Getting started as an investor

[Rod]

I'm not sure that you need any advice. Investing isn't a field where first you learn then you do. It's constant self-directed learning. As long as that excites you, keep going. If it no longer does then stop.

[SharperDingaan]

Appreciate all the input! Lot’s to add to my reading list :) Most advice corroborates the direction I was starting to go - use indexing for now (a large chunk was already invested in indexes) and start dipping my toe in the water with companies I understand. Start small so mistakes are limited. I like the idea to buy some BRK.B at 200.

 

@sarganaga Regarding data science/python, do you mean analyzing the business/industry data relating to a co. you are researching? I haven’t seen this topic come up much in value investing circles.

 

What other education is worth pursuing? Accounting, economics, industry specific research? I’m taking a free Wharton intro accounting class on Coursera.com now. I have a science background, so I needed some understanding of accounting language.

 

It's too early for the education decisions yet.

A great many 'science' people end up doing an MBA to broaden their skills base. That MBA will include the accounting, finance, human resource, and strategic management skills that you currently lack; and it will also benefit you in your day job.

 

The obvious 'investment' designation is the CFA. But it's a lot of work - and you don't have to know how to build a calculator, if you just want to use it. As with the dentist, or doctor; just buy the skill-set when you need it.

 

You need to find out first if this is something you actually like, and whether you're any good at it, before putting any more time into it.

If it wotks out well you've made the right decision, if it doesn't you've cut bait early and saved a fortune in tuition fees.

 

Now get out of the way and let me at it!

 

SD

 

 

 

 

[LC]

Give yourself a long enough leash to make mistakes.

 

Do not try to limit your mistakes - this is how you learn. And eventually the market will “educate” you.

[frommi]

Appreciate all the input! Lot’s to add to my reading list :) Most advice corroborates the direction I was starting to go - use indexing for now (a large chunk was already invested in indexes) and start dipping my toe in the water with companies I understand. Start small so mistakes are limited. I like the idea to buy some BRK.B at 200.

 

Looks like you are falling prey to confirmation bias here. Why do index investing if forward returns for the S&P500 (i assume you mean that one) are very likely to be lower than cash yields?

[mjohn707]

If you are looking to get started in value investing, and more importantly if you’re looking to start putting your own hard-earned money on the line using the modern principles of value investing, the first and most important thing you should learn is to lower your expectations.  And while it’s true that in the dark ages of value investing you could expect to underperform the index for periods of time when low-cost stocks fell out of favor, but expect modest outperformance overall, that expectation has changed with our discipline’s current enlightenment.  And it is undoubtedly true that if you carefully follow our modern guidelines to focus on business quality over all over factors, especially price, you can nearly be assured of not only underperforming the index periodically but also overall, and in many cases in such a magnitude that will shock and befuddle those ignorants who still cling to outdated notions such as the efficient market theory, which our discipline in recent years has strongly debunked on the downside.  The most important truth is that the modern practice of value investing is not about outperformance, but instead about thinking in an enlightened way about business quality, and practitioners should not be deterred if business reality occasionally or even consistently fails to live up to our fine principles.

 

The second most important thing is to realize that a proper understanding of the principles of value investing makes you a universal expert in nearly every field of human endeavor.  And once you understand our principles, you will be equipped to speak authoritatively about such disparate things such as politics, psychology, foreign relations, and even economics.  And you will undoubtedly find that you are always correct about everything, and that our principles are truly the key that unlocks all the mysteries of human understanding.  Issues that the rest of society has struggled with for decades and centuries even will seem simple for you to solve just in a message board post, and you will be able to cut through a tangle of contradictory evidence with ease.  You will be capable of other feats such as reading short books about bird migration or the nation’s sleep habits and diagnosing vast errors in the thinking of the less enlightened.  Everything will be predictable to you, elections, the long-term results of business decisions, and even governmental affairs.  And while others will still wander in the probabilistic world of fuzzy data and uncertain outcomes, you alone will know the deterministic truth of it all.  In fact you will see more and more how the less fortunate of the world, those unenlightened by our principles, are deluded and misguided, and that their delusion strangely runs in the direction of keeping you out of the rightful position of authority that you will merit.  Practitioners have no other recourse but to patiently explain to other parties their failings until society recognizes the intellectual bonanza of our discipline hidden in plain sight.  The whole world is truly your Gordian Knot, and your mind will be a sword.

 

The last and most important thing to learn is that as a repository of great wisdom and insight, you must find the correct balance between projecting an aloof arrogance and aggressively attacking the less enlightened.  There is no better way for our discipline to maintain its influence than to always demonstrate to others our own tremendous and unshakable self-regard, and our absolute conviction in every pronouncement.  In the dark ages of value investing there was an overreliance on producing actual results to demonstrate the worth of the discipline, which could not be relied on consistently even then, and is fleeting at best in these current times.  We modern practitioners must go a step further than the retiring Benjamin Graham or the modest Walter Schloss and summon a belligerence of spirit that would have been considered counterproductive to the scholarly and workmanlike fathers of our discipline.  We have truly added heaps and heaps, great dumps and piles onto the modest inheritance of these great men, and no doubt the discipline is all the greater for it.

 

I hope these few quick thoughts will be helpful to you and other young people interested in value investing.  The discipline is admittedly quixotic in a financial aspect, but I think can be fruitful intellectually for the select, especially if the select might have a little inherited money. 

[Guest ajc]

 

If you are looking to get started in value investing, and more importantly if you’re looking to start putting your own hard-earned money on the line using the modern principles of value investing, the first and most important thing you should learn is to lower your expectations.  And while it’s true that in the dark ages of value investing you could expect to underperform the index for periods of time when low-cost stocks fell out of favor, but expect modest outperformance overall, that expectation has changed with our discipline’s current enlightenment.  And it is undoubtedly true that if you carefully follow our modern guidelines to focus on business quality over all over factors, especially price, you can nearly be assured of not only underperforming the index periodically but also overall, and in many cases in such a magnitude that will shock and befuddle those ignorants who still cling to outdated notions such as the efficient market theory, which our discipline in recent years has strongly debunked on the downside.  The most important truth is that the modern practice of value investing is not about outperformance, but instead about thinking in an enlightened way about business quality, and practitioners should not be deterred if business reality occasionally or even consistently fails to live up to our fine principles.

 

The second most important thing is to realize that a proper understanding of the principles of value investing makes you a universal expert in nearly every field of human endeavor.  And once you understand our principles, you will be equipped to speak authoritatively about such disparate things such as politics, psychology, foreign relations, and even economics.  And you will undoubtedly find that you are always correct about everything, and that our principles are truly the key that unlocks all the mysteries of human understanding.  Issues that the rest of society has struggled with for decades and centuries even will seem simple for you to solve just in a message board post, and you will be able to cut through a tangle of contradictory evidence with ease.  You will be capable of other feats such as reading short books about bird migration or the nation’s sleep habits and diagnosing vast errors in the thinking of the less enlightened.  Everything will be predictable to you, elections, the long-term results of business decisions, and even governmental affairs.  And while others will still wander in the probabilistic world of fuzzy data and uncertain outcomes, you alone will know the deterministic truth of it all.  In fact you will see more and more how the less fortunate of the world, those unenlightened by our principles, are deluded and misguided, and that their delusion strangely runs in the direction of keeping you out of the rightful position of authority that you will merit.  Practitioners have no other recourse but to patiently explain to other parties their failings until society recognizes the intellectual bonanza of our discipline hidden in plain sight.  The whole world is truly your Gordian Knot, and your mind will be a sword.

 

The last and most important thing to learn is that as a repository of great wisdom and insight, you must find the correct balance between projecting an aloof arrogance and aggressively attacking the less enlightened.  There is no better way for our discipline to maintain its influence than to always demonstrate to others our own tremendous and unshakable self-regard, and our absolute conviction in every pronouncement.  In the dark ages of value investing there was an overreliance on producing actual results to demonstrate the worth of the discipline, which could not be relied on consistently even then, and is fleeting at best in these current times.  We modern practitioners must go a step further than the retiring Benjamin Graham or the modest Walter Schloss and summon a belligerence of spirit that would have been considered counterproductive to the scholarly and workmanlike fathers of our discipline.  We have truly added heaps and heaps, great dumps and piles onto the modest inheritance of these great men, and no doubt the discipline is all the greater for it.

 

I hope these few quick thoughts will be helpful to you and other young people interested in value investing.  The discipline is admittedly quixotic in a financial aspect, but I think can be fruitful intellectually for the select, especially if the select might have a little inherited money.

 

 

Might as well shut this thread down. That's not getting bested.

 

 

 

[Spekulatius]

Knowing something and applying it are two different things anyways. I used to know some accountants at work that seemed constantly broke and had credit scores in the 600’s. They certainly can run the numbers and budget, they just couldn’t apply it for whatever reason.

 

It seems like discipline and temperament are more important than knowledge and intelligence for success with investing.

[Viking]

As has been mentioned previously, find some mentors and read/listen to everything you can from them. You need to figure out an investment process that fits your psychological makeup. My journey:

1.) Buffett - i liked Hagstrom’s book on Buffett for an overview - The Warren Buffett Way; i preferred the first edition over the second.

2.) Peter Lynch - One Up on Wall Street - best single book on investing for new investors who want to do more than invest only in index funds. Provides a very useful way to think about the investing process and is very practical and action oriented

3.) Malkiel - A Randon Walk Down Wall Street - this book is better than any entry level course on investing you will take in university. Provides a great academic overview of investing.

4.) Graham - Intelligent Investor - no not read this book from cover to cover. There is a reason Buffett singles out chapters 8 and 20; start with these 2; skim and read any others that look interesting.

 

Life long learning. As you continue on your journey, keep learning. Your investing process will become a mix of those greats you feel are the best fit for you. You will take a piece or two or three from each and develop your very own style. Good artists borrow; great artists steal :-)

 

Don’t lose faith! My first investment was Bre-X (went to zero and i lost everything). My first two years i posted single digit negative returns each year. From that point, i have averaged 15% per year (+15 years). Perseverance is important; often over many years.

 

Learn from your mistakes (this is part of life long learning but I think it is important enough that it should also have its own header). My Bre-X loss pushed me to follow Buffett and the results have been stellar. I also bought Blackberry (RIM back in the day) when Fairfax was also just starting to buy; fortunately i figured out management was not good so i sold at a small loss (around 15% I think); however, what i learned about the cell phone industry prepared and allowed me to load up on Apple a year or two later (when it was out of favour); Apple turned into my biggest gain ever. My point is if you keep learning even what appears to be a bad decision in the short term can make you alot of money at a later date.

 

Concentration; this has been a key to my outperformance over the years. Do not try this when you are learnings. As you get your investment process figured out you can get a little more concentrated with your portfolio.  I think Buffett has said 4 or 5 stocks is good; my guess is ths is good after you have been actively investing (with above average results) for +5 years. Concentration is a killer if you are wrong :-) Peter Lynch is an example of the opposite approach; i think he held upwards of 1,000 shares in Magellan.

 

If you think you have the time and ability to be more than just an index investor you need to actually buy individual securities. When you have money on the line your brain will focus better and you will be more motivated to follow and learn about the company. You cannot become a great investor simply be reading a bunch of books. At some point you need to put your money on the line and see how your brain and your emotions respond to price changes.

 

One of my old bosses at Kraft had a great line “remember, with it comes to advice you tend to get what you pay for”. (Thank you Gary S for that :-)

 

Good luck!

[Liberty]

Looks like you are falling prey to confirmation bias here. Why do index investing if forward returns for the S&P500 (i assume you mean that one) are very likely to be lower than cash yields?

 

But are they? People have been saying "new normal of low returns" since about 2011...

 

If it was that easy to predict market returns, everybody would be a successful macro trader. The market goes up about 2/3rd of the time, not always when it seems to make sense that it does and vice versa. Owning a slice of the economy while you learn isn't a bad idea. This isn't market timing either way, just a general idea.

[LC]

I really appreciated the sardonic wit in mjohn707's second paragraph  ;D ;D

[sarganaga]

Appreciate all the input! Lot’s to add to my reading list :) Most advice corroborates the direction I was starting to go - use indexing for now (a large chunk was already invested in indexes) and start dipping my toe in the water with companies I understand. Start small so mistakes are limited. I like the idea to buy some BRK.B at 200.

 

@sarganaga Regarding data science/python, do you mean analyzing the business/industry data relating to a co. you are researching? I haven’t seen this topic come up much in value investing circles.

 

What other education is worth pursuing? Accounting, economics, industry specific research? I’m taking a free Wharton intro accounting class on Coursera.com now. I have a science background, so I needed some understanding of accounting language.

 

Since you're interested in value investing, you will eventually at least look at quant/factor investing. If you have an idea of what the quants are actually doing, it will help you better decide if  any of it has  relevance for you. Also, the main reason I suggested the podcasts was to offer a look at the different ways people look at investing. Just because you're mostly interested in value investing now doesn't mean that considering other investing paths won't be beneficial to what you decide to do.

 

I would look hard at asset allocation. You should also probably try to a book or two by Harry Browne, Doug Casey, Howard Ruff, or other gold bug Gloom & Doomers  from the 1970's when the investing world looked far different than it does now.

 

For me, the 50+ plus years I've been investing have been a continuing learning experience. Best of luck to you in your endeavors.

[Jurgis]

If you are looking to get started in value investing, and more importantly if you’re looking to start putting your own hard-earned money on the line using the modern principles of value investing, the first and most important thing you should learn is to lower your expectations.  And while it’s true that in the dark ages of value investing you could expect to underperform the index for periods of time when low-cost stocks fell out of favor, but expect modest outperformance overall, that expectation has changed with our discipline’s current enlightenment.  And it is undoubtedly true that if you carefully follow our modern guidelines to focus on business quality over all over factors, especially price, you can nearly be assured of not only underperforming the index periodically but also overall, and in many cases in such a magnitude that will shock and befuddle those ignorants who still cling to outdated notions such as the efficient market theory, which our discipline in recent years has strongly debunked on the downside.  The most important truth is that the modern practice of value investing is not about outperformance, but instead about thinking in an enlightened way about business quality, and practitioners should not be deterred if business reality occasionally or even consistently fails to live up to our fine principles.

 

The second most important thing is to realize that a proper understanding of the principles of value investing makes you a universal expert in nearly every field of human endeavor.  And once you understand our principles, you will be equipped to speak authoritatively about such disparate things such as politics, psychology, foreign relations, and even economics.  And you will undoubtedly find that you are always correct about everything, and that our principles are truly the key that unlocks all the mysteries of human understanding.  Issues that the rest of society has struggled with for decades and centuries even will seem simple for you to solve just in a message board post, and you will be able to cut through a tangle of contradictory evidence with ease.  You will be capable of other feats such as reading short books about bird migration or the nation’s sleep habits and diagnosing vast errors in the thinking of the less enlightened.  Everything will be predictable to you, elections, the long-term results of business decisions, and even governmental affairs.  And while others will still wander in the probabilistic world of fuzzy data and uncertain outcomes, you alone will know the deterministic truth of it all.  In fact you will see more and more how the less fortunate of the world, those unenlightened by our principles, are deluded and misguided, and that their delusion strangely runs in the direction of keeping you out of the rightful position of authority that you will merit.  Practitioners have no other recourse but to patiently explain to other parties their failings until society recognizes the intellectual bonanza of our discipline hidden in plain sight.  The whole world is truly your Gordian Knot, and your mind will be a sword.

 

The last and most important thing to learn is that as a repository of great wisdom and insight, you must find the correct balance between projecting an aloof arrogance and aggressively attacking the less enlightened.  There is no better way for our discipline to maintain its influence than to always demonstrate to others our own tremendous and unshakable self-regard, and our absolute conviction in every pronouncement.  In the dark ages of value investing there was an overreliance on producing actual results to demonstrate the worth of the discipline, which could not be relied on consistently even then, and is fleeting at best in these current times.  We modern practitioners must go a step further than the retiring Benjamin Graham or the modest Walter Schloss and summon a belligerence of spirit that would have been considered counterproductive to the scholarly and workmanlike fathers of our discipline.  We have truly added heaps and heaps, great dumps and piles onto the modest inheritance of these great men, and no doubt the discipline is all the greater for it.

 

I hope these few quick thoughts will be helpful to you and other young people interested in value investing.  The discipline is admittedly quixotic in a financial aspect, but I think can be fruitful intellectually for the select, especially if the select might have a little inherited money.

 

Hear, hear!

[frommi]

But are they? People have been saying "new normal of low returns" since about 2011...

 

If it was that easy to predict market returns, everybody would be a successful macro trader. The market goes up about 2/3rd of the time, not always when it seems to make sense that it does and vice versa. Owning a slice of the economy while you learn isn't a bad idea. This isn't market timing either way, just a general idea.

 

As a general saving tool over a very long period of time i think that index investing is great, because you will buy more if the index is cheap and less if it is expensive. But when you want to invest a lump sum you should think about the "index" as an investment and have realistic expectations of its return. Right now based on CAPE, market cap/GDP or https://fred.stlouisfed.org/graph/?g=qis there were only 3 times the market was in a similar position to now. 1929, 1968 and 1999/2000. On all three occasions the market return over the next 10 years was awful. Is this time different? Maybe, but i doubt it. In 2011 the market was in line with historical averages.

[Liberty]

But are they? People have been saying "new normal of low returns" since about 2011...

 

If it was that easy to predict market returns, everybody would be a successful macro trader. The market goes up about 2/3rd of the time, not always when it seems to make sense that it does and vice versa. Owning a slice of the economy while you learn isn't a bad idea. This isn't market timing either way, just a general idea.

 

As a general saving tool over a very long period of time i think that index investing is great, because you will buy more if the index is cheap and less if it is expensive. But when you want to invest a lump sum you should think about the "index" as an investment and have realistic expectations of its return. Right now based on CAPE, market cap/GDP or https://fred.stlouisfed.org/graph/?g=qis there were only 3 times the market was in a similar position to now. 1929, 1968 and 1999/2000. On all three occasions the market return over the next 10 years was awful. Is this time different? Maybe, but i doubt it. In 2011 the market was in line with historical averages.

 

CAPE? You'd have been sitting on cash for many many of the past years if you relied on that. It doesn't take into account changes in the composition of the index over time.

 

Hindsight bias is real. In 2011, people were expecting a second gfc and predicting low returns.

[Orchard]

There are several reasons to becoming an investor. Two that come to mind:

1) To manage other people's money and earn a fee for doing so

2) To build your own capital base.

 

If you're only interested in 1) then follow all the advice on this thread. If you're only interested in 2) and your current capital base is less than $1M, then you are likely to earn a higher return on your time than on your capital.

 

What does that mean?

 

If you invested all your effort in minimizing all your expenses i.e. finding a great deal for your housing, eliminating any car ownership and cooking your own meals instead of eating out, you will most likely earn a much higher return than you could earn on your current capital base by investing time in figuring out which investments to make.

 

This is particularly true because we are the tail end of a long economic expansion.

[frommi]

CAPE? You'd have been sitting on cash for many many of the past years I'd you relied on that. It doesn't take into account changes in the composition of the index over time.

 

Hindsight bias is real. In 2011, people were expecting a second gfc and predicting low returns.

 

Maybe "people" like Hussman did, but in 2011 the market valuation was not that extreme. Now it is, look for yourself: https://www.gurufocus.com/shiller-PE.php.

[John Hjorth]

There exists an investment universe outside the S&P 500 companies. [ : - ) ]

[Liberty]

CAPE? You'd have been sitting on cash for many many of the past years I'd you relied on that. It doesn't take into account changes in the composition of the index over time.

 

Hindsight bias is real. In 2011, people were expecting a second gfc and predicting low returns.

 

Maybe "people" like Hussman did, but in 2011 the market valuation was not that extreme. Now it is, look for yourself: https://www.gurufocus.com/shiller-PE.php.

 

The market valuation wasn't extreme because people were bearish. It's a complex adaptive system, reflexivity and all that. The market valuation was also so low in the early 80s because people were so bearish and expected the 70s SNAFU to continue. At the time people found all kinds of other excuses not to invest and why it was better to be "defensive", and then later including the CAPE. Lots of disciples of Prem Watsa saw his hedging and deflation bets as his next great trade at the time, etc.

[John Hjorth]

There is still the option - if one starts with a lump sum - basically no matter what size [however size of that lump sum naturally matters for the whole entry to stock picking] - to average in. It creates - over time - a shock absorber - both directions - in the beginning fairly much, later in the process less, - naturally on both your gains and your losses, and if you have made it realistic based on actual and personal circumstances with regard to duration, and do it with mathematical coherence, & determined as a "rule to get in" - you will eventually get invested by your stock picks, - over time.

 

In short, you may end up by starting to buy the index to get stuck/"hung" eternally there, because the index becomes a "sleeping pillow" for you, in that case in your "socalled stock picking endavour".

 

Personally, back then for me - now about 6½ years from now - I personally did that - starting averaging in. I haven't regretted it for one moment. Basically it is about what Mr. Taleb and others call "skin in the game" - personally - to me - it translates to: "If you don't actually practice, you'll never get better at it than you are right now". [<- In the extreme situation of starting with buying the index, you have absolutely no knowledge about if you're good, bad, or even personally a fit for stock picking.]

[John Hjorth]

There are several reasons to becoming an investor. Two that come to mind:

1) To manage other people's money and earn a fee for doing so

2) To build your own capital base.

 

If you're only interested in 1) then follow all the advice on this thread. If you're only interested in 2) and your current capital base is less than $1M, then you are likely to earn a higher return on your time than on your capital.

 

What does that mean?

 

If you invested all your effort in minimizing all your expenses i.e. finding a great deal for your housing, eliminating any car ownership and cooking your own meals instead of eating out, you will most likely earn a much higher return than you could earn on your current capital base by investing time in figuring out which investments to make.

 

This is particularly true because we are the tail end of a long economic expansion.

 

Here, I'm sorry for double posting.

 

Basically, this is set up by Orchard as an *OR* in the current environment. Now, how about the alternative *AND* [by doing both: - Saving AND investing].

 

Personally, I think it depends a lot about who you are and where you live, and what you're willing to do long term at the expense of short term sacrifices,  [in the meaning : Under which local circumstances with regard to taxes etc.].

 

[villainx]

I would add read up on Bruce Flatt and Brookfield, as inspiration and as stock target. 

 

Reading about Brookfield showed what a modern day Buffett or those other longer term minded value/great investor would be today.  Ie, (nothing against my elders) but someone who isn't an elder and is laser focus on producing returns.