MI Rewind: A Guide to Getting Started in Investing w/ Stig Brodersen

24:20Then you have an individual organization that's well-known like say Tesla, who's considered to be even more high risk than other individual organizations. And that causes investors to require an even higher rate of return. So really, it is that dynamic of higher risk requires a higher rate of return. Now, an important distinction I want to make here is that when investors buy bonds in their brokerage account, they are actually buying a bond fund. They're not actually buying a bond itself. And I would say today that it's far more common for an investor to buy a bond fund than it is an actual bond itself.

24:55When you buy an individual bond, it's sort of like owning an individual stock, it's different in the sense of debt versus ownership in the company, like I said just a few minutes ago. But how it's similar is that you're relying on that one entity, whether it be a corporation or a municipality, you're relying on that one organization, that one entity to pay you back and you have a direct relationship with that entity. Just like if you invested in an individual stock, you're then relying on that one company. But when you buy a bond fund, like a bond ETF, say, the ETF owns the actual underlying bonds.

25:29And then as the investor of owning the ETF, you then own a percentage of those underlying bonds. Just like the stock ETFs, now you have a diversified portfolio of bonds within your ETF. And that's usually a low cost way to greatly diversify a holding of bonds. I personally haven't owned an actual bond itself. I have briefly owned a bond fund before, a bond ETF, but I've never actually owned a bond itself. How about you, Stig. Have you ever owned an actual bond? Yeah, good question. No, I actually never owned an actual bond for the reasons that you also mentioned. And as you suggest, when you start up, a bond ETF is typically the best choice.

26:08It's definitely a lot easier than to go into a specific company and try to read their financial statements and figure out the debt situation. Yeah, I'm a buying whole investor. And like everyone else, I haven't been able to make a decent return in government bonds for a long time, given the low interest environment we're in. And with the interest rate being low, I'd say that typically stocks are a better investment. But we have had periods of time, even decades, where the return on bonds exceeded that of stocks. Another thing to keep in mind is that generally bonds are not popular with millennials, at least not at the moment.

26:46I need to emphasize that. The reason is that fixed payments, which is what you get from bonds, and often lower expected returns are more appealing as you approach retirement. And you need to replace your income with a steady stream of cash flows rather than accumulate your wealth, which you very often would do in stocks. Yeah. I think part of the lack of interest with millennials is the fact that they're not quote unquote cool. It's rare that anyone is going to brag about owning a bond or a bond fund, whereas you can talk to your friends and brag about owning a high-flying tech company like Uber or Snapchat.

27:23You're not going to go to a cookout or your family's house or a holiday event and say, hey, I own US government bonds and be excited about that. Whereas if you're investing in a company like say Uber or Snapchat or Apple or Facebook or anything like that, you can go to those parties or those events and you can brag or talk about that to the other people that are there and you can be excited about it. And that can add a cool factor because you now own those companies. And I think that plays a big role specifically for millennials. Another interesting point about buying a bond fund or a bond ETF versus actually buying a bond itself is the liquidity factor.

28:01And I think this is important because when you have a physical bond, when you have an actual bond itself, in general, it's hard to get rid of that early. If you have a 10-year period, it's difficult to get rid of that bond early. You can, but when you cash it in, you're going to pay a penalty or you're not going to get all of the interest. And so it's difficult to get rid of that actual bond. Whereas if you have a bond fund or a bond ETF with your brokerage account, you can just buy and sell that with your account just like you would a stock. So it's much more liquid. It's much easier to buy and sell the bond fund than it is an actual bond itself.

28:35So that's just something to keep in mind when you're considering potentially investing in bonds or bond funds. Another financial instrument you can purchase in your brokerage account is commodities. And commodities are things like oil, gold, silver, and they're somewhat similar to bonds in the sense that when you buy it with your brokerage account, you're generally buying a fund. You're buying a commodity fund or ETF that tracks the underlying value of those assets. You're not actually buying the assets themselves because you're not taking physical delivery of a barrel of oil or you're not going to have gold delivered to your house or silver.

29:12Of course, you can and that would still be investing in a commodity. But in general, when you're using your brokerage account, you're buying a fund, which then, like I said, tracks the underlying value of those assets. And so if the value of one of those commodities, say you bought a gold fund. If the value of gold goes up, then the value of your ETF should go up and you would have a positive investment. But if the value of gold goes down, then you're going to have a negative investment and your ETF should lose value. This is an overly simplified version of commodities. They are somewhat complex and they are a more obscure financial instrument to invest in.

29:47I don't personally do any investments in commodities myself, but I did want to go into that briefly so you're aware that that is a possibility. Thank you for elaboration, Robert. The last of the very published securities that we'll cover here in the episodes, that's options. So please take it away, Robert. Options are a powerful financial instrument, but they can be complex. And I could talk for over an hour. I could take up an entire episode talking about just options in themselves, which I'm not going to do here. We'll reserve a future episode to go deep into exactly what options are, some different option strategies.

30:22But here in this episode, I just want to provide a brief overview so you're aware that these are a possibility for you to invest in. And so you generally have two types of options. You have call options and put options. Let's start by going over a call. So a call option, when you buy a call option, you have the right, but not the obligation to sell the underlying asset at a given price. And the seller of that option from which the buyer bought, they are required to sell that underlying asset to the buyer at whatever price they agreed upon. So let's use Apple as an example. If say the stock is trading at$100 and the buyer thinks that the stock is going to go to$120, they could buy a call option for say$105.

31:08And then if the stock goes to$120, they can then exercise their option, buy the stock from the seller at$105, and then instantly sell the stock in the market at$120. And that$15 spread is their profit. However, if the stock doesn't go to$120, or if it doesn't rise above their strike price, the buyer of the option isn't required to exercise the option. They can just let the option expire worthless. And they do have to pay a fee to buy the option, of course. And so they'll lose that option and they'll lose a little bit of money for whatever they paid for that right to buy the option, and the seller will be able to keep that premium.

31:48And so a put option is almost the exact opposite of a call option. When somebody buys a put option, they are buying the right to sell a stock at a specific price. They're not required to sell it, but they have the right to. And the seller on the other end has to buy the stock from that individual at their agreed upon price if the buyer of the option wants to exercise their right. And like I said, options can be complex financial instruments to trade. So I'm not going to go more in depth than that here in this episode, but I just want to make you aware that they are a choice for you to invest in with your brokerage account.

32:21If you're interested in learning more about options, I'm going to dedicate a future episode entirely to covering options. So be sure to check that one out when it comes around. And so of the six financial instruments we've talked about that you can invest in, Which do you think is the best for millennial investors, Stig? I think it really depends on the investor. But if I should generally give a piece of advice, I would recommend that millennial investors should start investing in stocks. Now, keep in mind that not at any cost. There's one thing that is the price of equities or the price of stocks, and then you also have the value of stocks.

33:00And I know that you, rather later we'll do an episode specifically about stock valuations. But having said that, conceptually, I think stocks should be preferred. Primarily because stocks, and keep in mind, whenever you own a stock, you own a real company. If that company makes a profit, that money will one way or another be returned back to you as the owner or part owner of that company. Gold or oil doesn't generate a profit in itself. And just that makes it much harder to make a profit for you as an investor, especially if you are a long-term buy and hold investor. And that is really what we are talking about here.

33:40We're not talking about buying gold because you think it will go up in price over the next three weeks. We are talking about buying an asset and hold it for many, many years. And you just have a lot of tailwind from investing in stocks. Now, bonds also have a cash flow since, again, this is money you lend to someone else that pay you an interest. But in the environment that we have right now, and we're recording this in June 2019, and we just have a low interest rate environment. So the cash flows from bonds you can generally get are just not that attractive. And even if the interest rate should go up, you need to consider that the cash flows from bonds can typically be expected to be lower than stocks since it's a guaranteed payment, whereas there is no guarantee but more upside with stocks.

34:31If you're not completely sure about how to value a stock, and it can be a bit tricky, I would really recommend for the new millennial investor that you look into a low-cost ETF tracking the stock market first. And whenever we talk about the stock market here. There might be the S &P 500. It might be Dive Jones, Russell 2000. Generally, a large basket of stocks. That's really what you're looking for if you're just starting out. I agree completely. Investors can absolutely build a great portfolio by keeping things simple and just buying a few individual stocks and ETFs and then just letting them compound over the long term.

35:10And as you mentioned, Stig, I will dedicate an entire future episode to how to value specific stocks and ETFs. Let's shift gears and talk about, from a high level, the different investment strategies that can be implemented using the assets that we just talked about. There are many different strategies that you can use as an investor. And I plan to do a future episode where I dive really deep into these strategies. But for now, in this episode, I just wanted to briefly discuss them and point out a few of the most common strategies, as well as some of our favorites. I personally use a long-term buy and hold value strategy similar to Warren Buffett's, but I also mix in some options and momentum.

35:49I know you're a really big Buffett fan, Stig, so I'm assuming you implement a value strategy as well. Can you talk to us a bit about your current investment strategy and how new investors might be able to use a similar strategy to benefit them? Yes, I'd love to do that, Robert. And like you, I look at Warren Buffett. I'm not saying in any way I'm as smart as him. I think it's quite evident for everyone that I'm not. But Warren Buffett is really the pinnacle whenever it comes to investing. And the investment strategy that he preaches and the one that I'm trying to follow is actually very simple.

36:23I buy into individual stocks at a price that is lower than what I estimate the price to be. And then I simply wait. Keep in mind, price is one thing. Here it is again. value is another. We really have to separate those two. So if you watch CNBC and you hear that Apple stock is trading for$170, that's not the value of the stock. Now, the journalist might say that is now the value of Apple, but it's not. That's the price of one Apple stock. Your job as an investor is to estimate the intrinsic value for that stock. In other words, you need to provide an estimate of what you think it's truly worth.

37:08Yes, the price might go up 1 % one day, go down 1 % the next day, but the value of the stock changes very slowly. And if you're right on both the price to value assessment, meaning that you might buy one share of Able,$170, when the true value or the intrinsic value, as it's often referred to, is say$250, dollars. You'll make a decent profit as long as you're patient.

38:00And we've made a name for ourselves over the years by interviewing the best investors in the world, including Ray Dalio, Howard Marks, Joel Greenblatt, and many, many more. My colleagues Stig Brodersen, Clay Fink, Kyle Greve, Preston Pysh, and William Green each hosts their own We Study Billionaires episodes and bring their own unique perspectives. A whole new world of insights awaits you. Just go ahead and type in We Study Billionaires into your podcast app and see what you've been missing out on. Seriously, go ahead. I promise you'll like what you find. Bonus points if you show your support for our work by clicking follow.

38:34If something piques your interest, just start listening. No hard feelings. I'll be waiting for you back here. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on. But it's never too late to get smarter about stock investing from the ground up. At The Investor's Podcast Network, we've made a habit of studying the world's best investors. And now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with.

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40:59All right, back to the show. I think you hit on a very important key point right at the end there, Stig, and that is patience. as long as you're patient. This is one of the biggest problems investors have, especially millennial investors. It seems that today, most people, and millennials in particular, want instant gratification, and that can be very detrimental to an investor's returns. Now, that being said, just because Stig and I both use long-term value investing strategies as our main focus, that doesn't mean that that's the only one available to investors. There are certainly short-term strategies that investors can use.

41:37Now, I don't particularly use them or recommend them, but investors can day trade stocks, generally using technical indicators. Day trading is when an investor buys a stock with the intention of holding it for a very short period of time, usually just a day or maybe a couple of days, and then hopefully selling it for a profit. Some investors do this by studying how the chart of a stock looks and then trying to predict where that stock will go based on what the stock chart has shown in the past. That's how many people are actually introduced to investing through these types of short-term day trading strategies from quote-unquote gurus that promise to get rich quick.

42:18Like I said, I don't personally like these strategies because I believe no one knows where the market is going. Another way to look at this is really to look at the Forbes 400. How many investors do you find in there, like long-term buy and hold investors? Okay, quite a few. How many day traders do you find there? I don't think I've ever seen one. So I'm not saying that I don't respect or believe that you can make a few bucks. Like if you think that tomorrow at 2 p.m. this stock will do exactly this because you've seen a trading pattern. I'm not saying that it's not possible to make a little bit of money out of that.

42:56But I think that it's a very difficult way to make money compared to making a sound analysis and just wait. Hold that stock or that ETF for years, for decades, and not jump in and out on an hourly or daily basis. I think not only will it be very stressful, I also think it'll be very difficult for you to make money in that way. And it's hard to do over the long term. You might be able to do it for a short period of time and make a little bit of money, but it's very difficult to do consistently and successfully for a long period of time. And when you're learning about investment strategies like day trading from quote-unquote gurus who are posting ads all over the internet, I find it very important to consider how that guru is actually making their money.

43:38Is it from trading or is it from selling their courses? The answer to that question can be very telling as to whether you should trust them with investment advice or not. So after all of this discussion about various different instruments you can purchase, different strategies you can implement. The next thing you have to do is you actually have to buy that asset. You have to buy that financial instrument. You have to buy the stock or ETF or bond or commodity or whatever it may be. You have to actually place the order. And I know that this might seem simple. And some of you might be thinking, why is he even talking about this?

44:11But just the other day, I was reading the second edition of Ramit Sethi's book, I Will Teach You To Be Rich. And he had a story in there that just blew my mind. And so I knew I had to talk about it here on the podcast for you guys. Even if it's simple, I just want to make sure that everybody knows this so that nobody else makes this mistake. If I can save even one person from making this mistake, then this conversation is well worth it. So what you have to do is you have to actually purchase that asset. What happened in the story is there was a woman who invested in her account for about a decade or maybe even longer.

44:46She was continually putting money in the account every week or every month, just like she should, like everybody told her to do. But as she got to retirement, she didn't have much more money than what she put into the account. And she was shocked to see that because hadn't her investments been growing over the last decade or two decades? What she realized when she went to retirement is that she never actually bought anything in her investment account. And so her money just sat in her brokerage account in cash. And so it wasn't really earning any interest. It wasn't really growing. Even though she did all of the right things, she just made one small mistake and she didn't actually purchase anything.

45:21And so all of that time that she invested or thought she was investing, she wasn't actually getting the benefit of time. And so she missed out on all of that time that she could have used. And so I just want to make sure that everyone listening to the show today is aware that even though you're putting money into the account, just because you put the money in the account, it's not like a savings account. It doesn't automatically start being invested or anything like that. You have to actually pick the investments that you want to put it in. So that is very important. And just going forward, make sure that you're doing that for the next few decades before you hit retirement.

45:55And because that's so important, I want to talk about how to actually place the trade. Now, every platform is going to be different. When we talked about the different brokerages you can invest in, depending on which one you chose, it's going to be different on how you do this. So it's going to vary a bit, but in general, it's pretty similar. I've put together two guides on how to actually place trades on Robinhood and Fidelity. I put those in the show notes. So be sure to check those out so you can see how to actually place the trade. Like I said, your platform is probably going to be different, but it should be very similar and you should be able to find similar wording on your platform.

46:30So you should be able to follow it. But basically, what you want to do is you want to look for somewhere on your brokerage platform that says trade and then click on that. and then it should bring you to another screen or another box that pops up and you'll need to enter the ticker symbol for the security that you want to purchase, whether you're buying or selling and then how many shares for that transaction and then the order type. The two most common order types are market order and limit order. A market order will purchase your security at the next available price, whatever that may be. A limit order does exactly what the name implies.

47:04It limits the price you're willing to pay or sell your security for. So if you've set a limit at$5 and the stock is trading at$5.10, it's not going to buy the stock until the stock falls below$5. Now, both of these transaction types have merit in different situations and in different strategies. But I would argue that for most newer investors who are not looking to time the market and a few cents here and there or even a few dollars isn't a huge difference over the long term, over 30 or 40 years, a simple market order should suffice. I know this information might be difficult to visualize or remember if you're driving or running or working out or doing yard work.

47:47So again, refer back to the guides that I've created and put in the show notes with step-by-step instructions and photos showing exactly what you need to do. And like I said, Fidelity and Robin Hood's platforms aren't going to be the same as every other platform, but they should be similar and they should give you some ideas to what you're looking for on your specific platform. Rob, I'd really like what you said there before, you know, put your money to use as soon as possible. And providing a guide, which buttons should actually look like, that was actually one thing that really confused me when I began because that was just something I heard all over the place, just buy this or buy that, but how do you actually do it?

48:23But having said that, the next topic here, I know you have a great example of compounding and why it is so important to start early, Robert. So I would just like to hand that off to you. Absolutely. Compounding is likely the most powerful thing a millennial investor has on their side. Albert Einstein once said that compound interest is the eighth wonder of the world. And I completely agree with that. It is so, so powerful, especially for those with many years to really let it work for them like millennials do. It's so important to get started early so that you can let your money compound for you as long as possible.

49:01And I know this is simple, but once that time is lost, it's gone forever. You can't get it back. You're not going to be able to go back in time and invest. And a lot of people, a lot of successful investors, one of their biggest mistakes or their biggest regrets is that they didn't start sooner. So get started as early as you can. And so what exactly is compounding? Compounding is just the idea of you earning interest or profits off your previously received interest or profits. So for example, if you had say$10 ,000 in a savings account that pays a 10 % interest rate, you'd receive$1 ,000 in interest after one year.

49:41But then in the second year, you'll receive 10 % on your new balance of$11 ,000, which includes your$1 ,000 of interest from the previous year. So now instead of earning just$1 ,000 in interest on the$10 ,000, Now you're earning$1 ,100 on the$11 ,000 that you had in your account. So then in the next year, instead of earning interest on just$12 ,000, you'll earn it on $12 ,100 and so on. And I know this doesn't really sound like a lot of money when you hear it like this. So I'm going to give an even more drastic example from moneyunder30.com. And I'll be sure to put links to other examples and illustrations in our show notes that you can really see the true power of compounding.

50:23So the money under 30 example goes like this. There were three people, Michael, Jennifer, and Sam. Michael saved$1 ,000 per month from the time he turned 25 until he turned 35. Then he stopped saving but left his money in his investment account where it continued to accrue at a 7 % rate until he retired at age 65. And then there was Jennifer who held off a little bit and didn't start saving until 35. She still put away the same$1 ,000 per month from her 35th birthday until her 45th birthday. Like Michael, she left the balance in her investment account where it continued to accrue at the same rate of 7 % interest until age 65.

51:04And then lastly, there was Sam. Sam didn't get around to starting to invest until 45. Still, he invested the same$1 ,000 per month for 10 years and then stopping his savings at$55. Still, he invested the same$1 ,000 per month for 10 years. He also left his money to accrue at a 7 % interest rate until his 65th birthday. Now, their situation seems similar. They all put$1 ,000 away per month for 10 years, but the big difference is the amount of time that they let it compound and the time in which they started. The earlier people had longer for their money to compound. So despite them all saving the same$120 ,000, their ending balances at their retirement was very, very different.

51:50Michael had over$1.44 million, while Jennifer had about$730 ,000, and Sam had about$373 ,000. Now, I know these balances still sound like a lot in comparison to$120 ,000 they put in. So of course,$120 ,000 to$373 ,000 is still a lot of money and that still shows why you should invest. But if you look at Michael's, he turned the same$120 ,000 into$1.44 million. And that right there is the power of compounding. So I'm ashamed to say that I knew about the power of compounding, but I still feel I was late to the party. I was in my mid-20s whenever I was done with college. I got my first job. I paid off my student debt.

52:41And then I started compounding. But compared to you, that's old, right? Yeah. I was very lucky. I can't take too much credit. It was just myself being in the right place at the right time. But basically what happened was when I graduated from high school, I got a job at a local credit union. And part of their orientation and training program was that they required a financial education course. And in the course, they taught me why it is so important to start investing early. They talked about what compound interest is, and they showed about how it impacts investment returns over the long term.

53:17And for me, being young, it really made a big difference to me seeing how at just 18, I could have a huge difference in my retirement if I just started now. So I really took everything they taught me to heart and I started to invest for retirement at 18. And I know that sounds kind of crazy because at 18, who's thinking about retirement at 65, right? But when you learn about compound interest and see how powerful it is, it's hard to not take advantage of it at that age. So fast forward to today, I'm very thankful that I had that course and that I got started as early as I did. And so now I want to shift to the last part of the show and I want to talk about having realistic expectations, especially for a new investor or a millennial investor.

54:00Like I said briefly earlier, a lot of the investors that I've worked with, that I've spent time with, have heard about investing from get-rich-quick schemes from these so-called gurus. And I can't tell you how many times I've had friends of mine come to me and ask about investing in some new craze or a hyped-up company or something like that. And I believe it's very important to have realistic expectations and goals so you're able to make rational, data-driven decisions that make you money over the long term, rather than making emotionally-driven decisions that are going to hurt your investment returns.

54:33If you listen to the hype or the get-rich-quick schemes, you're going to make bad decisions based on your emotions, which will likely lead to you losing money, and therefore you're not going to want to invest anymore. But the reality is this. If you're not starting with a lot of money, you cannot expect to replace the income from your job and live off your investments right away or retire tomorrow. You're not going to double your money overnight. You should be targeting between 5 % to 10 % annually, as that's historically what the stock market has done. Anything you're able to earn above that is a bonus, and of course, that's great, but you should not plan for it.

55:08Your investments are going to go up and down over time, sometimes irrationally without much of a reason. But if you continue to make well-informed, data-driven decisions, and you have a long-term strategy that you're committed to, you invest early and often, you keep your fees low, and you don't let your emotions get the best of you, you can do very well over the long-term in the stock market. If you had to summarize everything we talked about today and everything you've learned in your investing career so far, Stick, what is that one final piece of advice that you'd give to a millennial investor that's listening to the show today.

55:41Really to dodge your question there first, I would say that I think you provided a great guide to investing in this episode, Robert. And I'm excited to follow your journey, but even more the journey of your audience here on the sideline. Really to answer your question, what I love about investing is that you meet so many great people on your journey into the world of finance, and you're never really done. You never reach your destination where you know everything that you need to know. It's a field where you can continue to learn regardless of your wealth or your expertise. So I guess my piece of advice would not be related to what to invest in and how to invest, but rather encourage everyone to love the journey.

56:25Of course, the proceeds from investing wisely is great, but if you don't love the journey and if you don't learn in the process, you likely won't be successful. Stig, that is very, very good advice. And I could not agree more. I personally love the journey myself. And I hope I can help the audience love their journey as well. Thank you for coming on the show today. Thank you, Robert, for allowing me to co-host the very first episode of your new show. And thank you for helping our generation become smarter at finance. All right, guys, that's all I had for this week's episode of Millennial Investing.

57:01I'll see you again next week.