How to think about investing
Defining "investing" and three to-dos on getting started
Everyone has heard stories or seen movies about a person that bought stocks that made them a fortune overnight. If you’ve seen “The Wolf of Wall Street”, you know what I’m talking about. The big headlines and stories have such a shock factor it’s hard to not be envious of that position. This greed lures people to get started in the stock market with high hopes of getting rich quick. I’d be lying if I said that wasn’t part of the allure that drew me to the stock market. After a few painful lessons early on, I asked myself what exactly I thought I was doing. Am I investing, or am I speculating, and what even is the difference? These questions led me to consider what my goals were of tying up my money somewhere other than in my pocket. Am I trying to retire young? Buy a big house? I realized I didn’t even know what I was trying to achieve which was my first mistake - something we’ll revisit shortly. Over the last few years, I’ve formulated my idea of what investing is, how you should think about it, and how to get started.
The first book on finance I ever read, The Intelligent Investor by Ben Graham, talked about the stock market with a goal other than getting rich overnight. In fact, the opposite; getting rich slowly. That sounds much less fun but I was interested so I kept reading. The premise of the book was that when you buy into an investment, whether it be stocks, real estate, or others - what you are doing is buying future income. You are an owner, or part-owner, of that asset, and you are entitled to the money it produces. This seemed so radically different than the exposure I’d gotten to markets early on. The idea resonated with me and shortly after finishing the book I began my investing journey. I didn’t, and still don’t have much, but you need to start somewhere right? Technology has made getting started with little means much easier than when The Intelligent Investor was first published in 1949.
What’s cool about being an “owner” of an asset is what it requires of you. In a traditional job, you are paid for your time and skills - if you don’t show up however you aren’t paid. Being an owner requires zero of my time. I’m an owner or shareholder of Apple and thus I’m entitled to a portion of the proceeds the company makes. As long as I have that piece of ownership and the business is in good standing, it will continue and I can go about my business. That understanding has led me to my current definition of investing: allocating my dollars today to things that will bring me more dollars tomorrow.
Now, that definition is high level and is obviously much more difficult in practice. I hope to continue to learn and pass those things along here. I’ve already made plenty of mistakes and don’t for a second imagine the last has occurred. My goal, not only with finance and business but life in general is to understand mistakes and learn from them. Ray Dalio, in his book Principles, talks about the importance of making mistakes and failing. Not that the failure itself is important, but learning to fail, course correct, and move on quickly. He advocates that the quicker you can master this process, the faster you can improve. I’ve come to appreciate that motto and tried to model it in all sects of my life. If you’re interested in leadership, business, or self-improvement, I’d highly recommend his book.
The importance of money producing assets is laid out clearly when reading about wealth inequality in America. What keeps the rich, rich? What I found is that there is a significant correlation between income level and stock ownership. NPR had a statistic on income levels that floored me - “Those richest Americans own far greater amounts of stock. As of 2013, the top 10% of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000.” I have a hard time believing that this is a coincidence and it’s for this reason I’ve taken a keen interest in stock ownership. While many people in my age category love to throw stones at wealthy Americans saying they don’t deserve it, I’m not interested in that. I’m interested in learning from that and bringing that into my own life. Capitalism isn’t perfect, but there is no other system in the world that allows people to produce something with nothing. Stock ownership is just the tip of the iceberg when it comes to investing your money. While it is the thing I know most about, I hope to explore other methods of wealth creation over time. If you’re interested in reading the article from NPR on stock ownership, the link is below.
I’ve managed to learn a few things so far that I believe are critical to any person getting started investing their money. The first of which is to figure out the end goal. How can you know if you’ve arrived at the destination if you don’t know where you’re going? This answer will look different for everyone. I’m not saying you need concrete numbers today, but it’s good practice to start thinking about where you personally are trying to get. The end goal may be just learning about the world of investing to see if it's something you’re interested in. The goal may be to produce income. It may be to save for retirement. For me, it’s all of the above and more. While I’ve learned a lot about these things over the last few years, I’ve learned more about psychology, risk, and decision making than I could in any higher education course. That kind of information is so valuable to me.
The second necessity is to begin surrounding yourself with resources. This can include books, people, the internet, and this newsletter! I’ve personally found the finance community on Twitter to be incredibly valuable to my learning. By regularly reading and engaging with other people on different financial subjects, it will be difficult not to be exposed to and learn new things. I love reading books and articles from different people because it gives insight into other ways of thinking that can improve my personal process. There are millions of styles and methods out there; there is no one right way to invest. It’s a matter of finding what works for you in order to achieve the goals you’re aiming for.
The last item is to start a journal. We sift through information all day and a journal is a great way to recount the most important. Writing down thoughts, quotes, businesses, and ideas create a trail that documents your thought process for future reference. I use a journal to document every time I buy stock in a company. Later on, when I wonder why on earth I did something, it is easy to reference the journal in order to compare my current thoughts to those at that point in time. This has become an invaluable tool in my learning process. Google docs is a great way to start an ongoing journal log that is quickly accessible and search-friendly.
I believe everyone should actively invest in order to help preserve what we make. Warren Buffett said that the only two things you can’t buy are time and love. Investing is a way to save your valuable time in order to do things you love and spend time with those you love. That’s something I can get behind every day of the week. I’d strongly encourage setting aside time this week to think about what long term financial goals you have and get them written down. With that in mind, we can begin to develop a plan about how to achieve them.
Great advice! And I can hear it in your voice! Well said!