Weekend thoughts: investing advice (not financial advice!) for non-investors
I have to start this post the same way I start every podcast: with the disclaimer that none of this is financial advice as I’m not a financial advisor. Please feel free to see our full legal disclaimer here.
Ok, moving on from that regulatory disclaimer, I wanted to do something different with this article: it’s not written for the people who normally read and (hopefully!) enjoy this blog. My normal readers are generally going to by finance fanatics; you have to be pretty into finance to want to read about how used car pricing is effecting the rental car companies depreciation expenses and causing windfall profits, or how having too much cash on a corporate balance sheet is actually ineffecient! This article is not for those normal readers; instead, I wanted to write an article for my friends that I could send to them in the future. Specifically, I wanted an article for my non-finance friends, because, at some point in our relationship, a lot of my non-finance friends will ask me “Hey Andrew, you do something with investing, right? How do I start investing?”, and I wanted to have an article I could send there way.
(Side note: asking if I do something with investing always makes me laugh a little bit. I try to have a nice separation of church and state (work and “normal” life), so most of my friends don’t realize just how wild about investing I am. Many don’t know that I host a niche finance podcast with dozens (dozens!!!!) of listeners or the borderline crazy amount of time I spend writing this blog. I have had friends ask me “don’t you do something with investing” while I’m wearing my Yet Another Value Podcast hat! Perhaps a bit egotistical of me, but it does always make me laugh!)
Anyway, I’ve gotten that question more than normal recently (perhaps the new kiddo has caused some additional introspection when talking to friends!), and when my friends ask me, “how do I start investing?” it’s normally because their savings are just getting to the point where it’s really meaningful versus their salary. If you save $5k/year, the first year or two those savings are a nice bit of money but it’s not like it’s a life changing sum….. but after a while it really adds up. I’m almost 15 years out of college, so if my friends have managed to save $5k/year every year at a normal return, today they’ve got ~$150k in savings. That’s a meaningful amount; it’s more than most married couples earn in a year! So suddenly my friends are looking at having a meaningful amount of savings for the first time in their life (and maybe they’ve just gotten a promotion so their excess income / savings rate is going up) and they think they need to do something more to really maximize those savings.
Anyway, when my friends ask me about starting investing, they often use the same words but, depending on the friend, they’re generally asking one of two very different things.
Sometimes, my friends are actually asking me about investing and how to start. They really just want the basics. That’s great! While reminding them I’m not a financial advisor, I try to turn those friends into Bogleheads; save what you can, focus on tax efficient low cost index funds, and enjoy the rest of your life.
But, most of the time, when a friend asks me how to start investing, they actually are wondering how to start trading individual stocks. They feel like they need to pick the next Tesla or Apple in order to prep for retirement. They think they need to watch CNBC at market close every day for the next hot tip or trend to follow.
And nothing could be further from the truth. This is absolutely not the most original thought, but investing is this really strange thing where an individual can beat the average professional without doing any work. After fees, the average active manager slightly underperforms the market. With maybe thirty seconds of effort, an individual can buy “the market” through a market based ETF and get the markets return in a tax efficient, low fee manner. So with basically no effort an individual is already ahead of the pros. Honestly, that does feel a little bit unfair, but it’s true.
So the “how do I start investing?” convo can be a little awkward, because almost every time I need to tell them, “you shouldn’t try; you should just look into low cost index funds and live your live.”
But that’s a strange thing to say and a lot of people don’t want to hear it, so I do try to really stress test it. The first thing they need to do is decide if they enjoy investing or not. Every now and then I’ll talk about needing to earn the right to buy a stock. Generally you earn the right to buy a stock by having a differentiated viewpoint on the stock, and you get that differentiated viewpoint by doing a lot of work. Sometimes that work happens on that specific name (i.e. you read the 10-k, all the competitors earnings calls, etc.), but sometimes that work can happen ahead of time (you’ve followed the industry or company closely for five years and something changes that you realize is an alpha opportunity). If they enjoy that work, then they should do it and invest in individual stocks. Not because they’re likely to outperform the market (they’re not!), but because they enjoy doing that work. But if they don’t enjoy it, or would enjoy doing something else with their time more…. then don’t do the work! Instead, they should just focus their savings on low cost index funds, and spend their time doing things they actually do enjoy. They’re likely to make more money (again, non-professionals investing are likely to underperform) and enjoy themselves more! Win-win.
I find that advice is particularly hard for my more successful friends who run their own business. They’ve been really successful at everything in life and are good at business; why can’t they spend 5 or 10 really focused hours a week on investing and beat the market?
I always try to hit them back with two arguments:
First, if you want more money, you’d likely make more focusing on what you’re really good at: your business. If you really want more money, why not take that five or ten hours and spend it on your business instead of investing. That way, you’re doing what you actually have an edge on, and you can take all of that money and throw it into indices.
Second, it’s kind of funny that just because trading stocks is so easy and visible that people think they can walk in and outperform. There’s no other profession where someone could go, “hey, I’m going to devote my Saturday morning every week to this hobby, and I expect to outperform people who do this for a living full time” Pick your profession: lawyer, barber, doctor, consultant. If someone went up to one of those professionals and said they wanted to put that little work in and outperform the average professional, they’d be laughed out the room. But, in investing, that’s what people are effectively saying by opening up their brokerage account and trading stocks with an hour or three of work put into it every week.
In general, what I find happens is that friends who try to invest “as a side hobby” have a good initial run (though it’s very possible that’s resulting; I’d guess some flame out quick and never tell!), but they generally do it by taking on some risk that they’re not aware of. Maybe they’re investing in a lot a dividend paying companies while interest rates are coming down, or maybe they’re investing in tech while tech has a lot of tailwinds. But, eventually, the risk comes back to bite them: they’ve been running a dividend strategy and one of the companies announces a huge dividend cut and drops 75%, or they’ve been running a growth strategy that runs into a recession or something. I’ve had two or three friends who have found a big winner and made what could have been a material amount of money on it…. only to hold on too long and discover they were invested in a fraud that eventual went to roughly zero.
I also find the my friends are *very* prone to investing into manias; I know this story sounds hyperbolic, but I swear I can have at least five friends sign affidavits that it’s true. At the height of gamestop mania, I had one friend ask about putting his entire net worth into gamestop because “it couldn’t go down.” From memory, gamestop was trading ~$200 at the time…. it’s currently trading under $15. Crypto is another popular one among my friends; who sunk a paycheck or two into dogecoin the day before Elon hosted SNL thinking that it would go to the moon.
Anyway, that’s my overall advice to my friends: if you don’t like investing, don’t do it. Just don’t spend like crazy, save a reasonably amount of your paycheck, put it into a low cost index fund, and focus on what really matters in life (board games and fantasy books, obviously).
However, for my friends who do like investing and decide they want to pursue it as a hobby, here are some tips I try to give them for improving over time.
First, they need to learn the basics. This generally means some finance / corporate finance knowledge and particularly accounting knowledge. Accounting is the language of business (I didn’t say it; that’s a Buffett quote!), so you have to get the basics of accounting and reading financial statements down. Investing in an accounting 101 class might not be an awful idea, or just reading some type of accounting text book is fine if you actually put in the work. You also need to generally know how to value a business; multiples, discounted cash flow, etc. For corporate finance and valuation, I generally recommend Value from McKinsey (disclosures: I used to work for the author), but there are plenty of other books out there.
Second, you have to understand that public market investing is all about finding an edge. Finding an edge is rare; if I’m honest, it’s probably rarer than I think it is. The best book for thinking about finding an edge is you can be a stock market genius; read that 3x.
Third, many of my friends are subject matter experts in something. In general, they want to do something sexy like buying a wild merger arbitrage situation or finding the next Apple, but I generally believe that’s wrong for them. The area they’re most likely to find an edge is in something that aligns with their expertise / day job. So, for my lawyer friends, I try to tell them to look more into investments with a legal angle. My doctor friends should probably focus on something like a one drug company with a phase three drug they can research and decide if it’s likely to get approved or not.
Fourth, you can ramp up quickly by reading other good investors and what they’re pitching. Obviously YAVB and YAVP are great resources…. but there are others beyond those two excellent products (and if you only read / research my stuff, you’ll have all the same biases and flaws I do)! A really popular resource that I know a lot of people have had success with ramping up investing knowledge is just going and reading all of the past winners of the VIC contest (and I will not so humbly tease that you might find a few of my ideas in those backlogs….). I think that’s actually a great strategy, particularly because the winners tend to span a wide range of different ideas (i.e. some are event driven, some are compounders, some are spin-offs, etc.)
And finally, my last advice to my friends is you have to learn by doing at some point. I’ve had a few friends who read every book on investing they could get their hands on and never traded a stock. Again, that’s fine if they really enjoy reading about investing, but nothing will teach you about investing like actually making investments. Set up a small brokerage account and start buying / selling stocks…. but remember, this is a side hobby for you, so you should probably invest a similar amount. Would you spend $2k/year on golf if that was your hobby? Probably! So maybe your brokerage account for your investing hobby should have a similar amount / reflect that this is a hobby, not a real job. Treat and fund it like that, and stick to Bogle’ing for the main retirement stuff.