Noob Investor Asks Noob Questions for the 10,000th time

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Mister Imperceptible
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Sat Aug 11, 2018 11:55 pm

NEVER buy TIPS. Ever! The government will NEVER be honest as to the true rate of inflation.

I also think bonds at these rates in general are a terrible investment. Not much more yield than cash, and a huge potential downside risk on principal balance loss if interest rates rise.

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Seppia
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Seppia » Sun Aug 12, 2018 1:56 am

Jin+Guice wrote:
Sat Aug 11, 2018 11:25 pm
If I understand your strategy correctly, you invest 50% in passive indicies and 50% in single stocks. How do you evaluate which asset classes to invest in?
That is correct. Regarding individual stocks I pick trying to diversify as much as possible, trying to avoid only what’s obviously overvalued and trying to buy what’s obviously undervalued.
So when oil was at $30 a couple years ago, I was buying mostly royal dutch, while I haven’t touched anything FAANG with a 10 foot pole since 2016.
I obviously don’t have a 100% hit rate (FAANG have done awesome since 2016).
Jin+Guice wrote:
Sat Aug 11, 2018 11:25 pm
How do you evaluate which companies to invest in.
My personal approach is I first look for large established companies that have been around for long and are leaders/main players in their sector.
So for example Coke, P&G, GE,royal dutch shell, Axa, Siemens, Engie would qualify.
I am aware there is more upside with smaller/growing companies but when buying individual stocks I’m personally also trying to minimize the potential downside. Then I try, among those, to look for one that has fallen recently. The more they fell the happier I am.
For example, P&G fell from above 90 to slightly above $70 this year.
Then I start to study the business and the reasons why they fell.
If I feel the reasons are temporary, or just people going with the latest fad, I start to think there’s a chance the company may be undervalued.
For example when oil was falling the narrative was that demand for oil would dry up and a consistent oversupply would have driven prices to zero.
That seemed excessive.
Now a new narrative is that brands are dead and amazon is going to conquer the world. That seems excessive too.
So I buy a little and start to follow closer (read quarterly stuff, follow news etc.).
If I like what I see from management and the stock doesn’t immediately skyrocket, I slowly add more. Otherwise I just hold the stock indefinitely.
This strategy works for me, and obviously doesn’t work all the time.
Jin+Guice wrote:
Sat Aug 11, 2018 11:25 pm
How does one "get familiar with" a certain company? How does one do the same for an asset class?
I think it was in my first post here. You can read, follow the news etc, but there is in my opinion no substitute for experience (= time).
Jin+Guice wrote:
Sat Aug 11, 2018 11:25 pm

Y'all are crushing it on the advice and discussion but you're shorting me on the how to.
This is because what works for me may not work for you.
There’s no “right” way to invest in absolute terms*: you have to find out one that you’re comfortable with, is aligned with your personal time horizon, your risk tolerance, your values, etc.
Way too many factors.
You have to figure it out yourself.

*there are however many wrong ways to invest

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Bankai
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Bankai » Sun Aug 12, 2018 5:02 am

Jin+Guice wrote:
Sat Aug 11, 2018 11:25 pm
@Bankai:
I realize you're the sole anti-index investor here. Thanks for providing a counterpoint. It seems like you're a single stock investor? How do you evaluate which stocks to buy? Do you follow a well known "strategy" (i.e. buy and hold, dividend, growth, value)? Do you invest in anything besides stocks and if so how do you evaluate which of those to buy?
I'm not anti-index. All I've written in this topic was solely related to individual stocks. I don't have a strong opinion about index investing. It worked really well for the last 9.5 years. However, it's also the closest thing to 'free lunch' in investing. When times change (and they will) and indexes will move sideways for years (as they did many times in the past/are doing now in some countries), free lunch will be over. However, even in the sideways market, there will be individual companies outperforming the general market.

I personally buy stocks showing good growth in earnings, revenue, improving margins and little/manageable debt. Ideally with some kind of recent 'catalyst' propelling the price up (like new product or management). The stock needs to be in confirmed price uptrend (which indicates accumulation by institutional investors). As you see, this is pretty much the exact opposite of what Seppia does - there are many ways to make money in stocks.

However, buy and hold in individual stocks just doesn't seem like a valid strategy for me since it's lacking exit strategy. By definition, you are holding on to stocks in decline and neglect phases of their life cycle. Some of them will go bust and some of them will never reach their previous levels. If you are 'buy and holding' the index, at least the index does the rotation for you (ejects weak stocks and replaces them with stronger ones on a regular basis).

Either way, before putting your hard-earned money into individual stocks, I'd strongly recommend reading a number of books on investing (at least 10+) written by market practitioners (investors who made millions in stocks), not academics, and a book on indexing for a counter-argument.

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Michael_00005
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Michael_00005 » Sun Aug 12, 2018 11:02 am

Seppia wrote:
Wed Aug 08, 2018 3:48 pm
Regarding peer to peer lending suggested by MMM, it’s complete and utter garbage.
Thanks for sharing that, that will be a time saver!
Y'all are crushing it on the advice and discussion but you're shorting me on the how to.
Read "Beating the Street.", by Peter Lynch. It's an older book, but holds up well. Basically you buy companies you know. For example a person is into clothing and they really like a new brand of shoes, and you notice they are very popular at work, school, etc., so you do a little more research and the potentially invest. You're into health, AI, flying cars (check out what Google is doing on YouTube), social media, etc., etc., and you notice it's really popular in your niche, so you do a little research and potentially invest.

As an example I'm into health and follow the WF PBD movement, and see an overall trend that is picking up speed, where as most might not even notice the change. So when I see companies going public in this genera, I'm very interested and will research the company. Mostly I want to see a company make a profit 1st, also trends are big, example: technology is here to stay, AI is coming, and big changes in transportation.

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Tyler9000
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Tyler9000 » Sun Aug 12, 2018 12:10 pm

Jin+Guice wrote:
Sun Aug 05, 2018 10:51 pm
MMM convinced me that buy and hold was the way to go so I have everything from previous years invested in a Vanguard U.S. total stock market fund and total bond market fund... but after reading a Jim Collins article about how the stock market "always goes up" I started to worry about this strategy. I then came over here and read the blog articles on buy and hold index investing and started to worry more. Frankly, I'm interested in the most passive money out there. I'm not super interested in reading companies financials or learning about real estate, but I do enjoy learning new skills and I do want to have at least part of my income come from investment returns.
Hey J+G. Welcome! And never feel self-conscious about asking investing questions, as many of us here love talking about this topic and are here to help.

While I admire how MMM and Jim Collins both do a great job of introducing people to basic indexing concepts, they really only scratch the surface. That works really well for their core audience and is a necessary tradeoff to help the most people follow along, but there's more to the story if you're willing to explore deeper (which you clearly are). A good place to start is by browsing the portfolios on my site, studying the historical performance of each, and reading a few of the accompanying books for the underlying theory. If you're already familiar with Browne and Bernstein, I might recommend this book by Swedroe for something a little different. Keep learning, and I'm confident you can find something that works for you.

BTW -- speaking to some of MMM's specific pet companies like Betterment and Lending Tree mentioned in this thread, beware all recommendations including affiliate links. That's not to disparage MMM in any way as I'm not opposed to people making money where they can, but just FYI you'd probably have never heard of either company if they didn't pay financial bloggers to mention and link them as much as possible. So take it with a grain of salt and make your own decision independent of any paid recommendation.

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Jin+Guice
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Mon Aug 13, 2018 11:39 am

Thanks for sharing your personal strategies. Many of you are recommending that I read books by successful investors about their strategies as a starting point. What are you favorite 1 or 2 books (articles are of course fine too)? Thanks to those who've already made suggestions, this thread is already has a wealth of resources and has been very helpful.

I asked in the OP whether I should "get my hands dirty" by starting to invest with real money in an attempt to learn by doing. No one who responded to this thought it was a good idea. How about doing a mock investment with fake money, I think investopedia has one for free? I've heard the downfall of these is it's way different when you're investing real money.

Where do y'all go when you're looking for news about specific companies/ industries? What resources do you trust? Do you read financials? How does one learn to read financials at a basic and advanced level (I've heard the real meat is in the footnotes).

CAPE10 has been mentioned as an important financial ratio. I realize there is no ratio to rule them all, but are there other ratios y'all consider important? Why?

The ethos of buy and hold is basically to be information blind and simply stick to your allocation guns. It sounds like some of you who index invest engage in market timing and look at indicators when buying indices. Looking to you in particular Seppia. Where do you get information for indices and what do you look at?

I assume many of you hold other assets outside of stocks such as bonds and perhaps gold? How do you decide when to buy these assets? Do you buy them in the form of an index/ fund or hold them as individual assets?


@Tyler9000 I've checked your site out and it's very informative. In particular your golden butterfly strategy resonated with my goals. If I was flightier with strategies (something that everyone who seems to know anything tells me is a VERY bad idea) I probably would've switched to that strategy already, but I'd like to know a lot more than I do now before I do anything. One thing that I fail to see addressed in the ERE community is ERE specific investments. In the accumulation phase one may be willing to take risks in the hopes of greater reward. If it fails one can simply work more. As the stash grows it seems that one would be willing to sacrifice returns in the hopes of stability and a steady income. If one "only" needs a 3% withdrawal rate to have "enough" why take greater risk for rewards one doesn't need? I haven't seen the latter part discussed at much length.

ThisDinosaur
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by ThisDinosaur » Mon Aug 13, 2018 8:54 pm

Jin+Guice wrote:
Mon Aug 13, 2018 11:39 am
I asked in the OP whether I should "get my hands dirty" by starting to invest with real money in an attempt to learn by doing. No one who responded to this thought it was a good idea.
You'll get a lot of different opinions. Mine is that losing a bunch of money will scare you away from investing. I could be wrong. But most new investors underestimate how badly they'll handle a drop in principal value. That's why I suggest either savings account, total market index funds, or Permanent Portfolio to Noobs.

Jacob started with a savings account and then:
http://earlyretirementextreme.com/how-i ... art-i.html
http://earlyretirementextreme.com/day-1 ... remen.html
http://earlyretirementextreme.com/day-2 ... ement.html

I started with Total Stock Market Index and then:
https://portfoliocharts.com/commentary/
http://earlyretirementextreme.com/start ... sting.html
Jin+Guice wrote:
Mon Aug 13, 2018 11:39 am
CAPE10 has been mentioned as an important financial ratio. I realize there is no ratio to rule them all, but are there other ratios y'all consider important? Why?
CAPE10 is based on Ben Graham's most popular value criteria. Price : Average Earnings over previous 10 years.
After his ideas became too popular to be useful, he switched to searching for companies with
Price < Total Assets - Liabilities .
Jin+Guice wrote:
Mon Aug 13, 2018 11:39 am
In the accumulation phase one may be willing to take risks in the hopes of greater reward. If it fails one can simply work more.
Cliché Rule of Thumb in a stock & bond portfolio; Stock % = 100 - Age. Meaning, the older you are the higher your allocation to Bonds and Cash. This is partly because your Human Capital (i.e., your ability to earn a paycheck in Dollars) is equivalent to your Bond + Cash component. So young accumulator phase takes more risk, while old distribution phase holds more cash.

Generation-X
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Tue Aug 14, 2018 2:38 am

Time is your greatest asset.

Have an investment horizon that is greater than 20 years, preferably 30 years. Let compounding do its thing, and the only thing left to do after that, is to wait patiently.

Patience is the key. Being consistent is the key.

The most important ingredient in investing, as with other similar challenges in life, such as weight loss, or to quit smoking, etc., is being consistent.

Here's an advice from a person who has supposedly done it, (msk from bogleheads forum*):
* I don't know msk other than few of his posts I've read on the forum

"Re: First time investor looking to jump in market but apprehensive with record highs

Post by msk » Tue Nov 21, 2017 10:15 am

I lived by these rules-of-thumb since my student days, retired early at 55, now at 73. Your life trajectory will be different, but these rules did well by me, currently at 8 figures NW:

1. Save and invest 30% of after tax income. Payment of principal on a home mortgage counts, but not interest.
2. Never buy a house worth more than 3x annual income, or 2.5x joint income. You may afford the monthly payments but expensive homes carry expensive maintenance commitments, be it landscaping or air conditioning.
3. Never acquire a car (or cars if multiple), by purchase or lease, worth more than 6 months income.

The most important one is 1. If you practise that diligently you never have to think of when you are jumping in, timing, since your investments in subsequent years will be much larger than your initial buy into the stock market. The stock market is almost always at its highest, so trying to time it is a toss up, with you as the probable loser. If the stock market makes you terribly nervous, perhaps you can repay some of that large mortgage. It'll 'earn' you an interest rate higher than bonds, and unless you have been very unlucky in choosing your home, its value ought to keep up with inflation, perhaps even rise beyond that, possibly even well beyond inflation in a HCOL area. IMHO there is no such thing as a forever home in your 30s. If you satisfy 1. above you will almost certainly be much wealthier in your late 40s than you are now, and probably will wish to upgrade... Anyway, I have always considered paying off the mortgage on my home as a high priority, if only for the feeling of security. Keeping a lot of cash aside for possible renovations, etc. is IMHO a waste of investment time. Fund the renovations from next year's 30% savings, or the following years'..."

https://www.bogleheads.org/forum/viewtopic.php?t=232788

Here's another:

"Re: Finding a direction - What next?

Post by msk » Sat Nov 25, 2017 3:14 am
Too much paralysis by analysis. Just open a brokerage account (Interactive Brokers is my current favorite), fill out all your tax advantaged opportunities, use your surplus savings to purchase VT (Vanguard Total World) and then spend more time analysing and contemplating what next, how to fine tune, 3 ETFs, etc. Pity, you just missed a ludicrously good, irrationally exuberant stock market year (up 20+%!) while awaiting revelation. Revelation ain't coming. Save and invest 30% of after tax income, year in, year out. What you do with the rest does not matter much. I just worked out what you can look forward to, if the next 50 years is similar to the past 50, totally invested in the SP 500 from age 30 and a $50k income:

Mediocre careers with your incomes just keeping up with inflation: you can retire at age 57 with a Net Worth of $2.5 million
Average careers with your incomes rising at 1% p.a. above inflation: you can retire at age 60 with a Net Worth of $3.8 million
Good careers with incomes rising at 2% p.a. above inflation: you can retire at age 64 with a Net Worth of $6.7 million

I define free-to-retire-age at a point when your Net Worth = 25xIncomex0.7 (since you no longer have to save and invest that 30%). It comes later with better careers since your income rises much higher, but in all cases you do not need to drop your standard of living an iota upon retirement. Save and invest 30% of after tax income, today onwards. That's what matters, the rest are just details that you can analyse ad nauseam over the next 3 decades :annoyed"

https://www.bogleheads.org/forum/viewto ... 0#p3633022

Essentially what he is saying is, dollar cost average and let it compound over time and let it do its thing forever (over 50 years in his case). Don't put all your eggs in one basket - i.e. he doesn't say to dump your entire life savings into the market all at once. Start small, put the first 30% of after tax savings first year. Then the next 30% of after tax savings the second year. Then the next in the third year... etc.

Even if the market were to drop 50% in the first or the second year of your investment journey, this will limit your exposure. And when the market does it again the next time in say, 5-7 years time, well, by then the gains in the investment maybe enough to offset the next 50% drop. Do this for the next 50 years and you may end up with 8 figure net worth, is essentially his argument and supposedly what he has done. In the mean time, you can live your life with remaining 70% of after tax income. And he rightly points out, as your career advances, your income should move higher.

Good luck.

P.S.> Here is an article on one CFA's analysis of Warren Buffett's prediction about Dow 1 million:

Predicting Dow One Million – Was Warren Buffett Being Bold or Overly Cautious?
https://www.financialsense.com/daniel-a ... y-cautious

Mister Imperceptible should take notes. 8)

Mister Imperceptible
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Tue Aug 14, 2018 12:57 pm

Me take notes!? Says the man with a half a mil in cash! :P

I’m glad you are reading Amerman!

I have a mortgaged rental property, which has a current market value of over two-thirds of my net worth. So I am am going to be conservative with the other funds I have to invest with that leverage. And maybe leave some small room for some high-reward speculation.

I bought the rental in 2016. If you had bought leveraged real estate for income in 2004, 2005, 2006, what would have been the best use of your other funds? Hint- not stocks.....

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slimicy
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by slimicy » Tue Aug 14, 2018 6:09 pm

I bought the rental in 2016. If you had bought leveraged real estate for income in 2004, 2005, 2006, what would have been the best use of your other funds? Hint- not stocks.....
I disagree, it would have been stocks.

https://www.schroders.com/en/insights/e ... investors/

Mister Imperceptible
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Tue Aug 14, 2018 7:08 pm

I’m trying to become financially independent by 2020 or 2021, not 2029.

Live look at the year 2029:

https://m.youtube.com/watch?v=RTq74Ae94T4

YOLO

Jk, just considering the current climate and sequence of returns risk. Do you expect stocks to be up or down, 3 or 5 years from now, based on current valuations? We don’t have investment horizons of infinity, or even 15 years.

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slimicy
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by slimicy » Wed Aug 15, 2018 1:55 pm

I started investing seriously (i.e. more than a few hundred dollars a month) in 2014. A lot of people were saying a crash was right around the corner, stay away from equities, etc. I read jlcollinsnh, a lot on here, and a book on asset allocation, and just started plugging away. Currently 27% of my net worth is a result of unrealized capital gains. That's just the part I can do the math on easily, and doesn't count all the dividends that weren't reinvested... so it could be closer to 30%. If I hadn't been investing, and worried about sequence of returns, I'd be 1/3 poorer today.

Just come up with a plan that you can stick with no matter what the market does, and follow that plan.

Mister Imperceptible
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Wed Aug 15, 2018 2:30 pm

jacob wrote:
Thu Oct 05, 2017 1:54 pm
I don't know if it's still the case, but Buffett has traditionally valuated Berkshire based on its bookvalue. Since bookvalue can in principle mean anything, I prefer to evaluate portfolios in earnings---which of course is also something that can mean anything. However, both are much less subject to market euphoria or central bank manipulation.

So without further ado, here's how well inflation-adjusted earnings are doing.

http://www.multpl.com/s-p-500-earnings/

As seen from the chart, earnings have only recently made it back to 2007 level. IOW, the "great recession" moniker is well-deserved. And performance over the past decade has actually been shite unless one has relied on the "greater fool"(*) theory of investing. Also seen from the chart is that anyone who has done the majority of their "investing" since 2009 has gotten somewhat of a lifetime two-sigma ride not experienced since year 1921. This kind of market behavior is not normal!

(*) The presumption that market prices will be higher in the future and yet still attract new buyers.

Compare to inflation-adjusted market pricing,

http://www.multpl.com/inflation-adjusted-s-p-500

As seen, the price of buying earnings is now somewhat 40% higher than they were in 2007. But people are still buying!

This, I believe, is what is "killing" number-based historical analysis. There's no actual law that determines what number anything should revert to. There's no reason it needs to be the historical mean. One doesn't even need to invoke "new era"-talk. The long term average could simply be a moving average. Specifically, if everybody collectively agrees that earnings don't matter (completely with CB support) and all that fake-money is NOT spilling into the greater economy (nor getting invested in foolhardy projects like McMansions or shale-fields) but simply sits in accounts that allow their owners to feel rich, all the stock market really does is to differentiate between the haves (like us) and the have-nots (like the perma-underemployed). Historically, once that difference becomes apparent to the latter, it begets political implications that don't end well.
Sclass wrote:
Fri Oct 06, 2017 8:01 am
The analogy falls apart when you consider the US role as the worlds reserve currency in the late 80s. I argue the cause of the Japanese bubble burst with my friend, a Yen trader of that era. Something I think that is commonly overlooked was a major change in reserve requirements for Japan at the time...by it's fellow Monopoly players.

What does this mean for the current US situation? We don't exactly have a gold plated reserve to take refuge in. It may get ugly for everyone. Maybe that is why Soros is buying gold. He did pretty well when Asia melted down. Scary stuff.

The high prices of return feels to me like inflation. When I could buy cheaper yields I didn't have much cash. Funny how that works. :lol:

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slimicy
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by slimicy » Wed Aug 15, 2018 5:15 pm

That all may be true, and may come to pass. I don't pretend to know. I'll just keep buying.

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