The Fault in Ourselves

August 22, 2016May 22, 2017 / 416Investor / 2 Comments

“The fault, dear investor, is not in our stars- and not in our stocks- but in ourselves…”

-Benjamin Graham

Winner of the Nobel Prize in Economics, Daniel Kahneman fascinatingly explains the fault that is in our intuition, biases, decision making, and sheds light to rationality. In economics and finance, we are taught theories that assume rationality and well-informed decision making of individuals, but we must learn these theories with much caution, as Kahneman’s Thinking Fast and Slow illustrates that human decision-making is indeed more flawed in reality, and certainly more than we notice. I will illustrate a few of his examples below that will (hopefully) spark your interest, and likely bend your mind, as it did to me.

To begin, Kahneman explains the mind as two systems, System 1 which is intuition (thinking fast) and System 2, which is your analytical system (thinking slow). For instance, the last time you were mad over something small and had to embarrassingly apologize afterwards, might have been due to your System 1, thinking (too) fast. Your emotions clouded your System 2 (your analyzing system) from working and you acted irrationally. Note that your System 2 is also quite “lazy”, so the majority of the time, you’re on auto-pilot with System 1, and (thankfully) most of the time it’s right. But other times when System 2 is needed, and fails to show up or to properly analyze, decision-making results can be devastating.

Here’s a quick test of your systems.

What’s 2 x 2? What’s 2+2?

Right away you knew the answer for both were 4 (that’s your intuitive System 1). Now:

What’s 28 x 9? What’s 38 x 17?

Your pupils moderately dilated, your blood pressure slightly increased; your System 2 was engaged into computing the answer, as your System 1 was unable to quickly solve it. For some, it is possible that the latter questions came intuitively via their System 1; they’ve practiced a great deal of mathematics that allowed them to generate the answer automatically. For those who had to employ their lazy System 2, don’t you regret not practicing math a little more when you were younger? I sure do…(252, 646, btw).

Speaking of regret; Kahneman defines it as an emotion and a punishment we do to ourselves. Frequently, we lag in our decision making due to the fear of regret. It stems from a deviation from the norm, or the default position (p.348). For instance, when you buy a stock the default is to hold it, when you enter a relationship, the default is to stay, when you finish seeing your friends, the default is to say goodbye; selling a stock too early, ending a relationship badly and even not saying goodbye can produce regret. Here’s another example: You’re the coach of a team that just badly lost your last game. You’re expected to make a change in players or strategy; failing to do so will produce regret (p.348). Notice how here, a specific action is the default, deviating from that will produce unpleasant emotions. Regret does indeed affect the decision of many, but there is good news: people generally anticipate more regret than they will actually experience, this is because we underestimate the efficacy of our psychological defences (p.352).

Here’s an unnoticeable pitfall people tend to make that may lead to regret, it’s called the The Sunk Cost Fallacy. More often than not, this fallacy makes us stay in things longer than we should. A bad job, a poor performing stock with no turnaround in sight; we would rather continue wasting our resources in a failing project than to stop, admit defeat and have a bad stain in our record .

Somewhat related to the Sunk Cost Fallacy is the disposition effect. A (unfortunately) real example for many investors is the following: when choosing to sell stocks in their portfolio, often times they choose to sell the winning stocks rather than the losers; they want to add a win to their record, instead of closing out losing stocks which would add a loss. Simply put it, gaining is pleasure and losing is pain, and we would much rather choose pleasure than pain. But, pleasure does come with its price, and in this case choosing purely based on a current winner and loser can be irrational and devastating. According to Kahneman, you should have a thorough analysis of your portfolio and sell the stock that is less likely to perform well in the future, not whether it is a winner or loser.

Here’s another pitfall that can significantly influence our optimism or pessimism when decision-making is “Framing“. Consider the following scenario:

How would you feel if I said the following before you entered a life-saving surgery:

90% of the people who receive this surgery survive.

Now If I told you this:

10% of people who receive this surgery die.

Both statements have the same probability of success-failure, but the way it was framed, did indeed give you different mental pictures. Another example of framing within Thinking Fast and Slow is the following:

You receive $70

Would you rather:

Keep $30 or Lose $40

As you’ve noticed, both options are objectively the same, but most individuals prefer the keeping $30 than the losing $40 option. Being able to reframe this question objectively, and not emotion-bound, takes much effort of your System 2, and since it efforts exhausts our energy, we passively accept decision problems as they are framed (p. 367).

Here’s a final- shortened example of framing that will bend your mind, it comes straight from the framing experiment conducted by Kahneman and his friend, Amos (p.368):

Imagine that the United States is preparing for an outbreak of some unknown disease. It is expected to kill 600 people, but there are two types of action plan that can be implemented to fight this disease:

-Action Plan A: 200 people will be saved.

-Action Plan B: There is a one-third chance that 600 people will be saved, and a two-thirds probability that no one will be saved.

What’s your choice? Think carefully. The majority of respondents chose A; taking the sure option rather than the gamble.

Now the experiment is framed differently. Consider the following options:

-Action Plan A: 400 people will die.

-Action Plan B: There is a one-third probability that nobody will die and a two-thirds probability that 600 people will die.

What’s your choice? Again, think carefully. The majority of respondents chose B, as you may have as well. “Decision makers tend to prefer a sure thing over a gamble when the outcomes are good. They tend to reject the sure thing and accept the gamble when both outcomes are bad”(p.368). Note how you’ve accepted a gamble with a 67% (rounded) chance of failure, even though it’s a bad gamble (numerically), it seemed like a good choice in this case.

Here’s the interesting part: You chose to save 200 lives for sure (Action Plan A) in the first question, and chose to gamble with Action Plan B, rather than accept 400 deaths in the second; there’s an inconsistency in the choices you make. Think about it…

We could go on forever in discussing the biases and faults in our intuition provided in this book (there’s a lot more), but let’s end with the Anchoring Effect. This happens when “people consider a particular value for an unknown quantity before estimating it” (p.119). For instance, if you are looking to purchase a house, you are likely to be influenced by the asking price (the anchor). You would feel a price of $1 million is expensive if the asking price was $700k. On the contrary, you would feel a price of $1 million is cheap if the asking price was $1.3 million. If I said the number 30 and asked you to provide an estimate of Shakespeare’s age at death, you’ll likely give a lower number than if I said the number 90. You’ll be inclined to use the number provided as an anchor and work your way up or down from it. This shows that we are susceptible to subconscious biases from an anchor and recognizing that can help us avoid poor decisions. This technique is used in sales and negotiations, so next time you’re negotiating a price, make sure you don’t get anchored by a number.

When you choose to read this book, you’ll learn valuable rationality lessons such as the law of small numbers, optimistic biases, the possibility effect and much, much more in Kahneman’s astonishing literature. After giving Thinking Fast and Slow a read, your thought process and decision-making will surely be enriched, as mine was.

Much of the recognition of our intuitive faults will seem unnatural to do, and indeed hard to consistently notice when we act irrationally. But nothing good comes easy. By being aware that it is easy to fall into the traps of our own irrational decision-making; we can avoid making potentially devastating mistakes, and make more sound decisions. For the investor, the chief problem, and even his worst enemy is very likely to be himself. You should give this one a read, you probably won’t regret it 😉 Find it here.

5 Must-Read Investing Books

July 29, 2016May 22, 2017 / 416Investor / 2 Comments

The most successful leaders always had one thing in common: they never stopped learning. As Charlie Munger, Vice Chairman of Berkshire Hathaway puts it:

“Those who keep learning will keep rising in life“

If you’re looking on improving your investing knowledge, you’ve come to the right place! Here are the 5 must-read investing books:

1. The Intelligent Investor by Benjamin Graham

Benjamin Graham forever changed the investing world with this timeless contribution. He builds the foundation of value investing by providing the concept of Mr. Market, defensive investing and margin of safety. This iconic book is considered by many the bible of investing, and for Warren Buffett:

“I picked up a copy of The Intelligent Investor. It not only changed my investment philosophy, it really changed my whole life- I’d be a different person in a different place if I hadn’t seen that book…it was Ben’s ideas that sent me down the right path.”

Pick up your copy of this classic: here.

2. The Most Important Thing Illuminated by Howard Marks

Howard Marks shares his thoughts on value investing in this mind-shattering book. He gets straight to the point on investing subjects such as second-level thinking, market efficiencies, value, contrarianism, risk, randomness and the other aspects that make up the 20 most important things. To make this book even better, there are even commentaries from other leading investing managers such as Seth Klarman, Christopher Davis and Joel Greenblatt. Marks’ work is even praised by legendary founder and former CEO of The Vanguard Group, John C. Bogle:

“Few books on investing match the high standards set by Howard Marks in The Most Important Thing…If you seek to avoid the pitfalls of investing, you must read this book!”

Find this invaluable book: here.

3. A Random Walk Down Wall Street by Burton G. Malkiel

Burton G. Malkiel’s best seller is jam-packed with quality investment insights and financial history. It takes a look at stocks and their values, analyzes both fundamental and technical analysis while comparing them to the random walk theory. Furthermore, he explores the concepts of EMH (efficient market hypothesis), smart-beta and rebalancing. He puts much emphasis on indexing and diversification through no-load, low cost funds and ETFs. The later chapters consists of personal finance and investing strategies for different age groups. Whether you’re a starter or expert in investing, this book is a must-read. Find it: here.

4. Common Stocks and Uncommon Profits by Philip A. Fisher

Known as a pioneer of Growth Investing, Philip A. Fisher’s contribution to the investing world will not be forgotten. In this book, consisting of 3 parts, he lays out the a general description in what to look for in stocks, and when to buy. He opens the book with his concept of “Scuttlebutt”, then puts in 15 detailed points to look for in common stocks, as well as 10 investor don’ts. In the second part, Fisher outlines his 4 dimensions in which he describes cues to look for in companies, such as the company’s superiority in production, research, marketing and financial skills. He notes the importance of employees and management, investment characteristics of certain businesses, conservative investments and much more. Fisher closes the book with his philosophy along with its evolution that has made him one of the most influential investors. Find this book: here.

5. Technical Analysis of the Financial Markets by John J. Murphy

John J. Murphy provides the fundamentals of technical analysis in simple enough terms for anyone to understand. You’ll learn the trends and essentials of chart analysis. This book gives excellent graphical examples of various price patterns and reversals. Furthermore, it teaches the basic methods of analysis, you’ll learn about moving averages, MACD, RSI, Bollinger Bands, and all the other fancy technical indicator terms. Whether you’re a beginner or experienced investor, this is a classic for the technical investor. Find it: here.

Through chances various, through all vicissitudes, we make our way…

-Aeneid

Those are the first words printed on The Intelligent Investor. I read this timeless classic some years ago and this quote made an impression on me. I’ve revisited it twice since, and every time I read it, not only does it get better, but I appreciate this quote more and more.

If it’s your very first time reading The Intelligent Investor, know that I am envious of you, the feeling of learning new knowledge of this quality is rare, and no words can describe that state of enlightenment. I invite you take your time and enjoy the invaluable information you will gain. I hope you will enjoy it as much as I have, and that you will revisit it in years to come.

Kickstart your Day with 5 Funny Economics Jokes

July 21, 2016May 22, 2017 / 416Investor / Leave a comment

Here are some economic jokes that will brighten up your day at work, or give your boss a good laugh. And if you’re in the economic discipline like myself, it doesn’t hurt to laugh at yourself once a in a while. Since these jokes have been passed around and modified, they might differ from the “original”, but the core is still the same:

1. A chemist, a physicist and an economist are stuck on a deserted island with no food. A can of food floats ashore. The physicist says “let’s smash it open with a rock”. The chemist says “let’s build a fire, and heat it first”. The economist says “let’s assume that we have a can opener…”

2. Economic forecasters assume everything, except for responsibility.

3. A mathematician, an accountant and an economist all apply for the same job. The interviewer calls in the mathematician and asks: “What do two plus two equal?” The mathematician replies “Four.” The interviewer asks “Four, exactly?” The mathematician firmly looks at the interviewer and says “Yes, four, exactly.”

It’s the accountant’s turn, the same question is asked: “What do two plus two equal?” The accountant answers “On average, four – deviated around ten percent, but on average, four.”

Then the interviewer calls in the economist, tells him to sit down and asks the same question: “What do two plus two equal?” The economist gets up, locks the door, closes the shade, sits down right next to the interviewer and says “What do you want it to equal?”

4. If you teach a parrot to say “supply and demand”, you have an economist.

5. A chemist, an engineer and an economist are shipwrecked with no food except for a single can of soup. They have no tools, and can’t afford to spill the insides as it is their only means of survival. The chemist sets up evaporating pans to collect caustic salts to etch the can lid through. The engineer piles sand to build a drop, that with precise calculation will be tall enough to crack the can open without spilling the insides. And the economist lays down on the beach, relaxing and laughing at them. After a day’s hot labor with nothing achieved, frustrated, the chemist, bursts out at the economist and says, “Okay, you’re so smart, how would you do it?!?!” The economist picks up the can and stands up straight, shining with confidence he presents the can grandly to the other two, and says, “ASSUME this can is open.”

All jokes aside, economics is a great discipline. Many economists have changed the world with their lifelong contributions, notably Adam Smith, John Maynard Keynes, John Kenneth Galbraith and many more. If you are interested in reading a book to understand the very basics of economics, I would recommend: Basic Economics by Thomas Sowell. It was well put together and covered much of the essentials for understanding the basics and flow of the economy. I will have a review for it soon. Meanwhile, you can find the book here. Of course, JMO (just my opinion).

We all love ourselves more than other people, but care more about their opinion than our own.

-Marcus Aurelius

For starters: Index and ETFs investing in your 20s according to Burton G. Malkiel

July 21, 2016May 25, 2017 / 416Investor / 2 Comments

Suppose you are new to investing, and would like to participate in the market but don’t have the time or knowledge to research individual stocks (or you’re just lazy), what should you do? Let’s explore a few options from the book: A Random Walk Down Wall Street by Burton G. Malkiel. For this article, let’s focus on two things, the importance of low fees and the asset allocation for the folks in their 20s according to Burton G. Malkiel.

HIGH FEES? WE DON’T NEED NO STINKIN’ HIGH FEES.

Now before you purchase that mutual fund your bank advisor is trying shove down your throat, consider looking at the different expense fees. Recently, many funds have come under criticism for their high fees and poor performance (compared to the benchmark), and rightfully so. Be aware of the MER, TER, front and back loads on these funds. A MER (Management Expense Ratio); is whats going to cost you for them to manage your money per year. A simple example is the following:

You find a nice mutual fund you’d like to invest in, and decide to place your hard earned $10,000 into that fund with an MER of 2.5% (this is high, and quite common). Essentially, you’ll lose $250 just to management expense fees. Now let’s assume the benchmark is the market, and it’s returning about 7%. Simply put it, you better hope your fund returns at least 9.5% just to get even with the market. Note that many funds, after fees don’t consistently outperform the market.

Now I know what you’re thinking, what’s 2.5% to you? Don’t think 2.5% is a lot?

Consider the following:

Let’s say you choose a fund that performs just as well as the market but has an MER of 2.5%. You invest $10,000 for 20 years.

Market performance: $10,000 at 7% compounded for 20 years: $38,697.

Fund performance: $10,000 at 4.5% (7-2.5) compounded for 20 years: $16,386.

You’ve indirectly lost $22,311, or about 136% to that “tiny” 2.5% fee. The longer the time, the more you lose indirectly to fees. High fees are crippling, and most people (especially starters) don’t notice them, so be careful.

“It is not necessary to do extraordinary things to get extraordinary results… By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”

– Warren Buffett

For beginners, Burton G. Malkiel recommends diversifying to decrease risk by purchasing different Indexes or ETFS: Stocks, Bonds and REITs and by weighing them differently during the stages of your life. For starters in their early 20s, diversify, seek a no-load, low expense, broad-based index funds, and it’s advisable to make these purchases in a Tax-Free Savings Account (TFSA).

Because you’ve got much time in your 20s before retirement, Malkiel recommends consistent contributions (to a no-load fund) and that the majority of your holdings:

–(70%) be of stocks. He recommends to put one half in U.S. small cap growth stocks (no-load, low expense Index and ETFs) and the other half in international stocks, including emerging markets.

-Cash (5%) should be in money-market fund or short term bond funds.

-Real estate (10%) should consist of high quality REIT portfolio.

-The remaining bonds (15%) should contain: no-load, high grade corporate bond fund, foreign bonds, some Treasury inflation protection securities or dividend growth stocks.

Some Equity Index Funds and ETFs tickers from A Random Walk Down Wall Street:

FSTMX, SWRXX, VFIAX, VOO, VTI, IWB, TWOK, VEMAX, VTIAX.

Now as you enter your 30s, 40s and so on, the mix of stocks, bonds, real estate (REITs) and cash will change. For instance, according to Malkiel, in your 30s, your Stocks-Cash-Bonds-Real Estate allocation would be: 65%-5%-20%-10%, respectively. You would slowly move to “safer” investments as you age.

If you’re relatively new to stocks, don’t expect quick gigantic returns, especially not from Malkiel’s recommendation. This type of diversified allocation has the goal to decrease risk through exposure of broad indexes. Long term index and ETFs are made to pay off in the long term. Briefly, for starters: the takeaway would be to look out for high fees and contribute to index and ETF funds according to your age. Always do your own research.

All in all, you can find the full asset allocation by age from: A Random Walk Down Wall Street. It was an amazing book, written like no other and it sheds new light to numerous important topics such as the efficient market hypothesis (EMH), behavioural finance, random walk theory, diversification and much more. I will have a review on this book soon. Meanwhile, you can find the book here.Of course all this, JMO (just my opinion).

In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.

-J. Kenfield Morley

Disclosure: I have no positions in any of the recommended ETFs or Indexes at the date of this article. I wrote this article myself and it expresses my own opinions, I am not a financial advisor. I do not get any compensation from this, other than from Amazon Affiliate links and advertisements. On the date that this article was posted, I have no affiliation with any of the ETFs or Indexes.

The Best Investment Book for Starters

July 3, 2016May 22, 2017 / 416Investor / Leave a comment

We’re all aware of the importance of starting early and we all know the costly price of starting late. That last minute 10 page essay, that last minute “studying” (if you even call that studying anymore) before the math exam always ends up with you always asking yourself: “Why didn’t I start earlier ?”

Procrastination is a terrible habit and we’ve all been guilty of it, some more than others (I, for one, am – you are too, no need to lie). On the other hand, procrastinating on that 10 page history paper isn’t the worst of the last minute bullsh***ing. It’s when you procrastinate on more important things such as learning to invest that you will pay the costliest price.

Starting your investments early will allow you to take advantage of time; giving you the ability to ride out some mistakes and more importantly use compound interest. I cannot stress the importance of compound interest. You can check out the article about why you should start early here.The earlier you learn about investing, the earlier you can start; the earlier you make capital gains. Now, you can’t learn EVERYTHING about investing, but without a doubt you need to learn the fundamentals before even thinking of starting.

In my opinion, one of the very best investment book ever written (if not, THE best) is The Intelligent Investor by Benjamin Graham (the second investment book I’ve read). Although I strongly recommend Graham’s “investing bible” to anyone, it’s not the book of choice when people ask me what to read as their first book.

The first book I ever read, was “The Neatest Little Guide to Stock Market Investing” by Jason Kelly, and I strongly recommend it for starters as their first book. Now before, I get stoned by the crowd for thinking I’m not recommending “THE best book” first, hear me out first. When I was a beginner in investing, there would have been no way for me to fully understand and appreciate The Intelligent Investor (you need to read it a few times), had I read it first. It’s not an easy read for beginners, especially if you have no background in business. It can be intimidating, and the length can turn people off.

Let’s jump straight into it: Why “The Neatest Little Guide to Stock Market Investing” is the best book for the Jon Snows of investing (those who know nothing):

1. It’s a very easy read. It teaches you the very basics of stocks, what they are, how they work and how you can make money while owning stocks. It teaches you the basics of evaluating stocks and touches upon growth investing and value investing. Additionally, the basics on how to read stock pages.

2. It will briefly touch upon Fundamental vs Technical Analysis. You will learn the basics of fundamental stock measurements such as Dividend Yield, EPS, ROE, Net Profit Margin, etc. You’ll also learn a bit about technical analysis basic measurements such as RSI, SMA, MACD, etc.

3. It introduces you to some of the most successful investors. The highlight of this book is that it summarizes the basic points and strategies of the most successful investors, notably : Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, Bill Miller and William O’Neil. This allowed me to follow up on my investing journey by reading “The Intelligent Investor” which changed my life.

4. The author also gives you a list with a description of numerous resources that provide research on stocks. Furthermore, he describes a few long term strategies. He also suggests ways to get started (setting up an account) and provides a few of his very own strategies he uses/ made.

Again, I cannot stress enough the importance of starting early in your investing journey. For me, this book eased my way into the investing world; it easy to read and has the right amount of important content so I didn’t lose interest (I get bored easily). It was very well structured and the summary of the greatest investors allowed me to follow up on my learning after I finished reading the book.

It will answer most, if not all questions of the beginner investor. All in all, I’m glad it was my first book, and I’m sure you’ll enjoy it as your first investing book too. It will provide you all the information you need to start your investing journey, as it did for me, long ago. Again, like preparing for your math final: start reading (and actually learning) about investing early– not later. In the end, when you’re looking at your account, you never want to say “I wish I started earlier“, instead you want to say: “I’m glad I started early“. Remember, you can bulls**t your history paper, but don’t bulls**t with your investments. Of course, JMO (just my opinion). You can find the book here.

6 Life Lessons from The Little Prince

July 3, 2016May 22, 2017 / 416Investor / 2 Comments

The Little Prince was written by Antoine de Saint-Exupéry, a famous French writer and poet. It is one of the top translated books in the world and voted one of the best 20^th century books in France. This book embodies many conceptual lessons regarding loss, love, friendship and “grown ups”. It was written for kids, but really for adults (you’ll understand when you read it). Here are some life concepts from this book:

1. “All grown ups were once children, but few of them remember it”

Our body may grow old, but our heart need not to: Lose the inner child and you may lose your creativity and without creativity innovation becomes very difficult.

2. Be honest, to yourself and others. If not, it might cost you dearly.

In this book, there’s a rose that The Little Prince cares for deeply. He waters her and protects her from predators. One day, the rose says that she does not need him to survive. Her pride causes The Little Prince, the only one person who loved her, to leave. Be true to yourself, don’t let your pride cloud reality.

3. The essential is invisible to the eyes.

One of the main messages of the book (The Fox’s secret):

“One sees clearly only with the heart. The essential is invisible to the eyes.”

We see things too much on the exterior, we judge too fast and think too little. There are wonderful people in this world that cannot be discovered simply with the naked eye.

4. Don’t be a geographer, be an explorer.

During his journey, The Little Prince meets a geographer. The geographer states that he knows every place and everywhere but never actually been to any of them. He knows about some distant stars but has even never explored his own homeland. It is beneficial to know something; but to feel, that is something entirely different. We reach towards the stars, but forget the beauty that is underneath.

5. Enjoy the ride, you’ll only get this one.

In the Little prince’s journey, he encounters a worker whom follows his job orders on a planet that revolves every minute. He never gets a moment of rest. Some of us are the same, we work so much that we forget to enjoy the things some others don’t have the privilege to. Appreciation is key to happiness.

6. The person in the mirror.

On his journey, The Little Prince meets a King whom can only speak of others and only knows what he rules. It is easy to speak of others, but it is hardest to judge oneself. This theme is essential in investing. Judging yourself is what helps one grow. Knowing your own limitations may prevent disastrous investments.

*Here’s an exercise to improve your qualities, suggested by Warren Buffett: Take a notepad and write down the greats that you admire, and why you admire them. Then, list qualities of these greats that you find attractive or would like to have. If you think of it, most of those qualities aren’t special skills, and with practice, you can make them your own.

I discovered this book through my father, who has a passion for French literature and education. This book has been a huge influence in my life philosophy and creativity. I highly recommend reading it, it’s very short (you can read it within an hour). If it’s your first time reading this, don’t rush it, enjoy it. You can find The Little Prince here.

Of course, JMO (just my opinion).

Golden Life Lessons From Investing

June 23, 2016May 22, 2017 / 416Investor / Leave a comment

What are some life lessons that we can learn from investing?

TIME IS MONEY, BUT MONEY IS ALSO TIME

They say time is money. The equation goes the other way to: Money = Time. Now, other things equal, the point of money is to have financial freedom, more financial freedom derived is really just more time.

Time is on the side of a continuously improving company. Time is also on the side of a person who’s consistently improving. Make every moment count.

DON’T PREDICT YOUR FUTURE, MAKE IT

A great company can’t predict the future, but it can make it. You might not be able to know what happens in a few years, but you can control what you do today, keep your long term goals in the crosshair and day by day, struggle by struggle, you’ll get there, sooner or later.

SEEK VALUE: DON’T BE TOO QUICK TO JUDGE OTHERS

Behind every stock is a company. Most people just look at the ticker price and judge whether or not it will go up or down. Instead, read the balance sheet, look for intrinsic value, margin of safety,learn about the company. Don’t be too quick to judge a stock based on just it’s price; don’t be too quick to judge people upon first sight.

Sometimes great companies will experience turmoil, unforeseen events can shake up even the greatest companies. Just like some individuals can be shaken by events, sometimes it just takes time to see the value in someone.

In the early 1990s, aerospace company General Dynamics was in bad condition. To be precise, $600 million in debt, negative cash flow and on the verge of bankruptcy. To the surprise of many investors, it made the impossible turnaround and long story short, is one of the leading aerospace companies today.

Sometimes people are in these rough times in life, perhaps they went on a bad breakup, lost their job or are just having a bad week at work, they may seem mad or irritated at first glance, but there can always be more to the story. We’ve all experienced bad times and made mistakes and through those mistakes we learned something or two.

SURROUND YOURSELF WITH WINNERS

Ideally, in our investment portfolio, we want to hold winning positions (great companies); ride your winners and let go of your losers. In life, surround yourself with people whom you value and admire, they will better your self-development. Toxic individuals may weigh you down and slow personal growth; thats the last thing we want.

SORRY ISN’T ENOUGH

The greatest investors have made billion dollar investment mistakes; but they adjusted and learned from it. Sometimes you’re greatest stock picks will turn out to be a mistake. Don’t just be sorry. Learn from it. In life, when you make a mistake, be quick to admit it, learn from it and work on ways to improve from it. The importance here is the actions taken to correct the mistake and to prevent it from happening again.

“There’s no shame in losing money on a stock. Everyone does it. What is shameful is to hold onto a stock, or even worse, to buy more when the fundamentals are deteriorating”.

– Peter Lynch

EMOTIONS ARE JUST AS IMPORTANT AS INTELLIGENCE

Regarding long-term investing, Peter Lynch says: “Everyone has brainpower. But not everyone has the stomach for it”. The stock market is a wild animal, and Mr. Market is often moody, euphoric and irrational. Some days he’s very optimistic, others, he’s incredibly pessimistic. Intelligence may help you detect a great stock, but emotional intelligence and disciplined temperament will give you the gut to ride the rollercoaster that is the stock market.

Intelligence will no doubt allow you to strive in learning, applying and information processing, but emotional discipline will allow you to keep your head in when everyone else is losing theirs. It can help you control your anger and save you from irrational actions. Pair these two together, you have a winning combination, in investing and in life.

Quick summary:

All in all, time is the greatest asset of a great person, a great company, but for a human life, time is limited. Making money will allow you to have financial freedom, but the goal of financial freedom is ultimately to have more time. Time to spend with your loved ones, your friends, to travel and explore the essential part of life that isn’t investing. Of course, do continue to pursue your financial goals and knowledge, but don’t forget the endgame.

As always, JMO (just my opinion). Cheers.

Why You Need To Start Investing Young

June 23, 2016May 22, 2017 / 416Investor / Leave a comment

Why you need to start investing when you’re young?

The answer lies in the most useful, but most scarce (limited) resource ever: TIME (and yes, time does indeed equal money). You will take advantage of compound interest paired with time; along with the right investments, you can have a capital powerhouse.

The magic of compound interest

Compound interest does wonders for young investors in the long run (it’s not magic, it’s just basic math). Here are a few monetary examples that will get you to start investing at a young age.

-If you had invested $1000 in Berkshire Hathaway (BRK-A, Buffett’s company) in 1964, and patiently waited 50 years until 2014, you would have $18,261,630 (a whoopin’ 1,826,130% gain).

Let’s visit a few examples, with fixed variables just to show you what compound interest can do:

Let’s say you invest $8000 today, into a fund that will average out 8% a year, compounded for 33 years:

Year 1: $8,640

Year 5: $11,754.62 Year 30: $80,501.26

Year 10: $17,271.40 Year 31: $86,941.36

Year 20: $37,287.66 Year 32: $93,896.66

Year 27: $63,904.49 Year 33: $101,408.40

Year 28: $69,016.85

Let’s say instead of starting to invest when you’re 22 years old, you start later at 25.

That’s a 3 years difference. By the time you hit that $80,501.26 mark, someone who started 3 years earlier would have $101,408.40. Imagine what you can do with an extra $20,907.

Let’s go with a more eye-opening example, a fund that yields good results:

Let’s say you invest $12,000 today, and another $100 monthly into an amazing stock or fund that will yield 15% a year compounded for 23 years.

Year 1: $15,095.42 Year 19: $285,052.50

Year 5: $32,870.49 Year 20: $329,105.79

Year 10: $74,848.51 Year 21: $379,767.08

Year 15: $159,281.30 Year 22: $438,027.56

Year 17: $213,434.67 Year 23: $505,027.11

Year 18: $246,745.29

Like the previous example, instead of starting at 22, you start at 25. Within those 3 years, you’re lagging behind $175,921.32 compared to someone who started at 25. You’ll have $329,105.79 (still very good) while you could have $505,027.11 (half a million dollars-even better), if you had just started 3 years earlier.

Think about it… that difference is enough for a considerable downpayment on a condo/ house in Toronto, Canada or can be used as retirement income.

Of course, this example fixes a lot of variables and requires a good return of 15% compounded over 23 years (rare, but yes, this type of performance does indeed exist): it shows the importance of time and starting early in investments.

“A low-cost index fund is the most sensible equity investment for the great majority of investors…by periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”.

-Warren Buffett

Now let’s say you decide to buy an index fund, as suggested by Buffett. Let’s keep it simple and select the Dow Jones Average. In 1915, it was $1,304 (inflation adjusted) and is currently sitting at around $17,360 as I’m writing this in late spring 2016. In 101 years, it went up around a total of 1,352%. That’s a multiple of about 13 times your investment. Compound interest paired with time does wonders.

If you’re worried about the market crashes and depressions, note this:

The Dow Jones Average survived the Great Depressions and countless others, 2 World Wars, more wars that followed, oil glut, the dot-com bust, the subprime mortgage crisis, etc. and will continue to survive and strive for times to come.

Mistakes

Mistakes are inevitable, they are part of the learning curve but you want to learn from it early, not late. Starting early will leave you room for mistakes. It allows you to adjust your strategies and gives you extra time to learn.

“If you love life, don’t waste your time, for time is what life is made of.”

-Bruce Lee

In summary, the examples provided have many fixed variables. The goal was to illustrate the difference even a few years can make in compound interest output. I am not implying that investing in stocks, bonds, index funds, mutual funds, etc. is the only way to take advantage of time. You may even choose to invest in your very own business.

Therefore, first investing in yourself could prove to be an invaluable investment, paired with time, your skills will grow exponentially which may provide you with valuable breakthrough ideas and investment knowledge.

All in all, start early, not late. Perhaps the earlier you start, the earlier you get to reaching your goals, and perhaps then, the more time you’ll have to enjoy your definition of a successful life. I would recommend the following books for those beginning in investing, the knowledge I have acquired from them are invaluable.