2024-02-07
In this post, I will share my take on investing, what you should do, and how. This is just my opinion, and I'm not a financial advisor. First of all, I think the average person who lacks knowledge about investing should avoid investing in individual stocks. Instead, they should consider investing in ETFs or index funds because the probability of outperforming them without any knowledge over the long run is close to 0. Another thing to note is that you should not exit your positions at all only when the fax change. This graphic shows how $10k invested from 2003 until 2022 would have fared if you missed the best days. It's absolutely necessary to stay in your ETFs.
If you have a slightly higher risk tolerance and an interest in investing, you can venture into individual stocks or have a mix of stocks and ETFs. When evaluating which stocks to buy, I believe in keeping it simple and selective.
"An investor should act as though he had a lifetime decision card with just twenty punches on it" - Warren Buffett
When making an investment decision, you should be comfortable with the idea that if the stock market were to close for the next 20 years, you would still hold that position. You should not trade in and out; remember, you are buying a part of a company.
This was Warren Buffett's portfolio from 1994 to 2021, and as you can see, he is not impulsive. He buys companies that he likes and keeps them. You should also only invest in companies where you understand how they make their money. For example, I know how Apple makes its money; they sell electronic devices. But I don't know how Walgreens or CVS makes their money. There's the good, the bad, and the too hard to understand. Keep it simple; that is what made Warren Buffett one of the richest men alive.
Regarding diversification, I don't think you should diversify too much. 1-4 stocks are enough if you have high conviction and are comfortable with the risks that come along the way. You should still be able to sleep at night; if not, you are in big trouble.
Alternative investments are often only accessible when you already have a certain amount of money. Of course, you can invest in commodities or crypto, but I wouldn't recommend touching or investing much in them if you don't really understand them.
However, I believe that alternative investments, in general, are great. You can allocate your money to outside managers like hedge funds or private equity firms, or even invest in private equity for real estate. You can also start buying real estate with some debt, but be cautious when using debt in any endeavor.
There are some excellent alternatives for buying real estate. You can invest in REITs (Real Estate Investment Trusts), which are publicly traded and manage real estate. By law, they need to pay out 90% of their profits in dividends. REITs are more liquid and are managed by experienced professionals.
You should also look at the fees associated with your investment because fees do matter and can make or break you.
There's a great story on Wall Street named "Where Are the Customers' Yachts?" and it's from more than a century ago. It's about tourists admiring the yachts in New York from the brokers and Wall Street bankers, and one of the tourists asked, "Where are the customers' yachts?" But of course, there were none. So be cautious whom you give your money.
Thanks,
Finn