Takeaway number 1: Why didn't they teach me this in school?
It's truly unfortunate that one of the most essential skills there is isn't taught in school
In Sweden, we learn about maths,
history, physics, and even cooking, playing instrument,s and handiwork. But guess what we aren't taught anything about?
That's right - personal finance and investing
We are raised to become lawyers, engineers,
doctors, cooks or, say, policemen, so that we can earn a salary and be useful to our society
But we are never taught how to have that salary being useful for us
Today I want to encourage you to create a second source of income
This is not a game of quantity, like some YouTubers seem to make it want to look like
It's not like "whoever has the most stream of income wins!",
but I think that relying solely on your salary is very wasteful
simply because money itself can create new money, and this process can be more or less passive
This second source of cash flow will come, not from your salary, but from investments
Let's have a look at three different options that you should consider
Takeaway number 2: Three investing options
Okay, so there are tons of different options out there you can invest in:
currencies, metals, art ...
Yeah, the options are pretty much endless
But here, I'd like to cover the three most common paths that people choose, together with their pros and cons
You can invest in either real estate, the stock market, or your own company
I'm going to rank these three options based on four variables:
Potential, expectancy, capital requirements and passivity
Here, I'll define investing in real estate simply as "buying some type of physical property to generate a constant stream of cash flow"
I'd say that this has quite a high potential and that the expectancy is pretty okay too
If you didn't buy just before the financial crisis, you'd probably be fine, and
even then you'd be fine if you're in for the long run
Properties are kind of expensive though, and not as accessible for smaller investors,
although the barriers of entry are reduced because you can use leveraged
Real estate investing can be passive, but that often means sacrificing some of the potential profits
I'm going to exclude any type of trading from the stock market category, and
simply refer to this as "the process of finding great companies at a reasonable price that you can hold for a long period of time"
With that said, the potential can still be high
As with real estate, the expectancy, given that you're in for the long run, is good
While some stocks can be quite expensive even to purchase a single one, most aren't, and
so the capital requirements for this type of investing is low
Buying great companies for the long run is passive,
but it requires that you read a lot about some companies and that you
re-evaluate your picks at least, say, every year or so
Finally, we have creating your own business
This has a crazy potential for high return on investment, even higher than the two aforementioned ones
But the success is nowhere from guaranteed. There are plenty of poor entrepreneurs.
Capital requirements vary a lot with the business but many businesses these days
do not require tons of it before they can become profitable
Finally,
passivity is of course very low. If you want to go down this road, you'd better quit your 9-5 and go all-in
Because investing in the stock market is advantageous from both a capital requirements and passivity perspective,
we shall focus on this option for the remainder of this video
Takeaway number 3: The investing process
Creating a money-making machine through investing in the stock market is a three-step process:
First, you must create your building blocks
This is money that cannot come from the investing process itself,
but that must be earned through hard work alone. More on this later.
Secondly, you pick companies to invest in. The more building blocks
you can add, and the better you are at picking these companies, the quicker your second source of income will grow
Thirdly, after you've repeated step two multiple times, you can start to enjoy the additional income that your money-making machine is creating for you
Now, this may seem like it's just a way of saving now to spend later.
It's actually not.
It's a way of saving now to spend a boatload later, and to be financially free
The secret lies in one of the most powerful (and overused) expressions within personal finance: Compound interest
Here's how it works:
Brian buys a hundred shares at $100 each of a company that gives a $10 yearly dividend
At the time of the purchase, the shares are worth a total of $10,000
That year, Brian receives a total of $1000 in dividends, which he uses to buy 10 additional shares
His shares are now worth $11,000, everything else equal
Next year, Brian receives, not $1,000, but
$1100 from dividends, because his additional 10 shares will earn dividends too
If Brian keeps reinvesting his dividends, his secondary income (that from investing) will keep growing in an exponential fashion,
and this is the reason why saving now means being able to spend a boatload later
Notice that this is possible for Brian even without adding any more capital than his initial $10,000
Takeaway number 4: A crucial part: The first building blocks
Compounding gets easier over time, as we saw in the previous example with Brian
Getting started and creating the first building blocks is what's difficult,
which is probably the reason why few people ever choose to begin investing
The age-old wisdom from the book The Richest man in Babylon rings loud and clear:
"It's not what your earn that matters, it's what you keep"
To create the first building blocks in your money-making machine, you must create a monthly surplus
Tobias Schildfat gives a great suggestion on how you can do this by lowering your monthly expenses
Start by writing down your top 10 largest monthly expenses
Remember to include any larger transactions that may only happen once or twice yearly, like going on a skiing trip
Now, once you've identified the 10 most important expenses,
I want you to grade them in terms of how much happiness they bring to your life
This is of course highly subjective,
but try to quantify as much as possible. Use a 1-5 scale where 1 means
"very little happiness" and 5 means "a lot of happiness"
This can be a truly revealing experience
Oftentimes, the largest expenses aren't even the most important ones to us
and therefore, they are a great place to start cutting to create that money surplus for our first building blocks
Takeaway number 5: Picking your first stocks
I have a whole playlist of books which elaborates on the art of picking the right stocks but here are 5 questions
that should work as a starting point
What's the company's business model?
It's absolutely essential to have a good understanding of any company in that you invest in
How does it create its revenue? Which are its competitors?
What type of megatrends are supporting (or limiting) the expansion of the company, etc?
What is said about the company in media?
This is primarily a tool for identifying red flags
Watch out for companies that treat their employees
poorly, those that operate in dying industries, those that are facing big lawsuits, etc
Who is leading the company?
The top management must be honest, business savvy, independent and shareholder-oriented
What does the balance sheet look like?
There's plenty that can be revealed by dissecting a company's financial statements and among the most important ones is the balance sheet
Essentially, this gives a snapshot in time of the company's wallet
What's the valuation of the company?
Some companies trade for under $10 per $1 of earnings, while others cost as much as $100 per $1 of earnings
It's up to you to decide what a fair valuation is, given the company's future prospects
Now, here's a playlist of videos that I think is great for you
if you want to learn more about the stock market and investing in individual companies
It's an art that takes time to master
but that has great possibilities of creating a powerful second source of income for you over time
Cheers guys!