I would like to suggest to you two ways to get started.
The first way is super simple and straightforward, and has as few hands in your pockets as possible. So If you have absolutely zero interest spending the time learning how to invest in individual companies on the stock market, and the very idea of sitting in front of your computer screen looking at balance sheets, printing off and reading annual reports, and analysis makes you nauseous, if this sounds like you, here’s how I would do it, and incidentally how Warren Buffett plans to do it when he’s done investing:
A recent study showed 99% of mutual funds underperformed the S&P, meaning 99% of the time you’re better off investing in an index…
1. Take your $1000 and put it all into the S&P 500 Index. I recommend taking your $1000 and buying the Vanguard S&P 500 ETF. (Ticker symbol is: VOO. The management cost for this is 0.04% of your $1000, or $0.40 cents per year, this is about as cheap as you can get.) The S&P 500 index is a collection of the 500 largest companies in the United States. You’re essentially buying a tiny, tiny slice of each of the 500 companies in the pool. When you invest in the index, you’re essentially saying ‘as America goes, I go’. And you’re betting America keeps chugging along as the economic powerhouse of the world. If you look at the economic history of the U.S., it’s difficult to come up with reasons to bet against America. You will do far better investing in the S&P 500 than any mutual fund from your bank or financial advisor. A recent study showed 99% of mutual funds underperformed the S&P, meaning 99% of the time you’re better off investing in an index. And so that’s it, you’re done! No fuss, no muss. I would go with someone like Questrade Brokers in Canada, or someone like TD Ameritrade in the U.S. to buy the S&P 500. You can buy it in your 401k, RRSP, IRA, TFSA, pretty much any account, and it should be free to buy, as the fees are included in the index fund ($0.40 per year on your $1000). And you will go on to achieve better results than 99% of the financial industry ‘professionals’. This is also a great way to enter the stock market and see if it piques your interest at all to take it further. (Note: Warren Buffett added he would put 80% in the index, and 20% in government bonds, but don’t worry about bonds at this stage of the game. Just stick with the index.)
This is similar to how I started, and to my surprise I ended up loving the process of it all, and investing has now become my main hobby! With this very low maintenance approach you can expect a 7-10% return over time.
I would also point out that you could add something called indicators to watch the S&P 500, so that you can follow what the big mutual funds and hedge funds are doing with their money. Think of indicators as basically following the level of the financial ‘tides’. And because the big mutual funds control so much of the money or ‘water’ you’ll be able to see when the tide starts to go out, and get out of the market before it ‘drains’ or crashes. You would check these indicators once a month, it would take maybe 3 minutes, and when they tell you to buy, you buy, and when they tell you to sell, you sell. And that’s it! If we look at what these indicators have done in the past, and we had followed their instructions, we would have added roughly 3% to our overall return by avoiding the big dips, and over time this adds up huge! So it’s definitely worth taking the time to learn about these indicators that the big mutual funds and hedge funds use to see what their competitors are doing. I’ll have another article that will go into more depth about the indicators and how to set them up.
The indicators are helpful, but not necessary. The key is to get started, and once you have real money at work for you, it’ll definitely pique your interest in a way that can’t really happen when you’re sitting on the sidelines. You may start reading more and wanting to learn more about investing. Check the ‘Bookshelf‘ in the ‘Tools’ link to find out where to get started reading.
2. The second way to invest $1000 is a bit more intensive, requiring maybe 1-3 hours of reading per week, for the first 1-3 months, and then some maintenance reading after that. In the beginning it’s definitely a part-time job type commitment, but it’ll be the most lucrative, high-paying part time job you’ll ever have! You’re looking at very do-able 15-30% returns on your money. Think of it like learning a life long skill, a skill so important it will change the very course of your life.
In the beginning it’s a ‘part-time job’ type commitment, but it’ll be the most lucrative, high-paying part-time job you’ll ever have!
Before investing in an individual company, you’ll need to know four things. These four things are the ‘hooks’ we hang our investing hat on. They are non-negotiable, we don’t stray from them, because if we do, we’re sure to lose money. The first rule of investing is ‘don’t lose money’ and rule number two is ‘don’t forget rule number one’. We learn about these four ‘hooks’ from Warren Buffett and Charlie Munger. They include 1. Being able to understand the company. What does this mean? It means we need to know something (don’t worry, not everything) about how to read their financial statements, which helps us to figure out a good price to pay for the business. (This is easier than you think. Hint: it’s a lot like a rental property.) Understanding also means knowing how the business makes money, understanding the market landscape the business operates in, who the competition is, who’s running the company and why they are trustworthy enough to partner with, and very importantly, why the company will be able to continue to make more money in the future, regardless of what the competition, governments, or just life in general throws at it. Which leads us to number 2. The company needs a moat. What is a moat? It’s a competitive advantage that allows a company like Apple to keep making money year after year. It could be some protective thing like a secret or patent that no one else has, or it could be that it’s really hard to switch from using an iPhone to another phone. Or a company like Wal-Mart is so big they can charge less for things than their competitors. This is called a price moat. Number 3 is that the people running the company on our behalf have to be really good at what they do, they need to be honest and transparent, and have their interests aligned with ours, meaning they own some shares of the business too and so they’re owners WITH us. There are some pretty simple way to figure this out, so don’t worry. And number 4, we only buy our companies when they’re on sale. This is probably the most important part. Say you bought a rental property that gave you $10,000 per year in rent, for $100,000. This would give you a 10% return. Well if we buy that same rental property for $500,000, our return is now 2%. See how important sale price is? We value stocks in pretty much the same way. I’ll show you how to value a business in another post, but for now, this is just to give you a sense of what you’ll need to learn. And don’t be intimidated, this is all a lot easier to learn than it looks.
This second method of investing is really a lifelong journey of learning, and probably a half hour to an hour a day of reading is all it takes!
This second method of investing is really a lifelong journey of learning, and probably a half hour to an hour a day of reading is all it takes! There definitely isn’t enough information in one post to know everything you need to know, so you’ll need to do some more learning, which is why I’m here. And don’t worry! If you’re feeling overwhelmed or intimated, you’re not alone! This is a marathon, not a sprint, it’s a journey you can go at your own pace. And like with anything else that’s new, you’ll be able to pick up these simple principles quickly if you keep at it. You can do this! Your family’s financial future depends on it.
So a couple practical steps to start: I would start by taking the time to figure out what companies that you have strong opinions about, this is a good place to start because you probably have an interest in these companies, and already know something about them. For me I have opinions about things like restaurants, retailers, automakers, oil companies, software, stuff like that. And what I understand and have opinions about is growing all the time, because I’m constantly reading and learning new things. I think that’s what I love most about investing, the ability to learn something new everyday.
So take the time to figure out what you understand, and more importantly what you don’t. Because this will be the cornerstone of how you invest. It will save you so much money, heartache, and stress. And be tough on yourself about what you truly don’t understand, because we can easily deceive ourselves. Start building a watchlist of companies you would love to own. You can easily create one on Yahoo Finance. And start adding companies you have strong opinions about. Companies like Costco, Starbucks, Nike, and Apple, or any company that has products or services you absolutely love. Most people would be able to understand these types of companies well enough to invest in them. Do NOT start with ‘hot’ companies, or companies you received a ‘tip’ about. This is incredibly dangerous for your financial health. Speaking from personal experience, stay away. Start with the easy, big name stuff. Stuff you interact with on a daily basis. Sneakers, coffee, electronics, software, etc.
Do NOT start with ‘hot’ companies, or companies you received a ‘tip’ about. This is incredibly dangerous for your financial health…
The other step would be to check out the ‘Bookshelf’ in the ‘Tools’ link in the menu at the top of the page for where to start reading. ‘My Top 7’ list is a great place to start. They are easy reads, made up of mostly stories. Remember, in a long journey like this one, it’s little by little. Start with reading one page as you’re going to bed, and build on that.
So to quickly recap:
Method 1: Invest in an Index. Ticker VOO. Time needed: 1-2 hours. 7-10% return. *Optional: add indicators.
Method 2: The four ‘hooks’ we hang our investing hat on, to be able to invest in individual stocks: 1. Understand the business, 2. Company must have some kind of moat, 3. Management has integrity and interests are aligned, and 4. Pay a good price. Time needed: 1-3 hours per week for 1-3 months, less after that. 15-30% return.