Back to the Basics: Core Principles

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1:25All right, folks, welcome to Investing for Beginners podcast. Today, we're going to talk about Back to the Basics. This is an on-again, off-again series that we've done through the years, and we just like to touch up on basic fundamentals of investing. It's always good to give yourself a refresher on the fundamentals as my sports teachings, coachings, always focused on fundamentals, pitching, dribbling, that kind of thing. It may be boring, but it's essential stuff you need to know. So we won't make it boring today. We're going to talk about some core investment principles that you have to kind of have your head around if you're going to invest in the stock market.

2:05And the first one we wanted to talk about was buy low and sell high. And maybe let's talk about this rule and maybe why it's hard to follow and how you can implement it. so what are your thoughts that's the rule right just buy low sell high just buy it when it's down and sell it when it's up and you're going to make money right all right obviously the stock market's not that simple if you really want the breakdown of why stock market's special over the very long term it does very well but in the short term things go up and down so when you try to think about buy low, sell high, I think one of the risks you can come across as an investor, and we might all feel the appeal, whether you're day one or day a thousand and one, trying to time the market, trying to think like, you know, what low is and what high is, because in hindsight, we all know when the buy low option was, when the sell high option was like, we all can see it clearly in hindsight, but the future is never that clear.

3:12And so you have to be careful with the buy low, sell high. Yes, I practice it. Yes, I buy stocks when they're cheaper than they should be. I do buy low, but I don't play the sell high game. I'm still in the building stage. I don't try to play the buy low, sell high game from a timing perspective and definitely not trying to jump in and out of the stock market because that can be a great way to lose money. All of it. All of it. Maybe not all of it, but it is a great way to lose money. Let's talk a minute about the whole myth of timing the market and why it's so hard. To me, it stems from one simple thing.

4:00We don't have any idea what's going to happen in the future. Zero zip zilch. You can be inundated, especially at the beginning of the year, people making predictions, prognostications. This is going to happen and this is going to happen. And periodically they are proven right. But is that skill or is that luck? And I would argue it's probably way more luck than it is skill. I'm not saying these people don't know a thing or two. They certainly do. But by and large, we don't know what's going to happen in the future. And if you're deluding yourself that you think you do, know that when you buy this company that it is going to go up after you buy it for sure.

4:42Okay, you may get lucky and it may happen a time or two. But I would say if you pick 20 companies, it's probably only going to happen one or two times. To me, that's one of the biggest myths. and confirmation bias for me on this whole idea is when you think of the greatest investors in history, we can all name them, when you list those people out, none of them were market timers. Zero, zip, zilch, nada, nobody. There are no market timing billionaires. It just, they don't exist. And so when you think about, oh, I could time the market. No, you can't. Not to be negative Nancy, but you can't and it's it's it's impossible and will we get lucky and like andrew said will we buy you know at a really good price low because we've done all this work and if we do sell it do we sell it at a higher price sure that's great but is that something that you can time no man that's well said the billionaires thing too right like there really aren't like no no none of them none of them go out there because there's plenty of billionaires will give their opinion on how you know the rest of us should make money like they do you don't hear market timing no no you don't i mean even even you know the people that are in the bitcoin space that you know talk about the they have bought it at a lower price and they've held it all this time and that's how they got rich i'm not suggesting people go out and invest in crypto but the same rules apply they aren't buying you know they aren't timing the Bitcoin market and buying and selling and getting out.

6:24Maybe, maybe there are a few people that have gotten lucky and you see those examples when they're trying to sell, you know, Hey, do this like I did. Okay. They got lucky and that's great. But even in that space, they bought low and they held on. Yeah. So what's the antidote? What's the antidote to do what we have been trying to teach you? people for the last seven plus years, right? Like I, I, I heard this quote once, uh, Oh, it was in, in the movie, uh, remember the Titans, you know, my, when, uh, Denzel Washington's character is talking about his playbook and you know, the veer, he says it's like Novocaine takes time, but it works eventually.

7:12Um, you know, so it's kind of the same idea. You gotta, you gotta do the work and understand the businesses and find the right businesses and buy them at a good price and hold on to them for a while. They're simple rules. They're not easy, but they're simple. Yeah. And having a plan in place that keeps you from... So I think, yes, the market timing obviously is an issue and trying to jump in and out. But even actions that you don't realize is kind of like a market timing. Like, oh, I'm just going to wait for things to come down. How much missed opportunity has there been from retail investors who are just waiting for things to crash before they dive in.

7:52Trust me, you'll wait for a long time. I mean, to Dave's point, you might get lucky. Maybe you wait six months and it is the big crash and hooray, you made an extra 20 % on your money, good for you. But if you have a lifestyle of I'm going to wait for the crash every time before I jump in and find those businesses and invest in them for the long term, I don't know about that. Mm-hmm. Yeah, it's hard. In some ways, it's probably harder mentally and psychologically to think about when the market is going down to jump in and then to hold on when the market is going up because it's harder to sell.

8:35You feel like if I sell now, I'm going to lose out on gains and it gets to nosebleed levels and you're like, oh, how do I hold on to this? So the psychology of all that is very, very hard. I'm glad you brought that up because that kind of goes to why these rules are so important and why it's important to try to fight against it. Because you are literally fighting against biological impulses. You're fighting against the emotions. You're fighting against fear. Oftentimes people talk about the stock market, fear and greed are in the market, how many times do you fear either missing out on something or you fear that if I sell this, I'm going to regret it later?

9:18And that can drive what would otherwise be a very rational, logical buy or sell moment. But when it's fear-based because you have a fear of regret, you have a fear of seeing this thing go up and you miss out, that can also hurt you as an investor and make things a lot more difficult. Yes, for sure. And I think to offset it, it goes back to having a plan and working the plan and being consistent and utilizing or exercising patience. And I think if you can learn to manipulate those skills, it'll improve your investing returns dramatically. yeah you know i'm getting really impatient of my ability to learn patience right i want to i want to be patient already i'm getting impatient on that i'm getting impatient learning to be patient for sure all right so another core principle is the whole magic of compound interest so when you hear the word compound interest what does that what does that mean to you?

10:31Yeah, like I was talking to Evan the other day on the show, compound interest is just a snowball that rolls down the hill. And that is your wealth, your little wealth snowball. As snow rolls down the hill, the amount of snow it attracts becomes bigger and bigger. And as it's even a more massive side, it's attracting even more snow. Compound interest works the same way. Businesses in the stock market work the same way. And those are two very, very powerful things. When a business is big, it's able to do big business things and then continue to grow and businesses can kind of build on their success.

11:13And you see it, I mean, some of the most obvious examples are the biggest, most well-known businesses we know today. Look at a company like Apple. Apple started as a computer company, but they compounded all the knowledge and the technology that they had built into the iPhone. Microsoft took Microsoft Office, compounded it into the cloud. So there is incremental compounding, compounding year after year with profits and reinvestments and growing from 10 stores to 11 stores to 15 stores to 20 stores, and that all compounds. But there's also compounding kind of big picture-wise, just how companies invest.

11:54And then you have the whole compounding on the investor side too, the way your investments compound as the businesses compound. And that's really exciting as well. Yeah, it's super exciting. And I think the greatest example of this for me as an illustration has always been Warren Buffett. And you think about, yes, he's been investing for a very long time and he's one of the wealthiest men in the world, but he really didn't really start to see those insane numbers, the monopoly money numbers that you kind of think about now, it's really started for him once he turned 60, 70 years old. And it continued to skyrocket.

12:36And you can see different images of how that's played out over the years on the internet. You can Google Buffett compounding and you'll see these charts that are hockey sticks, just up and to the right and just huge growth because to your point his wealth stems from his ownership of Berkshire Hathaway which the value of that has just compounded over time for many many decades and it's just gotten bigger and bigger and that as that snowball has rolled down the hill it's gotten bigger and bigger and bigger and as a matter of fact one of the greatest books written about him is called Snowball isn't it yeah Alice Schroeder Snowball yeah so I mean I I don't know this for a fact, but I'm speculating that she came up with that idea because of how he's grown his wealth.

13:26And that's a good illustration of how impactful this could really be. Yeah, you know, people get so impatient. They look at the NVIDIAs of the world and be like, man, I wish I 100x'd, 200x'd my money. 10 % doesn't sound like a lot. When you only have$100, 10 % is not much. But 10 % of a billion, it's the same 10%, but we're really talking about two different things. So investing is super powerful to your point. Also, being an investor as a skill set is something you can take with you as those numbers get bigger. And one of the things I think you've said a lot on the show over our seven and a half plus years is knowledge compounds.

14:10So imagine how exciting is that? as your own personal pile is getting bigger and compounding, your knowledge and skill sets getting bigger. Ideally, theoretically, hopefully you're making better decisions the more money you have. And I don't know, that excites me. I'm a dreamer. I can't, I can't help it, but that, that part, yeah, that's exciting. It's very exciting. I think it's, to me, it's one of the more, more exciting parts about the whole investing journey is just the, the, the knowledge that you pick up and the things that you learn. And yes, it definitely applies directly to the choices you make and what companies you choose to invest in, but it has tangential benefits outside of that as well in your life and how the things that you learn, you can use those skill sets to learn a particular thing and you could adapt it to learning how to fix a door, for example.

15:04Maybe That's not the greatest example, but it's what sprung to mind. So, uh, but those kinds of things is what really excites me. It's about the, the, the, the building of your knowledge and, and that definitely compounds, you know, I think back on our early days and I look back and think about, okay, I had to think about certain things. And now, because I've used them so much and I understand them so much better than I used to, that now it's kind of second nature to talk about something like return on equity. whereas 10 years ago I had to think about what is the formula and now I don't have to think about it and it's just because of the knowledge that's built up over time it's a simple example but to me it illustrates how much that can compound just like our wealth can hopefully it's motivating to know that both Dave and I did not go to school for finance we taught ourselves helping each other through the more difficult parts.

16:01And it was a process. It was not something that we did overnight. Took us many years. I still remember in the early days when I didn't touch banks because that was too risky for me. And now I feel like a fool even saying that. I mean, they can't be risky, but yeah. I mean, that was a flawed mentality. Yeah, right. Yeah, I mean, it's just, you know, I wouldn't touch semiconductors. It just baffled me. Didn't understand it. But Andrew helped me get a really good handle on how semiconductors work, how the actual semiconductor works and the industry and all those things because he had a lot more insight into it.

16:40And it taught me a lot. Now I feel comfortable enough that I could talk on a podcast about semiconductors. Am I an expert? No. But I certainly am a lot more knowledgeable than it was seven years ago for sure. and so that's those are just really simple examples of how knowledge can compound and you can do it too you just have to put in a little bit of time and a little effort and it's the same with investing putting a little bit of money and time into it the time and pressure are the two things i think morgan freeman talked about in or maybe not morgan yeah maybe it was morgan freeman in shawshank redemption they were talking about the hole that he dug time and pressure those are the two things you need to dig a hole like that.

17:23And it's maybe not the greatest example, but those are the two things you need to, to build compounding is time, time and pressure, time and knowledge. I love these movie references. Please keep it going. Cause now you're giving me a to-do list for the weekend. Yeah. I don't know where it's coming from. I'm not going to lie. Running a small business has been stressful lately. Swamped in paperwork, different state agencies, and got all these expenses to track and everything. And it's hard to have visibility on these things. But I've stumbled on a better solution, kind of like a one-stop shop for my bookkeeping, my expenses, my P &L, my banking, my contractor payments, all of the messy pieces.

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19:36Shop Labor Day savings at the Home Depot today. Offer valid August 27th through September 16th. USLAC store online for details. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. All right. So let's move on to the next principle. So this is risk versus return. So kind of understanding like the investment seesaw and how it has to be a core principle of how you think about investing. So what does that mean to you? lots of lots of things um if i was just getting started for the first time the big one that i'm glad i learned early and i'm glad i learned i happened to stumble on it so i didn't have to learn it the hard way but this idea that sidebar i think this is just part of when i came up as an investor when i first started learning about it uh was 2012 time period and people were very very scarred still.

20:33The stock market was not like it is today where people think of it as a happy place. A lot of people liked gold and silver more than stock market. Stock market had about gotten destroyed from the great financial crisis. So what I learned back then very early that people were talking about was the whole Enron situation was a big one. WorldCom was a big one. So what's kind of crazy if you weren't an investor in that time to realize is that Enron was actually the company. Their leaders were all in the business media. They were on Time Magazine or newspaper this, probably CNBC that. They were looked at as, man, this is the best CEO, business leadership, best business to work for, all these things.

21:25And what's sad is a lot of people had very publicly said, I'm putting my entire 401k in this company. And obviously with hindsight, we know how that story ended. But to me, it's such a visceral idea of just a company who everybody adores can just get wiped out like that. And that's why diversification is so important. That's why spreading your bets. That's why making sure all your eggs are not in one basket. because I don't care how good the company is, how great they've done, how much money investors are made from it. You don't follow diversification. It's unlikely to end well for you. Some people get lucky.

22:11Some people never have to worry about it. But over the majority of people, over a majority of cases, you want to be diversified. Yes, for sure. I mean, I think those are all great lessons, right? And I think when people start investing early in their journey, they don't really understand that the dichotomy is the upside is unlimited and the downside is zero. You can lose everything. And I think a lot of people don't realize that that can happen. It doesn't mean it will, but I think people go into starting investing as, yeah, I understand that the market doesn't always do great and blah, blah, blah.

22:55And I may not make as much as I want, but they don't think about the absolute bottom of I could lose it all kind of thing. And we haven't had really a big bankruptcy shake the market in a while. and so i think that that lesson has been lost uh through the mists of time if you will and i think everybody also gets a little bit too irrational exuberance idea newer investors usually don't wait in until the market is really hot and everything's going great and everybody's talking about it you know you get in an uber and the uber driver is talking hey have you checked out this stock and you know you get a you go to work and you hear your co-workers talk oh i bought this yesterday and I bought this yesterday and everybody's making money.

23:42And so you weighed in not understanding what you're really getting into. And you have to keep in mind that no matter how great every business you think is, there's always a risk. There is no free lunch, as Andrew likes to say. There's no free lunch and there's no absolute, I'm going to buy this and I don't have to worry about it ever. I'm not saying you have to worry to the point where you're obsessing and laying in bed, not sleeping, but you at least have to do some due diligence before you put your money. You think about how hard you work for that money, how long it takes you to make that money, and then you invest it with a company.

24:22You want to make sure that you're putting your money where that person's going to take care of it for you. And that's the beauty of the stock market, but we have to do a little bit of work and understand that there is a risk when you invest. There is no guarantee that i buy this and it's just it's gonna make me lots of money yeah hopefully that's the way it works out but we still have to do our due diligence and understand that risk is part of the game it's part of the equation of investing in the stock market yeah that's that's very well said thank you all right let's move on to the last core principle and this is dollar cost averaging and think of the i like to think of this as the tortoise usually beats the hare and why and so we've talked before about dollar cost averaging maybe we can kind of chat about it some more it's a really powerful thing and it's not probably talked about enough even though you and i have have talked about it a fair amount it's still not really a part of a normal conversation when you talk about investing with people?

25:32Probably multiple reasons. The one that's popping in my head right now, though, and this again goes back to the way we are wired. And don't feel shame if this is describing you. This is, again, just how we are wired. I've noticed with myself, I will get more excited or more unexcited about something that doesn't matter as much. I'll get more excited about something that doesn't matter as much if it makes me feel smart. Let's say that. Or if I buy a new stock, let's say I bought, everybody knows I bought Adobe recently. So I hyper-focus on how is Adobe doing? And if it's up, I feel better about that.

26:14Whereas Pulte Group, which is a bigger position, I don't care too much if that one's up. Because it was from so long ago, even though the Pulte thing would impact my net worth more. so I'm presenting those examples to show that like we can trick ourselves into wanting to feel smart and I think not dollar cost averaging is a way to make yourself feel smart because we all imagine this great moment you know game seven of the world series you know we're down by three and we hit a home run to score four and we've won the game we imagine the stock market that way too sometimes where it's like, I want to hold 30 % of my portfolio in cash.

26:57And then I want to wait for Apple, Amazon, Google, and Netflix to all crash 80%. And then I'm going to deploy all my cash. And I'm going to look like a genius because I'm going to have all these 10 baggers in my portfolio. Like the sounds extreme, but in a way, a lot of us can succumb to that. It's a way to try to outsmart the simplicity of dollar costs averaging. The downside, hopefully it's obvious, But if it's not, the downside is you are waiting and waiting and waiting and waiting when your wealth would have been better spent. Just put it to work. You don't have to put everything all at once, but you just incrementally habits over time, over time, over time.

27:40And then you look back 10 years later, and it really wouldn't have made much of a difference whether you had that downturn or not. Definitely not 20 years, 30 years, 40 years later. That habit wins out. and it doesn't give you those illusions of being in game seven of the World Series. And so it's not natural to do. And that's where the discipline can kind of come in and assist you as an investor, even though it doesn't feel great. Right now, when you buy more carpet at the Home Depot, you save more. During our Buy More, Save More event going on now, upgrade your carpeting with the top brands and save up to 15 % off installed carpet projects.

28:18Installation starting at just 49 cents per square foot. Select from a wide assortment of carpet to fit your room, lifestyle, and budget during the Buy More, Save More event at The Home Depot. Offer valid August 27th through September 13th, 2026. Base price for standard installations only. Excludes Traffic Master and stock carpet. For licenses, see homedepot.com slash license numbers. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks.

28:53Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. And it's not sexy, right? It's like, it sounds better at dinner parties to say, I waited for all those basket of companies you were talking about for them to get to my price. And then I pounced and then it all went up. And, you know, like you said, it makes you feel how smart are you? Everybody should invest like you. I'm not saying that you can't be successful doing it that way, but I think we established early on in the show today that there's a lot of challenges.

29:36There's a lot of hurdles to trying to do it that way. And there's a lot of opportunity cost. How long do you have to wait for those companies to fall to that point before you dive in? And if you're curious about this, something that I have looked at in the past, and I haven't really come to a lot of conclusions, but I think it's a really interesting kind of data point to look at. if you look at the p e ratio of costco over the last 10 15 20 years it's always been high 30 35 40 50 all very very high if you compare that to the stock chart of the company it's been up and to the right over that exact same time it's beaten the market had great returns and i'm not telling you to go out and buy Costco by using this example.

30:27I'm just illustrating that sometimes you could wait forever for a company like Costco to come to your price and you would have missed out on the opportunity to invest at any point along the journey of that company. And so the point is, is that sometimes the best opportunities are right in front of you. And a lot of times it's companies you already own and we get so fixated on the shiny new thing Andrew was kind of illustrating that point with I bought Adobe recently so I'm putting all my attention on that but Pulte Group which I've owned for a long time and has had great returns I don't care at all and so when you think about okay what do I want to buy next month well a lot of times the best investment is Pultigroup.