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4. Investing 101: The Myths of Investing

The financial industry has perpetuated three myths to keep you ignorant and scared of investing for yourself. And with good reason, billions of dollars in fees are at stake in keeping you uneducated.

Myth #1: Experts Only

The idea is that it takes a boatload of time to find and analyze companies, and that it’s a very complicated process that you couldn’t possibly understand.

This would be true if investing was hard to learn and information relating to stocks was hard to find.

Enter: The internet.

Everything has changed. Information that was once only for the most high profile hedge funds and money managers has now been democratized. Pretty much all the information you need to make very informed investment decisions can be found, for free, online.

There has been no better time throughout history to be an investor.

The financial industry plays by different rules. They do not. Repeat, do NOT invest like Warren Buffett and investors like him. They are playing a different game, with different rules. Rules in which you lose.

They trade stocks. We invest in businesses.

This distinction is of the utmost importance to understand and sets the course for our investing journey.

If playing the financial industry’s game of trading stocks sounds like fun, then you can definitely try to join in.

Although be aware; most people have kids to raise and lives to live and don’t want to be spending minimum 5-10 per week stressing about money they can’t afford to lose, and playing a game against opponents that are much smarter, faster, wealthier, and far better equipped.

Trading is a very dangerous game being played against talented people who are very motivated to take your money.

Personally, I’ve found being chained to the computer all week, checking on investments and stressing about them, to be an unsustainable lifestyle. I’d much rather invest in something that gets wonderful returns without spending a lot of time on it.  

Myth #2: The Market Can’t be Beat

We’re looking for minimum 15% returns, we could care less what the market does, we’re going to retire very wealthy anyways.

Thankfully, as small investors we don’t have the burden and restrictions fund managers have. You’re not a fund manager so you don’t need to care what the market does.

For example, If the market goes down 50% and your fund manager loses 40%, he may have beaten the market, but it doesn’t sound too appealing does it? Especially with money you can’t afford to lose.

This idea that you can’t beat the market started in the 70’s with the introduction of something called the “Efficient Market Theory” by professor Burton Malkiel. He purported to prove that the stock market is efficient. Meaning that the market prices things according to their value, always, and never deviates. (Think of merchandise like clothing, never, ever going on sale. More on efficient market theory later.)

Warren Buffett wrote a paper called “Graham-and-Doddsville” which debunks this theory in detail. I highly recommend printing this one and keeping it for reference.

Those who invested using Warren Buffett’s principles, who were also members of his class under the tutelage of the great Benjamin Graham, all averaged 18-33% returns over eight decades. The correlation? They all invested similarly.

They all believe stocks are real pieces of real businesses, and they treated them as such.

From 1965 to 2005, Buffett’s investors averaged a 23% return, compared with 9% and 8% for the S&P 500 and Dow Jones indexes, respectively.  

Myth #3: Diversify and Hold (For the Long Term).

Diversify and hold over the long term…Why? So your fund manager can collect a fat fee.

Note: Money managers do NOT make money if your savings are sitting in cash, which is often the best course of action. This is one of many conflicts of interest in dealing with the financial industry.

We’ve all been told that diversification is the only way to minimize risk, and it’s the safest way to invest, right?

From 1905 to 1942, 1965 to 1983, 2000-2008, 2009-2013 You would have had a 0% return from this method of investing…If you were lucky.

If you know what you’re doing and know how to find wonderful businesses, then diversification is a death knell to good returns. Investing in 30-50 different stocks is a sure way to mediocre returns, at best.

If you have 30 years to invest, and an 8% return and a very basic standard of living in retirement sounds good, then diversification is for you.

Warren Buffett calls diversification a guard against ignorance. This is extraordinarily expensive protection, that doesn’t even accomplish what it is intended to do!

Conclusion.

Our goal is to find wonderful companies, buy them at really attractive prices, and then let the market do its thing, which means the market will eventually recognize the value of the businesses we’ve invested in. And as the owners of those businesses, we eventually become very, very wealth.

To do this, we have to stop believing the lies being spread by the financial industry and instead, like Peter Lynch says, look to take advantage of the financial industry’s restrictions, and out maneuver these much bigger fish.

6. Investing 101: Types of Investments

With $70 trillion in stock markets globally ($70,000,000,000,000) and growing, there is seemingly a financial product or investment vehicle available for every taste. Baskin Robbins