How would you invest 500 or a thousand dollars?
That's a really common question
many beginner investors might have.
And we have Eric here today to talk about that subject.
This is Into Investments with Humphrey Yang
and today we're talking about first-time investing.
Hey man, how's it going?
Great. How are you doing?
Very well.
So would you like to tell me a little bit about yourself?
I'm 25 years old and I've been investing for about two, almost two years now.
So still pretty new.
Great.
And what was your first investment and do you remember what that was like?
My first investment, I got a free stock.
From there, I just kinda got really interested in other stocks and learning
after I saw like gaining money, I was like, oh, wait a minute.
This is pretty easy.
Let me go ahead and like look into it.
I like, I honestly thought of like, how are rich people making money?
You know what I'm saying?
Stocks was the first thing I thought of.
Do you have any big knowledge gaps when it comes to investing?
I would say like, how would you explain, like, okay, these are the
numbers of things you want to look at to find a good stock?
There's a couple of different types of analysis, when it comes to stocks.
There's something called fundamental analysis.
And there's something called technical analysis.
Fundamental analysis has to do with the metrics behind their business model.
For example, Coca Cola.
Okay.
It comes down to how big is their market size and how much does it cost
to make a product, or how much do they make when they sell a product?
That's their profit margin.
So it comes down a lot to those fundamentals of their business model.
And that's more like the fundamental analysis side, but then you also have the
technical analysis, which is where a lot of traders will look at the stock chart.
And they'll look at the patterns of trading behavior
that's happened in the past.
And from those patterns, they can basically infer predictions on
what they think the stock will do.
Okay.
Now, for an average or a beginner investor, if you stay away
from picking stocks, you're almost going to perform better.
And the reason is, is that...
Have you heard of what an index fund is?
Is that like a fund that has like a bunch of different stocks into it?
- I'll say I know a little something, I know. - Yeah
So an index fund or an ETF is a basket of stocks in one fund.
So you just buy one thing, buy that one ticker symbol, that one fund
and it basically gives you a broad exposure to all of those stocks that that fund owns.
And by doing so you get natural diversification.
and diversification is really key in investing because
let's say you have 10 different stocks.
If one of them crashes, you still have nine to keep your
the rest of your portfolio afloat.
So a really good beginner investor strategy is to invest in an index fund.
Gotcha.
Because it tracks the market.
And historically the market, the S&P 500 has returned about
8% to 10% a year for the past 40 or 50 years.
And famously Warren buffet actually bet, placed a bet against a hedge fund manager.
in 2007 and he placed a ten-year bet saying that his index fund strategy
would outperform a hedge fund.
Ok.
And at the end of the 10 years, he won.
So basically the hedge fund was actively managing money
trying to beat the market every single day
while Warren Buffet was just kind of chilling at home
with his index fund, just not doing anything and he still beat them.
And it's a really time tested strategy.
So one, you don't have to worry too much about the market
and day-to-day swings.
Two, it's passive.
And three, it actually has very low fees.
It's more steady going in the index fund than trying to find the individual
things and having the same sector of thing where it's like
If you have all tech and it crashes, then all your stuff is down.
So another thing that you could do is actually look up a company's
it's called their earnings report.
Or their balance sheet
or their income statement or their cashflow statement.
These are all the financial statements of a public company
that you can look up for free.
Okay.
I'm logging it in.
I'm going to remember this.
It kind of takes a little bit of work to, like, read through
read through what a balance sheet is because it's kind of like accounting heavy
but if you're able to read it and there are a lot of tutorials online
teaching you how to read a balance sheet, you can learn a lot about a business.
And then what you can do is that
after you have that knowledge and you start
comparing company to company, to company, to company, you start to build up this
library of experience that you've had.
And then that way you can have
a better framework for evaluating individual stocks, if you'd like.
And just, if you continue to do that and you start learning
from your mistakes, or even from your wins
you get a really good feedback loop going.
There's been a lot of mistakes.
- Like actually I'll ask you this. - Yeah, tell me your biggest mistake.
So here's the thing.
So the one I said that I invested in, I bought this one stock at like $2, right?
Like two and some change, I bought like five of them.
I thought I was doing something.
- So it eventually ended up getting up to $72 a share - Oh wow.
but I didn't know, like
at what point, like, it's just went from this to like this, and I'm like, did I...
I learned about stop losses late.
I learned about all these things.
So after the fact where I was just like, if I'd only known
or like, do I just wait?
Or what companies like that, what do you do in situations when you go up
so much, do you like sell a little bit for profit and then keep some there?
You know?
So your question's more about exit strategy.
Exit strategy. There we go.
The terminology I need, yes.
So if you're investing for, let's say 40, 50 years
and you really believe in the company,
most people would have told you to hold forever.
- Right. - Until 40, 50 years
But what a lot of swing traders and traders do is that
if they see their stock go up a certain percentage,
they like to take a little bit of profit off the table.
Just to even like cover some of their, it's called the cost basis.
So that's what you put into the stock, your initial investment into the stock.
Did you end up selling that stock?
So I did.
I ended up selling it, but I rebought. got it because, but that's also
Got it.
Because, but that's also something I just learned too
is like, I think you have to hold it
for a certain amount of time,
so you don't get taxed or something.
Yeah.
If you sell a stock and you buy it back in within 30 days, there's
something called the Wash Sale rule.
And so what, what basically happens is they, the IRS doesn't want
you resetting your cost basis.
That's what it's called.
So they want to make their... they want to take their taxes, right.
That's what I thought that was smart.
Yeah, so do you know anything about capital gains tax?
So that's the thing... I've heard of it.
Right.
But I'm not sure, like,
I think I was watching a video on YouTube where someone was like, you have to make
a certain amount for them to care per se.
Like if you don't make a lot of money, it won't take too much.
But I don't, I don't know if that's true or not.
The way capital gains on stocks works is I'm not sure if you know this,
but there's taxes on long-term versus short-term capital gains.
And so long-term is anything that you hold for longer than a year.
So if you hold the stock for longer than a year, that's usually taxed at zero, 15,
or 20% depending on your income bracket.
So if you made a thousand dollars, you would pay $150 in taxes.
For short-term gains,
this is where it gets kind of interesting or more expensive.
It's taxed at your ordinary income rate.
Oh.
So if you make 50k a year and your ordinary income rate is 32%,
on that same $1000 gain, you are going to be paying
$300, $320 in taxes.
Just like capital gains, there are capital losses.
And every single year, the IRS allows you
to offset $3,000 of capital losses.
So that means, if you had $10,000 in gains, but $3000 in losses,
you could lock in those losses by selling.
And then your gain would only be $7,000.
- Does that make sense? - That does make sense.
So you only pay taxes on that $7,000 gains instead of the ten.
So you can lock in those losses.
So sometimes people at the end of the year, they do like to sell,
especially if they're losers and maybe they might buy back in later,
30 days later, but that's, that's essentially what that is.
I grew up playing sports.
I never knew that the losers could win.
Do you know how much in gains you actually had last year?
I'm not really sure at the moment what the exact number is but.
Yeah so what you'll actually get at the end of the year is a 1099 misc form.
And it's actually from your brokerage and it'll tell you exactly
how much you gained or you lost.
Ok.
But if you are feeling unsure about it, what you can do is
just go online to TurboTax.
They have a bunch of free resources, like the capital gains calculator.
They also have a blog where you can learn about anything investing related,
which is pretty cool.
But the capital gains calculator is actually
pretty sweet because you just enter in everything that you got on your 1099
and it just tells you exactly how much you owe.
Oh, that's easy.
They have live tax experts that you could talk to one-on-one.
Oh, that's dope.
You know, because I got a lot of questions, so it'd be good to, like,
you don't have to like email somebody back and forth or whatever, like.
Right.
That's pretty cool.
I've partnered with Intuit TurboTax to answer your questions
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