Hey hey! I’m Adam Fortuna, the creator of Minafi and your guide for the Investor Bootcamp! I’m so excited you’ve decided to take control of your financial destiny. Learning the basics of how to invest in the stock market is a skill you can learn the basics of in a weekend, put into informed practice within a few months.
You’re watching the second course in the bootcamp: “Why should you invest in the stock market”. In this course, we’re going to dig into why the stock market is one of the best ways to grow wealth, the broad strokes of how people make money investing and take a look at some of the most common ways people mess up their investments.
For starters this first lesson, we’ll be looking at it from a 50,000-foot view asking the question – why do so many people say “you should invest in the stock market”. And what exactly do they mean when they say that?
I’m not an investing expert or a certified financial planner. I spent most of my career as a software engineer helping people learn how to code. At the same time I was going home and night and reading books, blogs and everything I could get my hands on about investing.
Throughout this time I went through countless strategies people use to grow their wealth. There’s stock picking, real estate, cryptocurrency, peer-to-peer lending, gold, commodities and countless other ways to invest. I honestly didn’t know where to start so I tried to learn about all of them.
What I soon learned is the difference between speculative investing and long-term investing. Speculative investing is about putting your money into something at a specific time with the hope of selling at a later time for a profit. It’s speculative because it’s highly dependent on your market timing for success.
Long-term investing is different. It’s not about finding the perfect moment to invest but more about picking robust investments you can put your money into for 1 year, 10 years or your entire lifetime.
Chances are you’ve heard the phrase “you should invest in the stock market!” It’s usually followed with a bunch of exclamation points, or other hysterical enthusiasm about how someone made a ton of money by investing in Apple before the iPhone, or Tesla before they were a household name.
There are many many different ways to invest, and that one is called individual stock picking – finding companies before they make it big, investing directly in them, riding their wave and reaping the rewards. It’s the most public investment strategy, but it’s also absolutely not the way most people make money in the stock market. Let me explain why.
The problem with picking individual stocks is that you need to know more than the experts to do it right. The price of a stock is a reflection of all knowledge about a company that is currently known. Investment companies spend a massive amount of time collecting information about these companies and know far more than most of us.
It’s easy to look back at a company like Apple or Tesla and think “of course their stock went up” I knew it would – but did you? And would you bet your ability to retire on that? If the company goes has a bad period you’ll lose money. If they go out of business you’ll lose everything.
If you had invested in Apple during the 1990s, you would have even LOST money. You need to pick the right company but also pick the right time.
Luckily there’s a better way to invest that doesn’t require betting your life savings or retirement on a single or a few companies. It’s called diversified index fund investing, and it’s the entire premise of this bootcamp. Here’s how it works.
One way a company can raise money, verify their accounting with a third party and get their company name out there in the world is to “go public”. Going public means selling a piece of their company through a stock exchange. They put up some shares of their company in exchange for money that investment firms and investors can buy. There are lots of different stock exchanges that companies can use for this. The most common ones here in the US are the New York Stock Exchange and the NASDAQ, which most tech companies favor.
If you’ve ever tuned into the business news or heard Kai Ryssdal do the numbers on NPR Marketplace, you’ve probably heard the terms Dow Jones Industrial Average, the Nasdaq Composite Index or the S&P 500. These all represent an investment in a bunch of different companies from different sectors of the economy. This means that companies make their money in different ways – information technology in the case of Apple, Food in the case of Coke, or Telecommunications in the case of Verizon.
The Nasdaq includes pretty much all companies listed in the NASDAQ, which includes thousands of companies.
The most popular index and the one that even Warren Buffett recommends paying attention to is the “S&P 500” which stands for “Standard & Poor’s 500”. It includes the 500 largest companies in the United States based on the value of those companies. Some of those companies are listed on the New York Stock Exchange, some in the NASDAQ, but you don’t need to worry about where they’re traded. This means that behind the scenes this one investment is actually investing in 500 different companies!
This is also a rotating index. That means that as a company falls out of the index by going down to the 501 largest company, it’s removed from the index. A new company is added in its place so the total number of companies always comes out to 500.
When most people say “you should invest in the stock market”, this is what they mean. By owning an index fund, like the S&P 500, you’re owning a little piece of every single one of these 500 companies. You don’t need to worry about choosing individual stocks either – you can just invest in this one index fund and it’ll invest in these 500 companies for you. In the next lesson, we’re going to dig into what an Index fund is and why people like me, Warren Buffett, Robo advisors and most financial advisors all recommend investing using index funds.
Ok, let’s review this lesson’s main 3 points:
1 – When people say “invest in the stock market”, they mean transferring the money you’ve earned from your job or other means and using it to buy shares of one or more companies on a public stock exchange like the New York Stock Exchange or the NASDAQ. You’re effectively buying a very small part of this company with the hope it’ll rise in value or distribute some of it’s profits back to you.
2 – There are better ways to invest in the stock market than just picking a single company and putting all of your savings into it. If you’re trying to invest by picking stock winners, you might as well be placing bets on horses. You have to pick the right horse and pick them at the right time.
3 – Rather than trying to invest in a single company by purchasing its stock, the way most people grow their wealth is through “index funds” – funds that invest in a collection of companies behind the scenes. These funds automatically adjust to include the funds that match their criteria. For example, the S&P 500 index includes the largest 500 companies in the US and automatically adjusts it’s weighting when companies rise or fall in value. You can invest in just that index fund and not need to worry about checking the news or acting on price fluctuations.
Warren Buffett has a guest quote about investing that paints an important picture of what it means to invest:
“The business schools reward complex behavior more than simple behavior, but simple behavior is more effective.” – Warren Buffett
Warren Buffett, a man who’s made it his life’s work to invest, favors a simple approach. Many of us are taught from an early age to not talk about money, or share our salaries, or our investments – and that leads to the idea that investing is a lot more complex than it really is.
Investing can be simple – and the basics of investing that Buffett speaks of are incredibly easy to learn.
In the next lesson, we’ll look into how index funds play a crucial role in your investing strategy. See you then.