Try to imagine that you want to build a zoo
You want to attract as many visitors as possible, but you also want to do this with minimal effort
You add the most popular animals - a few majestic lions, some mighty elephants, the tall giraffes
and of course the cute penguins
Now a friend of yours suggest that you should really add some of those walking sticks to the collection because those are his personal favorites
Hmmm ...
The stock market is like a zoo -
You only need a few of the best species to build a great zoo, and you only need a few of the best stocks to build a great portfolio
In this video, we will review some of the most common pitfalls in the process of picking the best stocks
This is a top 5 takeaway summary of The Investment Zoo,
written by the great Canadian investor Stephen A Jarislowsky, and this is The Swedish Investor,
bringing you the best tips and tools for reaching financial freedom through stock market investing
Takeaway number 1: Beware the predators
Investors are operating in a jungle with many vicious animals
We have the tigers, the poisonous frogs, the snakes, the vultures etc
All of them will, whether intentionally or not, try to ruin your ultimate investment portfolio from time to time
First out we have the friend who is advocating that the stock market is
dangerous and who suggests different areas of investment - such as gold, real estate or even governmental bonds
Don't let this guy fool you
The stock market is the best place to be for an early financial retirement, for the average person. And here's why:
Gold as an investment goes up and down a lot,
but if you hold it for the long term, it's a mediocre investment, to say the least
Gold does not produce any income whatsoever
Landslide victory for the stock market
Real estate can't really appreciate much in price over longer time periods,
because otherwise, few people would be able to afford living. Again, the stock market is the winner
And then of course we have governmental bonds. Let me ask you this:
If bonds would return more than stocks then why would anyone bother starting a business in the first place?
Second on our list of dangerous animals is the politicians
There's a simple strategy for politicians to execute to be reelected in a democracy
All they have to do is to take from those who have earned and saved and give to those who have not
Unfortunately, there will always be more of the latter - so you are pretty much guaranteed to get a majority vote
Taxes can be a heavy burden on your stock market portfolio
if you don't have the right investment philosophy, but luckily, we will learn how to cope with this in takeaway number two
Third out are the snakes ... I mean the brokers and investment advisors
All too often, these people have their own interests, and your portfolio returns is probably number
1000 on their list or priorities, or something like that
A broker will encourage you to trade as much as possible because they make money on commissions
Therefore, they will give you stupid advice such as "you never lose money taking a profit"
Investment advisors can be legit, but unfortunately, most of them are just salespeople in disguise
They make money from fees in mutual funds
Cut both of these guys out and do your own research
And forth on our list is a bit more problematic. It's the management of some stock market companies
Beware companies where the CEO earns way more than the average of the industry or the rest of the top management of that company
Also, beware those companies where the top management have huge stock option programs
Always remember that this is money coming out of your pocket as a shareholder
Takeaway number 2: Pay as few fees as possible
A pandemic disease hits society
Governmental regulations cause an industry to halt
War breaks out
There are many things that we cannot control in the investing arena
But there's one thing we certainly can control - and that's our expenses
Expenses come in many shapes and forms for the investor and the more of them you pay,
the less your portfolio returns will be. I know, this is not rocket science!
Firstly, we have transaction fees
Every time you buy or sell a stock, your broker will earn a commission for executing the trade for you
Moreover, there's typically a difference between how much buyers are willing to buy for and
sellers are willing to sell for, which is called a "spread"
Each time you buy or sell you'll essentially have to wait for someone else to close this gap for you and
risk, not getting your transaction through or you'll have to pay the spread
A friend of mine recently admitted to having about $1,000 in transaction fees during his last year of investing
He said he didn't think much of it ...
With an account of an estimated $50,000, you can't spend $1,000 in transaction fees each year!
That's equal to a 2% loss on your total invested capital!
This will make a terrible dent in your portfolio returns over the long run
Secondly, we have taxes. If you are from the US the level of taxation on your capital gains depends on your holding period and
level of income
There can be a huge difference, as high as 20% in fact
Lucky, both of these fees are eliminated using the same strategy: buying stocks for the long run
To illustrate how much of a difference that these fees make I will introduce two characters:
High-fee Frank and low-fee Felix
Both of them are equally skilled at picking the right stocks and their annual returns are 15%, before fees
Frank trades a lot though,
so he has to pay 2% (like my friend did) in transaction fees each year
and he also pays 35% in short-term capital gains tax each year
Felix, on the other hand, only pays
0.2% in transaction costs and
15% in long-term capital gains tax because he holds on to his stocks for an average of 5 years
Both of them start with $10,000 in capital and they save
$500 per month from their salaries to add to their stock market portfolio at the end of each year
Let's say that a $2 million account is enough for them to retire
If they both start at age 20,
Frank reaches his financial retirement by age 61,
while Felix will reach it at age 49
That's 12 years more on vacations, spending more time with friends and family,
doing the things you love etc that Felix gets compared to Frank -
just because he chose to hold on to his stocks for the long term. Think about it!
Takeaway number 3: What about diversification?
Imagine that there's a lottery with 100 tickets
They cost $1 each and there's a $200 price on one of them,
but there's no way to tell which one. If you got to participate in this lottery, what would you do?
The correct answer is that you should buy all of the tickets - you simply can't afford to miss that winning one
Now imagine a difference lottery, where there are 100 tickets in total and they cost $1 each here as well
50 of them are painted black, and those tickets are the winners, each with a $4 win. The other 50 tickets are white.
What would you do if you got to participate in this lottery?
Well, you'd only buy the black tickets, of course
The stock market is somewhere in between these two -
it's not 100% skill-based as our second lottery,
but it's certainly not 100% lock-based as our first lottery either
With some practice and company research, you can improve your odds of picking "the winning tickets", but only to a certain extent
Betting the house on a single ticket is therefore a bad idea, as it may be a losing one
There's always a risk of mistaking a mediocre or weak company for a strong one
But, at the same time, there are only so many good companies
Once you've picked one of them and removed it from the sample,
it becomes increasingly more time-intensive and unlikely to find the next one
For this reason, diversification should only be practiced up to a certain point
Stephen Jarislowsky says the following: "When I consider the small number of shares that interest me after 50 years of following stocks,
I ask: who owns all these other companies, and, more importantly: why?"
So, while some diversification is a good thing - just don't overdo it
Takeaway number 4: True understanding of something can only be achieved by oneself
When me and my family were on vacation in Greece
back when I was 10 or something, my parents stressed me about the importance of using sunblock
As a stubborn little kid, I didn't want to listen. I thought it was too much trouble applying that every morning
So what happened?
Well, I overexposed myself, and got burned quite badly on my cheeks and now they are more or less permanently sensitive to the sun
In more recent years, I thought about investing in a technology startup
I'd heard that the famous investor Warren Buffett preached the importance of staying in your circle of competence
Meaning that, you should only invest in situations that you understand yourself
This technology startup was certainly NOT such a situation
I had never invested in a start-up before and I didn't really understand the industry it was in either,
but I must have thought that
"well even Warren Buffett is wrong sometimes!" so I put up my money anyways
Unsurprisingly, it looks like this is going to cost me
What's the lesson here?
True understanding of something can only be achieved by oneself
And this is the reason why it's very very difficult to coat-tail other investors
If your conviction doesn't come from your own research
but from that of someone else, it will be very difficult to make the right decisions on your portfolio holdings
This is especially true in times of turmoil such as these days
Takeaway number 5: Jarislowsky's stock checklist
As a final takeaway,
I'd like to present a few of the characteristics that Stephen Jarislowsky likes to see in the stock market companies that he invests in
Regarding the business the company should be:
- A leader in its industry
- In an industry where innovation is low
- Within your circle of competence
- Non-cyclical; and
- Non-fashionable
Regarding the management, they should:
- Have competitive but not excessive salaries
- Develop managers from within
- Have board members that act in shareholders interests; and
- Be shareholders themselves, in proportion to their salaries
Regarding the financials, the company should:
- Avoid excessive debt. Having excessive debt is like living with the sword of Damocles over your head
- Have net income + depreciation that exceeds interest payments by a fair margin; and
- Have a strong current ratio
Other than that, the company should also:
- Have a fair price
- Show predictable earnings and dividend growth
Look at the last ten years. You prefer to see that earnings and dividends double every five to seven years or so
- Avoid mergers and acquisitions; and
- Have annual reports that are understandable
Companies that are producing legal gibberish should be avoided
Another animal that is popular at the zoo is of course the polar bear
If you enjoy what this polar bear is doing in trying to help you to improve your stock market returns,
consider supporting his channel
I've recently made it possible for those of you who enjoy the content to sponsor the channel through a channel membership
In return, I'll be very grateful
AND - you will also get access to this awesome polar bear emoji. Cheers guys