The global economy is doing so-so. Middle-class salaries have stagnated for decades.
Technology is disrupting so many industries that we don't even know if our jobs will exist tomorrow.
The president of the USA is more focused on Twitter followers than running a country.
I have all these risks in my life The Swedish Investor! How should I ever dare to bet any money in the stock market?
I can't foresee the future, you know!
First of all, it's not betting when you have the right tools and knowledge.
Secondly, you don't have to be a fortune teller to create a fortune in the stock market.
This book is a great start of your financial journey, if you're new to investing or if you have the experience,
but thirst for more wisdom.
It will remove your fear towards the stock market and replace it with tools and knowledge, taking you one step closer of becoming truly
financially unshakable.
Takeaway number 1: Winter is coming, but when?
Recent studies show that nearly 60 percent of Millennials
distrust the financial markets. Because of this, many of them keep 40 percent of their savings in cash.
What's the primary reason for this?
The reason is the overwhelming fear of investing at the wrong time and see your hard-earned money disappear in a market crash.
I'm here to tell you that market crashes, which are called Market Corrections if they exceed -10% and bear markets if they exceed
-20%, are nothing to be afraid of. In fact, they post quite an opportunity.
Here's the primary reason: There were 34 bear markets between 1900 and
2015. None of them lasted. The stock market has, during the last 200 years, been the best place for long term investments. Winter is coming,
but no one knows when. Some say 2019 but these same people have wrongly anticipated it in 2016 and 2017.
Investors should focus on what they can control, not what they can't. And no matter when winter finally comes,
we know that spring will follow. Here are a few facts that will keep you warm in the midst of winter:
Corrections happen on average once every year. By knowing this you also realize that corrections should be viewed as
regular occurrences, like winter spring summer and autumn. You don't fear autumn. Do you?
Nobody can consistently predict if the market will rise or fall. One of the best forecasters of our time is called dr. Doom.
He's famous for anticipating the 2008 market meltdown.
Unfortunately, he also predicted this wrongly in 2004, 2005, 2006 and
2007. Despite many short-term setbacks the stock market rises over time.
We are not getting into economic theory here,
but basically the stock market will rise as long as workers are becoming more and more productive,
the population is growing, and technology gives us new innovations.
Pessimism becomes optimism. The 12 months following the bear markets in 1949,
1957, 1962, 1970, 1974,
1982, 1987,
2001, 2002 and 2009 had an average of 39 percent in returns. In other words, Bulls follow Bears.
The greatest danger is staying on the sidelines. Staying out of the stock market even in short period of time can be truly costly. And
alternatives don't look too great at the moment. Heck, buying a two-year Swedish governmental bond at the moment
I'm making this video provides you with a negative
0.49 percent in yield. That's right, -0.49%. Good luck becoming wealthy with that!
Takeaway number 2: Don't overpay for underperformance. Quick quiz: Is your 401k (or pensionsförsäkring in Swedish) costing you money?
71% of people answer no to this question and they're all wrong. Next question:
How much does your 401k cost every year? 92% can't answer this question. I don't ask you this to put you in place ...
Well, perhaps a little. But primarily it's to prove an important point - people don't realize that all financial instruments come with fees.
These fees are like termites eating away your potential capital gains.
The most terrifying example is actively managed funds, which on average cost 3% yearly. Let's look at an example:
Sven Svensson and Anders Andersson are 20 years of age.
They each have 20,000 dollars that they invest in the stock market. Sven picked index funds with an annual fee of
0.5%, while Anders picked actively managed funds with an annual fee of 3%. They are both smart investors,
so they invest in the long run. At 55, they look at their portfolios again as they need money for their children's college education.
Both have achieved on average 10% in annual returns excluding fees. Sven's portfolio is now worth around $480,000,
enough to send his oldest daughter Elsa to Harvard. Anders' portfolio on the other hand is worth less than half, at
$210,000. Luckily for him tuition is free in Sweden. Now hold your horses Swedish Investor!
You said that Anders invested in actively managed funds! Obviously
his yearly returns should be higher than the passively managed funds of Sven?
Actually ... I was being generous when I said that they achieved the same returns as actively managed funds underperform index funds in
96% of the cases. They do, in 100% of the cases, cause you to over paying fees though.
Takeaway number 3: If it walks like an elk and talks like an elk, It's probably an elk. Or a broker.
A financial advisor could be worth their value in gold.
The problem is just to find a person that has your best interest in mind and is sophisticated at the same time.
Advisors come in three forms and you are looking for sophisticated people from the second category.
1: Brokers. They go by many names such as ....
No matter which fancy title
they use, you must realize that these people are sales persons under heavy pressure to generate revenues for their firms through fees. If calling themselves
financial consultants helps them to reach their aggressive sales targets, so be it. If calling themselves trading wizards or elves will help
that's fine, too.
Therefore, their advice will often be driving fees, not growing your portfolio. 90% of the financial advisors in America belong to this category.
2: Independent Advisors. Financial advisors of this category are legally obliged to act in their clients best interest.
Unfortunately,
these are rare birds. Only 10% of advisors fall into this category. 3: Duly registered advisors.
These guys are brokers in independent advisors' clothing. They are registered as both independent advisers and brokers. In other words,
sometimes they are obliged to act in your best interest and sometimes not. Unfortunately,
80% of the independent advisors belong to this group. If you've done your
calculations you now realize the hard truth - only about 2% of the so called financial advisors can offer you conflict free advice.
Fortunately, this still leaves us with many thousands of advisors.
Here's a list of questions that you should ask to determine if the advisor is someone you can entrust your money with.
I'll also put these questions in the description of the video so you can look at them later if you're interested.
Takeaway number 4: Follow the "Core Four". Nearly all great investors are guided by four major principles.
We are going to call them "Core Four".
These four patterns can be powerful tools to increase the likelihood of you achieving your financial goals. 1: Don't lose.
People in general tend to only have one thing in mind going into the stock market.
How do I maximize the chances of getting a homerun? The best investors on the other hand are obsessed with avoiding losses.
It's simple mathematics. Let me ask you this:
How much do you have to make to return to your starting point if your portfolio falls by 50%? That's right,
you need 100% return. This can take many years. Warren Buffett is famous for his first two rules of investing. Rule number one:
Never lose money. Rule number two:
Never forget rule number one. Margins of safety and smart asset allocation will help you to achieve this.
2: Create asymmetric risk/reward. You've probably heard that to gain more in the market
you need to take a greater risk. While I won't disagree with this, the best investors look for opportunities where this
relationship is asymmetric. One way to do
this is to invest in stocks during times of mass pessimism and gloom as explained in takeaway
number 1. Another way could be to invest in companies that trade below Book Value, buy with large margins of safety
or to use stops, but more about this on another occasion. 3: Tax efficiency. When selling stock you realize your capital gains
and usually you need to pay tax on the profits. If you're Swedish, you might want to consider a different brokerage account
Other than the traditional ones such as a kapitalförsäkring. Here,
you're taxed 1% annually rather than a normal 30 percent of profits. In the US,
be careful when it comes to owning investments for less than a year as they are taxed the same way as your income. If you
own them for longer than a year,
you will minimize the cost by usually paying 20% of profits.
4: Diversification. The author suggests that you should diversify in four ways: A) Across asset classes
B) Within asset classes C) Across markets and countries D) Across time
Takeaway number 5: The biggest threat to your financial success is your own brain.
It's possible to do everything right - invest in low-cost index funds, minimize fees and taxes,
diversify over time and assets and still end up with a mediocre or underperforming result. What's the last piece of the puzzle?
Your own brain. Unfortunately, the human brain is perfectly designed for making dumb decisions in the stock market.
In fact, neuroscientists have found in their studies that financial losses are processed in the same part of the brain that responds to mortal threats.
Now you know why many go and hide under their bed when the market goes south!
It's not enough to know what to do,
you must also do what you know!
Let's examine how we can execute this by looking at mistakes that your reptilian brain takes for you in the stock market.
1: It mistakes recent events for ongoing trends.
Investors project out into the future what they have been most recently seeing. This is called recency bias.
It's just another way of saying that recent experiences carry more weight when our brain is determining the odds of something happening in the future.
This causes people to buy more when the market has been soaring and sell everything when it's been plummeting, when the rational thing to do
is quite the opposite. To counter this, you should set up rules for your asset allocation.
For instance 20% capital in bonds and 80% capital in stocks. Re balance every year, no matter how the stock market has been performing.
2: It overestimates your abilities. Are you an above-average driver? An above-average lover?
Above average looking? If you just yelled. "Yes" three times towards the screen,
you might be a victim of another important biases when it comes to investing. It's called overconfidence. For investors,
it usually results in them believing that they can beat the market. Now, now. I'm not saying that this is impossible.
I'm just saying that before making such a statement look at yourself in the mirror and ask a simple question:
Why do I have an edge compared to everyone else? If your answer is
"everyone else in the markets are idiots!" or "because I happened to stumble all over this amazing stock that my cab driver recommended",
you're probably fooling yourself. On the other hand if your answer is "because I spend many hours every week to improve as an investor" or
"because I know many CEOs that like to give me information
about their publicly traded companies" you are, on the other hands, probably right. Just kidding about the insider trading by the way,
it's 100% illegal! 3: It seeks confirmation of your beliefs.
This is called "confirmation bias". Your mind loves proof, especially proof of how smart and right you are. This is counterproductive in investing though.
What you should do instead is to seek out persons that disagree with your stock pick or people that can play devil's advocate with you.
Always do this as a last step before investing.
All right. It's time to wrap it up!
Takeaway number 1 is that winter will come, but so far during the entire life of the stock market,
spring has always followed. Number 2 is that you should avoid fees at all cost,
especially if they cause their investments to underperform. The 3rd advice is that a financial advisor can help you a lot on your journey towards wealth,
but you need to be picky when choosing one as they often have other priorities then your capital gains.
The 4th takeaway is the "Core Four": Avoid loosing, create an asymmetric relationship between risk and reward, take another look at your tax expenses and
diversify. Lastly the 5th tip is that you can understand and execute takeaways 1-4 and still underperform in the market if you don't
learn how your brain is trying to constantly fool you to make the wrong decisions about your investments. Thanks for watching!
Feel free to write down suggestions if there are books on investing, personal finance or money management that you want me to summarize.
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