: having an investment portfolio can be
an emotional rollercoaster!
Come to think of it, maybe you shouldn't
buy stocks at all, but rather spend the money
going on a nice holiday and enjoy watching the sunset.
Or buy some nice artwork
to put on your living room wall!
Priceless!
Tip number 6: Understand the strategy
of the companies you invest in: what is the unique
and sustainable competitive advantage
they are trying to build.
Furthermore, what is the "optionality"
of the companies you invest in?
Are there any indicators that the stock is
ready for take-off?
Is the company a potential takeover target,
will they suddenly announce a big increase
in the dividend they pay, will they split up their
conglomerate structure into individual divisions?
Tip number 7: Make sense of a company's numbers:
familiarize yourself with terms like assets,
revenue, EBIT, EBITDA, and free cash flow.
The Finance Storyteller series
can help you understand these!
Be aware that a great historical financial performance
is no guarantee for future success!
There you have it!
7 clever and reliable stock market investing tips:
Avoid the risk of ruin
Invest in what you care about
Be humble & try to learn from your mistakes
Minimize transaction cost
Don't expect your stock portfolio to make you happy!
Understand the strategy and the "optionality"
of the companies you invest in, and
Make sense of a company's numbers
I hope this was helpful.
Thank you for watching!
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More videos coming soon!