What is Investing?
Investing is the process of turning ordinary income, the income you have to work for, into passive wealth — the wealth you don’t have to work for that increases in value over time.
You can do that using stocks, real estate, gold, art or even comic books. In fact a portfolio of key comic books significantly outperformed the stock market over the past three decades.
If, 30 years ago, you had simply purchased the first appearance of the most recognizable comic book heroes, such as Superman (Action Comics #1), Batman (Detective Comics #27), Spider-man (Amazing Fantasy #15), Wonder Woman (All Star Comics #8), the Avengers (Avengers #1) and the Fantastic Four (Fantastic Four #1), you would have handily beat the stock market. Still, comics probably aren’t the right vehicle for 99.99% of investors. So…
What Should You Invest In?
That’s always the biggest question most people struggle with. Each type of investment has its advantages and disadvantages but investing in the stock market can be a good fit for most people – if they do it right that is.
You can’t simply jump into the market, buying stocks without knowing what or why you’re buying and expect to make a killing. In fact that’s called gambling and it’s a good way to lose all your money.
I’ve seen people succumb to the glitter of greed and follow flaky, overhyped trading strategies that promised untold wealth but didn’t have the logic or a strong historical record to lean on. These are the people who continually do poorly in the stock market.
On the other hand I’ve known others who have patiently followed a solid investment plan year after year and turned $10,000 into over $1,000,000. This didn’t happen overnight, mind you, and it took many decades of doing the right thing even when many others were doing the wrong thing and still making lots of money (which they eventually lost, because if you do the wrong thing often enough, you end up in a bad place).
And, of course, there are the people I don’t know but have read about or seen on television – folks such as Benjamin Graham, Philip Fisher and, the most famous investor who rode a solid investment plan to piles and piles of money, Billions upon Billions in fact: the man known as the Oracle of Omaha – Warren Buffett.
Suffice it to say, after modeling my investment behavior on the dubious strategies put forth by Wall Street, meant to appeal to greed, when I was younger, I’ve come to realize that not only do these strategies lose you money, but they do something far more insidious: they delay your actual ability to start building wealth because they chew up time – and time is the biggest ally you have when it comes to investing because it is the main ingredient necessary for compounding to work its spectacular magic.
Without time, you have little chance of creating significant wealth. Oh, I know. People will try to tell you it’s possible to make lots of money in the stock market in a few weeks or months, but it’s not true. Don’t listen to these people. They will only delay your own wealth building efforts.
But back to Warren Buffett. I read somewhere that if you want to be successful at something, find someone who is successful at that thing and model your behavior on what that person does. In the investing realm, the exemplar is Warren Buffett.
If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”Benjamin Graham
So how did Buffett make his fortune? Did he buy on hot tips? Day trade his way to riches? Follow charts? Nope. None of the above.
Buffett methodically combed through thousands of companies’ balance sheets, income statements and other financial material and analyzed the numbers in order to find excellent companies, with strong barriers against competitors, that were selling at a discount.
He took his mentor, Benjamin Graham’s, advice to heart, “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”
That sums it up nicely. You purchase groceries by buying great products when they are on sale. You don’t buy more when prices rise and you don’t purchase low-quality products to feed your family. When brand name, high-quality groceries go on sale, however, you stock up. Buying stocks is no different. So if it’s good enough for Buffett it should definitely be good enough for the rest of us.
But what mechanical method did Buffett use?
My biggest complaint about Buffett’s strategy is the name. It sounds boring. It sounds like a lot of work and conjures up images of rummaging through endless bargain bins at a Sally Ann thrift store trying to find a good deal.
So I’ve taken to calling the Value Investing strategy the, “Magnificent Mechanical Money Making Machine” (although I admit it sounds a bit hypey, I still like it). Sometimes I’ll just call it, “Mark’s Mechanical Money Making Machine,” because one of my favourite pastimes is logging into my online account and seeing my wealth increase from the day before – without me having worked to “earn” it.
These nicknames are apt because sometimes it feels like I have a money machine cranking out cash while I eat, sleep or do other things.
For starters, once I’ve set up my portfolios, I really don’t have to watch the markets every single day. Some people get a thrill out of following the ticker second by second. Not me. I prefer to let my investments grow automatically while I do whatever I feel like doing at the time. Watching the stock market every single day is actually counter-productive.
It makes you crave action and causes you to do dumb things.
If you have an excellent strategy in place, let that strategy run. And by the way, the only excellent strategies are long-term ones – at least for those of us who don’t have access to large clusters of networked computers analyzing big data in nanoseconds over huge data pipes connected directly to the exchanges.
For us little guys, a proven long-term strategy and some great investment software is all we need. For example, I can analyze thousands of stocks in just a few minutes to find the ones Buffett would like, but with far less effort and in much less time than he used to expend. Fifty years ago Buffett read through all these financial statements manually. He didn’t have computers and, more importantly, accurate online data to help him speed up the process. It was a lot of work. A. Lot. Of. Work.
Times have changed… and software has led the charge
But all software isn’t created equal. In fact most packages try to appeal to your greed glands and promise an easy way to become rich overnight. Who can forget the ubiquitous late-night, “red light, green light,” infomercials and the day trading craze back in the early 2000s?
But great investment software is available. I know. Because I looked and looked and didn’t find anything that suited my needs. So I wrote my own. That was back in 1999. It’s evolved since then.
Taking a page from Buffett and Graham’s books I wanted to follow a mechanical, methodical system that would remove my emotions from all investment-related decision making.
I wanted to only invest in excellent stocks with strong moats like Buffett did.
I wanted to diversify and allocate these stocks using strategies based on proven methods.
I wanted to manage my investments to wring out short term gains from the markets’ inherent volatility while still keeping a long-term perspective.
I wanted to rebalance using a logical algorithm that captured the most buy low, sell high opportunities rather than simply choosing some random date and hoping for the best.
I wanted to be able to automatically backtest my strategies using historical data.
And I didn’t want to expend a lot of manual effort or spend tons of time doing these tasks year after year. Enter…
Software and Computers
Computers are great.
They take mundane, boring and error-prone tasks and automate them. Not only do they automate these tired old tasks, they improve them. If you were to add a string of, say, 10,000, numbers, you’d most likely make a mistake.
But a computer wouldn’t (at least not if it was programmed correctly).
And a computer would complete this task in less than a second. You, on the other hand, would take, well, let’s just say, more than a second.
Plus a computer can display results using interactive charts and graphs so you can visualize and understand your data in ways you just couldn’t do by simply looking at a long list of numbers.
It’s freaky fast. But at the same time it works like a wonder.
But you have to have the right software for the job.
Bad software makes you lose money faster than ever before.
Great software makes you money like an ATM spitting out $100 bills in your living room while you sleep – well, not really, but you get the idea.
By the way, the software I wrote is called, “The Pragmatic Investor.” There’s a book too.
The Pragmatic Investor hates complication. It does away with thick manuals and the multiple screens filled with dense charts and endless scrolling numbers you usually envision when thinking about stock market software.
In fact it’s simple and easy to use. Most people don’t even need to read the user’s guide to get started.
The powerful and complicated algorithms are hidden deep down inside the program, so all you see is a beautifully rendered dashboard with all the information you need displayed at your fingertips in an easy-to-read format.
From the dashboard you can control every aspect of your portfolio. There are a few carefully chosen charts and other important information plainly visible and easy to interpret. If you want more detail, click on these to activate more detailed views of your data.
You’ll love it. It’s like an intelligent robotic investment advisor who not only records everything to do with your investments, but gives you the details when you need them and spits out objective recommendations on what to do next.
And it’s available 24 hours a day. Every single day.
Plus it never gets tired and… never, ever lets emotions cloud its judgment.
Smart Phones and Tablets
Yup, these can also be used to access your investments. The Pragmatic Investor is cloud-based, so it’s available anytime, anywhere and on any device that has a modern browser.
You’re no longer chained to your desk. You can choose to receive email alerts when a new recommendation is given and take action right from your phone or tablet – whether you’re at home or on the sidelines watching your children’s soccer game.
If you’re at a restaurant for lunch and the Pragmatic Investor has a recommendation for you, it will send you an email. Or text you if you’d prefer that.
You can then open your phone’s browser and login to the software to view the status of your account and what caused the recommendation to be given.
You can also adjust parameters, run, “what-if?” scenarios, in case you want to see how doing something else would affect the recommendation. You can also find new stocks with the swipe of your finger, re-diversify, re-allocate and rebalance parts or all of your portfolio with unparalleled ease.
The Pragmatic Investor can make your investing life so much easier. It takes the complication and uncertainty out of investing so you always know what to do – even if it means doing nothing.
Swords and Battle Hammers
I like, “Lord of the Rings,” and, “Game of Thrones,” as much as the next guy, but I’m certainly glad I’m not living these stories. Life wasn’t always this comfortable. In the olden days, people did in fact charge into battle wielding two handed swords and swinging mighty battle hammers above their heads.
There were rampant diseases and making a living generally meant working extremely long hours in less-than-stellar conditions just to survive before dying at a relatively young age.
But those days are gone (at least in first world countries they are). Nobody has to work extremely long hours just to survive and most of us don’t have to worry about getting hit with a battle hammer. Life has improved significantly from the days of yore.
Except when it comes to investing. Investing is still a wild card in these tranquil waters. Sure we don’t have to worry about some king taking our assets simply because he liked the colour of our horse, but instead we make a routine of handing over our hard-earned money to the so-called, “experts,” on Wall Street so they can manage it for us. We’ve replaced the whims of kings with the whims of mutual fund managers and other Wall Street kingpins.
These are the companies and people who, through various means, have convinced wide swaths of the population they are too stupid to handle their own money so it’s a good idea to turn it over to a group that most definitely does not have individual investors’ best interests at heart.
Then Wall Street milks these investors for all it can through outrageous fees and risky derivative products, no one person can even begin to understand, so it can pad its pockets, make lots of money and buy expensive office buildings, dole out large bonuses and make its executives and managing directors rich beyond your wildest dreams.
And of course you know where all that money comes from…
It comes from you. And your family. And your friends.
What I’m trying to say, in a very roundabout way, is that for most people, turning their money over to Wall Street is dangerous. If you’re lucky you won’t lose money relative to the market indexes. If you’re in the majority, you’ll underperform the indexes and pay the Wall Street millionaires (and Billionaires) a king’s ransom for the privilege.
If you don’t take the time to learn how to invest correctly (by the way, it’s not difficult) but simply trust a group of people who have shown time and time again they don’t care about your well-being – only theirs, then you will be taken advantage of.
Unfortunately that’s human nature at its worst.
But you can stop this. It doesn’t have to be that way. You can learn what you need to know in a few days (read the Pragmatic Investor Book) and then implement a solid investment plan in a few weeks. After that, it’s simply a matter of making minor course corrections and letting time and compounding automatically build your wealth for you.
The point is, if you’re going to invest your money in the stock market in order to build wealth for you and your family, you should be doing it based on a proven system, like Value Investing, that is essentially a long-term money machine that increases your bottom line without you having to do very much.
That’s what you should do.
What you most definitely should not do is hand your money over to a group of untrustworthy people, you’ve never met and don’t know, to manage it for you. Because nobody cares more about your money, investments and wealth than you do. Period.
Greed and Fear
People are emotional creatures so they react based on emotions – the two most powerful are greed and fear.
Which is why when markets are hot, and rapidly rising, just about everyone thinks they are stock market experts and sincerely believe they are going to become multi-millionaires overnight.
Never mind the fact these cycles have been seen many times in the past (from the Dutch tulip mania in 1637 to the bursting of the dot com bubble in the early 2000s to the most recent global economic crisis in 2007 and 2008).
Never mind there are hundreds of thousands of worldwide, “investors,” who lost everything gambling in the stock market.
Never mind the fact there is ample documentation proving people get caught up in the mania surrounding stock market bubbles and purchase stocks at ridiculously high prices (because of greed) only to sell them at even more ridiculously low prices (because of fear) when the markets tumble.
People are emotional creatures and react based on their emotions
Never mind that despite losing piles and piles of money, many of these same, “investors,” jumped onto the next bubble and repeated their mistakes again.
Some even repeated the exact same mistakes multiple times.
Like I said, people are emotional creatures and react based on their emotions. That’s good for some things, but definitely NOT good when it comes to investing.
A good rule of thumb is simply this: If you invest with your emotions you will lose your money.
That’s why you need to follow an excellent, proven, solid plan that removes your emotions from the equation and lets you know exactly what you should be doing at every single moment. Once you have faith in such a system, you can ignore your emotions and let others succumb to greed and fear while you roll through the dangerous times keeping your emotions in check.
Investing in the Internet Age
It’s been interesting watching how the Internet has changed investing (well, it’s really changed just about everything hasn’t it?).
Full service brokers who used to charge hundreds of dollars per trade are gone.
Access to stock market data and company financial statements are available for the taking.
Market Research and Analysis that used to cost thousands of dollars are now available for free or at a very low cost.
Computing power that, just a few decades ago, required large air-conditioned rooms and teams of specialized engineers and operators is now orders of magnitude more powerful and fits in your shirt pocket. (And in case you were wondering, the phone you’ve got sitting in your pocket contains far more computing power than the computers used to land astronauts on the moon.)
The internet has turned investing on its head. But it’s also brought about some very real dangers. Just because you have more information and more computing power does not mean you’re a better investor. “Garbage in. Garbage out.” That’s a good saying to remember.
Over the past 50 years Warren Buffett has made over $60 Billion in the stock market (that’s Billion with a, “B”). And a number of people like him (some of whom also studied under Benjamin Graham) made multiple Billions themselves.
They did it using Value Investing strategies. And Buffett accomplished all that without using any risky trading strategies or get-rich-quick schemes.
He’s famously quoted as saying, “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.Warren Buffett
He’s been so successful he now has another problem: What to do with all the money he’s made. Investing such large sums is extremely difficult and spending it in his lifetime is nearly impossible. So he’s decided to give the bulk of it to charity (specifically to his pal Bill Gates’ charity).
It’s a nice problem to have but the important point to understand is Buffett and his ilk proved a model: that Value Investing works if you give it time and have patience. They proved you don’t have to give into greed and fear or listen to people who treat you like a child and don’t have your best interests at heart.
They showed you can invest successfully for yourself, by yourself and with less risk.
Like the dinosaurs, the Wall Street Banks and big Mutual Fund companies are on their way out when it comes to managing retail investors’ investments. Yes it will take many years for this to happen because they are so entrenched in the average investor’s mind, but the writing is on the wall (“Mene, Mene, Tekel, Parsin,” indeed).
The internet and connected devices have ushered in unprecedented change. Entire industries (such as music, television and newspapers to name but a few) have been decimated. Investing firms are on the radar but, with their deep pockets and lobbying efforts, they’ve been able to stave off what’s coming, at least for the time being.
But that will change. Once investors realize the services these bloated investment firms offer are actually detrimental to their well-being, these same investors will decide, en masse, to head for the exits and invest for themselves.
The big firms will have to adjust or die a long, slow death (much like the music, book and newspaper industries).
Warren Buffett is a once in a generation force who showed investors the way to invest successfully in the stock market. He dared to go against the crowd, even while others were mocking him for staying out of technology stocks during the dot com boom, and continued to use logic and a sound plan while removing emotions from his decisions.
And he has succeeded spectacularly.
The great thing about it, however, is that anyone who follows his methods can do the same (albeit on a smaller scale, but seriously, who needs Billions anyways? Millions or tens of millions will take all but the most consumption-mad people nicely through their lives).
And make no mistake, when it comes to Wall Street, they’re long overdue for a change.
I can’t predict the future. I don’t know which stocks will explode in price or which ones will go bust. Nobody does. However I do know Value Investing strategies are, bar none, the best way to increase your wealth in the stock market with the least amount of risk.
Value strategies react to what the market does, they don’t attempt to do the impossible and predict what the market will do.
But in order to implement a Value-based strategy you MUST have patience, look at things from a long-term perspective and control your emotions by unerringly following the Value-based methods regardless of what everyone else is doing.
Unfortunately most people can’t do this, but if you’re one of the few who can, then you’ve got it made in the shade.
Yes, it will take time – no doubt about that. But in the end the payoff will be worth it when you’ve got your very own Magnificent Mechanical Money Making Machine firing on all cylinders.