This is part two in the “getting started with investing” series on Whirling Thoughts. The purpose of this series is to provide the underlying rationale for investing and small, actionable steps to get started with investing. I’m doing this because I believe that investing is a fundamental skill in life and something that many students / young people find very intimidating.
DISCLAIMER, not an investment expert and this is not investing advice. Just some general knowledge repackaged to help you get started. This is a beginner guide and not meant for finance whiz kids.
What Will Be Covered In The Series
Within this series I want to discuss a few key topics:
- Why should you invest?
- What are some common misconceptions about investing?
- What can I buy? Options, bonds, stocks, dividends, mutual funds, ETF’s and everything in between
- The concept of passive investing. Why ETF’s are a great place to start.
- Where can you start investing stocks? What platform can you use?
- The psychology of investing
- Sources for more information
If you have additional questions, please comment below, and I will make sure they are answered within the articles.
If you study business/already invest and have objections, questions, comments, and variations on “you’re dumb”, I also welcome those in the comments section! Feedback and debate are always appreciated.
What Are Some Common Misconceptions About Investing?
- It’s a path to get rich quick
- Investing is gambling
- You need a deep understanding of business to get started
In this article, I will present arguments and debunk some of these misconceptions. It’s a little boring and theoretical, but it sets up a good base for the next few articles.
Investing Is Not A Path To Get Rich Quick
We constantly hear the stories about the traders and investment bankers who are making millions (occasionally billions) of dollars investing over a week. It’s tempting to believe that we are able to replicate similar success. As a beginner, this is the worst mindset you can possibly have because:
- These people are professionals who have access to knowledge and resource you do not have
- Investing is a long-term game. But not as long as you think.
- Risk is directly correlated with returns. The higher the return, the higher the risk. AKA you losing a lot of money
Even Billionaires Lose Big
As a beginner (which I would consider myself to be), you need to realize that those firms have access to machine learning algorithms, hundreds of analysts, more time, and occasionally some insider information. Though they have all those resources, sometimes they still lose money or perform under average.
Do you think you can do better?
Even worse, you have to realize that it’s ok for these guys to lose a couple of million here or there. Their firms are huge and they can take that loss.
Can you afford to lose a couple thousand dollars of your hard earned money?
Think Long Term, But Compounding Happens Faster Than You Think
In reality, it’s the most beneficial for us to treat investing as a long-term game. You get rich over a long period of time. It’s a tool that will allow us to slowly, steadily accumulate more money and assets. It doesn’t take fantastic % returns to double your money.
One rule of thumb that has blown my mind is the Rule of 72. Given a certain compound interest rate, divide 72 by that number. This rule tells you how long it will take for you to double your money. The average % return of investors is 7%. This means that in 10.2 years (72/7), you could double your money.
That would turn $1000 into $2000. $5000 into $10000. $10000 into $20000. Not bad for making an investment decision once.
Wait. Why not just take that rule and divide it by 72%? You can get that with a penny stock or cryptocurrency or maybe some foreign Brazilian Bonds!
More Returns = More Risk = You Will Probably Lose Money
Risk is directly correlated with returns. The more money you might be able to make, the more likely it is you are going to lose that money. I don’t know about you, but I really like the idea of not losing money, most people do.
That math is even scarier. An investment that loses 50% of its value has to gain 100% (double) from that point to reach its original value. Example:
You start with $1000 in a penny stock. Disaster strikes and you lose 50% of that value. Your $1000 is now worth $500. To get back to $1000, you have to double that $500 or have it grow by another %100.
Philosophically, I believe that in investing, it’s better to focus on making a respectable return on your money and not lose it. This is opposed to making a moonshot bet and risk losing it all. A little patience never hurt.
Investing Is Not Gambling
When you buy a stock, you are buying a part of a business. If the business does well, your stock does well. If it does poorly, you will lose money.
For most stock-based investments, you will have to choose several companies. That involves a degree of risk. You may lose money. But you have control and several factors in your favor.
When you go to a casino or play the lottery, the odds are stacked against you. Someone has done the math and figure out that in the long run, the gambler will lose money and the casino will gain money. It’s a loser’s game. It is inconsistent, random, and you are more likely to lose money than gain money
With investing, people have consistently grown their wealth. There are certainties, cause-effect relationships, and things you can seek to understand that don’t involve complex statistics.
People have consistently gotten rich.
One of the most useful cause-effect relationships is the fact that companies in North America are keen to grow. The stock that tracks the largest 500 companies in America has grown in value at 7% every year. People want more money and success. So they grow companies and increase earnings. Their business does well, the stock goes up, you make money.
But there are drops! Recessions! Yeah, well if you had bought in 2008 (when everything crashed) and held until 2016, you still would have turned 1500 into 2100. Not bad.
Options, ForEx, Shorting
Never heard of these before? You can skip this section.
I’ll be going into more detail about what each of these techniques is in a future article. However what you need to know now are that these are forms of “investing” that get hyped up by scammers hoping to suck a few newbies in. These are the short-term techniques that get people questioning whether investing is the same as gambling.
Do people make money using these techniques? Yes. But very few. Those that do are often seasoned experts who spend a lot of time reading up, losing a lot of money first, and getting lucky occasionally. Oftentimes, they make their money selling coaching sessions, subscriptions, or getting people to sign onto pyramid schemes.
These techniques have their unique purposes and opportunities, but for people without much time to learn and are having trouble determining what stocks to buy, they should be ignored and forgotten about.
Understanding Business Helps, But You Can Start Without A Deep Knowledge
The more you understand business the better. Having an understanding of business models, cost structures, trends, leadership, accounting, and strategy will give you the ability to find better investments with the potential for higher returns. Investing in business knowledge gives good returns. One article in this series will be dedicated to resources and links to help improve your understanding of business.
All that being said, there are avenues and investments that you can get started in right away. I am specifically referring to passive investing, which will be discussed in a future article. What matters more with these strategies is consistency and sticking to a strategy.
Of course, these techniques aren’t foolproof and have their own unique risks (which will be covered), but overall they are some of the best paths for beginners to start investing.
Hope this helps!
I’m a big fan of personal finance, and I really hope this series can answer some basic questions. Always appreciate comments and feedback, and will make sure to respond to them.
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