Getting started as an investor

[mccole72]

Hi everyone,

 

I am new to this site and have been very impressed with the threads I’ve read so far. I am new to both investing and value investing - I’m 28 and have only been working full time less than 2 years. In my first 26 years I didn’t even really know what a stock was. Having actual savings, I began playing with compound interest calculators, and I quickly realized the value of increasing both time and alpha. This led me to explore investing, which led to reading people like Peter Lynch, Mohnish Pabrai, Guy Spier, which led me to where I am now: reading Buffett’s annual letters, 10Ks and this forum for fun.

 

“Value investing” really resonates with me, and I see myself doing this stuff for the rest of my life, but at the moment I am having trouble getting the ball rolling. Part of that may just be because most companies appear to be full/overpriced right now. Is right now just a hard time to buy good companies with a wide margin of safety, or is my inexperience making me hesitant? I am naturally a cautious and patient person. I would appreciate any words of advice on how one should get started, or your personal example of how you got started. From what I can gather, this forum seems to be full of DIY investors and perhaps some fund managers, all of whom follow a value-type approach, and I am curious to hear your thoughts.

 

I should mention that I recently inherited a nice little chunk of money as an inherited IRA. While it may have been a bit easier to get the ball rolling by investing as I saved my own earnings in bite sized pieces, the magnitude of inheriting money is more daunting, but also exciting. There is a post on this thread “how to invest 100k” with some helpful advice. One suggestion that came up repeatedly was to start in real estate, but I am in coastal CA where prices are high, and if I bought with lots of leverage and rented out it would be hard be break even on the mortgage. Another suggestion was indexing or a “target retirement fund”, which I think of as kind of a fall-back option if I find I don’t have the skill or time to pick companies to invest in. I think of a basic hierarchy of investing as 1. Bury cash in the backyard 2. Pay an FA 1-2% to deliver market avg return 3. Invest in low fee index funds for market avg returns 4. Pick companies using Buffett approach for above market returns (if you know what you’re doing). I’m currently at 3 trying to get to 4.

 

Thanks!

MC

 

[DTEJD1997]

MC:

 

Welcome to the board!

 

My advice is to get started as soon as you reasonably can...but only when you have researched things, understand it, and feel comfortable doing so.

 

 

At all times, there are bargains to be had.  At some points in time there plenty, other times, you've got do more scouting work.

 

I would also recommend getting started with just a few thousand dollars...open a discount brokerage account, fund it, pick a stock, and get going.

 

As time progresses, keep researching, put more money in, pick another stock...repeat, repeat, repeat, in a few decades you will have a few million in your portfolio!

 

[LC]

I'd say put the majority in an index fund as you're doing and take 5% or so to invest yourself.

 

Read all those value investing books, value a bunch of companies "blindly" i.e. without looking at the market price, lose some money and understand the emotional highs and lows of changing portfolio market prices...over time you'll get smarter and more experienced...you'll know when you feel comfortable shifting more out of index funds and into personal stock selections.

[Castanza]

Be willing to spend 100 hours analyzing 50 different companies and at the end of those 100 hours be willing to walk away without taking a position. I see a lot of people who feel obligated to open a position simply because they put in the leg work. In other words, don't let time spent doing DD emotionally affect your decisions.

[porcupine]

Read "You Can Be A Stock Market Genius" by Joel Greenblatt. He argues that special situations tend to present opportunities for a security to be materially mispriced, and I think that most here would agree. After reading this book, track spinoffs and interesting situations that you read about in the WSJ.

 

Just my 2 cents.

[SHDL]

I would also recommend getting started with just a few thousand dollars...open a discount brokerage account, fund it, pick a stock, and get going.

 

This is good advice.  Start now but start small.  And stay small until you think you know what you're doing.

 

I don't recommend blindly putting all your money in a US equity index fund at this time by the way. 

[Gregmal]

Take 20-30% in the next week/month and spread it amongst companies/themes you can safely count on to be integral to the system and that will unavoidably benefit from time simply passing. You could also just take that % a buy an index fund, but frankly I think a basket of companies like GOOG, MSFT, BRK, JPM, BA, etc will do way better. I'd throw in a personal favorite, MSG, and maybe some ETF's like CIBR/HACK. There is your "exposure". Then take your time diligently putting the rest to work. But at least you get the hardest part out of the way, which is getting in the water.

[Guest]

very, very few actually go from 3 to 4. The vast, vast majority of people are better off with index funds.

[sarganaga]

I agree with the advice above that suggests low costs index funds as the best choice for most investors. It's simple, and realistically, if you don't have an absolute passion for the markets, anything else you might choose to do is going to be less successful. Quite likely to be less successful even if you do have a passion for the markets.

 

Here's a few suggestions if you want to give it a shot. You have to understand risk, diversification, and inflation. Following is a recommendation I gave to an very bright student interested in finance:

 

 

 

Understanding risk is the most important concept in navigating the financial markets.

Against the Gods by Peter Bernstein is a look at how investors & businessmen have thought about risk throughout history.

The Black Swan examines unanticipated events of significant importance and why they are responsible for most of the major changes in the world and in each individual's life. It also discusses many of the mistakes that are made in probability applications.

 

The Meb Faber Show and Masters in Business with Barry Ritholtz are podcasts that feature interviews with financial market participants. Start at the beginning, plow throw them all & you'll get a pretty good financial education.

 

Data science is important in most business fields today including the financial markets. While you will probably take a course in this sometime, Data Smart by John W Forman is a good place to get a first look at what's being done. You will also want to learn an a programming language such as Python to move beyond spreadsheets and deal with larger data sets.

 

Barrons is a weekly magazine that gives you a summary of what's been happening the financial markets.

 

Asset Allocation Strategy by Meb Faber_is a beginning  look at asset allocation. Faber wrote an extended version of this that's often available free on his website or can be purchased on Amazon.

 

 

[gfp]

Good advice all around to not blow your inheritance on 'stock market tuition.'  A small portion should be enough to learn with.  If your goal is to slowly move towards a Warren Buffett type approach with the individual companies you invest in, you could do worse than parking a portion in Berkshire at 200/share to take some of the 'index is at the end of a really long bull market run" risk out of your strategy.

 

Since you mentioned that everything seems fully priced, and you are interested in the types of companies selected by Warren Buffett - take a look at the financials / presentations of BAC and DAL - both look "not overpriced" and are companies that caught WEB's eye for being attractively priced currently.  I'm sick as a dog, so apologies if this post reads weird.  Not sure what I got!

 

---------------------

to benchmark this advice against the index, or -god forbid- "value funds":

3/29 closing prices

BRK.B - 200.89

BAC - 27.59

DAL - 51.65

SPY - 282.48

 

[Jurgis]

Good advice all around to not blow your inheritance on 'stock market tuition.'  A small portion should be enough to learn with.  If your goal is to slowly move towards a Warren Buffett type approach with the individual companies you invest in, you could do worse than parking a portion in Berkshire at 200/share to take some of the 'index is at the end of a really long bull market run" risk out of your strategy.

 

Since you mentioned that everything seems fully priced, and you are interested in the types of companies selected by Warren Buffett - take a look at the financials / presentations of BAC and DAL - both look "not overpriced" and are companies that caught WEB's eye for being attractively priced currently.  I'm sick as a dog, so apologies if this post reads weird.  Not sure what I got!

 

I think gfp caught value investing virus. ... Get well soon, gfp!

[John Hjorth]

Your post reads to me perfectly up to your usual standard of quality in posts here on CoBF, gfp,

 

And I personally agree with what gfp posted - sincerely,

 

- - - o 0 o - - -

 

Off topic:

 

Best wishes for a speedy recovery, gfp.

 

- - - o 0 o - - -

 

Now back to topic.

[cameronfen]

I should mention that I recently inherited a nice little chunk of money as an inherited IRA. While it may have been a bit easier to get the ball rolling by investing as I saved my own earnings in bite sized pieces, the magnitude of inheriting money is more daunting, but also exciting. There is a post on this thread “how to invest 100k” with some helpful advice. One suggestion that came up repeatedly was to start in real estate, but I am in coastal CA where prices are high, and if I bought with lots of leverage and rented out it would be hard be break even on the mortgage.

 

If your in San Fransisco or another of the big coastal CA cities I have seen companies like Zeus that do relatively pain-free real estate management.  You buy the house they do everything else and give you a check.  I think the payoff is pretty good as they do short term rentals for businesses (i.e. a consultant is working a job for 4 months and needs a place to stay):

 

https://zeusliving.com/

 

Zeus also has competitors which you can find here (and price shop):

 

https://techcrunch.com/2019/03/15/zeus-corporate-housing/

 

As a value investor maybe you will ask what is the catch, obviously they skim some off the top (but lets be honest VCs are likely funding some of your profit just as we have Softbank to thank for cheap Uber rides), but this concept of landlord as a service is both new, unknown and untested.  I have never used and don't live in a Zeus city but I think its a good idea.  With scale and more reputation, your returns may go down. 

 

 

[Liberty]

At this point focus on keeping your expenses low and saving as much as possible (that'll make a huge difference when you get compound growth going), and learning as much as possible without feeling the need to act on much yet. Just follow your curiosity and remember the Dunning-Kruger effect; even when you start feeling like you know something, you don't know much yet, just keep going, it takes a while. You can put your money in index funds or Berkshire while you learn about various industries, companies, etc.

 

On the expenses/saving site, read this in chronological order (first few posts aren't quite as good, but he finds his voice quickly):

 

https://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/

 

One thing I did years ago is I read pretty much all the archives of this forum thread by thread. A lot you can just skim, but there's a lot of good dicsussions to be found and things (links to articles, interviews, talks, etc) to build on too.

 

I also suggest focusing on learning about how to think and how the mind works. Cognitive biases, etc.

 

Some places to start:

 

-Thinking Fast and Slow by Daniel Kahneman

 

-Influence by Cialdini

 

-Rationality: From AI to Zombies by Eliezer Yudkowsky

 

-Stumbling on Happiness by Dan Gilbert

 

-Munger's speech on The Psychology of Human Misjudgement and The Art of Stockpicking

[rukawa]

I'd say put the majority in an index fund as you're doing and take 5% or so to invest yourself.

 

Read all those value investing books, value a bunch of companies "blindly" i.e. without looking at the market price, lose some money and understand the emotional highs and lows of changing portfolio market prices...over time you'll get smarter and more experienced...you'll know when you feel comfortable shifting more out of index funds and into personal stock selections.

 

This is good advice. You can get valueline from Fairfax Library for $25 a month and just try to value companies based on value line one pagers. I would stick to something dead-simple...like magic formula or net-nets which does not require a lot of analysis or thought and mostly just focus on excluding stocks which seem to be not real companies or have strange financials.

 

I would also advice strongly against any type of strategy that involves a lot of analysis or research. I guess the most important thing is to not be ambitious.

[wachtwoord]

I would also recommend getting started with just a few thousand dollars...open a discount brokerage account, fund it, pick a stock, and get going.

 

This is good advice.  Start now but start small.  And stay small until you think you know what you're doing.

 

I don't recommend blindly putting all your money in a US equity index fund at this time by the way.

 

So just pick VT from Vanguard (cheapest worldwide index fund) and put all your investing money in it. Then start researching and if you want to take a position after sufficient due diligence sell a small part of the index allocation to fund the position.

 

By having your money invested you won't feel time pressure (oh no! My money isn't doing anything) and you will take your time.

[SharperDingaan]

A few things to add to the great advice given.

 

90% to value funds, 10% to you to invest.

But .. invest that 10% in the industry you work in. You have experience in the industry, you know how it works, and your 100 hours 'researching'- will help in BOTH your 'investing' AND your day job. You are developing 'circle of competence', & right now - you know very little. It's why the 90% is in value funds.

 

2nd ANNUAL income, at least equal to the 10% you're investing. If you screw up (& you will), you recover your loss within a year. If you just tread water, you've doubled your 10% capital allocation. You are learning risk management, and it will allow you to remain mentally supple when the investment is not going your way.

 

Accumulate in tax free, tax deferred accounts; then use the proceeds for a house down-payment. Your first two 'investments' should be securing the roof over your head, and finding your lifetime partner. Your 'portfolio' is your family; thereafter, 'investing' is just how you manage the family cheque-book/net worth.

 

Net-worth isn't just financial.

Something that a great many people totally miss.

 

Good luck!

 

SD

 

 

[SHDL]

I would also recommend getting started with just a few thousand dollars...open a discount brokerage account, fund it, pick a stock, and get going.

 

This is good advice.  Start now but start small.  And stay small until you think you know what you're doing.

 

I don't recommend blindly putting all your money in a US equity index fund at this time by the way.

 

So just pick VT from Vanguard (cheapest worldwide index fund) and put all your investing money in it. Then start researching and if you want to take a position after sufficient due diligence sell a small part of the index allocation to fund the position.

 

By having your money invested you won't feel time pressure (oh no! My money isn't doing anything) and you will take your time.

 

I do like VT a bit better than, say, VOO/VTI at the moment.  My paternalistic advice would be to use BRK as a default equity investment though.

 

More generally, the thing to keep in mind is that an equity index fund is essentially the stock of a giant conglomerate.  As such, it’s a good idea to run some numbers — like how much it’s currently earning, how much growth potential there is, and what the return on re-invested profits are likely to be, etc — before buying to make sure you are going in with realistic expectations.

[wachtwoord]

@SHDL: I have nothing against suggesting BRK as the default equity investment (its swapping diversification for likely outperformance) rather than VT but when you look at the numbers of the index as a giant conglomerate numbers are not so bad: PE: 16, price/book: 2.1 and ROE: 14% https://investor.vanguard.com/etf/profile/portfolio/vt

(And OP should learn to pick his own stocks rather than copy "ours", even if it is Berkshire we're talking about).

[SHDL]

wachtwoord: I agree.

[Spekulatius]

For a new investor, putting money in index funds is really hard to be. I also think that putting a small percentage into BRK is a good idea. First of all, the generally consensus is that it’s relatively cheap, it’s well run very diversified and very solid. Owning this also will be a strong incentive to read up on Warren Buffet, follow what he says in the financial news and read his shareholder letters and over time understand the business side better. You can do this without owning it, but from my experience, it is much more likely that you will follow what you own.

 

I also think that putting a small amount into a stock of your choice is a good idea, but ask yourself, what your circle of competence is. It could be a stock in and industry OP works in or local company. i strongly recommend to stay away from here say recommendation from friends etc. and trendy investments like blockchain and cannabis etc.

[clutch]

90% to value funds, 10% to you to invest.

But .. invest that 10% in the industry you work in. You have experience in the industry, you know how it works, and your 100 hours 'researching'- will help in BOTH your 'investing' AND your day job. You are developing 'circle of competence', & right now - you know very little. It's why the 90% is in value funds.

 

+1 especially for those who have a full time job outside of investing. You also sometimes get information edge that people outside of your industry might not easily realize.

[frommi]

I would recommend to create an investment process (when to buy, when to sell, how many positions, where new money goes, how to value a business if you want to value-invest, which broker is the cheapest for your style etc.) and start immediately. And then improve this process over and over again (based on hard facts and your experience) until it fits your personality and your emotional temperament. It is not a single investment or stock that will make you rich over time, but this process of continuous improvement.

Of the 350 businesses i have on my watchlists i would argue that at least 15-20 are buyable right now, so its not a question of markets being expensive, but by your watchlist not being large enough. Especially at the start it is a lot of hard work to fill these lists, but by keeping track of what you have looked at you keep compounding knowledge that helps you later.

Since you already have some money to invest i would try to buy the 30-40 stocks with the highest expected return because that way your mistakes will be tolerable and you will probably make plenty of mistakes. ( Even if your expected return is just 10%, thats probably still better than the <2% return you can expect from a 5-8 year investment into index funds at this point in time )

 

I started my journey with dividend growth and netnet stocks because they are relatively easy to value (Gordon growth model or NCAV). I then learned about how to value financials by using avg RoE and book value. After 5 years of doing this for 2-3 hours a day i finally feel like what i do is working, but i still reject nearly all ideas that are outside these valuation frameworks. When i do i typically get my head handed to me. (like in BIIB this month)

[mccole72]

Appreciate all the input! Lot’s to add to my reading list :) Most advice corroborates the direction I was starting to go - use indexing for now (a large chunk was already invested in indexes) and start dipping my toe in the water with companies I understand. Start small so mistakes are limited. I like the idea to buy some BRK.B at 200.

 

@sarganaga Regarding data science/python, do you mean analyzing the business/industry data relating to a co. you are researching? I haven’t seen this topic come up much in value investing circles.

 

What other education is worth pursuing? Accounting, economics, industry specific research? I’m taking a free Wharton intro accounting class on Coursera.com now. I have a science background, so I needed some understanding of accounting language.

 

[wachtwoord]

If you haven't already definitely read The Intelligent Investor. Mandatory reading material ;)