Investing--Early 20's

[jwelborn93]

Hey guys,

 

I've been reading this board since the beginning of my college years, and have just begun posting this past month. Value investing for the past few years has been a big interest of mine that is continually growing, and I appreciate all the valuable knowledge this board and its posters provide.

 

I'm in my final semester of college and have some money that I have been investing, but I still have a very large portion in cash at this point. The last few months I've been thinking about the best way to approach the next few years, as my account will be growing in size significantly after I begin my first job due to savings. I will be working in m&a for the first few years after graduating and am considering the best investment approach for someone who will have a rapidly increasing cash position in his portfolio (compared to my small net worth at this point).

 

The past few months I have been considering the following strategy: To invest in good companies run by good managers in out-of-favor areas of the market and let time take care of diversification. Therefore, if I have 15k at this point, I would deploy all of that over the next few months in O&G and let's say Russian stocks (right now I have a small position in CBI and am looking at other companies such as NOV & QIWI). Fast forward 1 year and 20k in savings later, I'll have the opportunity to invest in possibly another industry/sector/country where there is blood in the streets. Not saying there will always be opportunities, but I'm hoping I can be patient enough to know when not to act.

 

Would appreciate hearing your thoughts on this matter.

[jawn619]

Hey guys,

 

I've been reading this board since the beginning of my college years, and have just begun posting this past month. Value investing for the past few years has been a big interest of mine that is continually growing, and I appreciate all the valuable knowledge this board and its posters provide.

 

I'm in my final semester of college and have some money that I have been investing, but I still have a very large portion in cash at this point. The last few months I've been thinking about the best way to approach the next few years, as my account will be growing in size significantly after I begin my first job due to savings. I will be working in m&a for the first few years after graduating and am considering the best investment approach for someone who will have a rapidly increasing cash position in his portfolio (compared to my small net worth at this point).

 

The past few months I have been considering the following strategy: To invest in good companies run by good managers in out-of-favor areas of the market and let time take care of diversification. Therefore, if I have 15k at this point, I would deploy all of that over the next few months in O&G and let's say Russian stocks (right now I have a small position in CBI and am looking at other companies such as NOV & QIWI). Fast forward 1 year and 20k in savings later, I'll have the opportunity to invest in possibly another industry/sector/country where there is blood in the streets. Not saying there will always be opportunities, but I'm hoping I can be patient enough to know when not to act.

 

Would appreciate hearing your thoughts on this matter.

 

I'm in a similar boat as you and i can give you a tip that i have found helpful. First, go to dataroma and follow successful investors. Look at the 10qs of the companies they invest in and try to find out what they see. I have learned so much reading 10qs already its insane. This is literally the beginning of our investing career and the chances that we start doing well with our original ideas is slim to none. I'm still afraid to act on anything original or i don't see other fund managers holding.

 

Hope this helps!

[Ross812]

Hey guys,

 

I've been reading this board since the beginning of my college years, and have just begun posting this past month. Value investing for the past few years has been a big interest of mine that is continually growing, and I appreciate all the valuable knowledge this board and its posters provide.

 

I'm in my final semester of college and have some money that I have been investing, but I still have a very large portion in cash at this point. The last few months I've been thinking about the best way to approach the next few years, as my account will be growing in size significantly after I begin my first job due to savings. I will be working in m&a for the first few years after graduating and am considering the best investment approach for someone who will have a rapidly increasing cash position in his portfolio (compared to my small net worth at this point).

 

The past few months I have been considering the following strategy: To invest in good companies run by good managers in out-of-favor areas of the market and let time take care of diversification. Therefore, if I have 15k at this point, I would deploy all of that over the next few months in O&G and let's say Russian stocks (right now I have a small position in CBI and am looking at other companies such as NOV & QIWI). Fast forward 1 year and 20k in savings later, I'll have the opportunity to invest in possibly another industry/sector/country where there is blood in the streets. Not saying there will always be opportunities, but I'm hoping I can be patient enough to know when not to act.

 

Would appreciate hearing your thoughts on this matter.

 

Make sure you are maxing out tax advantaged accounts (this means 18k in your 401 and 5.5k to a Roth). Depending on your salary when you get out of school should dictate whether you continue to invest in a Roth or Trad IRA.

 

Rotating in and out of sectors is more applicable in tax advantaged accounts so you don't have capital gains dragging on your returns. Chances are in the next 5 years you will change jobs and that ~100k in your 401k can be moved to a self directed IRA (if you do not have a brokerage window on your 401k).

 

I wouldn't buy individual stocks until you have about 20k in your Roth; stick to ETFs in the mean time. As for a taxable account, aim to trade as little as possible. Look at ETFs or companies you want to hold long very long term. 

[frommi]

The past few months I have been considering the following strategy: To invest in good companies run by good managers in out-of-favor areas of the market and let time take care of diversification. Therefore, if I have 15k at this point, I would deploy all of that over the next few months in O&G and let's say Russian stocks

 

I had to laugh a bit at this point, because you mentioned good companies with good managers and o&g/russia in one paragraph. With your account size i would pick one or two ideas of packer, study them and put everything in it. I don`t think diversification is very helpful with your account size.

[thepupil]

you're going into m+a. you'll be HIGHLY restricted in terms of buying/selling individual names by your firm's compliance department. I'd suggest maximizing tax efficiency, resisting the more extravagant vices (coke, hamptons shares, bottle service) while still blowing the occasional couple hundo on a fun night out with friends (you won't get many in the first few months).

 

You probably won't have time to research stocks and probably will be sick of finance by the 2am when you roll back into your shared apartment. Just try to save a little dough (again no bottle service), learn a ton of hard skills, and focus on your job.

 

maybe not the answer you wanted to hear; I was in trading which was much less time intensive but may be more emotionally draining on a per hour basis. I had time to do some research on individual names at night, but I can't imagine doing so if I was in M&A.

[jwelborn93]

you're going into m+a. you'll be HIGHLY restricted in terms of buying/selling individual names by your firm's compliance department. I'd suggest maximizing tax efficiency, resisting the more extravagant vices (coke, hamptons shares, bottle service) while still blowing the occasional couple hundo on a fun night out with friends (you won't get many in the first few months).

 

You probably won't have time to research stocks and probably will be sick of finance by the 2am when you roll back into your shared apartment. Just try to save a little dough (again no bottle service), learn a ton of hard skills, and focus on your job.

 

maybe not the answer you wanted to hear; I was in trading which was much less time intensive but may be more emotionally draining on a per hour basis. I had time to do some research on individual names at night, but I can't imagine doing so if I was in M&A.

 

Thanks for the responses guys. I'm headed into m&a within a specific sector in a low-cost city and am fortunately completely unrestricted on all trades besides those within this sector. I will understandably have much less time to focus on investing during the 2-year analyst stint but hoping I can still fit some in. Could be a pipe dream.

 

 

 

 

[thepupil]

it is a pipe dream if your experience is like that of my friends who gained the banker 15 and worked 100 hr weeks, but Michael Burry killed it picking stocks as a medical resident so maybe you can do it.

 

my advice on coke and bottle service still stands : )

[thefatbaboon]

what thepupil and ross said.

 

Plus, I would avoid cyclicals.  You won't have any time, you don't really know anything, and cyclical businesses are tricky.  This message board and VIC are littered with the graves of thousands of clever write ups on "value opportunities" in cyclical industries. (i would put the companies you mentioned in this category)

[jouni1]

in general, people are bad at investing. don't listen to them. these blogs and message boards are full of people losing to benchmarks year after year.

[wachtwoord]

The past few months I have been considering the following strategy: To invest in good companies run by good managers in out-of-favor areas of the market and let time take care of diversification. Therefore, if I have 15k at this point, I would deploy all of that over the next few months in O&G and let's say Russian stocks

 

I had to laugh a bit at this point, because you mentioned good companies with good managers and o&g/russia in one paragraph. With your account size i would pick one or two ideas of packer, study them and put everything in it. I don`t think diversification is very helpful with your account size.

 

There are plenty of examples in the sector of quality wide moat businesses, both companies (eg SLB, HAL, NOV, CAM, ENB, CLB) and MLPs (eg WPZ, OKS, EPD, SEP).

 

OP I started exactly the same way as you suggested. For me the undervalued sectors at the time were big tech (eg MSFT, INTC, CSCO) and pharmaceuticals (eg JNJ, NVS, AZN). Those are not undervalued anymore. Most of the misses I had were misguided attempts to diversify more.

[100 Shares]

I am one year out of college faced a similar situation to you (the having a small portfolio and my savings over the next year more than doubling it).

 

1) If you want a portfolio of 10 stocks, don't try to find all 10 at once. Slowly build the portfolio as you find ideas. I look back now and think about a specific company I bought stock in and question how I considered that to be a worthwhile idea. Certainly weren't money losing ideas, but average at best. My 1st, 2nd and 3rd picks were good ideas, but the rest were portfolio fillers, I just didn't realize it at the time.

 

2) Think about position sizing relative to your future portfolio size. For example with you 15K and likely to be 35K in a year. If you want a 10% position  do 3.5K. Maybe even think two years ahead and do 5-10K in it. I myself built 5% positions relative to what I had at the time, and now those sit at 1-2% and I feel like I wasted an idea.

 

 

[ScottHall]

you're going into m+a. you'll be HIGHLY restricted in terms of buying/selling individual names by your firm's compliance department. I'd suggest maximizing tax efficiency, resisting the more extravagant vices (coke, hamptons shares, bottle service) while still blowing the occasional couple hundo on a fun night out with friends (you won't get many in the first few months).

 

You probably won't have time to research stocks and probably will be sick of finance by the 2am when you roll back into your shared apartment. Just try to save a little dough (again no bottle service), learn a ton of hard skills, and focus on your job.

 

maybe not the answer you wanted to hear; I was in trading which was much less time intensive but may be more emotionally draining on a per hour basis. I had time to do some research on individual names at night, but I can't imagine doing so if I was in M&A.

 

I dunno, man. Katy Perry says she respects kids who spend their rent money on bottle service. And she's rich as hell, so what do you know?

[jawn619]

you're going into m+a. you'll be HIGHLY restricted in terms of buying/selling individual names by your firm's compliance department. I'd suggest maximizing tax efficiency, resisting the more extravagant vices (coke, hamptons shares, bottle service) while still blowing the occasional couple hundo on a fun night out with friends (you won't get many in the first few months).

 

You probably won't have time to research stocks and probably will be sick of finance by the 2am when you roll back into your shared apartment. Just try to save a little dough (again no bottle service), learn a ton of hard skills, and focus on your job.

 

maybe not the answer you wanted to hear; I was in trading which was much less time intensive but may be more emotionally draining on a per hour basis. I had time to do some research on individual names at night, but I can't imagine doing so if I was in M&A.

 

I dunno, man. Katy Perry says she respects kids who spend their rent money on bottle service. And she's rich as hell, so what do you know?

 

Bottles first, then the models will come.

[oddballstocks]

Why not just invest your portfolio into a fund or two and focus on saving and your job?

[jay21]

Why not just invest your portfolio into a fund or two and focus on saving and your job?

 

Im seriously considering this (at least for a good % of my portfolio) due to a combo of me not finding any "obviously cheap" ideas, lack of time, deterioration of confidence*, etc.

 

Im just not sure if a MF structure is good for value investing, maybe I'll just index which should still work out OK.

[writser]

Oddball just posted the first sane reply. Sounds like you'll have a great career in front of you. Outperforming the market by a couple of percentage points will yield you like $500 this year. That's what you'll earn in an afternoon if you end up being great at M&A. So if I were you I would just focus on learning my job and buy a couple of index funds. I'm not familiar with your situation but I also think it is smart to keep your first $30k in cash anyway - regardless of expected cashflows in the future. Just in case you get cancer, are fired or another unconceivable bad thing happens. The upside of investing this sum is very limited. The downside of being fired in a financial crisis and going broke at the same time is huge.

 

2) Think about position sizing relative to your future portfolio size. For example with you 15K and likely to be 35K in a year. If you want a 10% position  do 3.5K. Maybe even think two years ahead and do 5-10K in it. I myself built 5% positions relative to what I had at the time, and now those sit at 1-2% and I feel like I wasted an idea.

That is also why I think this is horrible, horrible advice. The upside is a few hundred (ok, a few thousand) dollar, but the worst case scenario is that you end up broke & jobless in the gutter. Remember that if you work in M&A your income is partially levered to the stock market anyway (indirectly).

 

I'm not saying you should bail out on active investing, but I would recommend a conservative approach. Set some money aside for a rainy day, invest the rest in index funds, work hard, save money, read a lot about value investing (books, blogs, this forum) and two or three years down the line you can decide whether it is worth your time and effort to try and beat the market.

 

Managing a small portfolio is quite a distraction and, quite frankly, a waste of your time and energy. Your bosses will make fun of you checking out your 100 BAC share portfolio on your iPhone while you are working on a multi-million dollar merger. And rightly so :) .

 

On the flipside, investing a small sum is a good learning experience but don't overdo it.

[CorpRaider]

Why not just invest your portfolio into a fund or two and focus on saving and your job?

 

Im just not sure if a MF structure is good for value investing, maybe I'll just index which should still work out OK.

 

It seems like the traditional MF strcuture if pretty darn near obsolete for taxable accounts.  You can find some good ETFs to get exposure to value stocks/the value factor.

[jwelborn93]

Thanks for the responses guys, at this point I'm going to take some of the advice to put my money in funds but continue reading about value investing when I get the time. If I were to construct a portfolio what would you recommend? I continually hear that it is useless to try to time the market, but I would like to approach my allocation to funds/ETFs with at least a value mindset.

 

 

[innerscorecard]

Thanks for the responses guys, at this point I'm going to take some of the advice to put my money in funds but continue reading about value investing when I get the time. If I were to construct a portfolio what would you recommend? I continually hear that it is useless to try to time the market, but I would like to approach my allocation to funds/ETFs with at least a value mindset.

 

http://www.bogleheads.org/wiki/Lazy_portfolios

 

If you want a value tilt then put 10% of your portfolio in QVAL. Or use Research-Affiliates-style "fundamental" indexes for your 1/3, 1/3, 1/3 allocations instead of market-cap-weighted indexes. They'll outperform sometimes and underperform sometimes. You might beat the market. But you'll feel that you're passively value investing, which is what's important here.

[Liberty]

Somewhat off-topic, but everybody should hear this when they start out: When very young, the most impactful thing you can do is cut your expenses by a lot and thus increase your saving by a lot. Making tons of money doesn't help if you spend it all, and the hedonic treadmill effect means you probably won't be much happier than if you spent a lot less.

 

Here's the first post on this frugality/early retirement blog:

 

http://www.mrmoneymustache.com/2011/04/06/meet-mr-money-mustache/

 

Use the arrows at the bottom of each post to read them in order. When you've read the past 4 years of posts, you either won't get it (it's like value investing, you either do or don't), or you'll be able to save way over 50% of what you earn and get financially independent super quickly.

 

I did the same thing, except that I got my info from different sources (The Complete Tightwad Gazette, a compilation of newsletter from the 90s, and Your Money or Your Life, a classic book in financial independence). You're lucky because this blog I link above is better and more up to date, and now there are forums of people discussing this stuff.

[west]

I have never been a banker, so I may be completely wrong here, but I hear lot of those 100 hour weeks really aren't "productive" 100 hour weeks, but a lot of waiting for your superiors to leave the office.  So you may have down time to do research while "working".  Maybe.

 

First bit of advice: Focus on your job first.

 

Second bit: Follow liberty's advice above.  And make sure you have six months of living expenses in cash.

 

Third bit (which is optional): If you can stomach it, put the rest of your money in one idea you've researched the snot out of.  Then watch it like a hawk.  Even if you end up being wrong, you'll learn a lot in the process.  Think about it as an investment in education.  It's better to lose money now and learn from it than later, when your total future earnings will be lower (because you're older) and you have more money at risk (because you're older, and have more saved.)

 

I would pick a small company that's easy to understand, but has lots of disclosure.  One of Packer's ideas might not be a bad bet.  Maybe FRD (the story isn't as simple as "they make steel pipe", however).  Or maybe one of oddballstock's high conviction ideas.

 

This is of course assuming that you do think you can beat the market (I no longer think most people can on their own) and are willing to put the thousands of hours of work and study into it, over a lifetime, to *maybe* make it work.

[AzCactus]

Oddball just posted the first sane reply. Sounds like you'll have a great career in front of you. Outperforming the market by a couple of percentage points will yield you like $500 this year. That's what you'll earn in an afternoon if you end up being great at M&A. So if I were you I would just focus on learning my job and buy a couple of index funds. I'm not familiar with your situation but I also think it is smart to keep your first $30k in cash anyway - regardless of expected cashflows in the future. Just in case you get cancer, are fired or another unconceivable bad thing happens. The upside of investing this sum is very limited. The downside of being fired in a financial crisis and going broke at the same time is huge.

 

I think that randomly suggesting that he keep the first 30K in cash is pretty arbitrary.  The figure should be between 3 and on the conservative side 6 months of expenses.  I think it was Liberty who mentioned trimming expenses if he is able to live off $2000/month than $30,000 is 15 months worth of expenses.  And if something very unfortunate happened the emergency fund is in place.  If something VERY bad such as cancer occurred I am pretty sure medical bills would be FAR in excess of 30K.

[writser]

From reading the topic start I got the impression that the initial poster wanted to invest all his savings since he will be getting a good job anyway. I didn't think that was a great idea so I came up with an different suggestion. But sure, $30k was a completely arbitrary amount :) . The correct number depends on your private situation. I have approximately 1 or 2 years of expenses in a bank account but maybe that's too conservative for others.

 

My point was just that the utility of investing a small amount of savings doesn't outweigh the utility of not going broke - however small the chances of that happening.