Q&A: Getting Started from Ground Zero; Is there value in the Mag 7?

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2:11All right, folks. Welcome to Investing for Beginners podcast. Today, we're going to answer some great listener questions. We got a group of questions from the Spotify machine. We also got some from Reddit. And so we're just going to kind of work through these. The first one's going to be a great question from Nathan. He said, hey, love the podcast. Been listening for these past months. He would love to hear our thoughts on three steps. Number one, the first steps after opening a brokerage account. Number two, action slash due diligence prior to opening a brokerage account. And three, advice for new investors.

2:48That's a broad one. So, Andrew, what are your thoughts on Nathan's great question here, his three-parter? I would say build a good habit once you've opened a brokerage account. What would you say? I would agree. I think building a good habit is the best place to start. And to me, building a habit is getting into the habit of regularly putting money into the market as part of your budget. Evan and I talked on, at any rate, the other day, our other show, about the B word, budgeting. And we did talk about investing and how it should be part of your budget. As somebody who worked in the banking industry, I saw firsthand, people would always say to me, oh, I'm going to do that at the end of the month when I have money left over.

3:36Well, guess what? There was never any money left over ever at the end of the month. and so I think making it a habit a part of your bills or making sure that you pay yourself start a habit start investing at least once our friend Braden Dennis invests I think it's on the first Tuesday of every month and I've kind of copied that it's real easy simple work takes all the guesswork out of it and you just need to do the work ahead of time but those kinds of things will set you up for success as you continue to grow. Because newsflash, you're not gonna be Warren Buffett out of the gate. And you may be someday, but not out of the gate.

4:14And you will make mistakes. And if you start to build a habit, you will move past those mistakes. You won't get discouraged and stop. Because the one thing about investing that you should know, if you haven't figured that out already, is consistency will win far more than being a superstar and having one great hit. So if you continue to learn and evolve, you will do well over a long period of time. And that's really what it comes down to. It's just being consistent, putting money in the market, letting the companies do all the heavy lifting and all the work. And the rest is gravy, baby. It is gravy.

4:51A book that I have recommended in the past, haven't recommended it for a while, so I want to bring it back up again. Even if you're not a reader, This is on the easier side of reading. The Richest Man in Babylon by George Clayson. I believe it's in that book. He talks about paying yourself first. And it's everything that you were just saying. It's, you got to do it first. Treat it like a bill. Otherwise, it won't happen. Yeah. Fantastic book. Oldie but goodie. And to your point, it is super, super easy to read. And it makes a lot of sense. And it's very logical. And it's very well laid out. and one of the best books to help get you started on the money mindset from the get-go, not just investing, but just how to handle money and the way to think about it.

5:38Yeah, great recommendation. All right, so let's move on to the next question. So thank you, Nathan, for that great question. All right, so let's go with this one. So this is a fun one. What stocks are good for beginners? Like where would you tell somebody to go start? Hmm. That's a good question. I feel like I'm repeating myself, but I would try to start in places that are safer. I would not recommend going into IPO land, SPAC land, all these fancy new innovative things. Go where the businesses have been around for a long time, the businesses that have had profitability for a long time, and ideally the businesses where the price earnings are cheaper.

6:26businesses that are cheaper tend to be more forgiving you'll lose less money the last thing you want to do is get too discouraged and think that oh i'm not the type of person who can make money in the stock market that's the last thing that we would want anybody to to feel like or think about so try try to find some some easy wins i have a newsletter you can steal those picks if you want. Twitter is a great source of ideas. Substack's a great source of ideas, but preferably more mature, safer businesses. I know that would be hard to kind of conceptualize if you're just first starting out, but even like most dividend payers, I would say, tend to be safer.

7:12So that can be a great place to start. Yep. Yep. Those are all great suggestions. I would probably throw out the Peter Lynch, by which you know idea. It's a good place to start. In other words, think about either companies maybe you work for or products or businesses that you really like. A common one is always Starbucks, but think about things like your iPhone or if you drive a particular car or if you love a particular internet company. Thinking about those kinds of things. Another great place to look, it's kind of boring, but it does do the job, is go through your medicine cabinet at home or go through your pantry at home and see what companies you are buying stuff from.

7:58And generally, those are safer businesses. They're usually dividend payers, like Andrew was suggesting. And they can be rock-solid businesses that you can get started with. and like we were talking about in our previous episode, you're unlikely to lose a lot of money in those kinds of businesses and start in the wrong place. So a company like Procter & Gamble, is it sexy? No, it is not. But it pays a dividend, it's a strong, consistent business and it's a really good place for you to kind of cut your teeth and start to learn. Andrew and I were lucky and we chose Microsoft back when it was not the Microsoft now like it is now.

8:39but that was a good place to cut our teeth. It was a good place to start and learn from. And I think that's probably what I would recommend is looking at those kinds of businesses. I would strongly encourage you to stay away from anything that gets a lot of buzz and a lot of hype. Those typically are going to end up in the growthy graveyard or are just not gonna be good places for you to start investing. Yes, you could get lucky and pick a great one, but chances are you won't. And it's also the other part of it too, is we were talking just a moment about habits and trying to build a habit. And if you're, if you're investing in something that's very volatile and you're new to the stock market, that could drive you away and we don't want that.

9:27And so I think avoiding those until you can figure out, you know, how much risk and how much stomach you can handle the ups and downs, then maybe you can play in that playground. But until then, I would probably recommend staying with something a little safer and air quote boring. Berkshire Hathaway, for example, something along those lines. And I think that's a great place to start. if I kind of go down memory lane and think about the last five ten years Procter & Gamble and Berkshire would have just that's the same advice three years ago five years ago ten years ago and done pretty well and that would be a great place like you said to start and a great place to have your money period if especially for Berkshire and then if I to go back through memory lane of all the businesses that were kind of hot at the time, every six months you can find a new area, a new industry, a new IPO this, a new...

10:28I mean, just the list goes on and on of all these companies that were hot at one time or another, and now you don't hear about them anymore. It doesn't sound like super complicated advice, and that's what makes it so helpful if you can actually respect it. Yeah, yeah, exactly. Exactly. All right, let's move on to the next question. So we got, howdy, I'm 22 and I recently opened up a Roth IRA with Fidelity because I got some money to open one as a Christmas gift, which is awesome, except I have no idea what to do with the money once I put it in an account. It says I should use the money to invest in something but i'm completely lost and don't really understand what i should be doing does anyone have some good advice or good resources to explain what it means and what i should be doing maybe i investing slash roth ira terminology for dummies from reddit so andrew what are your thoughts on this and we how would we help this person kind of get started kind of similar to what we just did with stocks for beginners.

11:36This person sounds like they're really confused or just completely overwhelmed. In that case, I would just say buy an index fund. That's actually great advice for most people, by the way. The people who tend to stick around with us, they like to pick stocks and we like to talk to them and help them. But for probably the majority of people out there who just want to check investing off of their checklist and move on to their next life item, just buy an index fund. It's not super hard to understand. It's a collection of some of the best businesses in the world. And as long as the economy grows, that value of that investment will grow.

12:18Yes, we have times and periods and recessions and trade wars and pandemics and all these things that will come to slow down the economy, maybe take a couple steps backwards. But over the very long term, the economy as a whole finds a way to continue to grow, to continue to improve, to continue to get better. And that works in the United States. It also applies most international countries too, more developed world, Western world, things like that. And so the businesses in the S &P 500, for example, some of them are very US-focused, but a lot of them actually drive a lot of revenues internationally.

13:00Visa, MasterCard, Microsoft, Apple, to call them U.S. businesses is not fair because they drive so much revenue from all around the globe. So if you believe in, you know, you might have hesitations about the United States, but if you believe in the global economy, if you believe in humans, human progress, human drive, human ambition, than S &P 500. I mean, ticker SPY. Literally, I believe all you would have to do, I haven't done it, but I believe it's as simple if you have fidelity. Put SPY, say, I'm going to do a couple hundred bucks a month automatically out of my checking account, and it'll just continue to buy that, and you just let that sit.

13:47That's massive wealth generation compared to the alternative, which is doing nothing, and it's small in the beginning but it snowballs to a lot in the end so highly recommend to anybody who's in that place to go do that because it will it will have a huge impact eventually yes it will and that that's such good advice and i think the one one of the things that people can get scared about investing in the stock market is it it is overwhelming there's so many choices and they don't know what to do and they're afraid of making a mistake. And the first thing you kind of really need to do is figure out what kind of investor you want to be.

14:26And if you have money to put in a market, the most important thing is maybe not necessarily the choice, but it's the putting the money in the market, letting it do the work for you. The sooner you can do it, the sooner that snowball can start to work for you and the better off you'll be in the long run. And if you don't know where to start and you don't know what to do, then yes, buy one of these index funds. The SBY, like Andrew was talking about, there's millions of other ones. Fidelity has a whole ocean of different kinds of ETFs that you could use. But just try to find one that is a total stock market or a total American stock market or something along those lines that's super easy to use low fee and start buying it and set up that habit like we were talking about earlier.

15:16Start establishing the habit of investing on a regular basis. And it also buys you time. So if you decide that you want to do stock picking like Andrew and I do, then you're already setting yourself up for success by having this really good base of solid investments that will build and grow over time. And it gives you time to figure out what kind of investor you really want to be. you may discover that as you're going along, you know, the thought of trying to figure out what Microsoft really does and all the things that are involved in that just leaves me cold. I'm not interested. I'd rather just keep doing what I'm doing and go enjoy my life.

15:57That's awesome. And just keep buying that SPY fund or whichever fund you do choose and let those companies, you know, let Sati Nadella and Sundar Pichai and Tim Cook, let them have all the headaches. You can go out and have fun and enjoy your family and doing the things that you like to do, and you'll make money by literally almost doing nothing. And that's a pretty awesome place to be, too. So try not to get overwhelmed by all the choices. Try not to get overwhelmed by the idea that the stereotype that, oh, the stock pickers are the ones that are going to be all successful. No. There are many, many ways to invest, and buying index funds is a fantastic way.

16:40And as Warren Buffett has said, and Andrew just said, many, many times, that's the right way to do it for most people, and that's awesome. And that's where I would highly recommend somebody start, because it's more important to build the habit and put the money in the market, let it do its work, than to obsess about whether you should buy Google or Microsoft. Just start, and then you can figure that out later. Yeah, for sure. 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.

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18:32Read found fee schedule. This episode is brought to you by PayPal. You know how a mom's bag has everything? Sunscreen? Snacks? A stapler? The new PayPal app is like that, but for your money. Shop, pay, manage your account, and earn rewards all in one place. And with purchase protection on eligible items, biometric security, and pass keys, you're protected at every step. Download the new PayPal app to get started. See paypal.com slash protection terms. 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 question.

19:13This is kind of a fun one. Can the Magnificent Seven offer value? So I guess first, what is the Magnificent Seven and can it offer value? I really don't know at this point. They've had so many different acronyms and so many different this and that and now there's Tango and so I don't know. I don't know anymore. Fang Mang and Fang Game and I have no idea. And Magna and Fang Fang. Yeah, there's so many of them. What are they, Dino? Right now, the Magnificent Seven? Yeah. I believe. Let me see if I can count them out here. So we got NVIDIA, Microsoft, Apple, Google, Tesla, Meta, and Amazon. Okay.

20:06That's my guess. Not my final answer, but that's my guess. Yeah. Not 100 % sure about the Tesla part, but the other ones, I'm pretty confident those are in the list. I mean, to me, yeah, I think there's still value in certain places of the MAG-7. That's my personal opinion. I own several stocks in the MAG-7, so obviously I would say that. But if you compare to other time periods, they used to call them the Nifty 50 back in the 70s, I believe it was. And if you go back in history and read some of the books that were written about it, Howard Marks talks a lot about the Nifty 50 because I believe that's when he started his career, which tells you how experienced he is and how much he knows about the market.

20:53If you bought the Nifty 50 as a whole, you would have done pretty poorly depending on what time period you're looking at. The returns from buying all 50 were not great for a while, but there were pockets in there and certain companies that you bought. And it wasn't just one or two, it was several, where you would have done awesome buying those stocks and ignoring the other nifty-fifty. So I 100 % believe that there is value in the MAG-7. I just think it's, well, there's a beauty is in the eye of the beholder, and value is in the eye of the beholder. So obviously tough to know who's going to do what, but it comes down to kind of doing all the analysis that we do for every company we look at.

21:41How have they done up to now? What does the competitive landscape look like now? How expensive is the stock now? All those things make a difference in how they will perform over the next 5, 10, 20 years. Yep, yep, exactly. You hear people bucket different kinds of investments like the mag seven or large caps or small caps or micro caps or mid caps or growth versus value versus momentum versus trend. All these different types of investing that people love to throw out. I think you can do well in a lot of different ways if you just figure out what works best for you. And you can figure out a system of trying to find the best companies that you can find and pay a decent price for them.

22:32And let, like I just said, let the companies do all the heavy lifting. And let Mark Zuckerberg do all the heavy lifting for you if you want. And I think there can unquestionably be value in some of the MAG-7 companies. if you look at what those businesses are doing they're unquestionably growing and they've become a very dominant part of the global economy you think about a business like amazon i was thinking about this the other day which company amazon or walmart is going to get to a trillion dollars in sales first it's going to be one of them and they're not that far off and so that's kind of staggering when you think about that and so i i think it would be i think it would be a mistake to just discount them just because they're large cap businesses are you going to hunter bag amazon no just because of the sheer size of the business it's probably impossible but doesn't mean you can't get a good return and i'll give you an example uh andrew years ago bought cisco and And he got a good return out of the company, even though it has not returned back to its original high from the dot com.

23:48He still got a really good return from that investment, why he held it. And so I think you can find value in a lot of different places. And I think the trick is, is to figure out what works best for you and not try to get pigeonholed into, oh, I only do this or I only do this and try to keep your eyes open. And I think if you do that, I think your chances of success improve dramatically. but do you think there's people who are just ignoring the mag seven just out of principle like i'm not going to touch these yeah yeah yeah for sure yeah i actually i know i know a few people that uh i will remain unnamed but they do not yeah they're they're like they're anti mag seven like no not gonna i'm not gonna invest in them like okay fair enough interesting yeah yeah curious how that i mean i feel like you're you're right on the mark you know um one of one of the things and then i'll stop i'll try to stop beating this dead horse one of the things that was a really eye-opening to me is that you can get really great returns even though a stock market cap grows really small so take the amazon example um let's say they were all of a sudden buying back a bunch of shares.

25:04You can look at a company like Home Depot and the Lowe's, I think, are two of the best examples of this. They hit... And this is very vivid for me because I remember when I was first learning about the markets and looking up different articles of who were the best stocks, what were the best dividend growers, this and that. Home Depot and Lowe's were Keynes for like, I think it was 2005 to like 2015 or something like that, or maybe 2009 to 2019. We're talking about returns like 20, 25 % year after year after year. And businesses where Home Depot and Lowe's are pretty much saturated in the United States.

25:46They didn't have many more stores to grow into. But when you have ROIC of like 35, 40, and then you're just buying back gobs of stock, markets not recognizing it. And then you're also paying a lot of dividends. Those, the stocks themselves, even though the businesses didn't get outrageously huge. And I think near the end, I think that some of the debt like amplified everything, but you know, the returns are their returns. So I'm trying to say that in that, like when we think of mag seven, just because you can't picture them all becoming like$5 trillion businesses, doesn't mean that there aren't going to be some great investments in there.

26:24and you can look at Home Depot and Lowe's 10 years ago and look at their 10 years prior as a great example of where a big business can, obviously they still grew, but it didn't massively expand and still create a great value for shareholders. Yep, yep, exactly. And you can find lots of great value in lots of different places and try not to put the blinders on, I guess what I would suggest. keep your eyes open you'd be surprised where you can find value yes all right so we got a great we got a great question this is more portfolio related so this is from reddit as well been thinking about this lately whether it's better to buy your existing top holdings as long as a reasonable margin of safety exists or to allocate to new companies which is a better route to go Ooh, this is a, we could go on for hours on this one.

27:24Yes. It's like really personal preference, I think. Really personal preference. Where do you stand on it? I probably lean more towards, because I'm getting, my portfolio is starting to build out as I started to follow you more closely. i have built out the portfolio to where i have a lot of i have a lot of ideas in the portfolio now and so i guess i more want to add to those positions as opposed to like it's got to be something like rockstar to want to add you know another another stock to the company and so if If it's even, if it's like, okay, I really like this one and this one's good, but it's not that much better than this one, I will gravitate towards putting money into the company I already own.

28:27I think it was Peter Lynch said, a lot of times the best stock to buy is one you already own or something along those lines. And so I guess I lean more that way, especially as I have a fuller portfolio at this point. Yeah. If I were to take just an extreme example, let's say you are a venture capitalist type investor and you bought 100 of the fastest growing, biggest TAM kind of stocks, and you really didn't know which one was going to be the next Amazon or Google, but you were hoping that one of them would be, then the one that you find that is like that, that's the one you want to add to right like that would be the one you want to add to because the ones that are not growing in stock price are probably not going to be the next amazon or or google right so right that would to me that would be a no-brainer um i i'm i fall on like the extreme other end of that where it's like once i hit a critical mass I'll just kind of let that planet orbit on its own, but not add anything more to it.

29:43But that's because I'm the opposite of, I'm not necessarily looking to hit the home run. I'm more looking for singles and doubles. And so just because a company has done, let's say we can use Pulte Group as an example. It's like my biggest position. I'm biased. So if you ask me, yes, I will say that I was all business driven, but there's a chance, there's a good chance for, if you were to randomly pick a stock out of my portfolio, there's a good chance that those gains are more valuation driven. And I'm not saying all valuation driven. I'm saying leaning more to valuation driven than business performance driven.

30:20And so if I understand that about myself as an investor, then it doesn't make sense for me to add to the, because if, because I'm just buying, if I'm just buying high, then that's, that would be counterintuitive. So I think it comes down to what are you trying to achieve with your portfolio and what method will be most conducive to better results. And that's all the logic side. Then you have the emotion side, kind of like one of the discussions we were having earlier is, well, what's going to keep you in the game longest? What's going to keep you from having negative emotions that cloud your other decisions?

30:57and that's a whole emotional side that also plays a role here that I haven't even touched on yet. Right. This episode is brought to you by PayPal. You know how a mom's bag has everything? Sunscreen? Snacks? A stapler? The new PayPal app is like that, but for your money. Shop, pay, manage your account, and earn rewards all in one place. And with purchase protection on eligible items, biometric security, and pass keys, you're protected at every step. Download the new PayPal app to get started. See paypal.com slash protection terms. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs.