Hey Riders, we are Monday the 1st of June 2020 and the first edition is out! We are already 180+ in the community :)
In this first edition of The Next Wave I wanted to dive in the fundamentals of investment and the tools I use to do so. However I received many messages last week of people worried they don’t have enough money to invest. Since I faced the same barrier for years and it prevented me to invest too, I thought I would start with this topic!
Winners and losers in the economy
What if we start investing today?
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The thing we need in order to invest in the stock market is… money. And it is to make more money that we wanted to invest in the first place. So most of the time we think we don’t have enough, and it becomes an excuse that prevents us to start investing. It was also my excuse. But then I learned a counter intuitive fact about financial market: it’s not linear (more on that later). Therefore you don’t need tons of money, you can start investing with as little as $200 a month and make significant returns. The most important: be consistent.
Today I want to highlight two facts that convinced me that (i) $200 a month is enough to start investing in the stock market and (ii) the stock market is one of the best available options to invest in. These two facts are compound interests and policymakers.
1. Winners and losers in the economy
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Winston Churchill - The End of the Beginning
The general idea is that the economy runs in cycles (with periods of growth and recessions). Every time there is a crisis/recession (and the current coronavirus outbreak is no exception) policymakers have two options: lower interest rates and/or print money in order to sustain the economy. Understanding these principles is fundamental for an investor, so if you are not familiar with these mechanisms you should watch this video by Ray Dalio where he explains how the economic machine works. (I also suggest you read his publications on linkedin).
Policymakers try to save (or at least stabilize) the economy, and by economy they usually mean large companies (such as banks) and therefore the financial markets. However financial markets are not a perfect reflection of the real economy, especially in times of financial crisis.
The United States government is now explicitly in the business of choosing winners and losers in the economy. As usual, owners of financial assets have been selected as winners. As usual, those who do not own financial assets are losers.
Therefore investing part of our revenue in the financial markets seems to be a good idea. It has been appealing to me for a long time, I’ve read about stocks and commodities but also real estate, foreign exchanges and even bitcoin. However the same false idea hit my head every time: I don’t have enough money. “If I invest $100 and double it, which is a huge performance of 100%, I will only make another $100. Which won’t change my life”.
But I never took into account the most important factor of all.
2. Compound interests.
Let’s take an example: the S&P500 has a median average return of 12% (not corrected for inflation) since its inception. The S&P500 is an index of 500 stocks taken from the NYSE and from the NASDAQ. So if you invest in a S&P500 tracker (an entity that follows S&P500 performance), it is as if you invest in 500 different stocks meant to be a representation of the health of the US market. You can achieve 12% a year without any stock picking. Source: Wikipedia
You think 12% a year is not that big? Well think again:
Consider a mutual fund investment opened with an initial $5,000 and an annual addition of $2,400. With an average of 12% annual return of 30 years, the future value of the fund is $798,500. The compound interest is the difference between the cash contributed to investment and the actual future value of the investment. In this case, by contributing $77,000, or a cumulative contribution of just $200 per month, over 30 years, compound interest is $721,500 of the future balance.
The amount of money we allocate is of course an important factor of our future balance, it is the elephant in the room. However most beginner forget another, as important, factor: time. Warren Buffett, one of the most successful investor of all time, built his fortune on compound interests: he decided to play the long game instead of gambling on short-term lottery winnings.
“Wealth is assets that earn while you sleep” - Naval
3. What if we start investing today?
I decided to invest $200 a month in the stock market.
I will make two $100 investments a month and write about it. So that you can track what I invest in and learn why I did it (which does not mean I made the right call, so you will also learn from my mistakes :) ). Spoiler: the first will be before the end of the month.
I take for granted that you are able to invest, at least, $100 a month in the stock market (2x$50 investments). If you can’t afford it, there are multiple articles that explains how to save money so I will let you read them: here, here and here. Just keep in mind that the personal finance game is only three steps:
Step 1 = Earn Money
Step 2 = Spend Less Than Money Earned
Step 3 = Use The Difference To Increase Money Earned, Or To Decrease Money Spent
Think about your career. Try to advance it so that you earn more money.
Take a second job to earn more money. (Side hustle might be the best marketing trick ever. Side hustle = second job)
Collect returns from your investments.
101 Ways To Live Like A Poor Hermit.
Pay less tax.
Using The Difference
Pay down debt. (this is the same as investing, it’s all allocating capital effectively)
Or to summarize: (i) generate free cash flow (ii) allocate capital effectively. In this newsletter we will try to become expert in step (ii).
If you do the same (whether you decide to invest $100, $200 a month or even more), in 10 months we will have invested in 20 different companies, commodities or indexes: A well diversified portfolio (we will talk about diversification later).
That’s all for today! If you liked the content remember to ❤️ it and share it with your friends:
Also, if you have any question or feedback: leave a comment and I will reply to you directly.
See you next Monday!
This newsletter does not provide investment advice
As always, trading activity is risky and exposes you to loss of capital. Never invest more than you can afford to lose. Never. The information presented on this page (and every other) are not investments counsels. Your use of this content is at your own risk. The content is provided “as is” and without warranty of any kind, either expressed or implied. All views and opinions expressed here are the author’s own, and are not representative of the views of any current, past or future employer.