Investing is boring. I mean, who wants to put their hard earned money into an account and not touch it for decades? It is downright, not exciting.
What IS exciting is the fact that you can make extra money each day, month, and year by investing or “putting your money to work.” Historically, the stock market has produced an 8-10% annual return. That means $10,000 theoretically produces $800-$1,000 of extra “income” per year. So if you save 10 grand, you’ll essentially make another grand in the next year from that money. Wealth begets wealth.
If you put enough of your money to work for you, and you don’t live an inflated asshole-ish lifestyle, you can live off the interest and do whatever you want with your days. Exciting?
What’s more exciting is that the 8-10% return may be on the low end of potential returns if you learn to leverage your expertise and do a bit of studying. And it’s doubly exciting to think about how your monthly expenses could turn into more than $250,000!
For instance, if you’d been a passionate gamer who poured as much money as time into Call of Duty: Modern Warfare (Activision Blizzard – ticker symbol $ATVI) when it revolutionized the first person shooter genre in 2007, you would have seen your money grow by 400% since then.
Or maybe in between multiplayer rounds when your focus began to slip, you scurried to your kitchen only to realize how convenient your single-cup-producing coffee maker was and invested. The only thing better than a 3.0 K:D ratio is a 2000% return on your investment, and that’s what you would’ve seen from an investment in Keurig.
Hope you’re still with me at this point. The key takeaway is that investing doesn’t have to be boring or over complicated. What I recommend, and I’m going to outline in the following guide, is to buy shares in great companies that you know/love/understand (and most importantly, want to be a part owner of) and hold onto them until their situation changes or you find a better investment. It’s really that simple.
This guide will go through topics like recommended reading, what to use to buy/sell stocks, types of business and how they affect you, index funds and ETFs, and
some lots of mistakes that I’ve made and continue to make.
“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”
I plan on regularly updating this guide as I come across valuable lessons or strategies worth sharing.
Disclaimer: I’m not a financial professional or self-proclaimed investment wizard. I’m just a dude who loves personal finance, business, and making money with the least amount of work as possible. The following information is a simplified version of what I’ve found most useful in my young investing adventures.
Recommended Resources for Beginners
One up on Wall Street by Peter Lynch – the basics of finding good companies to invest in that you love and know better than most + how to make sense of all the numbers associated with a business
The Richest Man in Babylon by George S. Clason – “Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.”
The Compound Effect by Darren Hardy – motivating tale of the 8th wonder of the world, Compound Interest
Rich Dad Poor Dad by Robert Kiyosaki – A must-read, mindset shifter for anyone who’s not investing in some form already. Put your money to work for you. (note: author is not a proponent of the stock market)
Tools of the Trade
If you’re starting out and will be experimenting with different types of stocks, set up an account with Robinhood. Robinhood is a mobile app based free trading platform with easy to use interfaces, helpful notifications, and everything you need to begin experimenting with stocks. And did I mention it’s free? Free trading allows you to buy one or two shares of a company you love and believe in when you’re lacking dry powder (cash) on hand.
I won’t bore you with the ins and outs of market orders, calls, shorts, and other investing terms. TBH, for this style of investing you won’t need to know much other than buying and selling, and those are simple enough to learn. If you’re having trouble, Robinhood has a how to use guide within the app and many other brokerage firms and investing sites have complete guides on the basics of investing platforms. (You can use a site like finviz to take a deeper look at the financials of a company.)
With a typical brokerage account, you’re going to pay a flat fee ($5-$10) per transaction. Meaning if you bought one share of Facebook ($FB) for $120, you would be losing 4-8% right off the bat. Even when you shift over to a brokerage account for things like a Roth IRA, it’s wise to make your fee less than 1-2% of the market order. An example would be buying $1,000 worth of shares with a $7.95/trade fee. (This can be advantageous because you’re going to buy with more conviction on a $1,000 order than a single stock purchase. More on this later.)
Note: An account with Robinhood will be a taxable account so anything you sell for more than you purchased it for (capital gains) will be taxed by Uncle Sam. You don’t pay any taxes until you actually sell a stock. In addition, buying and holding will influence the % in taxes you pay. The best way to avoid these taxes would be via a retirement account, like a Roth or Traditional IRA, which are by and large untaxed accounts. You’ll need more than Robinhood for a retirement account and you will run into the trading fees, so they’re not ideal for starting out and experimenting in the stock market. You should definitely have a retirement account and the sooner the better, but if it’s going to prevent you from starting out with investing, go without for now. It’s worth mentioning that many firms will give two months or a specific number of free trades for new accounts.
Different Strokes for Different Folks
There’s a lot of hoopla and terminology in the investing world. I’m convinced most of it was created to keep the everyday person from taking control of their own portfolio and using professional financial services. I’ve come to believe that investing can be simplified to two strategies, for the most part.
- Potential to 10x your investment + risk of losing 100% of your investment – any income from your investment (small cap growth stocks or “exciting” startups)
- Potential to have very little fluctuation in your initial investment + slow annualized returns + quarterly income – the potential to 10x your investment (Think: large cap or “blue chip” stocks & index funds)
The younger you are, and the more risk-tolerant you are, the more you can chase the bigger returns in strategy one. Though even as a young individual investor, diversifying and including both strategies would be a wise decision. As you age, you’ll want to transition into safer and less volatile investments at the sacrifice of bigger returns.
Note: this is a massive oversimplification of things and there are many other investment strategies like mutual funds, bonds, currencies, etc., but I’m not convinced any individual investor needs to bother.
Small Cap vs Large Cap Investing: Explosive Growth Potential vs Slower Moving & “Safe” Investments
“Cap” refers to market capitalization, or simply put, the total value of all shares outstanding for a company. If you want to fully nerd out, here’s a quick video.
A great example here would be Amazon ($AMZN), which is one of the largest publicly traded companies in the world now and has a market capitalization just shy of 400 billion dollars. Chuy’s ($CHUY) has a market cap of around 500 million dollars.
Chuy’s ($CHUY) on the other hand, has a market cap of around 500 million dollars. They also have the best tortillas this side of the Mississippi and for that, earn a strong buy rating from me.
Which company has more potential to double in size? This may be a poor example because Amazon may damn well double its current size and take over the world. But traditionally, large cap stocks are slower growing, well-established companies while small cap stocks have more potential growth.
So which one is for you? I’ll list a pros and cons of each, IMO:
- Higher chance of explosive growth – Small caps have to potential to double or triple (or more) your initial investment in the short-term. You also run the risk of losing 100% of your initial investment if an unproven company tanks.
A big winner always outweighs a loser – You can only lose 100% of your money invested, but you can gain 1000% or more from a stock.
- A company’s price per share means nothing about the value of that company. Cheaper stocks aren’t less value than higher priced stocks and vice versa. That said, many small cap stocks are going to have lower share prices, allowing a beginner to experiment and diversify by investing in many different companies. If you have $1,000 to get started, buying a share of $AMZN, currently priced around $800, would occupy 80% of your portfolio and heavily tie your success to one company. Diversity is good – and fun!
- Speaking of fun, small cap companies are usually more cutting-edge and exciting companies. Investing in a company that makes paintball shooting drones is a lot more exciting, at least to me, than a company who provides wireless service. BTW, don’t really invest in a company that makes paintball shooting drones. That can’t be a useful product or successful business. Or could it?
- Dividends – A company like Verizon ($VZ) has a 4.23% dividend yield, meaning you earn 4.23% annually for sitting on your hands. For example, one milli in $VZ would earn roughly $42,000 each year in dividends. You won’t see much growth in terms of share price, but that’s not what you’re after here.
- Share buybacks – When a company has cash on hand, they may repurchase outstanding shares. This typically, though not always, benefits shareholders by elevating the earnings per share (how much the company makes for every share outstanding). This makes a company and its shares more valuable, and that’s good for your wallet.
- Less volatility – Using our example from above, a massive company like Verizon isn’t going anywhere anytime soon. You lose the chance of doubling your money in the short-term for stability during hard times. In the Great Recession, Verizon did just fine. They even increased their dividend yield during those hard times.
Vanguard and Other Confusing Names
The last piece of the puzzle I laid out earlier are the index funds and exchange-traded funds (ETFs). Again, for the nerds, here’s a great article on the differentiation.
Let’s say you wanted to be a shareholder in every company in the S&P 500 (500 companies) but had neither the cheddar to buy all those shares nor the patience to put in that many market orders. You could save up the funds before hiring a part-time lackey to do the grunt work, or you could buy the Vanguard S&P 500 ETF ($VOO) which tracks the S&P 500’s performance and has an annual return of 14.5% since 2010.
An index fund is simply a compilation of stocks in one specific area of the stock market. They may range from areas like the aforementioned $VOO to the iShares S&P SmallCap 600 Growth ($IJT) to the Vanguard Total World Stock Index Fund Investor Shares (VTWSX).
The biggest benefit of this type of investment is the lack of action required of you. All of the management and rebalancing in a fund is done for you, and at a fraction of the cost of a mutual fund. Other than checking in every now and then to see if the US economy is still churning, the only other action step would be perpetual deposits into your money machine.
Oh, and did I mention that some index funds pay a dividend?
Final disclaimer: I may own shares in the companies I mention and this guide, or any other investing and finance-related information on masonwoodruff.com, is not intended to be investment advice.