Investing Summarized

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect anyone, and these views and opinions do not qualify as investing consultation or advice.

Investing is committing money to financial instruments with the broad purpose of gaining a profit.

We technically “invest” when we lose weight, organize, advance our career, and succeed, but financial investing is strictly using money to make more money.

Don’t Invest Full-Time

Start by build your wealth on your expertise.

  • When you don’t have much money, you will receive dramatically more gains in learning specific trade-based knowledge and experience than in the returns the market can give you.
  • Investing by borrowing loans (made popular by Kiyosaki’s Rich Dad, Poor Dad) will dip heavily into your returns, and exposes you to plenty of risk.
  • Only look into investing after you’ve acquired some wealth.

Barring dividends, all investing is a zero-sum game.

  • If 100 people each hold $100 in a small market, and one person makes $1,000 more, that person’s money came from the other 99.
  • Behaving above-average means you’ll sometimes win, sometimes lose, but on average win more than everyone else.

While anyone can make investing a full-time lifestyle (and many people are greedy enough to try), great investors have 4 key elements:

  1. A legitimate interest and desire to learn about the intricacies of investing.
  2. Plenty of math skill, specifically regarding statistics.
  3. A firm grasp of economic history, including as far back as the Great Depression and South Sea Bubble.
  4. Emotional discipline and stubbornness to stick with what they know to be true.

A vast minority of people do not have all four:

  • However, anyone can still invest casually if they simply have 1-2 of them.
  • People can still find luck in the markets.
  • Making investor groups with friends can also offset some elements you may lack.
  • Anyone can invest with money they’re willing to risk.

Start Soon

Compound interest profoundly affects wealth over time:

  • Most investors are debt collectors, and their returns become exponential over time.
  • Even if you don’t have much, invest as often and as soon as possible.
  • Calculate out how much you must invest to reach your goals.

As you age, your risk tolerance must change.

  • A general rule of thumb is to invest a high-risk percentage of 100 minus your age:
    • Age 35: 65% high-risk, 35% low-risk
    • Age 55: 45% high-risk, 55% low-risk

Watch for idle cash in your accounts:

  • Inflation sabotages cash’s value, so it’s only useful to quickly swap out assets.
  • The average investment account has $31,000 in idle cash:
    • Assuming 30 years at 7% growth, that can be a $20,000 loss on returns.
    • Cash can redeem mutual funds, but shouldn’t be that large.
  • Never let idle cash persist for long.
    • Synchronize your accounts with a financial service.
    • Automatically reinvest dividend payouts to avoid idle cash.
  • However, if your broker doesn’t allow for fractional shares, keep plenty of cash available so you’d be able to buy 1 share.

Keep Your Portfolio Organized

Good investors have a common-sense understanding of how we exchange goods and services.

  • Everyone else investing is just as self-interested, and it helps to have a basic understanding of game theory.

Keep track of your entire list of assets (“investment portfolio”) organized.

  • Keep a document that tracks all your investments together:
    • Investment company name
    • Type of investment
    • Amount invested and on what date(s)
    • Contact information to follow up or make changes
  • While it may make sense to use software (e.g., an investment website), you should make sure it tracks all your investments.
    • If you have too wide a range of investments, just use a spreadsheet.
  • Create a routine where you revisit your investments (e.g., weekly, monthly, quarterly).
    • You should be prepared within a day or two to make changes when you see new information.

To avoid making a silly mistake, keep your large trades to a minimum.

Buy Low, Sell High

Successful investing, across any industry, is knowing when things are cheap or expensive relative to what they will be in the future.

The concept of value, however, is a philosophically complicated one, and investing uses a combination of several possible approaches to parse the value of money:

  1. Momentum investing – looking at the current price of something and creating expectations about future price, then purchasing the things that will go up in price and selling things that will go down.
    • The idea is that the right mode of intuitive analysis and understanding alone can predict future performance.
  2. Value investing – find the investment’s intrinsic underlying value, without distortion, then buying or selling based on the divergence from that value.
    • It tends to emphasize tangible factors like assets and cash flows and discount factors like talent, fashions, and long-term growth potential.
    • Its primary focus emphasizes cheapness and concrete facts, but it can become myopic to bad decisions.
    • At the far end, net-net investing directs funds to places where a company’s stock is less than the company’s current assets.
    • However, enough unwise money-losing operations or acquisitions can still burn up a company’s assets, and the measurement of value must be accurate.
  3. Growth investing – find the price of something, then closely observe trends that would make that value go up.
    • The focus is less on the company’s current attributes (like value investing) and more on its potential future value.
    • At the same time, it incorporates the trust that the investment will appreciate in value (like momentum investing).
    • Growth investing often fails because it concerns itself so heavily with known-good investments that it disregards what technology’s fashions can do to a company.

A market maker will provide bids and offers to purchase assets, then ask for a higher price later.

  • The bid price will always be lower than the ask price, and they’ll make a profit on the difference.
  • Technically, every investor is a market maker, often with multiple middle investors between a person and the actual assets being traded.

No matter what you invest into, there’s always a lead time.

  • Investing into something and receiving back the same amount later is technically a loss (because of inflation).
  • For financial reasons, being too far ahead of the right time is the same as being wrong.
  • Value investing is better in a declining market (because it obsesses with intrinsic value), while growth investing is better in a growing market (because it captures more of the positive effects of the unknown).

Watch for frequently overlooked investments the public has turned its back on.

  • Focus on assets with below average price-to-earnings ratios.
  • To find unconventional returns, you must think unconventionally.
  • In some situations, people may be forced to sell at a loss, but it’s not a good investing strategy because it’s not frequent enough to rely on.

Only sell short if you see a looming negative change.

Steadily Invest

The market will naturally cycle up and down:

  • A market cycle is a trend that rises, crests, and falls.
    • There are predictable seasonal trends, such as from weather or elections.
    • It tends to go up more slowly than it falls.
    • When it falls, it can devastate entire nations, but only happens periodically.
    • In any randomly given month, the market is likely to go upwards a little.
  • Government decisions can dramatically slow or speed up market crashes, but they always happen.

Timing the market (“speculation”) is so ubiquitous that most people think it’s the essence of investing.

  • Precisely timing the market for a buy or sell is statistically unlikely, but great investing wisely manages assets across years and decades to make returns.
  • Your investments should naturally grow over time from a well-budgeted lifestyle and wise decisions, irrespective of what the market is doing.
  • Focus more on intimate familiarity with your investment than timing a buy or sell.
  • Only speculate with money you can withstand losing.

Don’t sway emotionally toward industry trends unless you know exactly why you want to invest there.

Try Dollar-Cost Averaging to make safe, non-emotional habits out of investing:

  • Put the same dollar amount every month towards the same ratio of investment types you want.
  • Whatever the market does, don’t change your ratios.

As you come closer to retirement and your investment goals change, re-balance your ratios.

  • To avoid an irrational decision, do it when the market is not extremely hot or cold.

Risk

Unlike other domains, investing treats risks as simply unpredictability, and are always a part of investing.

  • Good risks are directly correlated with returns, but introduce progressively more uncertainty about those returns as the risks grow larger.
    • However, we tend to expect higher returns from those investments as they grow more uncertain as well.

Most people tend to be more afraid about losses than unpredictability, but there are still bad things beyond simply losses:

  • Falling short of your goals for an investment.
  • Under-performance of an investment.
  • Social risks from being unconventional.
  • Career risks if investing is how you make a living.
  • Illiquidity that may tie up your funds in assets when you need to use them for something else.

People don’t tend to consider their risks not connected with loss, which means they won’t stay alert to how things can go wrong:

  • Correlations between prices can break, or even reverse.
  • Prices move overnight, and there might not be enough time to exit illiquid positions.
  • Rules change, and things might become illegal.
  • Rules change, and financial institutions/brokers may no longer invest in an asset from breaking news.
  • People make typographical errors, and computer code that runs the transactions themselves sometimes has bugs.

Loss and risk are a natural and mostly uncontrollable part of investing, so your ability to not react to it determines your financial state.

  • It’s impossible to fully gauge risk because we can’t know all the things that never happened.
  • We also assume things are risky when vastly unlikely things materialize.
  • Consider praying about investing decisions, since markets deal profoundly with the unknown.

When managed correctly, risks can be extremely profitable.

  • A large and likely enough return will offset any possible losses.
  • Only make 5:1 investments, where a $1 risk is worth gaining at least $5.
    • People tend to overestimate their hit-to-miss ratio, and a 5:1 investment means being wrong 4 out of 5 times (or 80% of the time) will break even.
  • One of the easiest ways to directly increase returns (and increase risk nearly but not quite as much) is to cut out the intermediate parties.
    • By removing the brokers and bankers, you take on more risk, but have a closer relationship with the money-making assets themselves.

Generally, conservative thinking means your investments will stay steady with or slightly above inflation.

Our bias means we tend to believe our “retirement money” is on the line.

  • All money is the same money: salary, gifts, savings, lottery winnings, dividends.
  • We tend to think our present money is more important to the future than that future money when we’ve made returns.
  • Most of our mindset about money comes from comparisons to other money (e.g., a $100 increase to $110 isn’t as emotional to us as a $10 increase to $20).
    • Our emotional reactions are to the scope of gain or loss itself, and not to the domain of our actual financial position.
  • We tend to make dumber mistakes proportionally to how much we strictly trust our intuition.
    • As a general rule, most people tend to keep losing investments and get rid of winning ones.
    • The decline in price is only indicated on paper, and only feels “real” the moment you sell.
    • For that reason, since you’re feeling what almost everyone else is feeling, the smartest investing move is often to go against what you’re feeling.
  • Don’t pull out simply because the market dropped.
    • If we react to short-term drops, we tend to lose out on the productive days when our returns would be more significant.
  • Don’t stay simply because you’ve already invested into it.
    • If the investment hasn’t performed historically, you need clear evidence of a change to justify maintaining that investment.
    • Look only at the present state of the investment, and the future losses/gains it can provide, not what it has done in the past.

We get more emotional proportionally to how frequently we check our investments.

  • Only check your investments when you want to change them.

Don’t assume a present windfall means you can re-gain it.

  • Markets and opportunities change, technology changes, laws change, and conditions today may be different from when you had made a gain before.

Calculate Returns

Even in high-information markets like the stock market, professional investors succeed in the margins.

  • They’ll buy a relatively stable asset for $30,000,000, then sell it later for $30,015,000.
  • Most of the time, they can use computers to automate the task.

Most accounting ratios apply to your investment decisions, but there are more that go beyond the specific entity.

The Return on Investment (ROI) is one of the simplest ratios for calculation:

  • It’s a quick, raw number to establish if the investment is even worth thinking about.
  • ROI = investment gain / investment cost

When you have an investment’s future value (FV), calculate its present value (PV):

  • It’s used to discount cash flows in the future because you won’t have that money during that time.
  • Present value = future value / [(1 + rate of return) ^ number of periods]

Numerically, you can measure an asset’s risks:

  • Alpha – take the price risk of something, then compare its risk-adjusted performance to a benchmark index.
    • An alpha of 1.0 means it’s outperformed the benchmark index by 1%.
    • An alpha of -1.5 means it’s performed worse than the benchmark index by 1.5%.
  • Beta – measuring the systematic risk of an asset compared to the whole market.
    • The market has a beta of 1.0, and the asset is measured on how it deviates from that.
    • A beta of 1.2 means it’s theoretically 20% more volatile than the market.
  • R-squared – shows the percentage of an asset’s movements that can be explained by movements in a benchmark index.
    • Values range from 0 to 100.
    • A performance record that’s close to the index is 85 to 100.
    • Below 70, it’ll typically not behave like the index.
    • For fixed-income securities and bond funds, the benchmark is the US Treasury Bill.
    • For equities and equity funds, the benchmark is the S&P 500 index.
    • It’s not a good idea to invest in actively managed funds (see below) with high R-squared ratios because they’re essentially performing like index funds, but with higher fees.
  • Standard deviation – the difference between the rate of return compared to the statistical average.
    • In finance, the standard deviation measures how much something is making higher returns than normal.
  • Sharpe ratio – subtracts the risk-free rate of return (i.e., US Treasury Bonds) from an investment’s rate of return, then divides that result by the investment’s standard deviation.
    • It indicates whether an investment’s return is due to legitimately wise decisions or a result of excess risk.
    • Higher Sharpe ratios means better risk-adjusted performance.

The Rule of 70 is a simple calculation to figure out how long it will take an investment to double:

  1. Find the percentage growth rate for a period (e.g., 3%).
    • It’s worth noting that this growth rate is projected, and very likely will be lower because of risks nobody can control.
  2. Divide 70 by the whole number of the percentage growth rate (e.g., 70 / 3).
  3. The result will be the number of periods it will take for the investment to double (e.g., 70 / 3 = 23.33).
    • 8% growth rate happens in 8.75 years (70 / 8 = 8.75).
    • 12% growth rate happens in 5.8 years (70 / 12 = 5.8).

Bonds have their own specific ratios:

  • Current yield = bond’s annual coupon / bond’s current price
    • Useful to compare interest income by a bond to dividend income by a stock.
  • Nominal yield = annual coupon payment / bond’s face value
    • Indicates the periodic percentage of interest that will be paid.
  • Yield to call (YTC) is rather complex and has computer programs for it, but it essentially gives the probability of the bond being called before its due date.
  • Realized yield is only for holding a bond for a certain period of time, rather than to maturity.

Diversify Whenever Possible

Spread your wealth across multiple assets and asset types whenever possible:

  • If you put all your wealth into one domain, you’re exposing yourself to more risk.
  • Not diversifying creates more short-term gains, but will risk losing the entire portfolio.
  • When you can, spread it across industries and investments that are completely unrelated to each other.
    • It’s easy to accidentally put money in indirectly related investments (e.g., healthcare and pharmaceuticals).

One of your most important skills is in knowing when to risk what.

  • Your confidence should be finely calibrated to take reasonable risks while also avoiding overconfidence.
  • If you have a tendency toward overconfidence, place a numerical overconfidence discount into your financial projections.

It’s tempting to chase high returns, but focus more on diversity.

  • To be prepared, play out every likely scenario within your portfolio.

Once you start making gains, your impulse will be to place more of your investments into that asset class.

  • However, while you might make more money, you’re also risking losing it as well.
  • Keep at least 20% of your investment away from trends you’re currently capitalizing on.

For maximum diversification, have a portfolio composed of the following:

  • 20% stocks, split across 3 generic index funds
  • 20% bonds
  • 20% currencies, cash, savings, and money market funds
  • 20% commodities
  • 20% other things like microloans, venture capital, and foreign investments
  • If you get real estate, you’ll have to rearrange everything around it to accommodate it

One of the easiest failures in diversifying is to have separate things that don’t feel like they’re related, but are the same thing.

  • If you’re a homeowner, you’re already invested in real estate, even if it’s not giving any yields until you sell it.
  • If you’re a company employee, you’re already a stakeholder of that company without owning any stock (i.e., you’d be unemployed if the company failed.

Periodically rebalance your portfolio.

  • Naturally, some investments will give better returns than others, meaning they’ll be a higher percentage of the entire portfolio.
  • Keep your risk low by never letting an asset class stray to more than 35% of your investment.

Leveraging

By borrowing money to invest, you’re not making a better investment or increasing the chances of gains.

  • All you’re doing is magnifying the gains and losses that may materialize.
  • If your portfolio fails to satisfy a contractual value test, the lenders may demand their money back when the investment is lower than you want.
  • You’ll always owe the money, but you won’t always be able to get the money from others (even when their loans are technically safer than yours).

Some people create unbelievable wealth by borrowing, but they’re more often ruined.

  • The exponential extent of compounding returns will be offset by the compounding expenses that match it.
  • One of the most frequent ways they fail is through secondary math calculations (e.g., failing at ratios), which can be devastating when they assume more risk.

If you operate strictly on a cash basis, you’ll never go entirely broke.

Expect Disappointment

Generally, our bias makes us believe we’d never commit others’ past mistakes, and that our future is far more certain than it really is.

  • You will win some, you will lose some, but the losses will hurt more than the gains.
  • Most investors act quickly, so the very act of moving slowly on trades will oddly time your market movements compared to everyone else.

Wise and reasonable investing, more than anything else, protects against most risks.

  • Most investing wisdom involves finding financial advantages that are less unlikely compared to alternatives.
  • However, there’s always a chance you’ll lose your money on any given investment vehicle.

Don’t look at any isolated loss or gain.

  • Each loss and gain is connected to part of a broader whole, and often a learning experience.
  • Losses can easily become part of a success story.
    • Most of the time, people who lose learn more than people who win, and their long-term portfolio will look significantly better.

Like sales calls, most investing decisions are failures.

  • We tend to fixate on specific losses when they become popular news.
  • If you keep self-criticizing over failed investment opportunities:
    1. Write down every single investment idea you’ve had for at least a month.
    2. Store that list away for about a year.
    3. Take it out and see how all your picks have done.
    4. You’ll likely find your nostalgia forgot the bad ideas you had.

Don’t rush your plans or set your expectations too highly.

  • Good investing spans decades.
  • Don’t let fear kill your chances to make a decent return.
  • Your philosophies, values, and understanding are more critical to successful investing than luck.

Research

The efficient-market hypothesis indicates that the price is essentially a fair value, and no individual can consistently identify and profit nuances in that market without specialized information.

  • Returns on any investment are no different: high returns typically means higher risk or lower cash-in-hand by the end.
  • The only time this hypothesis diverges is when there are inefficiencies (i.e., insufficient information), and it takes an unusual perspective to find those situations.

The efficiency of an asset class as an investment vehicle is proportional to a few things:

  1. They’re widely known and have a broad following.
    • New asset classes do not have much information on them, so they’re extremely high-risk.
    • The information should be widely distributed, and preferably approved by a reputable government.
  2. The asset is socially acceptable and not controversial or taboo, which exposes you to non-financial risks:
  3. The benefits of that asset class are instantly clear and comprehensible.
    • The risk of a scam increases with how opaque their system is (see below under Scams).

An inefficient (and possibly profitable) market will have a few characteristics:

  • The market prices are often entirely wrong, sometimes hilariously.
  • The returns, adjusted for risk, are way out of line with other asset classes.
  • Some specific people are making spectacular returns, and they’re also typically praised as a celebrity (sometimes controversially).

Don’t invest, or do anything, you don’t understand.

  • You’ll almost always improve your odds of being right if you can do things that give you more (and more accurate) information.
  • To comfortably learn more about an asset class, only invest in things you would like to know more about.
  • Only withdraw if you’re perfectly aware of the tax implications.

High-quality analysis and experience can give a competitive edge if you can apply it to the psychology of large groups.

  • Understand how investing and banking works, as well as how to read accounting reports and applicable laws.
  • Stay at least somewhat familiar with that investment’s industry and related industries.
  • Your best opportunities to invest usually come from personal experience.

When you’re ready to make the investment (and only then), intimately learn where your investments are going.

  • Simply reading the annual statements makes you more informed than 98% of investors.
    • Reading the notes in the financial statements takes you ahead of 99.5% of them.
  • Do you know the industry?
    • Are you familiar with resources a company in that industry needs to operate?
    • Is that industry growing or shrinking?
    • How many competitors are actively in that industry?
    • How successful is the average company in an industry?
  • Does a company’s business model make sense?
    • Is that company’s current mission focused and consistent with their brand?
    • Is that company making an impact?
    • How does that company make money?
    • Does that company have any distinctive competitive advantage?
  • What’s its current financial position?
    • What can you infer from its 10-K filings?
    • What’s its debt-to-equity ratio?
    • Has it grown year-over-year?
    • How are their industry ratings (e.g., Moody’s, Standard & Poor’s)?
  • Do you know the history of that company?
    • Have you reviewed that company’s performance history?
    • Have you compared their performance to competitors and relevant indices?
    • Do you know that company’s financial health?
    • Have that company’s profit margins steadily trended upward or downward?
  • Does that company provide value you believe in?
    • Is the product a sufficient quality for the market it goes to?
    • Is the company leading or following a trend?
  • Do you know what the management team is like (such as their website or LinkedIn)?
    • Are they well-respected and trustworthy?
    • Are the executives given fair compensation compared to others in the industry?
    • Does that team have a history of good management in the past?
  • Can you identify with their customers?
    • Are you a customer or want to be one?
    • Do you know who the customers are?
    • Is the customer base loyal?
  • If it’s in another region of the world, what’s their culture like?
    • Is their country’s government corrupt?
    • Do people have respect for the nation’s laws?
    • How prominent is that country’s black market?

However, too much information can be a bad thing.

  • Avoid over-information, and take a step away from the news if you’re emotionally affected by it.
  • The information should be the platform for thinking beyond what everyone else is thinking.
  • The more you hear from others, the less you’ll chew on the information you have.

The best choices have more benefits than downsides, but still have downsides.

  • Since every decision has a downside, you simply aren’t paying attention to it if you don’t see it.
  • As much as possible, live in the world of probabilities more than possibilities.

Things to Watch For

Some things can be very risky, so take your time with them.

Trends

Observe the markets’ large-scale trends:

  • Stock market index futures are essentially indicators that determine everyone’s sentiment on the market.
  • History very frequently remixes from the past, so learn to detect patterns that happened decades ago.
  • Ignore the minute gyrations of the market, which is harder than it sounds.
  • Generally, it’s a good idea to sell when there’s hype and buy when there’s panic.

At any given moment, a market trend exists as one of 4 movements, and you should have a plan for each one:

  1. Prosperity:
    • Living standards are rising
    • The economy is growing
    • Business is thriving
    • Interest rates are typically falling
    • Unemployment is declining
    • Stocks usually thrive the most
  2. Inflation:
    • Consumer prices are generally rising (at least 6% annually)
    • The economy is slowing
    • Business is still thriving, but hesitant about their long-term plans
    • Interest rates are rising
    • Unemployment is holding steady
    • Commodities and stocks rise with inflation
  3. Tight money or recession:
    • The money supply has slowed down
    • People have less cash than they expected to have
    • Business is struggling, and the weakest fail
    • Interest rates are holding steady or starting to drop
    • Unemployment is rising
    • Bonds, currencies, and startups thrive the most in a recession
  4. Deflation:
    • Consumer prices decline
    • The purchasing power of money grows
    • Businesses are hit hardest
    • Interest rates have dropped dramatically
    • Unemployment hits dramatic highs
    • If it persists long enough or the government intervenes wrongly, it can become a depression
    • Foreign currencies and commodities survive deflation

Look ahead at the future of the market.

  • Government decisions can dramatically slow or speed up market crashes, but they always happen.
  • It’s possible to develop an intuition for what the public will likely do with enough observation and understanding, and you should move in the opposite direction.

Ask questions about the second-degree effects of market movements:

  1. What is the range of likely future outcomes?
  2. Which outcome you think will likely occur?
  3. What’s the probability you’re right?
  4. What does the public consensus think?
  5. How does your expectation differ from the consensus?
  6. How does the asset’s current price compare with both your expectation and the public consensus?
  7. Is that consensus too bullish or bearish?
  8. What will happen if the consensus is right, versus if you’re right?

It’s generally easy to see a market bubble arise long before it pops.

  • There will typically be a lot of publicity around that bubble.
  • You can still capitalize on a bubble in the short term, but try to avoid long-term investments toward a hot trend.

Large-Scale Events

The best time to invest is when large-scale events happen.

  • Every natural disaster is an opportunity to fund rebuilding.
  • Every economic crash will make debt collectors (e.g., repossessions) flourish.
  • A collapse of civil society increases the need for personal security and healthcare.
  • For centuries, war has been one of the most profitable ways to profit (i.e., invest in the military supplies, then invest in rebuilding).
    • However, war funding is highly risky because there’s too much vagueness and misinformation to accurately understand anything.

When markets drop, your feelings are your enemy.

  • If you know how to manage your personal finances, the market shouldn’t scare you.
  • Hold on to your investments and wait for the market to climb again before you drop your investment.
  • After a market drops, the economy will usually start to grow again within a week.
  • Most people focus on risks, but savvy investors consider opportunities that crises create.
  • The amount of time the market climbs is way more than when it’s falling!

Fear will kill any chance for large returns.

  • When panicking or following a trend, you may make a devastating decision.
  • On the other hand, hoarding cash will erode your portfolio’s value.

If you want to beat conventional thought, bet on unlikely odds.

  • If you pay extremely low amounts for investments that are really unlikely (e.g., always bet on the last horse in the race) your comfort with that risk is more likely to find something everyone else was overlooking.
  • It’s not a winning strategy at first, but when done correctly over many iterations can yield better returns than safer investments.

Public Narratives

The public narrative defines where markets travel.

  • It’s our natural bias to create order even when something is completely random.
    • The market is a random progression with a slightly upward slope over long periods, and that’s all that anyone can say with certainty.
    • High past returns might indicate low future returns, and low past returns might indicate high future returns.
    • A pessimistic set of investors dampening a stock price can often influence a company to perform better.
    • An optimistic set of investors can often make a company grow complacent.
  • Large trends tend to start with individuals ignoring their inner thoughts to listen to what others are doing.
    • Financial contagion is caused by us being so affected by what others think that we can spread misleading or false information rapidly across markets.
  • The crowd is often wrong over short periods, but the true value of the investment tends to win out in the long term.
    • For that reason, following the entire crowd is a generally good bet (e.g., index funds).

Be careful with investment advice.

  • If you hear it’s hot news, and you’re not insider trading (which is illegal), you’re probably one of the last to hear it.
    • People are six times more likely to act on “exclusive market information”, even when it’s not exclusive.
    • Fortune magazine’s top stock predictions consistently lose out against the rest of the market.
  • Investing books often have as much scientific rigor, proven tactics, and complexity as alchemy was a few centuries ago.
    • Most fantastically wealthy people who gained their money through investing were incredibly lucky.
    • The best investing wisdom may come from what not to do, but those people would never have best-selling books.
  • Investor-targeted media panic is a sophisticated version of media outlets’ fearmongering.
  • If anyone starts talking about an unprecedented, innovative thing, check if the market is overheated and pull out your capital.
    • Be very doubtful of people saying “it’s different this time”, since nothing is ever new.

Look at what people are actually doing, not what they say.

No matter how elite or prestigious it sounds, it’s likely that many people will follow a popular media personality’s recommendation, even though potentially millions of others are doing the same thing.

Nearly everyone who gives investing advice has something to gain when you take action on it:

  • Brokers make money on every trade transaction.
  • Many wealthy investors will advance an asset class (e.g., bonds, cryptocurrency) because they hope to influence the public narrative enough to turn a profit.

For reliable investing thoughts, follow quants (quantitative analysts) who numerically follow market trends.

  • Keep in mind that they’re simply crunching numbers, and can’t predict the future.
  • However, most of them will not tell you their actual strategies, since they’d lose their competitive edge.

Stick with what you know and are familiar with, not simply what someone recommends.

Personal Feelings

Change your perspective regularly to new points of view to avoid fear or mania.

  • If all the assets in a market were fairly priced (which comes with more information), nobody would gain or lose anything by trading.
  • Avoid focusing heavily on short-term success, and keep your mind on your goals.
  • If you need to, look back years to see where you’ve come from, or read about history on any subject you want from before you were born.
  • We quickly tend to forget the uncertainty we had before an event happened.

When your feelings run hot, doing nothing is a better policy than acting on what you’re thinking.

  • It’s easy to acquire a gambling mindset when trades start generating considerable returns.
  • Instead of perceiving a choice of rejecting or accepting, reverse that choice.
    • e.g., instead of deciding among investment options, figure out which one you’d in no way choose.

The only way to offset our constant emotional reactions are to hope for the best and expect the worst.

  • We often act to mitigate regret later, but tend to over-calculate how much we actually regret.
  • Instead, work to make the wisest possible decision now, then vow to never have regrets about what may happen.
  • An imperfect decision is still often better than none.

Scams

The most frequent indicator of fraud is promising high return with low risk.

  • No matter how “secure” things like gold, silver, or cryptocurrency sound, they’re still as volatile as the human perception of value.
  • If an account seems to have a skyrocketing balance, it’s probably fake.

The best way to avoid scams is to educate yourself thoroughly before committing to anything.

  • Before speaking details with any investment advisor, make sure they have FINRA oversight.
  • Practice healthy cybersecurity with all your computers, before logging into your investments, and make sure you’re at the right website.
  • Don’t trust someone who just because you’re connected on social media.

Avoid bad investing strategies and philosophies.

  • “Specialized” investing secrets the professional investors use.
    • While esoteric information can be useful, most of that information is on web searches and online references like Investopedia.
  • Anyone who says you’ll miss out if you don’t invest now.

Many people exploit poor investor education to create products that create zero returns, sometimes with 100% fees.

  • A timeshare is a vacation rental, not an investment.
  • A Ponzi scheme is relatively simple, but is difficult to track if they’re not being clear with you:
    1. Convince someone to invest $1,000.
    2. Go to someone else and convince them to invest $2,000.
    3. Go back to the first person and give them $2,000.
    4. Repeat with everyone until you have tremendous wealth, then either leave the country and assume a new name or get caught by the government.
  • If the investors are becoming owners/sellers/marketers, they’re putting their money in a pyramid scheme.
  • A Section 770 or Section 702 is the portion of the tax code involved with insurance.

Annuities are simply another type of insurance vehicle.

  • Most insurance companies are using your premiums to invest into significantly higher-yield products for themselves.
    • They’ll give you a guaranteed 3% rate of return for the rest of your life, but they’re typically making 6% on it that you could make yourself if you took on a little more risk.
  • All the tax advantages are more sufficiently fulfilled with your own retirement account (e.g., SEP IRA).
    • If you’re wealthy enough that you’ve maxed out your retirement accounts, then you can start considering an annuity, but at that point the per-unit value of each dollar is less, and you can afford it.

Gold, silver, and platinum are commodities, so they only give a profit when sold.

  • Because of their extreme refining, precious metals would be difficult to exchange in the apocalypse compared to centuries ago.
  • Someone advertising for people to buy gold is only advertising because they’re turning themselves a profit.
  • If you’re worried about the apocalypse, gold and silver are too highly refined to be tradable.
    • To invest against that possibility, buy an easily tradable and on-hand commodity that never spoils, such as hard liquor.

Lottery tickets aren’t an investment.

  • The chances of you winning are abysmally small, so you’re only renting a dream.

Brokered mortgage notes are necessary when banks refuse to lend to that person.

Blockchain is a unique commodity of encrypted, solved math problems.

  • Blockchain implementations are largely unregulated and have little legitimate government-recognized value.
  • Avoid blockchain for long-term investing, and be prepared to sell quickly.

Most complex new investment vehicles largely benefit the people who create them.

  • Never invest in what you don’t understand.

Crimes

You may not get taken advantage of within an investing environment, but stay legally safe to prevent unknowing criminal activity.

The laws of each country and industry will vary wildly, but always avoid a few actions:

  • Don’t trade on specialized information other people have told you (which is called “insider trading”).
    • You can trade on public information (news, news articles) and on your intuition, but don’t buy or sell around the same time that someone told you a major event will happen.
    • Don’t keep records of what you’re doing, if there’s any chance it happens to be insider information.
  • Never lie about whether you plan to buy or sell, since it will mislead others and they can sue.
  • Avoid anything remotely criminal, even if it’s not criminal but only may appear to be criminal to an uneducated person.
  • Make sure whoever handles your finances is accredited by all applicable regulations.
  • If you’re going across countries, make sure both countries’ regulations are satisfied.

Even then, everything everywhere can be securities fraud under the right judge.

  • CEOs of public companies know more about the company than outsiders do, but they’re technically committing securities fraud if they even own 1 share of that company’s stock.
    • They tend to trade with 10b5-1 trading plans over a set period of time to (typically) convert their stock into fungible cash.
  • Board members of public companies know more about the company than outsiders do, but they’re likely in violation of fiduciary responsibility if they own 1 share of that company’s stock.

Criminally prosecuting over securities fraud is difficult.

  • Someone can frequently misstate the truth, then say it enough times they actually believe it.
  • It’s easy to legally prove that someone didn’t state the truth, but very challenging to prove they lied.
  • A society that’s free enough to allow private investing is also usually free enough that people can make bad deals.
  • Further, there are numerous bad lawsuits because hiring a good lawyer at $250K to sue someone who might be blamed is very worth the cost if an organization loses $200M.

Advisors

Getting a second opinion can weed out your shortcomings.

  • Find friends who you can discuss your investing strategies and ideas with.

Average out your five closest friends’ income to see the financial lifestyle you’ll have in five years.

Investment Advisors

An investment advisor can safely manage your portfolio, but you can more easily build wealth without one if you’re willing to learn and work for yourself.

  • A professional investor can’t predict markets, but they can sometimes find and capitalize on accurate market patterns.
  • Most brokers’ fees are based on investment returns, so they’re more risk-averse than you could be.
  • If you have wealth over $1M, they may be able to add complexity and fine-tuning, but it’s not worth it for almost everyone else.

The test of an investment advisor’s skill is persistent achievement.

  • Look back at least 5 years to see how well they’ve done, but preferably 10.
  • If they cut off the data point at any time (e.g., 6 years), look further back than that.
  • However, no professional advisor is a skilled-enough expert that they’ll consistently outperform the market.

The less you pay in commission and management fees, the less drag on your return.

  • One of the most common causes of fees comes from investors failing to read the materials from the investment firm.

The worst fees are ongoing for every period.

  • Ongoing fees charge fractions of a percentage repeatedly.
  • Some of those fees can be from merely keeping the account open!
  • An employer-sponsored retirement plan will sometimes have higher-than-average fees.

Many investment advisors might have a minimum investment requirement:

  • Minimum investing amounts are set by brokers to ensure they make a profit.
  • There are many options with a low initial investment.

Brokers invest for a living, so their services are never free:

  1. Investment advisory fees can be expensive, especially on mutual funds.
  2. Watch for management/maintenance fees, shareholder service expenses and distribution fees (12b-1 fees).
  3. These fees are added together and called operating expenses and create the expense ratio.
    • Avoid anything with an expense ratio above 1% annually.
  4. Costs are then passed down to the investor.
  5. Beyond that, transaction-related costs can double or triple the total fees:
    • Markups – the broker-dealer sells their investment to you at a premium to the market price
    • Front-End Sales Loads – a fee when buying something
    • Back-End Sales Loads – a fee when selling something
  6. Further, brokers can often “churn” investments to make more returns for themselves.

Automated brokers can’t advise well, but their brokerage fees are typically very low.

  • Use an online discount broker, or online automated investment firms, for a more hands-off experience.

Investment Types

When compared to other investments, each individual investment has four possible advantages, but never all at once:

  1. Low risk – Less chance you’ll lose your money
  2. High returns – more money back
  3. Low taxes – less money goes to the government
  4. Low fees – less money goes to other people

All investment returns only come from 3 possible sources:

  1. Dividends – you own something, then receive proceeds that originally came from someone else’s labor
  2. Price appreciation – the market value of something you own moves upward
  3. Lending with interest or rent – payment to use something
  4. Flipping – providing dividends, price appreciation, or interest/rent to others by using their money

Generally, every trading system goes through a trend of growth, but becomes less effective over time.

  • Frequently, investors will jump in the middle to create additional products that reduce earnings while also mitigating risk.
  • At some point, the system will start lagging on its exchange/market updates.

For many of the below, there are also contracts for future investments, called options:

  • Call options allow someone the right (but not the obligation) to buy something at a future time for a set price.
    • This is most frequent in stock markets, where someone can pay a relatively small amount to gamble on an unlikely situation (e.g., a very affordable call option for selling a stock at 5 times its current value).
  • Put options allow someone the rights (but not the obligation) to sell something at a future time for a set price.
    • Puts most frequent for startup investors, who have the right later to sell the company stock if they want to cash out.
  • Both of them typically have a fixed expiration date, which means they have to exercise those options by that time or the contract is terminated.
  • The strike price is the required price the underlying asset has to arrive at to have any legitimate value.
    • An option is in-the-money or out-of-the-money based on its call/put price relative to the market price.
  • Stock options are a great way to plan ahead to invest, but without actually investing.
    • Restricted stock units (RSUs) are the most common, and have a certain amount of time to vest before they become like normal stock options.
    • If you’re a market maker, buying puts is an excellent way to plan ahead for a market crash.
  • Shorting a market (e.g., 2007-2008 housing market collapse, 2021 Gamestop short squeeze) is a specific type of option called a short position:
    1. Send a short order to a broker (often within a margin account) and publicly disclose that desire.
    2. The broker lends you that asset and sells them for you at the normal price.
    3. You gain cash from the sale, but must now pay off the debt.
    4. If the asset drops in value, you can pay less and buy back the same number of assets.
    5. You’ll keep the price difference as your profit.

Investing in a market gives more data, but investing in-person allows you to work with your experience.

  • However, informally investing all depends on your capacity to judge people:
    • Trusting people too little means you’ll miss out on numerous opportunities.
    • Trusting people too much means you’ll be exploited and possibly scammed.

1. Dividends

In any formal market (e.g., stock market), dividends are the most common type of investment.

  • They have countless options, features, and opportunities.

Stocks (to receive company dividends) – owning a portion of a company:

  • High risk, high returns, moderate taxes, moderate fees.
  • Often listed on a stock market, but is often unlisted.
  • Pros:
    • High long-term returns of about 10-12%.
    • Good for retirement.
    • Relatively short time to learn enough to invest.
    • Depending on how the company manages its equity, may also appreciate in price and act as a commodity.
  • Cons:
    • You can lose everything if you don’t know what you’re doing.
    • Not diversified unless you own at least 35–50 stocks.
    • If a company goes bankrupt, you lose the entire investment.
    • Not very likely to beat the market’s returns (e.g., DJIA, NASDAQ, S&P).
    • Self-managed taxes.
  • The most stable equity industries are providing a service everyone absolutely needs:
  • If it’s a foreign stock market, it may be subject to higher fees and more risks of political unrest sabotaging the investment.

Mutual funds – multiple investors combine their money, then a fund manager buys and sells securities to increase returns:

  • Medium risk, medium returns, moderate/high taxes (depending on political climate), high fees.
  • When picking a fund:
    • Each trade will likely incur fees or commissions, so avoid actively managed funds.
    • The expense ratio will tell you how much the fund operator makes each year.
    • Pay more attention to what the fund manager is investing toward than their rate of return.
  • Pros:
    • Decent long-term returns of about 7%.
    • Built for more diversification than stocks.
    • A great fund manager will stay with the market’s trends.
    • Relatively short time to learn enough to invest.
    • Has very few limits to how much money you need.
    • Index funds that track the stock market have a geometric average of 6.9% per year.
  • Cons:
    • An inept fund manager will create many risks.
    • Rises and falls more closely with the stock market than individual stocks.
    • An actively investing fund manager will incur more fees than if you simply invested into a generic fund.
  • Mutual funds have many types:
    • Index Fund – follows a stock market index’s ups and downs closely (e.g., NASDAQ or DJIA).
      • Usually the safest and most reliable funds.
      • Can be inexpensive and are often well-diversified.
    • Growth and Income Fund – big, boring long-time companies which sell staple goods and services.
    • Growth Fund – made of higher-risk growing medium/large company stocks.
    • Aggressive Growth Fund – very high-risk, high-return.
    • International Stock Mutual Fund – made of international companies’ shares.
      • The Vanguard Total World Stock Index I (VTWIX) is one of the broadest international funds.
    • Bond Fund – made of bonds.
    • ETF (Exchange Traded Fund) – a mutual fund that can be traded on a public exchange.
      • The Vanguard Total Bond Market ETF (BND) is one of the most popular broad bond index funds.
    • REIT (Real Estate Investment Trust) – a fund, but with real estate investments.
    • Hedge Fund – uses complex trading and risk management techniques.
      • Historically, hedge funds were designed to short the market and “hedge” risk, but can now apply to anything outside conventional investment activities.
  • A fund can have a group of essentially anything the fund manager wants, and some ETFs are entertainingly odd:
    • Columbia EM Core ex-China ETF (XCEM) – non-China regions that serve what China serves (e.g., Korea, Taiwan, Brazil).
    • iPath Bloomberg Livestock Subindex Total Return ETN (COW) – specifically in live cattle and lean hogs.
    • The Obesity ETF (SLIM) – obesity and health issues.
    • Global X Millennials Thematic ETF (MILN) – millennial consumer habits.
    • Buzz US Sentiment Leaders ETF (BUZ) – social media’s most frequently mentioned stocks.
    • ETFMG Video Game Tech ETF (GAMR) – electronic games.
    • AI Powered Equity ETF (AIEQ) – run by an AI bot.
    • Becky ETF – tracks white American teenage girls’ consumer habits.
    • The Inverse Cramer ETF (SJIM) and The Long Cramer ETF (LJIM) – tracks everything against Jim Cramer’s Mad Money TV show recommendations.
  • Investing for returns across the market is much easier than obsessing over it:
    • You don’t have to pay attention to financial media or mountains of conflicting information from self-proclaimed experts.
    • The fees are less expensive and the results are dramatically superior.
    • You won’t need an advisor or broker, and it takes 90 minutes or so per year to work directly with brand-name mutual fund families.
  • For tax reasons, be careful with mutual funds.
    • Some funds are taxed several times, especially if they’re foreign (e.g., Vanguard Total International Fund).

Business startup (investing) – investing in someone else’s business idea:

  • High risk, high returns, moderate/high taxes (depending on political climate), low fees.
  • Pros:
  • Cons:
    • Profoundly connected to that business leadership’s character and work ethic.
    • It takes a bit of research to find whether a business is viable.
    • There are many unknown factors, and nobody can predict a high probability of a startup succeeding in its early stages.
  • Always review the last 3 years’ Schedule C tax forms (filed with their annual 1040) and pull the balance sheet before investing.
  • Crowdfunding, specifically, rarely gives significant financial returns on your investment.

Business startup (building) – building a profitable business:

  • Very high risk (as well as lots of labor), very high returns, low/moderate taxes, low/moderate fees.
  • Pros:
    • Opportunity to convert a passion into a stream of income.
    • Chance to successfully build something rewarding and meaningful.
    • You need marketable skills instead of severe risk tolerance.
  • Cons
    • Long hours, low-paid for a long time.
    • Must have the right personality to handle the rejection and hard work.

2. Price Appreciation

If you’re young, consider investing a significant percentage of your portfolio to price appreciation.

  • Derivatives are pegged to the value of an underlying asset, which is why they’re sometimes called an underlying (e.g., corporate stock is attached to the value of that corporation).
  • Hold on to appreciating assets for at least five years.

Real estate (flipping):

  • High risk, very high returns, low taxes, moderate/high fees.
  • Pros:
    • A fantastic investment vehicle both as rental property and in trades.
    • Researching and applying various skills can give tremendous returns.
    • Inflation-resistant, and yields high returns.
  • Cons:
    • You must know the area and the market well.
    • It takes years to see returns.
    • Maintaining real estate is expensive.
    • Unless you’re very wealthy, you can’t diversify.
    • Your assets are geographically confined to a location.
  • Many people buying real estate only look at their monthly payment, so its asset value and interest rate are inversely correlated.

Collectibles – objects of unique value:

  • Medium risk, low returns, moderate taxes, low fees.
  • Pros:
  • Cons
    • Not typically very profitable.
    • The esoteric nature of most collectibles can make scaling for more profit very difficult.

Commodities and futures – literally anything mass-produced:

  • Low/medium risk, low returns, moderate taxes, low fees.
  • Commodities are things people can use now, futures are prepaid commodities.
  • Pros:
    • Generally resistant to inflation.
    • Typically fulfills something people need, meaning no risk of a complete loss.
    • More boring, meaning less publicity around them.
  • Cons:
    • Can be high risk, especially in unfamiliar materials.
    • They don’t usually give returns unless you’re buying or selling them.
  • Commodity cycles tend to represent themselves in a few patterns:
    • Some are used regularly year-round (e.g., petroleum, timber).
    • Most are seasonal and cycle based on routine needs (e.g., corn, Christmas trees).

Stocks (for trading):

  • Very high risk (as shown here), very high returns, low-to-high taxes (depending on how you do it), low fees.
  • Stock trading, especially day trading, is the scope of risk-taking usually within a casino, but with much better odds.
  • Pros:
    • An extreme rush from the frenzy of activity.
    • Can quickly make tremendous wealth.
    • While you’re holding them, you may receive dividends.
  • Cons:
    • Can be exhausting.
    • Can quickly lose tremendous wealth.

Currencies – any means to store or transfer wealth, including cryptocurrency:

  • High risk, low-to-high returns (depending on timing), low taxes, low fees.
  • Pros:
    • At the right timing, geopolitical events can wildly swing its value and give remarkable gains.
  • Cons:
    • At the wrong timing, geopolitical events can wildly swing its value and create losses.
    • Unless you’re buying or selling them, they don’t usually give returns.
    • More of a personal insurance policy than an investment vehicle.
  • Cryptocurrency is semi-regulated as a security, and semi-regulated as a product, so it’s very murky what it actually is.

Intellectual properties – ideas protected by copyright/trademark/patent law:

  • Low risk, low returns, low taxes, moderate fees
  • Not typically a “market” for them, but can be purchased individually from people.
  • Pros:
    • Ownership of a property that permits royalties and commissions.
  • Cons:
    • Ethical implications of owning someone else’s created work.
    • Risks of publicity issues.
    • Expensive to enforce, especially with aspects like open-source licenses.
    • Once it expires, it becomes public domain.

Web domains – the URLs that could be used to host websites:

  • Medium risk, high returns, low taxes, high fees.
  • Often traded publicly on a web domain market.
  • Pros:
    • With the right buyer, can become very valuable.
    • Useful if you make websites yourself.
  • Cons:
    • Maintenance fees can be expensive ($2-20 annually per domain).
    • They may never appreciate in value, and it’s often impossible to tell.

3. Interest

Banking (having accounts) – a bank arranges to use assets, then pays interest for it:

  • Nearly zero risk, Dismal returns, low taxes, low fees.
  • Includes many varieties of products:
    • Checking Accounts
    • Certificates of Deposit (CDs)
    • Money Market Accounts
  • Pros:
    • Very high liquidity.
    • Allows as a “holding tank” for other investments.
    • Practically zero risk.
  • Cons:
    • Depressingly small returns.
    • Horrible idea for long-term investing, even savings accounts.
  • The bank should be insured by the government (e.g., member FDIC for the USA).
    • Make sure to never surpass that insurance amount in any given account (e.g., $250,000).
    • Your bank account will be insured, but not your stock ownership of that bank.

Bonds – an organization borrows money, then pays it back after a specified number of years when it matures:

  • Low risk, low returns, no/low taxes, low fees.
  • Often traded publicly on a bond market.
    • The aggregate value of the bond market is much larger than the stock market.
  • Can be treasury bonds from a government entity or corporate bonds from a company.
    • Treasury bonds (I Bonds) are very low risk and a very low return.
  • Pros:
    • Regular interest income of about 5%.
    • Potential appreciation in value.
  • Cons:
    • Not diversified unless you own at least 35–50 bonds.
    • To get a decent return, your money is typically tied up in a bond until it matures.
    • If a company goes bankrupt, you lose the entire investment.
  • Interest rates have a generally inverse relationship with bonds, so bonds are popular when interest rates are down.
    • If interest rates drop too much, your bonds may have a call provision and the organization may prepay them.
    • This means you’ll have to re-invest in a low-interest environment.
  • Compared to corporate bonds, government bonds are tax-exempt but provide significantly lower returns.
    • They also give less anxiety, which may be important depending on your personality.

Microloans – a mutual fund, but with loans:

  • Medium/high risk, medium returns, low taxes, moderate fees.
  • Often traded publicly on a microloan market.
  • The borrower’s credit history determines the risks and returns.
  • Pros:
    • Provides the opportunity to issue loans without assets.
    • Many types to choose from, including student loans, consumer debt refinancing, and startup loans.
    • Easy to invest across international borders.
  • Cons:
    • The money is locked in until they’ve paid it off.
    • Depending on what the loan is for, you may not see all your money returned.

Real estate (renting) – lending out space for someone else to borrow:

  • High risk, moderate/high returns, moderate taxes, moderate fees.
  • Pros:
    • Your skills in maintaining a property can be useful.
    • There’s always a rental market available.
  • Cons:
    • Inability to successfully frame or manage contracts can involve bad tenants you can’t get rid of.
    • When the market goes down, you won’t be able to get great returns.
    • Constant maintenance on the property.
  • If you’re purchasing a secondary property, never own it farther than an hour’s drive from your home.

4. Flipping

Generally, the only people who can safely flip investments have been very involved in investments already.

  • The math for running a successful two-sided investment operation is twice the calculation, meaning twice the ways to fail.

Fund management – operating a mutual fund:

  • High risk, any number of returns, high taxes, high fees.
  • Pros:
    • Operating a fund allows access to markets with a minimum balance.
    • Can be done with as little as a few people.
  • Cons:
    • May require licensing, depending on the region.
    • Your fees may make the returns too low for your clients.

Insurance – owning an insurance company:

  • High risk, low/moderate returns, low taxes, high fees.
  • Pros:
    • Providing a valuable service for people who need to transfer risk to you.
    • Able to invest without much public attention toward it.
  • Cons:
    • Requires a lot of overhead through a substantial collection of lawyers, claims adjusters, and underwriters, as well as a few actuaries.
    • Highly scrutinized by a government’s insurance division.
    • The only investing you can do is the remainder after the loss ratio and expense ratio.
    • If you don’t make sufficient claim payouts, insurance clients will find out and you’ll lose premiums.

Banking (owning) – using others’ assets to invest more:

  • Moderate risk, moderate returns, high taxes, high fees.
  • Pros:
    • Providing a valuable service for people who want to store or transfer their wealth.
    • Able to invest into just about anything.
  • Cons:
    • Requires many filings and legislation to become established.
    • Difficult to compete on fees compared to larger banks without unique branding to appeal to specific demographics.
    • Operating in the USA requires approval from multiple government bureaus (FDIC, SEC, et al.).
    • If people don’t trust you, even slightly, you’re about to go out of business.
    • To stay insured with the FDIC, you’ll always need reserve currency available.

Inflation and Taxes

Expect a 7-11% return across your investments.

  • Any more return than that is pure speculation.

Take your investment, then expect inflation and taxes to remove your returns.

  • Inflation and taxes will turn a 10% investment into a 4% return.
    • e.g., each $100 will yield $10, then the economy will take away 3% from inflation, then the government will and 3% to the government.
  • Learn to think in inflation-adjusted numbers to have an accurate estimation of your returns.

Further, depreciation is one of the most substantial expenses in the world.

Good investing guarantees that the asset will combat or beat inflation:

  • Besides opportunity cost, inflation makes a dollar today worth far less than in the future.
  • Across decades, the average inflation rate floats around 3-4%.
  • Any good investment will, at the very least, stand steady with or beat inflation.

Most investing activities are taxed, so paying taxes may test how disciplined you are at saving money.

  • With some exceptions, you will pay taxes before you can use your money.

Max out your IRA/401(k) and Roth IRA.

  • If you expect to be very wealthy later, do the Roth IRA first (and get taxed first).
  • If you don’t ever expect to be particularly wealthy, do the IRA/401(k) first (and get taxed later).

Investments across national borders may incur taxes from both countries!

  • Staying in your country avoids the tariffs/duties you may have to pay.
  • Staying regionally local prevents you from risking losing your investment if a political upheaval redefines what you’re allowed to do.
  • Try to use tax-sheltered accounts (e.g., IRAs) for international investments.

Taxes usually engage on each trade, so try to limit (or at least time) how many trades you make.

Beware of tax-avoidance schemes.

  • Many of them are scams.
  • Even if they work temporarily, they may leave you paying more in lawyer fees and back-taxes than if you had paid the taxes in the first place.

If you make any significant investing income, get a good accountant to find your most favorable tax situation.

Time Your Losses

Losses are guaranteed, and some years will be better than others.

  • If you don’t offset your gains with your losses each year, you will be taxed.
  • Every time you sell at a profit, make a habit to look for anything you can also sell at a loss to offset it.

Selling losses can significantly lower your tax burden.

  • Tax loss harvesting is a perfectly legal way to write off a loss:
    1. Buy investments in any given tax year (i.e., between January 1 and December 31).
    2. Wait 1 tax year (i.e., at least the next January 1st).
    3. Sell them at a loss and repurchase a similar-but-different investment (to avoid wash rules).
    4. File that sale and purchase on the next relevant tax filing.

Closely track your losses to time them to offset your income.

  • The loss isn’t realized until you sell it, so you can sometimes hold that loss for a little longer until you can match it with a major windfall.

Cashing Out

If you acquire any capital gains, take advantage of donor-advised funds.

  • Donor-advised funds are essentially mutual funds directed toward charitable organizations, which means they’re tax-deductible.
    • They can also be invested now to claim the credit, but disbursed to the charity at set intervals.
  • Donating capital gains to donor-advised funds can clear out any capital gains tax and grant the normal charity tax deduction.
    • This is more advantageous than simply donating to a charity, since you can use the saved capital gains tax to invest even more.

Pulling all your money out at once is a terrible idea because you’ll immediately pay taxes on it.

  • Instead, draw out as little as possible and try to invest the rest:
    1. Tax loss harvest all losses.
    2. Donate capital gains to offset any taxes on other gains.
    3. Live frugally to take more advantage of markets.
  • If you do well, you can deliver wealth to your next of kin.

In general, a good investing/retirement strategy should involve:

  1. Don’t touch your investment until it reaches 10 times your annual salary needs.
  2. Start spending 7% of it per year.
  3. If you keep investing safely, your wealth will never be exhausted.
  4. If you desire any further than that, you should be trying to climb the social ladder.

You should have at least a few idiosyncrasies resolved regarding your retirement:

  • Know when you can start collecting on Social Security, and how much.
  • To stay compliant, know your required age for Required Minimum Distributions (RMD).

Focus on What Matters

The markets are driven heavily by luck, so stay both optimistic and humble.

  • Your most important investment is in yourself, beyond the money.
  • Learn to cool off anytime you start thinking you’re a financial genius.
    • Even if you are a genius, your hubris will become your undoing.

The same rules for gambling addictions apply to investing:

  1. Set a hard limit on how much you’re dropping into it, and how far ahead or behind you’ll go before you stop.
    • That limit should reflect on something not related to money (e.g., a house, freedom to travel, etc.).
  2. Walk away when your feelings become intense.
  3. Like a casino, there’s no value or meaning created in the activity, but only what you do with it afterward.

Understand, before you invest, when your returns are “enough”.

  • People have enough money when they no longer need to think about it.

Never loan to friends as an investment.

  • Simply give the money to them, and clearly let them know.
  • If you treat it as an investment, you will lose your friend as well as your money.

Don’t let the rush of market investing overwhelm you.

  • Beyond the intricacies of jargon and technical details, most of the hype is driven by the vice of greed.
  • Think how much time and money you’re spending, and whether you enjoy it.
    • If the market starts dropping, get your mind off it by going for a walk or having fun with a non-investing hobby.
  • If you’re having a hard time breaking free from the investment rush, you may have an addiction.
    • If you like the returns but don’t like the work involved in investing, you should probably invest your time into finding a better day job.
  • Try to make the experience a routine mathematical experience instead of an emotional one.

To understand how each of your investments fit with your financial goals, focus on what you want instead of the tools themselves:

  1. Avoid asking yourself about options or tax treatments like IRAs or bonds.
    • Instead, consider things like your children’s college tuition or your retirement.
    • While it’s tempting, ignore what other people may say or do.
  2. Calculate returns you’ve received to see if you’ll hit your goals.
  3. Estimate how much you’re willing to lose and how bad things could get.
  4. Make your exit plan as thoroughly as you want.
  5. Never think about it again until you want to or need to adjust things, then live the rest of your life.

The faster you give away money, the more it flows back to you.

  • It’s not because of “good karma”, but more that you spend less time defending it and more time making more of it.
  • If you start growing rich, you must isolate yourself to avoid further social problems.

Listen to your significant other’s advice, since they share your life with you, and it’s their money too.

Satisfaction and meaning never come directly from money.

  • Money is only one way to accomplish most purposes, and also happens to be the least creative.

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