Starting
There is nothing about money that cannot be understood by a person of reasonable curiosity, diligence and intelligence.
– John Kenneth Galbraith
1. Keep track of your papers and important
information.
2. Use these lists to track assets, liabilities,
income and expenses.
3. Think of your financial priorities and future.
On investing
Greenhorns beware:
1. The primary rule: Don’t lose money. If you don’t know the facts, don’t play. If basic facts are wrong, a geometric pile-up of errors will follow. Take your money, put it in a money market fund and sit back. Do not treat the stock market as a safe haven. Be prepared to do some learning and researching if you want a less passive approach. An individual investor may well lack the training, the time and the talent to navigate markets. A good healthy dose of humility and common sense are needed.
2. Be patient. Anxiety causes fools to rush in. Try not to get too obsessed with money, with getting more of it, with the need to “score”. When you are wrong you will have a harder time cutting your losses.
3. Also remember this: Investing is not a game. You do not play to make your life interesting or to discuss it like a new sport at your next dinner party. Its objective is to compound your money at a decent rate over a long period of time, and it’s not the place to go if you want excitement instead of responsibility. Never get over-confident and never get arrogant. You must understand what you are getting into, what you are buying, what the costs are.
People I like
In the world of finance I admire Benjamin Graham and Warren Buffett. As the Martin Capital annual report in 1999 says
As businessmen and investors they have certain traits in common that have encouraged and inspired my 30-something years as an unrepentant student. Although they live in a world where few folks are the equal of their money, these two tower over theirs. Wealth has never lowered them to extravagance, self-indulgence, the exercise of raw power, or pretense. Rather, it has driven them to thoughtfully shoulder the responsibility and duty that is expected of great indivuduals...Buffett and Graham have never sought wealth for its own sake; it merely emanated from higher order endeavors. It is the side effect, the by-product, of a fascination with the pursuit of business and investment, a game they play with excellence and distinction – and to which they bring dignity and respect.
Short bibliography:
1. Benjamin Graham, The Intelligent Investor
2. John Kenneth Galbraith, A Short History Of Financial Euphoria
3. Charles MacKay, Extraordinary Popular Delusions And The Madness Of Crowds
2. Robert Shiller, Irrational Exuberance
3. Maggie Mahar, Bull! A History Of The Boom 1982-1999
Beware of “advisors” on commission who carpet-bomb you with marketing. Beware when Wall Street seers become superstars. Beware of money managers who closet-index and prefer market risk to career risk. The unsuspecting are often the target market for many IPOs and fancy products, and money can flow not into projects with the strongest business plans but into those with the sexiest “stories”.
Do not buy when stocks are too hot, unless you go in thinking oh, I will get some tulips for a bit and know that you are speculating. If you know you are speculating, you will know that if a stock goes up it is not because you are a whiz.
Don’t get caught up in catching the top of the market, but pay attention to not being wiped out. Focus first on not losing money. When a bull market ends, those who can afford it least are often those who lose the most.
Starting young
When asked at the 2001 Berkshire Hathaway annual meeting what investment advice he had for a young person, Warren Buffett responded: “If you’re interested in financial matters, getting a stake early is very useful and getting knowlege early is useful...Just try to keep accumulating knowledge. That’s one of the beauties of the business that Charlie and I are in – everything is cumulative. The stuff I learned at 20 is useful today not necessarily in the same way and not necessarily every day, but it’s useful. So you’re building a database in your mind that’s going to pay off over time.”
He’s talking about knowledge, but it applies to money too – the younger you start, the more compounding works. Please get familiar with saving habits and investment concepts as soon as possible; if you don’t believe me go do a google search on compounding calculators and see the difference.
1. Learn to avoid debt, budget, save and set goals for yourself such as having
$200,000 in liquid assets by the time you’re 35.
2. Learn to do research into best interest rates for accounts and loans.
3. Look into insurance policies (I like to separate my insurance and investments,
beware of agents who do not know what they’re talking about).
4. Learn about investing – what to buy, when to buy. Investment must
be based on thorough analysis and promise safety of principal and a satisfactory
return. Risk-taking without adequate study is mere guessing, and constitutes
most of what passes for investment in the stock market. Read Benjamin Graham
for the quantitative aspects, and Warren Buffett on how to combine that with
a qualitative approach. Bruce Greenwald has a good textbook out. Learn how
to read annual reports and get familiar with accounting figures.
Invest in yourself
Yes, yes, very cheesy. But put time and money and effort into your health, your relationships, your integrity, your skill sets, your peace of mind, your looks, your happiness. I set aside 10 per cent of my salary as a “training fund” which I use for seminars and books and lessons.
The Pareto principle works here, identify and put effort into the 20 per cent that gains 80 per cent of the results.