That is a great question. I will save you the suspense and give you the answer. You are as smart as a 14 year-old when it comes to your knowledge of your investments. What 14 year-old teenager am I referring to? I am referring to myself. I started investing when I was 13 back in October 1987. (If you do the math, you can figure out how old I am). After spending a year studying the financial markets, I had amassed quite a bit of understanding. How does this relate to you? Well, if you have been following my blog, I have not revealed any information that I did not already know by then. Now my writing style has improved and I have incorporated innovations introduced after 1988, but the topics I have written about are not that complicated. Before you continue reading, I would like to state at the outset that I was not some sort of child prodigy when it came to finance. I was good at math and retained what I learned. I am no genius and have no delusions of grandeur. As I sometimes tell my friends, “If I really knew what I was talking about, I would be running a $10 billion hedge fund”.
With that being said, you also have the good fortune of learning from approximately 25 years of mistakes in investing and misunderstanding about the financial markets and the impacts of exogenous and endogenous events. I could go on and on about my mistakes; however, I will mention a few here. First, I had the opportunity to invest in two shares of Berskshire Hathaway Class A (BRK.A) stock back in 1991 when it traded a little above $8,700 per share. Of course, Berkshire Hathaway is the company run by the famous investor Warren Buffett. As of August 5, 2013, BRK.A’s closing stock price was $177,300 or a bit over $350,000 if I would have purchased those two shares back in 1991. Why did I miss out on this opportunity? I did learn everything I could about Warren Buffett once my economics teacher talked about him and his investing paradigm. It really made sense to me from the start. Unfortunately, I passed up on purchasing the shares because I would only be able to own those two shares and one other mutual fund. As a young man, I was hyped and yearning to pick a number of different investment choices. Second, Best Buy is one of the best performing stocks in the financial markets and trades over $30 now. I purchased Best Buy about 7 years ago and paid $42. I did sell quite some time ago, but I took a huge capital loss. Third, I wrote a paper during my MBA program that talked about the risk management procedures of Citigroup. As I look back on that paper written in 2005, it is curious to note that, besides AIG, Citigroup went through the pain of learning the limits of risk management and it had a bailout of epic proportions. I guess my paper was not the best in retrospect. Finally, I had a terrible habit of picking the current “hot hand”. I tended to switch my mutual fund holdings way too often when I was in my teens. It was really attractive to calculate how much money I could earn in a mutual fund that made 20% per year. Wow, I could double my money in less than four years! As you always see now, past performance is not indicative of future returns. I really ignored that statement and invested many times based upon hopes and extrapolation instead of rational thought. My emotions got the best of me.
I did have quite a few wins along the way. For example, I was invested in the famous Fidelity Magellan mutual fund when it was run by Peter Lynch. Peter Lynch is a legend among mutual fund managers. At one point in time, Fidelity Magellan had more assets than any other mutual fund in the country. Oddly enough, that was its eventual downfall. Another example would be that I was able to learn how to successfully manage my father’s 401(k) portfolio from 1988 to the present. I have seen many bull and bear markets and never had his eventual retirement portfolio take a significant hit in terms of poor returns. My experience investing over the last 25 years has shown me that there will be many times when the financial pundits say this time is different, new industries are going to blow away the Old Economy, or that news events should cause investors to reallocate investment portfolios dramatically. Even though I have been investing for 25 years, there have been very few seminal financial market events, the global economy may be different but the laws of finance and economics still hold (or they eventually bring prices down to earth), and new industries tend to bring more innovation and tools for existing, mature industries. An illustration would be the early Internet companies lost money and burned through enormous amounts of cash. However, the technologies they introduced allowed existing businesses to use the Internet in unique ways to either generate additional revenue or improve productivity. A direct example would be how airplanes revolutionized leisure and business travel, but the airlines have been a wealth-destroying industry. On the other hand, there are a myriad of businesses that use the services of airlines.
My overall point is that if you take one hour per week for about four months, you will be able to get through the five books I recommended on investing. Additionally, you can spend another 30 minutes looking at a few financial websites just to increase your knowledge of investment products, finance terms, and keep abreast of news in general. As a reminder, the list of five books can be found here: https://latticeworkwealth.com/2013/07/23/spend-20-hours-learning-about-investments-to-prepare-20-years-of-retirement-2/ . As another reminder, some recommended
financial websites can be found here: https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/ .
My entire goal with this blog is to save you lots of time. Rather than being bombarded by disparate information regarding the financial markets and how to approach investing, I am trying to give you a shortcut. I am hopeful that, if you have a roadmap that is clear, you will be more motivated to learn about investments and eventually become more comfortable with the process of building an investment portfolio to meet your financial goals, while ensuring that your emotions do not get the best of you. At the end of the day, many individual investors pay fees to financial professionals to save themselves from enemy #1. Who? I mean that sometimes individual investors act rashly and keep buying and selling stocks and bonds at inopportune times just because a bad news event comes along or via peer pressure. Remember that, if you have read all my previous posts, you are more than likely in the 85th percentile of individuals understanding of how the financial markets work. Keep in mind there have not been that many posts to my blog, so I hope you realize that it is not as painful as you might have once thought learning about managing your investment portfolio and the financial markets is.
As an aside, please feel free to reach out to me if you have a recommendation for a topic I can discuss. Please remember that this is a website geared toward individual investors who are novices or have not been investing for too long. Thus, I am not looking to discuss how one might use ARIMA modeling to understand how macroeconomic variables affect the financial markets or individual stocks/bonds. I appreciate you keeping it relatively simple. With that being said, if enough people contact me in regard to one specific topic, I will definitely take a closer look. Thank you in advance for your participation and time thinking about what would be more useful to you. Furthermore, I am hoping that I cover topics that apply to everyone. If the collective investment intelligence of the group steps up a few notches, I will cover the topic. Please send me an email: firstname.lastname@example.org