The Basics Of Investing
Wisdom from great investors to help you get started
Summary
We will cover a few important topics in this article
Market wisdom from legendary investors
The power of compound gains
Dollar cost averaging (DCA)
Beginning to invest is a daunting prospect, there is such a wealth of information out there and so many decisions to make. To help break it down, in this article we will explore some key principles that will not only help you make decisions on what to invest in, but also how to protect your investments and maximise your returns.
What do the experts say
Legendary investors like Warren Buffet and Benjamin Graham are in tune with a few very simple truths that lots of new investors overlook.
“The stock market is a device for transferring money from the impatient to the patient.” “Time is the friend of the wonderful business, the enemy of the mediocre.” -
Warren Buffet
"Be fearful when others are greedy and to be greedy only when others are fearful."
Warren Buffet
Let’s explore these quotes, as together they can help you achieve success in your investment journey.
“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett
This is a really important point to understand. The probability of an investment becoming profitable increases as time goes on. This is the opposite to an actual casino, where your probability of being ‘up on your investment’ trends to zero throughout your life.
So what does this mean for our strategy? Well, basically it means sit tight. As you can see that the probability of your investment being profitable after the first year is a modest 65% but that moves all the way up to 95% after 8 years. You are in this for the long term, so do not stress about short term volatility in the market. This means however that it is important to pick companies and investments that will be around in 10 years time! Don’t know what companies to choose? Well as an amateur investor, there is a simple solution to this, and that is index funds.. Essentially you just buy them all!
Index funds
An index fund is a fund that tracks one of the major indexes like the S&P 500, would allow you to have exposure to a certain market without having to choose an individual company.
The S&P 500 is a stock index that consists of the 500 largest companies in the U.S. and is generally considered the best indicator of how U.S. stocks are performing overall.
The benefit of an index fund is diversification. You are not at risk of a single company imploding and destroying your investment, conversely you would not benefit from any exponential growth that a company or investment might face like was seen in the case of Apple, or Bitcoin.
Now sitting tight also unleashes one of the most powerful parts of investing and that is the compound effect. This is something that you may have heard about, and it is the single most important part of building wealth. Essentially.. You earn money not just on the initial cash you put in (the principle), but also on all the money that you have made from that initial investment over the years.. This grows exponentially with time. Let’s take a look at some numbers..
Once referred to as the either wonder of the world by Albert Einstein, compounding and compound interest play a very important part in shaping the financial success of investors.
So what are we looking at here.. Basically you can see that the deposits made over the years (represented in yellow) pale into insignificance compared to the gains made by the interest (or gains) on the investment. This is the power of compound growth.
So how do we achieve compound growth? Well, the most important thing is to not lose money, and stay in the market as long as possible. There are multiple strategies that can help you achieve this. The easiest one is to DCA..
DCA (Dollar Cost Average)
This is the most common strategy that investors use to build their wealth. All it means is that you invest a portion of your income consistently, whether it be every month, or every week, and you do not stop, no matter what the market conditions. The data shows that this strategy far outweighs the returns of any other over a long enough time period. Consistency is key! This strategy could be as simple as buying $100 of your favourite shares or cryptocurrency each month. Over the medium and long term you will statistically be maximising your gains. It is a good strategy as it stops amateur investors trying to time the market.
Time in the market is better than timing the market. If you do choose to try and time the market, that’s when our 2nd piece of wisdom comes into play:
"Be fearful when others are greedy and to be greedy only when others are fearful."
Warren Buffet
This is an easy concept to read and a hard one to put into practise. It’s so tempting to buy into investments when it looks like they have momentum and are doing well. This is in fact not the best time to invest, instead you want to invest when prices are low and market sentiment is weak. This offers the best returns, and the lowest risk, but goes against human instincts of buying ‘strong looking stocks’.
It is very hard to time the market well. Unless it is your full time profession, it is likely not worth the energy.
So what have we learned today
Well, firstly we learned to be patient, think about 5,10,20 years into the future. That is what investing is for. Do not be entice by short term profit, that is trading and requires a whole different set of skills and education. Day trading leads to losses for up to 90% of trader, investing does not.
Secondly we learned that you can choose your favourite stocks or an index to capture overall market growth, and the best way to ensure positive returns is to bu constantly using a DCA strategy. Simply deposit however much you can afford to invest into a trading account or onto an exchange and build your wealth month on month.
So where can I start?
You can start right away using the Scallop exchange for investments in cryptocurrency and any decent stock broker for investments into traditional stocks.
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