The Psychology of Investing | Greg Vanderford | Skillshare

The Psychology of Investing

Greg Vanderford, Knowledge is Power!

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12 Lessons (2h 28m)
    • 1. Introduction to Psychology of Investing

      1:56
    • 2. Lesson 1 The Pyschology of Investing Intro

      18:22
    • 3. Time In the Market Not Timing the Market

      19:26
    • 4. Lesson 3 Only Buy High Quality Assets

      15:02
    • 5. Lesson 4 Ignore the Noise

      12:24
    • 6. Lesson 5 Automated Reinvestment

      13:06
    • 7. Lesson 6 Avoiding Taxable Events

      10:25
    • 8. Lesson 7 Concentrated Portfolios for Wealth Maximization

      11:25
    • 9. Lesson 8 Only Use Money You Don't Need

      13:10
    • 10. Lesson 9 Don't Follow Daily Stock Prices

      13:49
    • 11. Lesson 10 Read the Intelligent Investor

      13:35
    • 12. Lesson 11 Conclusion

      5:15

About This Class

Investing is a confusing subject for most people. After all, we don't study it in school, and even if we take finance courses in college they completely ignore one of the most important aspects of investing: PSYCHOLOGY.

In this course, you will learn why most people are so bad at making, using, and investing money...and how to become an intelligent investor by avoiding the most common money pitfalls.

The Psychology of Investing will teach you how to invest intelligently for the long term and sleep well at night knowing that you don't have to worry about the next market crash or stock market bubble.

Transcripts

1. Introduction to Psychology of Investing: As the title suggests, this course is all about the psychology of money. And it's very interesting that this topic has only become really wide spread in the whole industry of money management and investing in the last decade or so. Because if you think about it, it's really obvious that psychology has a lot to do with how we spend our money, how we think about money, how we worry about we're gonna make or lose money. But this new really, which is called behavioral Finance, is really just now starting to come into its own. But people knew about this. People like John Maynard Keynes and Benjamin Graham, which are famous investors and scholars and economists. They knew about this over 100 years ago, but it hasn't been something that has been widely studied in academia or really well understood until recently. And I think it's really interesting, really amazing because you know how we behave has a direct impact on how we spend our money , how we invest our money and particularly because of how we're wired as humans and how we evolved. We actually are hardwired were actually designed to make really bad investment decisions and that's what the sport is all about. We'll look at why that is so we can identify these bad habits and patterns of thinking in ourselves and then what we can do about it, to become way better managers of our money and then better investors over time. There's a lot to be learned from studying the great investors. They understood these lessons very well. So we're gonna look at what they had to stay or go look at their historical records. And then we're going to look at all the different ways that we can change our behavior so that we can build wealth over time in a way that is safe and conservative and basically mimics the patterns of all the greatest investors in history, says the course is all about thank you for joining, and I hope you guys get a lot out of it. 2. Lesson 1 The Pyschology of Investing Intro: the psychology of investing, how to avoid the common pitfalls of investment under performance and build long term Well, no matter what your situation, so investing is a really confusing topic. It's been made even more confusing by the fact that we live in this hyper digital information age, where you hear conflicting information from every article you read every talking head on TV . It's very, very confusing. And it's also very ironic because the fundamentals of good long term investing have been known for decades. We know how to get really good results, how to achieve compound interest, and the miracle of compound interest is that your money grows exponentially. Hence the word compound. So what I want to get to you in this course is understand. Help you understand, explain why investing is so difficult by focusing on the psychological aspects of it that basically make it so. Less than 10% of all investors outperform the market and do well. And if we understand these cognitive biases that we have, we are basically guaranteed to get really good results, and that's what the whole course is all about. So one thing that we've learned through the new field of behavioral finance is that human beings are extremely lost averse. Research has shown that we feel a lot more pain from loss than the pleasure that we would get from a game. It's actually about to one based on how they measure this, so you can look at something like gambling. So you go to a casino and you put in $100 to a slot machine. You lose it. You the pain you feel from losing that money is about double the pleasure you feel. If you would have doubled your money and gone from $100 up to $200 you feel good about winning money. But you feel a lot worse by losing money, and this causes us to make really bad decisions when we are investing in something like the stock market, especially when you see your for fully were going up and down every day. Now the real estate market is a lot different because if you buy a house, you're not checking the price of your house every day. There's no quote. It's popping up on the screen saying, Oh, real estate went down 1% today, a real estate went up 2% today. It causes you to be very stressed out and causes a lot of anxiety. And basically it causes you to make really bad decisions. So what a lot of people end up doing is saying, Well, I don't know what I'm doing. I'm gonna trust my money, Teoh a professional. And then you give your money to a financial advisor who charge you fees. And most well, don't quite realise is that those fees eat an enormous amount of the profit that you gain from compound interest of your money. If your professional adviser even gets good results at all, we're gonna go a little bit into the fees and everything. But even, you know, less than 1%. If you're paying less than 1% up to 2% which is any anywhere between half a percent to 2% of sometimes you mawr, it's standard in the industry. It really, really eats into your money over time. We're talking about tens of thousands or hundreds of thousands of dollars, depending on the amount of assets that you have invested. Um, so basically what the psychology of, um finance has taught us is that based on the way that we're wired, just the fundamentals of human psychology tend to make us buy high and sell low, because in the market is high, we feel like it's gonna keep going. Human beings are pattern recognition machines. We see a trend. We see a pattern we postulate that is gonna keep going. It's just the way we think. And so when the market's going down, we get really scared is gonna keep going down. We're to lose our money. We sell, usually at the worst time, and so we tend to buy high and sell low. When, of course, everyone knows the thing to do is to buy low and sell high. It sounds very simple, as one of us likes to say, it is simple, but it's not easy. And the reason. It's not easy to your hardwired in the exact opposite way. And so, But if you first of all learn this, I'm aware of this. You can do a lot of things to change your behavior orders to protect yourself from yourself and by basically doing a few simple things, you can make sure that your guaranteed to get good results from investing over a lifetime as a famous Benjamin Graham, who was Warren Buffett's mentor, said many decades ago, what an investor is seeking an intelligent investor, the safety of principal, an adequate return. So that means we're not trying to be greedy and get 20% compound and year after year, which will usually lead to us taking too much risk in losing our money. But we're also not happy to get, you know, one or 2% from like long term Treasury bonds or whatever. And basically not even keep up with inflation. May as well just keep our money in cash. We're gonna do that almost so to get safety of principal an adequate return to get this, um, result. It basically means that we're going to of it, take a style of investing that is conservative but virtually guarantee will say it has a very, very high probability of making us financially independent over time. And but this course is gonna go less into the fundamentals and the details of finance and a lot more into our behavior, the decisions that we make about our money and why most of us are so bad with it. In addition to the fact that we're is not trained in school to learn much about finance. There's all kinds of psychological reasons why we just tend to make really bad decisions. So, as already mentioned, following financial news causes confusion and at least a bad decision that you made by a stock. And then the next day you read some article that says all that stops going down and makes you, um, frees up. It causes fear. You go. No, I made a mistake, maybe. And you and you second guess yourself your constant second guessing yourself. And this is why some like or love it. He never listens toe anything it said by not all of the news but anyone else in Wall Street . All he does his own research because he's an expert in understanding, uh, the fundamentals of company, looking at the financial statements and understanding what they mean. And then also kind of synthesizing all of that data, the financial data with what the company actually produces, everything that it takes a lot of skill. But the point is that we basically need to learn how to ignore all the noise. So that means don't listen to Jim Cramer. Don't listen to the news about the stock market. I'm gonna make some recommendations as we go through the course of what you should do. But right now I want to talk about what we shouldn't do. And the first thing we shouldn't do is make big mistakes with money. Remember the definition of an intelligent investor of someone who was seeking safety of principal an adequate return? Or, as Warren Buffett would say, the first rule of investing is don't lose money and a second rule is Don't forget. Rule number one sounds like an obvious kind of stupid statement. But the point is, when you understand compounding how money compounds, if you have a bad year, you lose 10 or 20% on your investment. Takes a really long time for that smaller amount of capital to compound back up to what you've lost. So a conservative style is a very intelligent style because if you protect your money than as it compounds even have assumed that is compounding slowly, let's say 567% per year. Eventually, it's going to start compounding at a very rapid rate due to the fact that it's compounding exponentially right. 6% of $100,000.6000 dollars but 6% of a $1,000,000 is $60,000. So if your money compounds at an average rate of 6% that's gonna make you rich over time. And so I think a lot of people were attending a little bit greedy or impatient. We think, 0678% Whatever is not enough to really move the needle for us. You just got to remember that is the numbers get bigger, there's an acceleration in the growth. And so that's a really important thing To keep in mind helps us not make any really big mistakes when we're investing. So the psychology of owning stocks and reverses realistic is very different. And usually when you in real estate, you're using a lot of leverage, right? We borrow money to buy real estate way, put a down payment down, and then we borrow the rest of it. And a lot of people like real estate that reasoning if use leverage, you don't have to worry about all of the well is that you see every day that the stock party gives you kind of seem less stressful. But the reality of the matter is that real estate prices are also highly volatile. And if your leverage, you could end up losing a lot more money than you wouldn't stocks because you know you could be underwater on the house very quickly if you have a real estate boom and bust cycle like we had in 7 2008 when you have a great bubble. Now stocks also have crashes. But think about owning stocks is is over the long term. They appreciate at much higher rates than real estate. So you're gonna insure, make a lot more money and a lot more wealth if you own stocks over long periods of time than if you old realistic and it's actually easier once you learn how to protect yourself from yourself. Once you learn how to not try to trade and time the market and guess what's going to happen , you know it becomes very simple. Warren Buffett recommends that 90% of the investing public simply by an index fund like the S and P 500 like Vanguard, has to be 500 index fund. You know, over the long term that gets 9% compound interest on average. And if you're just constantly buying that when they're when the market is a highs, lows and its in between you just costing putting money into an index, you're gonna outperform over 90% of professional investors as hard as that is to believe. And we'll talk a little bit about why they tend to underperform the market, which is really, really insane because people have a lot of money to hedge fund managers from the manage their money. They're supposed to be the best of the best and make sure that you outperformed the market . They actually tend to underperform the market because they're trying to beat all of these short term of benchmarks and step for themselves so it looks like they're fun is performing higher than the market of. Paradoxically, it tends to make him underperform the market because in investing you have to have a long time frame. You have to let the economics of business the profits that they make in the growth of those profits. You have to let that play out, and over the long term, the market we really accurate or love. It says that in sort of the market is a voting machine, which is why it has so much volatility due to fear and greed and all stuff like that. What's in the news? Everything. But in the long term, it's a weighing machine. It's actually very, very accurate in a long term. So you do need to have the patients in the time to let the economic results of a business or of the total stock market average play out. So if you simply by an index fund over the long term or a few years back basket of E. T s on, then you are virtually guaranteed to get adequate results from investing and stop. The stock market will outperform real estate. And, of course, big Bender for the stock market. Real estate is that it's passive a lot of talk about owning rental properties as a passive way of making money. But if any of you have on a rental property, you know that is not actually passed. People say it's a passive income, but not passive income. Even if you hire a rental company to manage the property for you, you have to deal with that run a company you have to communicate with them. There might be damage to the property from tenants. You want a toe? Spend a lot of money fixing your property up. And if you don't hire someone to manage the property, you might have to do a lot of the work yourself. You have to deal with the tenants leaving You might have vacant properties. It might be hard to rent it for as much as you thought you were gonna get. All kinds of things can happen. But if you buy index funds in the stock market, you could basically do nothing. And all you do is wait and then you just buy. I'm or you buy more. Now a lot of it will worry about Well, what if the market crashes and we're gonna get into that later? But the short answer is, never be fully invested. If you have $100,000 that's your life savings, you don't want to have $100,000 in the stock market, right? You will need to choose. Do you wanna have half of your money in the stock market? You wanna have 60 or 70% of your money in the stock market. Now there's formulas that are recommended by experts spending on your age, how close you are to retirement things like that. And that goes a long way towards telling you, You know how you should be invested in terms of the ratios. A lot of that have to do with your personality and your risk tolerance. And that's all part of the psychology of investing that we're going to learn about in the course. You basically you want to set your financial situation up so that no matter what happens, you come out okay or you will feel OK, right? We want to sleep well at night. We don't be taking such a risk that if the market plunges 20% over a few months, we're going to be very, very stressed out. We want to invest in such a way that we have cash that we can wait or the market to recover , and we're not gonna be freaking out about it. That's preferable Number one. Basically, Buffett says, don't lose money. That means be conservative and be careful, but also never be fully invested. This is another reason that separates the amateur investor from the professional is that they always want to have as much of the money under their management in the market as possible, so they can show these really big returns, and they they can scrape off the big feeds. But we don't have to do that. We don't have to be fully invested. You can always keep a lot of our money on the sidelines. Um, and so that gives a big psychological advantage. Okay, so, um, you know, the difference in owning stocks and real estate is a big psychological difference, and we're gonna talk more about it. We'll talk more about other asset classes as well. And, um, you know, why don't we? Why do we follow stock price fluctuations every day anyway? You know, I mean, the value of the business has not declined just because the price of the stock has declined . I mean, just think about that. The stock might go up for Michael down based on some news. Or maybe it will be based on one financial report like we have quarterly earnings reports right that say how much a company's profits have grown or declined, etcetera, etcetera. But even that only tells you about maybe that 1/4. So if a company's stock went down because the earnings disappointed and they were lower than we expected, why what was the reason for that, Right? Was that because they invested in the long term? Is that because they were they were investing in growth? Or was that simply because competition came in and undercut their performance? Right, So one bit of bad information or good information or anything like that can cause a stock price to move a lot. But the point I'm making is that shouldn't freak us out. You know, stock prices go up and down all the time. And if you're a true investor, you don't even need to check the quotes. Just like the way you own a house, you don't check how much it's worth every day. You may know that the real estate market this year is going up or it's going down. But you know you're gonna hold that property for a long time, and you just waited out. The same approach needs to be taken for stocks, and you can find the ECU indemnity Teoh not be stressed out about it and not check prices. All the time you're gonna end up being much, much wealthier than you would be if you try to trade stocks actively or if you invest Onley in real estate. Because the history of the market shows that due to the fact that you know stock stocks, a share of stock is an actual ownership in a business. And business is, you know what they do is produce profits by creating value in the marketplace. Now properties do that, too. It's more limited. And how much money can you make up a rental property? How much money can you make off? Um, commercial rental property? It's It's pretty limited, right? You might get a 678% yield or whatever. If I'm not saying that real estates bad, it might be something that you're really interested in it and that you like. But the thing about investing in a business is that you can have unlimited growth, right? You invested Amazon early on, you would be a multimillion or no, maybe even a billionaire. The same isn't true. If you invest in real estate and just hold that real estate, it's not gonna go up 20 or 30% per year, on average for 20 years. It's just not gonna happen. It's impossible. You might have a a bubble that happens where if you're lucky and you time it right and you Boston Real Estate in 2000 and you held it up until the top of the bubble and sold everything at the perfect time. You know, maybe you get results like that. That's just sure. Look, rather the stock market it's not. Look, if your dollar cost averaging and buying human in just a regular S and P 500 index fund over time History shows that you're guaranteed to be building a lot of wealth and outperform every other asset class, including precious metals, commodities and real estate. So you know, understanding how to value a business is what really matters, and investing and rental property is similar is like a small business. You look at the yield how much profit about making per year off of how much money I put into it. So we're gonna talk about that in the course as well. And the thing is, you can learn how to do this. Like professional investors like Warren Buffet have done. Read the Vantive statements invest on your own, and that will lower your stress because you'll be able to tell you know exactly what a business is actually worth. Or at least it's not exactly how much, but within a range very accurate range. And be confident that even if the stock market is going down, you know that the actual intrinsic value of the business is mawr. That with stock market says you simply wait and it will go back up. Or, you know, if you don't have the interest or the skill to do that, the value businesses on your own. The only logical course of action is to you, either by index funds or maybe do what I've kind of said not to dio, but psychologically, it's easier is invest in real estate. Real estate is easier toehold psychologically than the stock market. But once you trained yourself to hold stocks, yes, better in the long run for your financial health, I hope that makes sense. So that's what this course is gonna be about. Um, and the first thing we're gonna talk about the next lesson is this whole idea of you wanna have time in the market and not try to time the market. That's we're gonna talk about next 3. Time In the Market Not Timing the Market: so this is a really important idea. A lot of people think that they can time the market. They can buy low, sell high, sell a stock of it's gone up, take profits, wait for it to go down by again. A huge amount of research has shown that this is basically impossible. Now you can find out liars of people that have done it and most of those outliers. It will be shown that it's just pure luck, just pure luck. And you may look at someone like Warren Buffett or Paul Tudor Jones, some of the greatest investors, that it seems like what this is, what they've done. But really, they're not trying to time the market. All they're looking at the value of a company and they're looking at wind is out of whack with the stock price. So it's not timing the market. They're not looking to see what's gonna happen to stock market. Trying to guess they're gonna go up or go down there analyzing of business. And they're going okay, this business to a private investor. If it wasn't the stock market would be worth X, and they know that because they will take the profits into the growth rates, and they'll say, Okay, this is how much money is making. So it might be worth five or 10 times one year's earnings or something like that, depending on the industry, that will be different. So they're saying, Okay, the value of this business is X and O. The stock market says that it's only this stock market is very pessimistic about this company. For whatever reason, it might be because of one bad report because of some news coming out. Maybe regulation from the government is looming. They're all kind of reasons wife stock will be done. It also might just be because the economy is bad and so all stocks it down. And that tends to be when the best Indust has become most active and that you can only be active in a recession or in a bear market when you have dry power, which is what we say in the industry for cash. So that's why um, you want to always have cash and not be fully invested, as I mentioned previously. If you're never fully invested, then the market goes down. You can take advantage of that. Buy stocks in the sheets, so this is a little bit confusing it with one hand. I'm saying, Don't try to time the market But on the other hand, I'm saying, if it goes down, you know, get better prices, so that sounds like a little bit of a contradiction. But in general, the message here is by value holding for the long term. Don't worry about fluctuations in the stock market, but always have a hedge meaning, since we never know if the stock market is gonna go up or down in a given year, month quarter, whatever. It's good, always have cash for emergencies to live off of, and to take advantage of the opportunities that will, from time to time come your way, for example, no one would have predicted exactly win or how the housing crash was going to happen. Way back in 8 4000 and nine. A lot of people said it was gonna happen eventually, and no one knew that stock market was going down as much as it did. No one knew that the whole entire financial system was going to be at risk, but the best investors, like Warren Buffett and Charlie Munger and some others. They were worried about valuations being very high. And while they were, they were still invested in the market. They were trying to time the market. They still had cash lying around in there. Cos on, we could be just like them. We may not have billions of dollars, even millions dollars. But even if you could just save up thousands of dollars and have that stayed away for a rainy day and then have AH, stock market crash that goes down 30 or 40% well, it's pretty safe to say that would be a good time to buy. And so, in 2000 2009 you see people like Warren Buffett buying entire companies for pennies on the dollar. You know, they're getting 60% discounts, 50% discounts, sometimes even more, and all they had to do Basie was, Wait a few years and those investments have doubled, tripled, quadrupled in value. So we do want to be opportunistic. Sometimes it's obvious that, um, it's a good time to buy, but you can only do so if you're not fully invested in the markets. It's a big, big, big lesson and It helps us psychologically. For all the reasons that I outline safer it, let's think advantage of opportunities and it feels better when we're holding these investments. I just feel better at night knowing that I got 30 or 40% of my money outside of the market and that if it crashes, Aiken buy stocks cheap. Or I know that at least my losses are limited, and I haven't bet the farm I just feel good that way. Some people feel comfortable having 90% of the money in the market, but if they go through, it crashed of 30 or 40% of the total assets. I mean, that's really stressful this way. Have people jumping off skyscrapers and killing themselves. Stuff like that, and to a lot of my friends who don't know that much about the stock market or about finance or think about it, is gambling. They say they would have a crash comes What do you dio and my acid that is always Well, I don't invest all of my money at the same time, so I know a crash is gonna happen eventually. All markets have cycles. Everybody knows that. So you just have to do with logical thing and a logical things. There have a lot of your money, either in bonds or in cash. So again, research has shown that nobody has consistently and successfully time the market over the long term. It just doesn't happen. It's too random. It's a complex, adaptive system. There are too many variables, so people like Warren Buffett are not timing the market. He's valuing companies, and he's buying them when it seems like the value is much, much higher than the stock market is saying. In other words, the stock market is not efficient in the short term, but it is efficient in the long term. It's another way of thinking about it. Another thing is really just things that Reaches has shown that 90% of investors believe they're above average. You know, that's obviously impossible. 90% by definition, cannot be above average, but most will think they are. So in other words, we're overconfident. We tend to be overconfident. All of us that think we know about business or studying businesses studied finance. We think that we can manage our money and we're gonna get good returns in the stock market But the reality is that the vast majority will underperform the market indices. Market averages, and there's a lot of reasons for that me. One of the reasons is that an index fund is self cleansing. In other words, the S and P 500 for example, which I'll use throughout the course as as one example. There are lots of different indexes that take cross sections of the market and put it together. But, yes, every 500 is composed of 500. You know, most successful largest companies, etcetera in America on. And if a company is no longer performing well for various reasons, standard implores, right S and P stand for Standard Poor's. It's a company that puts the index together and rates businesses. They will drop some companies off the index and add new ones, so it automatically sort of stays healthy and robust, based on, uh, their ratings and things like that. So it's really, really difficult to beat the market. I mean, we all want to think that we're above average and average returns. That doesn't sound very exciting. Who wants to get just average returns? But actually, research shows that average the average amateur investor that invest their own money without a professional war without just buying the indexes on Lee has averaged about 2.6% returns, which basically is keeping up with inflation. So you're basically making no money. That's what the data shows. You can believe. That or not. Mason. Unbelievable. That's what the data shows. So this mismatch and leads a terrible investment decision making. It's a psychological thing. This is not about financial understanding. It's not about business knowledge. It's about human. Overconfidence is about hubris, and it's about this misunderstanding, the nature of human decision making. Charlie Munger calls us the psychology of human misjudgment, and I have some some courses specifically about, um, that that goes into even more detail about this stuff. But this course, I kind of want to do some broad strokes, and this stuff is new to you. I want you guys to understand how important this stuff is and why most people are so terribly bad at making decisions about money that go way beyond the fact that, you know, we just don't learn about it very much in school. You know the financial aspects of anyway. So in short, only a tiny minority of people should actually be managing their own portfolios. Probably less than 5% can beat the market over time, and we'll end up happening to most of us. Is that well, We will learn that the hard way, and eventually we will do the smart thing, which is start investing into E. T s or index funds and basically guarantee ourselves really good results over time again. To quote Warren Buffett, he says. Once the dumb money recognizes that is dumb, it ceases to be done. In other words, if you if you are humble about your abilities, you all of a sudden improve your results by recognizing your limitations when the office it is true for over confidence. And this is why it's well known thing in business circles in investing circles that certain types of professionals are notoriously bad investors and the most famous are doctors. And the reason is because doctors are usually very intelligent, obviously very well educated people, and they tend to overestimate their abilities and understanding finance because they think well, obviously it can't be that complicated on the doctor and so doctor said to be the targets of con artists scam artists for two reasons. One is that they usually have money, and the other one is that they are usually easily tricked because of their over confidence . So that's sort of an interesting tidbit, but that's very much a psychological in nature. You know, at no point in history, including the Great Depression, has a stock market or real estate markets not increased in value and outpaced inflation over 20 period, 20 year period. Now a 20 year period. Sounds like a really long time toe wait for your money to go up, but this is including we're talking about during the even the Great Depression. So from the peak of like 1929 stock market bubble until things recovered during World War to, you know that that was the longest period ever. And even then, you know you would have made money. He simply did nothing and held all your stocks and waited for a long period time. But if you if you exclude the Great Depression and include all the other recessions and everything like that, stocks just go up over time, especially if you buy the averages. The Dow Jones industrial averages. That's to be 500 NASDAQ, the Wilshire 2000. Think any large index of stocks and they go up because the whole reason is, by definition, a company that is profitable is going to take those profits and do something with them. They're going to reinvest them back into business for growth. Well, they're gonna pay them out to shareholders. That's us with dividends or they're going to give them back to shareholders. In another form is doing something we called buybacks, which is when they buy their own stock back off the market, increasing the company's ownership of themselves because a company that's public traded on the stock market their own, You know, whole entire company that that's got that sorted issued shares people like us to buy when they buy the stock back. That increases the per share value of the business because it's making the the stock more skips. In other words, it's reducing the supply of the stock on the market that drives up the earnings per share, and that drives up the value of stock Now. Sometimes my backside are controversial because, um, it's not a good use of capital. If the stock is trading at a very high valuation than it would be actually destroying value . But when you do smart buybacks, when stock is trading at a reasonable value, it is basically like returning money to shareholders because it drives a stock price up. It's a very good thing to do if the stock is at a good value. A good example of this is apple. It penetrated a pretty low valuation, considering how stronger bounds sheet is, because people always worried that you know the smartphone market is maturing and Apple can't keep up their huge probability forever. And so because of that, the evaluation of Apple's usually pretty low. It traces like 15 times earnings a lot of times when the S P 500 NASDAQ averages air in the 20 times earnings ranges, even though Apple apples the most profitable business in the whole world. So when they buy back stock, it's just a really good use of their money, and they have so much capital that they can invest. It'll I mean, there's only so many manufacturing plants that they can, they can buy, they can set up. It's not a good use of their capital, so they should increase their dividend or they should return the money back to you share horse. But the point is, stocks go up because businesses create value. This is what capitalism is all about. This is the genius of the free market system. Now, we're not getting anything political about, like, how free should markets be or how much regulation should there be? But history is pretty much won the argument that markets, you know, to depending on how whatever level of of laws, a fair, um, you know, or regulation, you think there should be markets create wealth. And they they worked really, really well in general. OK, um, not including the Great Depression. The market is almost certainly go up already 5 to 10 year period. So if you simply can wait five or 10 years, you're going to make money by investing in the stock market. I mean, every find a 10 year period. Over the last 100 plus years, this has been the case, So it's not that it's not that complicated. You don't have to think much at all. You just take your money, you buy some stocks me by the index and you wait that's all you have to do. But the hard part is ignoring the news, ignoring all the pundits that are contradicting each other, saying, Oh, you should sell the stock to buy that stock over sessions coming. Oh, no, I'm bullish. The stocks are going up. Nobody really knows. Nobody knows. Even the greatest investors like Warren Buffett, trying longer say they don't know what's gonna happen. But they know is that over the East periods of time, stocks will go up because businesses are profitable. That's all there is to it. It's just basic financial knowledge. Okay, so it guarantees that a patient investor will be richer by simply buying index fund or real estate and then doing nothing. And the reason that so few people do something that is seemingly so simple is do the factors that are discussed throughout this course. People are impatient, People are loss averse. People follow the price fluctuations too closely. People listen to the news. That's the noise factor. And then, of course, a lot of people just don't understand business and investing very well to make really bad decisions that may see something on the news and it's follow the herd even though you know they're paying, like 50 times, multiple or 100 times multiple price to earnings, multiple on the stock, that is way overpriced, and they buy it anyway. That's just misunderstanding business and is paying way too much. You wouldn't want to pay a $1,000,000 for a house that you know is only worth around 200,000. But in the stock market, people get confused. Anything? Oh, this stock keeps going up. I'm gonna buy it, regardless of what the actual value of that business is. Right. So, um, these are the reasons why people tend to lose money, the stock market and not do well. Why? Why people are confused about it and by simply understanding the nature of how it works and then the nature of how our minds work. We can all of a sudden become I wouldn't say master investors. But we can basically guarantee that we will build wealth over time. And to quote Warren Buffett again, he says that it's pretty easy to become well to do slowly but very difficult to get rich quick. And so a lot of these little these little adages and sayings of of him and others. They really help to put everything in perspective, sort of crystallize the main points that will make you, if not a great investor, at least not a danger to yourself when you are making financial decisions. So main point is here that over long periods of time, the benefits of holding these investments they include not paying taxes right from when you sell assets. If you sell your assets that have appreciated a lot, you pay taxes on that, right? And so buying and holding for a long period of time has is really big benefit. Your money continues to compound it on, no matter what the tax rate is the tax rate, the future could be four years, 50% capital gains. Who knows? We don't know if the national debt keeps going up. We're gonna keep increasing taxes at some point. But if you let your investments rot, ride and compound, then you're gonna end up being way, way richer in the future by letting those assets compound, not pay taxes. And then you're also not paying fees for every time you trade. If you traded actively, you're paying fees might only be $10 a trade or whatever, but you let those $10 stay in the stock and compound. And let's say that that's a few $100 a year. It ends up being tens of thousands of dollars over 20 year, 30 year time frames or more. So those are more benefits of buying and holding. Really. Interestingly, there's research done by Charles Schwab, which found that accounts that were completely for gotten had the highest returns of all the accounts. I mean, some people like inherit stock accounts, or maybe they throw a couple 1000 bucks into an account and they get busy with life for whatever reason, they lose track of a brokerage account that they had, and Charles Schwab was able to identify these accounts by people being inactive, not logging in whatever. And they did a study. And it turns out that people who just didn't nothing ended up having the highest return just really amazing, because a lot of people spend a lot of time worrying about their investment, buying and selling and trading and talking to the brokers and all these things. But the people who literally for got about their investments, outperformed all the other accounts on average. On average, you get any averaged altogether. They got the highest returns, and that's pretty amazing. And I think that that tells you a lot about the nature of good investing and why buying and holding and just forgetting about about it is really the way to go here. So when it comes to investing, it turns out there doing nothing is usually the most effective thing that you can do. Assuming, of course, that you don't need the money that is in the market for living expenses, right? It's the first caveat. Never invest money that you might need in the next year or whatever asked me money that not necessary that you're willing to lose but money that you don't need for your living so that you can wait for a recovery in the market. This is a mistake. A lot of people making think I have put my money to work and put in the market. But then they realize, Oh, shoot. Um, I need that money to six months, and now my investments gone down 10% and makes investing feel bad, at least with a bitter taste in their mouths and then people think up stock market. It's dangerous. It's like gambling. It's risky. They misunderstand the nature of the market. And, um, again, it's psychological. They should have known. Don't put the money in there if you're not willing to wait long long enough to get the results that you want to get Okay, so the next thing we're gonna talk about is buying high quality assets over time is a big difference between high quality assets and average investments. We're gonna talk about how to recognize those. 4. Lesson 3 Only Buy High Quality Assets: so the key to achieving the good results that I've been talking about throughout this course is making sure that they asked you by our high quality, as it already explained, If you buy yes, if You 500 Index, it's an average of 500 high quality assets. But if you do want to try to beat the market or you think it's just too boring, or maybe you are very, very confident in your ability convey value a business, the whole idea is that a really good business or really hype all the asset is going to appreciate over time. You can apply this to real estate or to stock. If you look at real estate, there's a famous idea that you should buy the least. UM, we'll say the cheapest property in a good neighborhood, the whole idea there being that the values of really attractive neighborhood. Maybe because you're in school because they're really nice houses in the area. It's a good area. Devise gonna keep going up over time because it's safe there because all the houses there are nice and various other reasons. But if you buy the most expensive house in a crappy neighborhood or a much less desirable neighborhood, then you're not gonna have as much appreciation. You might even have the house night d Appreciate that area sort of continues to decline over time. For whatever reason, as I just shows you the quality of the asset is gonna have a lot to do with how much it appreciate over long periods of time. So this is why you know, most blue chips stop. Stop that with leading companies on Wall Street like Disney, Coca Cola, I am, you know, big companies, G uh, G and things like that. Those will qualify as high quality assets. Now you're not gonna want to buy them you regardless of the price. As I've already explained, you want to make sure that you're not over paying for something, But in general, if you're buying this stock of a really high quality companies as a really good name brand , that is very probable, even if it's growing slowly or even if it's not even growing that stop go up over time. Because even if a company's profits remain flat indefinitely like I already explained a little bit, the company takes those profits and I have that money to do what they want with it. So, for example, in Warren Buffett's case and his company, Berkshire Hathaway, they had invested in mostly insurance companies because they can use the insurance premiums that they get, which is called float, even though they not only don't own that money, but they count it on the books as a liability that is gonna have to be paid out at some point in the future, in the form of claims, they are allowed to invest it and keep the profits from that investment. So all they have done is take cash that came into their business that they didn't even own , and they invested it to earn a profit, and that has grown them into a $550 billion company. Of course, they're huge moment now, and they've got dozens and dozens of other companies that are insurance based. But even if the company's profits don't go up, it doesn't mean that the stock's not gonna go up. First of all, a stock could go up and profits can go up simply by a company having such good assets of products that they can raise prices. This is the case with company. Like Disney, they're constantly raising their prices at their theme parks. And even though that might lower the attendants somewhat, that actually ends up being a good thing. Because do the parts are notorious for being overcrowded, and when they raise prices, they actually thin out the crowds. But they are still more profitable due to the fact that you know, selling a few fewer units at a 10 or 20% higher price is still more probably still make more money. We see this with Apple. They continue to raise the prices of their iPhones and because of the power of the brand and the perceived quality of their phones over others that someone say are comparable or maybe even better, they maintain either profit stability or profit growth, even though they're selling fewer units. So buying high quality companies will end up making you richer over time, even if those companies no no longer growing rapidly. Another good example of that might be a company like Coca Cola. The number, uh, sugary classic Coca Cola beverages that are sold is actually not going up any more. It's actually decreasing despite growth in international markets of people consuming sugary beverages. Because people are becoming so much more health conscious, they are actually buying less of those drinks. But Coca Cola can take all the profits that they've made previously and continue to make from their core product and reinvested into other businesses and other product lines. So they were reinvesting in to help your drinks. They're acquiring other companies. They're coming out of new products, you know. You take those profits and you and they reinvest them and kind of a labouring this point here because a lot of people misunderstand the reason why stocks appreciate in value and what high quality companies are really safe bets over the long term stop. Some of the stock market is not gambling and just not like, you know, Oh, no, I don't know what's gonna happen if I buy the stock. Go up or down. I don't know. That's true. If you're only looking at the next five days or even the next year or two. That's true. If you want your money to increase in value, but you need it in the next two years, then it's risky because there's a lot of volatility in the stock market. But if you want to build wealth or time for sure and you buy nothing but blue chip stocks, then your wealth is basically secured for these reasons. So I mean, it turns out that the most successful investing is probably pretty boring. I mean, when you buy companies like Waste Management, which is a big company in America, that he knows a garbage company, that's a service that has to be taking care of. We have to have our garbage taken care of, and they can slowly increase their prices. You know, they have, like, 50% of Mawr of the whole entire country market share, and they have a nice dividend, and it's really hard to see how that company is not gonna be profitable or even more profitable than now in the future. So you buy and hold that stock. That actually happens to be the largest holding of Bill Gates, along with his good friend Warren Buffett's Berkshire Hathaway, those where his two biggest port oil holdings that seems pretty boring investigating garbage company are investing in a water company or utility. But those are the types of investments that are going to get you the results that you want your goals to build wealth over time. You know, it might be a lot sexier to the bike Tesla or invest in the newest tech AIPO. But that may be the worst thing that you could be doing with your money if you want to increase the probability that is worth more in the future. So you know if it's exciting and you're probably doing something risky that resembles gambling or speculating rather than investing organ, remember our definition for investing is safety of principal an adequate return. This can be guaranteed. Investing is a skill. It is a skill, it is not gambling. And that's what this course is is all about. And but we're just focusing on the psychological aspects of it more than the financial aspects of it, because that's really when most people struggle with when it comes to not knowing what to do with your money. It's not about being a financial genius and knowing everything that all the hedge fund managers on Wall Street no, it's knowing about human behavior and why most people invest so poorly and how we can not be like that. How we can not invest on the way that most people who lose money due so buying and selling stocks it repeatedly causes psychological challenges that end up leading to money losing results. It's like you're throwing up one difficult decision after another. All the stock went up to a cell or do a whole. Oh, then I gotta worry about taxes. Stop to pick taxes. I gotta pay fees, but of Estella, and then it keeps going up. Well, then I have a fear of missing out on a wish. I held it blah, blah, blah. You know, you could go on and on and on with the Vassily over your decisions, which is another reason why psychologically, it's just easier to buy a really good asset or index and just hold it. You don't have to make any other decisions except for that decision to purchase it with money that you save. And so it's just it's just easier, less stressful. Way to behave have to make far fewer decisions. If you made money so far, you know you may erroneously feel that your behavior we'll continue. You just keep doing what you're doing and making money. That's that's gotta being what your mantra is is put money in the market and then wait, put money in the market and then wait. And if you do, the dollar cost averaging strategy, which when you basically put the same amount of money in, um, every month or every quarter or every year, whatever whatever period of time you want to use and you're buying it all levels of the market when its high winds low whatever you're doing, paying average prices and if you find in next, you're gonna be giving average results. But in the case of investing in the stock market, average is really, really good. In fact, average outperforms 90% of investors, which sounds kind of like a confusing thing to say. But most people don't buy. Index is getting more and more popular because of people like John Google. Are Jack Bogle, the guy who invented Vanguard on Warren Buffett advocating most people do that some more and more people are doing it, But still, far too many people try to actively invest their money or pay advisers to do it for them, and you end up almost guaranteeing yourself horse results. So basically, you know you resembling a gambler who wins money in the lottery or maybe on a slot machine or something, and then you feel like, Oh, I'm not. It's using my winnings to play like your stock goes up and then you feel like it's just profit. So now Aiken gambling and risk it. Maybe I'll buy this risky stock and maybe we'll hit a home run. But the reality is that you're probably gonna lose money doing that, and you pretty much certainly would have continued to make money by just leaving that money invested again. It seems boring, but investing is not supposed to be exciting. Investing should be something that you you do in a way that is prudent in a way that recognizes, you know, uses patience and discipline. And that's what it's all about, really. And so again, and for some of you, it might just be too boring and too difficult the whole stocks and not check the prices, in which case I recommend that you do something like by real estate. Hold it because at least you're not getting a daily quotation about how much you real estate, uh, assets are worth every single day. or literally every single second when the stock market is open on the day, you can literally watch the value of your money go up and down very, very bad. Um, for your decision making to do that. Excuse me. So over time, the above patterns of behavior that I've been explaining that not only end up with money being lost, but they're more stressful, they lead to poor health. You know, loss of sleep, worrying about your money. It's simply more difficult and just buying high quality assets with your savings and then waiting for the inevitable appreciation that will occur. So it's just easier to do, and it will get you better. Results don't look. Cost averaging ensures that you are not over paying and buying at the top of the market, right? A lot of times, planets on TV to say, Well, you would have bought stocks, you know, in 1999 or in 2007. You know what I'm taking you this many years before you would make your money back. But they're suing that you put all of your money into the market at the absolute peak, which of course, would be retarded. no one would do that. It would be stupid. But if you're just buying over time consistently, you may be over paying sometimes when you're also going to be under paying with the market down. Li lo. If you pretty much by just whenever you have money and so that's really the behavior that you should have. It's a habit that you should develop over time, and you're by assets during all market conditions. You're getting used. His average prices. There's no way around it. So that's what you guys need to be doing and every result again. In investing, it means an 8 to 9% compound return over time. This is the level of compounding that will make anyone financially independent. You have here only saving, you know, $500 a month and you guys can use your own investment calculators. And it shows, you know, over 20 and 30 year time period. If you invest is little was a few $100 a month into an index fund. You end up with over a $1,000,000 by the time you retire, and that's up just a a couple 100 bucks a month. So you start doing the math of thousands of dollars a month. You get up into the millions, and it's really amazing because almost anybody could do this. Most people should be millionaires, but we have really bad money habits. Be misunderstand markets. We don't save enough. We buy high and so low, and we have always really, really bad behaviors that if you would just do the things that I'm staying in this course, you will end up being financially independent. And I don't want to my own horn here. But in terms of credibility, I am financially independent because of this exact behavior that I learned about that I followed under my late thirties right now, and I do these online courses and I work teaching finance and stuff like this for fun because I enjoy it because I want to help people. Most people are struggling financially. Most people, if they would just learn to save and invest their money in a rational conservative manner, would be financially independent, much, much faster than they. I think it just it seems like an impossible task because of all of the conflicting information that noise, the pundits, the news, it make it complicated on purpose because they want to sell you something. You want to sell you a product, but it does not need to be complicated. All you to Dio is consistently save money by high quality assets, whether it means in next Fun's high quality stocks, like Apple or Disney or Starbucks or whatever. Blue chip companies, um, or real estate and then be willing toe wait and don't worry about it too much. And before you know it, all of a sudden like, Oh, my investment has gone up 20% or doubled in value and all of a sudden you find yourself in a really good financial position that maybe even if you're not totally financially dependent, even if you're not totally, um, well off, you will be in a much safer position and maybe sleep sleep well at night, and that's less time to go. More into how important is to ignore the financial news. A noise 5. Lesson 4 Ignore the Noise: so I've already bought at this point a couple times in the course. But it's so important because it's so difficult for most people to do. Now that we have our smartphones at our beck and call, you know there's the arm's reach away and we're constantly consuming news and information. There's so much conflicting information out there. It's very stressful to own a stock and then be following all the good news and the bad news and the reports and the recommendations. You know by the Sox tell the stock it's got good things happening. It's got risks that are coming. It's very stressful. So one of the most ironic things about the financial role today is that despite having so much evidence of what does and does not work like I'm talking about the outscores, the level of noise and the environment actually makes following this advice more difficult than ever. It's very ironic we know what to do. We know what to do for a long time, but it's becoming more and more difficult to follow this advice and that the turnover and the average person's portfolio continues to increase. That means the amount of buying and selling that happens in a portfolio is is increasing, and people are holding stocks and assets in general for shorter and shorter period of time . So it's the exact opposite of what we should be doing, and we're doing more and more of it than ever. So the solution is truly simply to not consume financial news. You just don't need you. I mean, you don't need to do it. You just need to save money and then by assets, and then wait and save more money and buy assets in the way. And, of course, you can increase your income. That's really where you're gonna build Well, because the more income you have and the more assets you could buy, and, um, or the compounding will accelerate. That's really how you increase the probability of building wealth rapidly. If you choose to bind index funds, it doesn't matter what is happening in the economy as long as you have years toe wait. You know, as I said, whether you bought during the Great Depression or before you, even in a bubble, if you're buying through the ups and the downs, you're going to get good results. Unless the future is completely different than the last 102 150 years of free market economics. It just doesn't matter. I mean, even in the 19 fifties, there the top tax rate in America with 90% at one point. People worry about what if taxes are higher in the future? What if this or that? What if there's more social? You know, expenditures. One of the deck keeps increasing. We have gone through pretty much all of those scenarios. We've had world wars. We've had wars all over Asia. Rio had high tax rates. We have a hyperinflation in the seventies and there. And there were bad periods. No, the seventies. There was a market crash on 73 74. Then it recovered. Why did it recover? Because, well, one. The Fed can raise and lower interest rates, and they can do things. You know, stimulus that we saw 4009 that you saved the economy from going into a total depression. They could do things like that. But the main reason that markets go up after all these crashes is the thing that I already explained. The market mechanism of free market capitalism creating value creating profits, reinvesting those profits, you know, inventing new technology using that new technology. I mean, Apple created hundreds of billions of dollars in value in just the last 10 years due to the advent of the iPhone, hundreds of billions of dollars. It means more money than most countries have more money than the GDP of multiple countries combined together from one idea, one innovation from one company. So that's the power of markets and that the power of investing in companies that make profits you don't need to be a genius. You don't need to follow the financial news. You don't need to be reading financial reports Now. If you want to be Warren Buffett and you love this stuff, you're interested in it as I am. You understand accounting and you want to follow the company's and you want to read the financial statements and try to buy low and maybe sell high. By all means, go for Just know that you need to be the top 5% uh, skill level all investors in order to beat the market in order to get a higher return than the average market indices. You really didn't know what you're doing. And so I say, for most people, the vast majority. Why even shot when you know you can get eight or 9% live in truck? You know, if you Warren Buffet, you're Charlie Munger. If you're Pol Tudor Jones, if you're a few of those people, then go for it. Hedge fund managers, these famous billionaires, they make their money simply because they're managing such huge amounts of capital. If you take 2% off of 10 or $20 billion you're going to be very, very rich. And they get that fee regardless of whether or not their fund outperforms the market or even goes down and value. You know, you'd be better off just buying. And next one, even if you're super rich, the wealthy, they think that. Okay, well, I'm gonna invest in this exclusive hedge fund because being ran by this famous investor. But what happens is, in reality, even very, very, very, very, very small minority of those investors actually outperformed the market. Which is why, of course, Warren Buffett one a bet he made that said any basket of five hedge funds will not outperform the S and P 500 index over any 10 year period and one that it was a $1,000,000. Bet that money with charity after you want it, some brave hedge fund manager guy stepped up and says, I'll take that bet and this is from the period I can't remember it was, like 2000 and, like 45 to 2014 or 15 something like that. And at first, the hedge funds they started out with head there having a good year to and the indexes of lie behind. But you know, slow and steady wins the race of the next several years. Almost the innocents started to take a leave and then the end of this crushing the hedge funds by the end of the 10 year period. So it was really good example of this lesson that more about that showed the whole entire world. That's and that's just the reason why you should ignore the financial news and the pundits as much as you possibly can. I mean, you can't do it. You just can't bring yourself to ignore the noise and you can't control yourself. You should put your money into some sort of fixed income investment like uh, certificate of deposit that hopefully gives you good interest. Maybe by some U S. Government bonds. Or maybe you accumulate real estate That doesn't show a price quote every day. You know, if you could save up to 20% down payment on investment, probably go ahead and do that by the real estate property. Maybe manage higher management company to rent it out. It's not gonna be passive. That's not an abuse passive. As holding stocks are holding bonds like U S Treasury Bonds T bills. But you've got to know what is best for you. What will stress you out? A lot of people are just simply too stressed out by the fact that they're getting all this information about stocks are gonna crash. We're going into a bear market. We're going into a recession and they can't sleep at night. If you have your life savings or most of your life savings invested in the market, it could be very scary. But that's one of the reasons why I made this course. It's help you guys understand, like you have nothing to worry about if you're investing in the long term and a stock market in to see, like A S and P 500. I mean, even if you would have invested at the absolute peak of the bubble of 2007 Now, you know, 12 13 years later, you would have made a significant profit if all you did was nothing and waited for your money to compound. Now it might seem in a really long time. If you're watching the stocks, I think we say a watched pot never boils right. It seems like a really long time to wait 10 years for your money to go back. But that's like the worst possible scenario. That's why did you put all your money at one time into the market during the peak of a bubble? You still would end up with a profit by waiting. But it's almost impossible for you to invest that bad. I mean, it's almost impossible to be that stupid, so that's an extreme example. Even then, you would end out end up ahead over time. But it's just that some people dispositions is such that investing in equities what's another word for stocks? It's just gonna be stressful no matter what. You shouldn't do it so you should simply avoid the stock market and put your money into bonds to put your money in the stock and Teoh the real estate market, maybe even just buy gold. Even though gold has underperformed the stock market and the real estate markets by huge, huge amounts of time, you may feel more comfortable owning gold because it's tangible and you know it has appreciated. Some overtime goal does tend to do really well during recessions and crashes and stuff like that. You have to know yourself and what will work for you. But the data shows that you want to build wealth, but I have a high probability becoming financially independent the place of what your money is. A stock market. The easiest way to do it is index funds. And just make sure that you don't invest all of your money at one time or any money that you are afraid to lose, not reading the financials news. It leaves the less stress and less worry. It's better for your health. It leads better investing results, and it leads to better health. So that's no small thing. I mean, people lose sleep over this stuff. I'm not affects your health. Having higher stress levels can leave the heart disease. I mean, it lead to cancer even seriously. So if you don't want to have to worry about it, just set it and forget it. You know, you may need to avoid discussing finance and other people who always want to give you advice or influence your behavior. Tell you what to buy with the sell. A lot of times, people will show off their knowledge or want to sell you a financial product. I choose to just ignore all of that. That could be including this course. I'm us to listen to what I'm saying right now. Don't just take my word for it. I mean, just look this stuff up in the stats are all there. You can use Google long term returns of the S and P 500. You can google this stuff Google everything that I said about. You know what Warren Buffett has said What Jack Boo has said. You can look all this stuff up. You can look at the fact that the stock market outperforms other asset classes. You can look all this information up. It's not secret, you know, there's nothing here. This is, you know, mystical, or that most people couldn't just look up. Find out on your own. It's just there's so much information out there that it's very confusing. And to be honest, I think a lot of people just aren't that interested in money or finances. A lot of times we just don't want to think about it. You know, it's almost like considered of older topic, which is probably one of the reasons why we know study it very much at school to our great detriment. I mean, kids get out of high school that I don't even about money. They don't know how to manage, you know, their bank accounts or credit cards work or how to buy a house, which is just insane with, you know, the whole rest of your life. A lot of you know, a lot of your life has to do with out Well, you manage your money knowing about your credit score. I mean, I think that even know that credit score waas until I got out of college. Or maybe maybe I was in college when I learned about credit scores and every like that, but I was a business major. I still didn't learn about that. I mean, business, school. You don't even learn about real estate and investing and all the stuff. We're talking about it. Even though I got a degree in business management, this is quite a long time ago. We learned about how to be a manager in a company. You learn about certain things, but you don't learn much about money hosting finance costs. And even then, finance classes in college are really, really boring and, in my opinion, needlessly difficult as well. But in general, it can simply be a good policy not to even discuss financial matters and other people just to avoid controversy, to avoid confusion, keep things simple, save, invest and wait. It's like the Hippocratic Open doctors, right? First, do no harm. That's what I say you should do in investing on the next one. I want to say a few things about reinvesting all your dividends and your profits, and how much of a different that's gonna how much of a difference that's gonna make for you over your investing like time 6. Lesson 5 Automated Reinvestment: so this should be obvious based on everything that I've been saying to the course. But I don't want to skip over it. All of your gains. Whether their profits from selling stocks or real estate um, unrealized capital gains dividends that are paid into your account, they should be reinvested back into the market. A huge majority of all of the stock market's gains have been from reinvesting. It's You shouldn't take that money out of the hot profits. I'm gonna spend it. Just have the have and have the policy of reinvesting and buying Mawr and Mawr assets. Lifestyle people is a very common thing that happens to people when you get increase in salary or you have more earnings from your business. People tend to say, You know what? I work really hard. I deserve a nicer car and at your house and after this night that we tend to spend more money. But you can have this habit instilled in you of simply taking the extra profits and reinvesting them, and it can make a huge difference and you becoming, ah, a little bit well to do or becoming totally financially independent or even wealthy because as the level of your assets grows. As as we all know, it's pretty basic. I shouldn't even have to say this, but it starts to compound more rapidly. Imagine the difference of having $200,000 doing at 10%. That would be $20,000 in a year. We have $2 million eventually and having that same 20% in $2 million.20 percent is 40 or $400,000 in one year. Your assets can go up $400,000 in one year if you have a 20% year. I've been talking about like averages like 89% avenues for the stock market indexes. But some years, the average in next the it goes up 30% in 2013 I believe it was. The market went up 30%. So let's say you get a little lucky and you happen to accumulate. Um, you know, one or $2 million because you've been following this policy and reinvesting, reinvesting, reinvesting and it seemed so slow. It's so boring and so arduous and all of sudden boom, you hit a year where the s and P 500 goes up 30% and you made hundreds of thousands of dollars that year doing nothing. It will have been because all the previous time, all of the accumulation I mean, you could even have, let's say, three or four years where the index produces zero bitter, Let's say, for example, that happens and you say a $10,000 a year, five years? Okay, so you got $50,000 now and you're thinking, man, I do a lot of learned to do. I've been saving all this money. I've been investing it for, uh, five years, and I only got the exact same amount that I would have had, But then the next year you have a 20 or 30 or 40% gain. This is the thing about markets. You don't know when they're going to go up and down. That's why you have to disbelieve your money invested in there because you can have a whole bunch of years of basically zero growth and then have a 50% spike and all of a sudden that $50,000 a $75,000 or that $1,000,000 is 1.5 $1,000,000. So that's something you have to understand. The money needs to be in there for you to catch that growth, and it can happen very, very quickly. Sometimes markets go up 10 to 20% in one month. So you gotta have the money in there. You're trying to time the market. You will feel horribly if you decide to sell your investments and then the market goes up 10% in a week or whatever you know. So a simple thing to do is just don't buy and sell. And don't move your money around too much. This is another reason to behave that way. If you choose to invest in dividend paying stocks, you should know that dividends are taxed and a regular brokerage account, too. So when you get dividends, usually taxes on those dividends. Now you have that money in an IRA retirement account, like an IRA for one kid. Whatever. You don't pay taxes a little, so you should definitely used to be a tax shelter. Retirement accounts as you can. But if you are investing in a broken account because you've already maxed out your retirement accounts and you should know dividends are test and so you invest in companies that don't pay dividends, but they tend to reinvest all their money back in business for growth. And you just let that money compound. Then you will never have to pay taxes until you sell. And even then, it will only be on the profit that you made the cost basis of your original investment. Of course, it will not be taxed. This is the reason why I warned about this company. Berkshire Hathaway never paid a dividend because they want to take all the profits and reinvested because that's what they do is their business model. Is capital allocation is taking profits from the businesses and buying other profitable businesses or buys stocks improbable businesses? That's not what all companies do. Their business model is investing business small so they don't wanna be paying up money dividends. They know they can be reinvesting in a higher turn out better for the investor in that company not to do it, but for other companies at a slow growth company that Coca Cola or Disney or Apple now or whatever. It's a good policy for them probably to pay out a dividend because they're not gonna be going 2030% more. They're big giant companies, but they're very probable businesses. And, you know, if you wanna retire and you want to have nice income from stock like that, then it's a good policy for a lot of those companies to pay two or three or maybe 4% dividend out to shareholders. So maybe that you get 5% appreciation per year on that business, and you also get 3% dividend. You're getting an 88% return. It just know that you're paying taxes on dividends. A lot of people don't realize that. Okay, so good ideas, instantly making automatic contribution to your investment accounts every month if you can . So that means that you can set it up so that your brokerage account that makes automatic control from checking account into your brokerage account. And you just say, you know, on the first day of the month, it takes this much out every single month, and then he's automated. You don't want to make any decisions of all every month used by the index, and you're on autopilot basically, and that's a really smart way for a lot of people. Teoh to manage their their money. So I recommend doing that on. Do you know, you just think about your investment contributions. That's just another expense, right? You gotta pay your cable bill. You gotta pay the water bill. And then you could think about is ago. Oh, yeah. And every month I invest 20% of my income into stock market, and then it's just a habit. You don't think about it all just autopilot and then use getting richer over time. And you're just not having to use any of your cognitive load at all. It's a really good way to go about doing these things in your stress level low and your outperforming. Paradoxically, most investing professionals, which I know again it's hard to believe is the truth. Even two or $300 per month will eventually add up to tens of thousands through compounding interest over a few years. There's something called the Rule 72 which is a nice a little shortcut to help you understand, like how fast your money will double at different interest rates. This is a handy little rule of thumb, so it says that investment that earned 7.2% it will double every 10 years or another way you can think about is an investment that earns 10% will double every 7.2 years. So you kind of plan out like, Oh, I'm getting 10% average returns in the stock market that I'm gonna double of money about every seven years or from getting only 7% returns. I'm gonna double my money every 10 years. Now, that's assuming that you don't put more money in right. So if you take $100,000.5 stop, you know, stock market index and you get 7% over 10 years, then you will have $200,000. It will have double now. I also should say that even though long term average of the index is around Internet sent, there have been 20 and 30 year periods, like during the eighties nineties, where the index's average like around 13 14%. So a lot of people think that the future will actually have more returns, maybe only as low as 45% because we've got so much growth that such a long bull market after the great recession in 8 2009 10 whatever. But the fact of the matter is nobody knows what the return they're gonna be exactly. And you with long term, super long term average return is about 9% during the eighties and nineties. If you simply bought index and held it for those 2025 years, you have got 13 or 14% which compounds your money very, very rapidly. And that's the kind of money that would make you very, very rich. A lot of people who are investing in real estate and do other things that they simply would have put their money in the eighties into stocks and waited all the way until, you know, the two thousands, it would be super rich. They have done that and, you know, it wouldn't It doesn't take that much knowledge to know that you understand these principles. You understand his beauty market. You think it's pretty simple. I'm just gonna do this and the odds of you getting really good results. Maybe you're not gonna get 13 and 14% but you're almost certain to get pretty good results by doing this. So, you know, just have the policy of automating your investments and reinvesting all of your gains. And if you're worried about paying taxes because you let's say you have a large amount of capital and you're dividends that were being paid out are high, and you might wanna consider owning stocks that don't pay dividends so that you don't have to pay any taxes at all. And you just let your gains compound as unrealized gains that do not become taxable events . Generally speaking, if you want to maximize your investment gains, it is recommended that the younger you are the more exposed region of stocks at high growth sectors. Because the in effect correct and they go down, you have a lot more time than to rebound and catch up. But if they don't do that, you may end up getting very, very rich very quickly by doing this. And so it's kind of like the best chance that you have a 1,000,000,000 a lot of well. But of course, the closer you are to retirement, the less risk you want to take on more. You should focus on stable, probably dividend paying investments, even though you have to pay taxes on dividends. You know, if you own a stock like Coca Cola. It's gonna be very stable that you're gonna get, you know, 3% plus dividend on that. And you can pretty much take that to the bank and not worry about giving yourself a income in retirement. And so, uh, we call a lot of these stocks doing in aristocrats those companies that have been paying and doing it and raising their dividend with every single year for 2034 years. And even if the stock might go down, sometimes you're going to get this payouts dividend payout as income, no matter what. So closely automotive retirement, the more you want to be thinking about stable, dividend paying stocks and vice versa, it's a general rule of thumb the way you should be thinking about things. So this, for example, some in their twenties and thirties. They may have 70 80% of their assets in the stock market and the rest of it in cash or bond . That's a really high exposure to stocks, I said the very beginning of this course. I talked about how you know you never want to be totally invested in the market, but when you're younger, you can have higher exposure. Maybe someone in their fifties or sixties may a Onley 60 or 7% maximum of their assets and maybe safer dividend paying stocks. And then the rest of the assets are in bonds or cash. Or maybe real estate with you own your own home. But in general, you wanna have a more conservative makeup because you need that light in the last you throughout retirement and hopefully that you are in a position where you know you could live off of those assets and you don't need a lot of growth when you're younger. Obviously, you have end of time to accumulate yet, and so you want to be more aggressive when we take on more risk. So they just sort of general things that think about depending on your age and what your financial goals are. But for me, personally, I tend to be a little bit on the conservative side, and I try to keep at least 30 40% of my assets and cash or bonds so that if stocks go down , I'm not too stressed out about it and in fact can take advantage by buying more stocks at cheaper prices and then if stocks go up. Of course I'm happy because I'm making money. My my portfolio is going up, and I just had to try to remind myself that, you know, even though I could have made more money if I would have been more fully invested, like some other people, I'm taking myself in the event of the market going down. So no matter what happens, I can see well tonight and I'll be OK. And that's the psychology of investing. In a nutshell. Basically, so you set your affairs up financially in such a way that you're going to win no matter what. It's not that hard to do once you learn the principles involved here. But most people haven't had it explained to them, and most people are confused by this subject. So on the next lesson, we're gonna go live more in detail about, like how much you really benefit when you don't pay taxes and a lot of fees of your investing strategy. 7. Lesson 6 Avoiding Taxable Events: so the key to successful long term investing and compounding of well is based on the idea that unrealized capital gains are neither taxed nor in cure fees. Most people this is really misunderstood. Don't realize that by not paying $10 every time you trade or whatever your fee is with your company and by not having to pay taxes on profits every time you sell and take profits that you are compounding your money much, much more forcefully. So, for example, if you make $10,000 on some stocks this year and you say I want to take those profits and yourself, let's say the year in that tax bracket where you're gonna pay 30% on those gains because they're not capital gains not long term capital gains. They get taxed as regular income. Let's just say that you held the stock for less than a year and you want to take the profits because you're worried that stocks were gonna go down so you pay $3000 off at 10,000 and you only have $7000 left. Hey, sold on a bad result. But then you decide. OK, I'm gonna reinvest at $7000. It took my gains. Now I'm playing with you know, the house's money, basically something that I mentioned before. You tend to get into the sort of a gambler's mentality. You feel like you're up, and so the money. Now you're not really risking its profit right. The problem is, if you would have left that money invested, he got $3000 more that you just paid in taxes. That could be compounding as well. And again, this goes back to choosing conservative investments in the first place that you don't have to worry too much about decreasing. And that way you can leave them compounding more forcefully over longer periods of time when you buy more volatile stocks or growth stocks or stocks and risk year. And it makes sense that you might want to take profits because you're worried that they're gonna go down and they probably will. But when you buy really, really stable stocks, like always of the example of Berkshire Hathaway again, it has to go up pretty slowly. It's really boring stock toe. Sometimes it seems like it just sort of stays of one spot for a really long time, one whole entire year. They only go one or 2% pretty boring. But it's almost certain to average seven or 8% or more over time, maybe even 10 or 11%. But no one knows for sure. But then all the sudden it will have a 10% year or 20% year, and it very, very rarely goes down. And in fact, when the overall market does go down because it's such a strong company financially, the found she just so strong companies that it owns air so conservatively financed, it's been known, has been called, you know, financial Fort Knox. Basically, what happens is that first half moon test out from the market a lot more during bear markets, when stocks were going down and during bull markets when stocks are going up. And so that's kind of a weird thing. You can really see it like OK, the stock market went down 20%. Berkshire Hathaway. We've got 5% that that protection of your capital is a big deal when it starts to compound again, because you're compounding out of this bigger base as opposed to having to catch up from this lower base So this is related to taxes, because when you don't take those capital game, you don't sell, and you let your money compound slowly. But surely you end up over time much, much better off and again. It has all the additional benefits of being less stressful, simpler, easier, etcetera, etcetera. So it cannot be emphasised enough that this investing style is both easier and by far has the highest probability of maximizing your returns with long term. It may be boring. Um, it's slow and steady wins the race. It's the tortoise versus the hare strategy, and strangely enough, when we try to push our capital too hard to get rich too fast, all you're doing is actually increasing the probability that you're going to lose money. And you really want understand this stuff? You should read the book recommended by Warren Buffet, which is the intelligent investor by Benjamin Graham, and he emphasized that you should read Chapters eight and 20 which talk a lot in great detail about some of these concepts that I'm summarizing for you guys in the court. So the difficulty lies in the psychology, basically doing nothing, and waiting through bear market is through periods of flat growth and ignoring the onslaught of the daily financial news. It's very, very hard to do nothing. Human beings. We're programmed to be active. We're programs to make decisions, to do things. And it's very strange sort of paradox that the best investing style is to do nothing. Now, if you want to make more money so you have more capital to invest, and you should be spending your energy working to increase your income so that you can invest by more assets. But don't spin your wheels trying to time the market and make your your investments game. You know, impossible returns that are not going to happen. Don't gamble with the money that you were so hard to stave. The thing to do is to increase your earnings, but decrease your risk of your investments. That's the style that will end up getting you wealthy Over time. Uh, get an investment profit $100,000 could be taxed at 35% depending on your marginal tax bracket and circumstances, which means you would pay $35,000 taxes. And he left with only $65,000 of the $100,000 game. But if you left this capital again in the market to continue compounding that, you would not, only not, Oh, the $35,000 you had to pay the government, but that $35,000 can continue to compound year after year after year, you know, at an exponential rate. So the numbers get big. You could just really see the difference is here. 10% of $100,000.10,000 dollars, but 10% of a $1,000,000 is $100,000. I understand of $10 billion is a $1,000,000 you know those the numbers that you wiped off when you pay taxes on his larger subs. And indeed, even when you pay taxes on the lower self because of lower sons, well now take longer to grow into the larger amounts. Hope that makes sense something. It's not that complicated, but people seem to misunderstand this and do way too much buying and selling, taking profits when they should be letting letting their money ride. So depending on your tax situation and your marginal rate, there could be many more benefits. Not having a lot of taxable events from investment gains and dividends. For example, if you earn over $3500 from any investment, you do not qualify for the earned income tax credit. Now. Granted, the earned income tax credit is basically for poor families that don't make very much money . You only get it if we don't make very much money, but it's still a rule. If you look your money, let's say you have some money saved up and you put it in stocks and you have. You have $5000 gain this year. You may not know that if you sold that you took that game, you wouldn't get the earned income tax credit you would have otherwise qualified for. So it's better if you leave that money invested. You know, if you sold stocks and so you have a 20 $20,000 game and that bumps you up into a higher tax bracket, then you would have been Justin told into a higher marginal tax bracket. It could put you up for up from being in a 25% tax back to being a 30% tax back. So not only are you paying tax on those games, but you're paying more taxes all of your income from that year. It's another thing to think about. You may trigger higher taxes on all over income by selling your investments, and so sometimes you know could really be hurting yourself and actually a lot more than you thought. Also, if you have student loans, which most people do and you use like an income based repayment program and showing investment games will increase your payment because it will increase the income that you're showing. So let's say, for example, that you bought $100,000 to go to college. Maybe you with graduate school whatever. For whatever reason, you got $100,000 in loans, and because your salary is a relatively low relatives, your debt, you're not paying very much on your loans. And then let's say that you, you know, from working really hard, saving up a lot of money. You have built up a sizeable portfolio. You want to take some gains on that, and you don't realize, Oh, shoot. I just showed $20,000 more income this year, and it triggers a much higher monthly payment for the next year because You have to re certify your income when you're involved in these income based repayment programs and you'll be paying more time. Student loves. So there's all kinds of repercussions that could be triggered for you financially by selling your investments when simple. At best thing to Dio, assuming that you made good decisions originally and bought high quality assets or simply bought index bonds, is to leave that money invested for as long as you can, ideally, until you are retired and Onley use money You didn't need to live. Finally, if you happen to use health insurance from the Affordable Care Act is also known as more commonly known as obamacare. The same thing is true, as with your student loans, so you show more income and therefore you pay more for insurance. So if you show less income because you are letting your investments grow as unrealized games, then you don't trigger higher payments for your income based repayment program for your student loans for your health insurance from obamacare, maybe from an earnings tax credit or even being pushed up into a higher marginal tax bracket. So letting your money compound without paying taxes without triggering taxable events and increasing your taxable income is a huge deal, especially over long periods of time. In one year, it can still be a big deal, but over 10 years or 20 years or 30 years, it could be millions of dollars when you let that money compound compound pap pap out. So it's really important that you guys understand that aspect as well. Now, in the next lecture, we're gonna get into a really, really important topic that a lot of people do not understand very well. And that is to compare and contrast investing in index funds, which we've been talking about, mostly there on this course, or to use what is called a concentrated portfolio. 8. Lesson 7 Concentrated Portfolios for Wealth Maximization: so I've been talking a lot about investing in index funds and not having to worry about actively managing a portfolio. However, I would be negligent of my duty if I didn't tell you the best way to outperform the index the way that people like Warren Buffett, it Peter Lynch, Paul Tudor Jones, Charlie Munger, Benjamin Graham, John Maynard Keynes and the other luminaries of investing that have become billionaires or multi millionaires by outperforming the market and getting very, very wealthy. So basically you have to logical choices when it comes to investing. If you aren't an expert, as I have been talking about the other course and you can buy an index fund and then just sit back, this provides you with diversification, passivity, lower stress and all the benefits that I've been discussing. Throughout the course. However, you do feel confident to invest in your own portfolio in order to outperform the market. It makes no sense to seek diversity in terms of building your own sort of mutual fund of 20 or 30 or 40 stocks. If you're gonna do that, you may as well just buy index and not have to do any decision making because you can't keep track of that many companies and that many businesses. This is a makes sense, so if you want diversification, just buy an index or e t. F or whatever. But if you want to out from the market, I think it does do very, very carefully analyzed small number of outstanding businesses and then Onley invest in those small number of businesses. This is called focus investing or having a concentrated portfolio. It means that you're gonna own Onley between about five and 10 stocks. But it allows you to more easily understand what you were doing and to more easily track of what's happening in those companies. And those companies are out growing in the market. That's how you get outstanding return. So in other words, you're increasing the probability that you're either going to outperform the market or if you're wrong and your assessments, you're increasing the probability that you may underperform the market asses. Most people can't do this very well. All the experts say you up diversification, diversification, diversification, and then you should just buy in next month's. But if you're really good at valuing of business, you know how to do it. You know how to read Evangel statement To understand accounting. You understand how much a company should be worth, and you should be able to look at a business and say, OK, it should be worth this much. And the stock market says that it's worth this much. Oh, my evaluation for this company, my objective valuation of what we worked to a private buyer trading at, say, five times one year's worth of profits. That evaluation is a lot higher than what the stock market is currently valuing it at, and you have a big margin of safety. It was the term used by Benjamin Graham and Warren Buffet have a margin of safety. It's like this idea in engineering. If you're gonna build a bridge, you want to be able to carry far more weight on that bridge, and you're ever gonna have on that bridge because the bridge fails, people die, right? So you want to be able to carry, you know, 1000 tons across the bridge, even if you're never gonna have more than 100 tons on at one time or whatever marks of safety engineers, you sound enough. But in investing, we don't do that. We don't want to think that way, but the same thing is true. You want to be buying stocks when they're training below the intrinsic value or the real value of the company. And now, if you can learn how to do this, like people like Warren Buffet have learned how to do this is how you can get very, very wealthy investing in the stock market. So you want to concentrate your portfolio only carefully. Futuro stocks. Let's say, for example, you identify Microsoft and Amazon and a few of the really truly powerful tech companies that were started in a nice oracle. Intel. You know those guys coming you Onley invested in life 56 Those companies, Cisco, whatever you would be fabulously wealthy right now, right? You wouldn't be a multi multi 1,000,000 or maybe even a billionaire, right? If you were lucky enough to, let's say, Oh, Facebook when it was brand new and you just held Facebook all the way until now, you'd be really rich, right? So the key is knowing which companies are going to achieve growth for a long time, and at what valuation you know is it were the two invested. So this is the art of investing it. And investing is more of an art than a science, even that you're doing with numbers. And, you know, business schools and financial professors have all kinds of formulas, like formula discounted cash flows and everything that you can use the real world of companies and all the variables that go into a given company's profits and the forecast for their future profits. It's so complicated because it's a complex, adaptive system. There's too many variables interacting with too many other variables. It makes it very, very difficult to do this. But if you can do it because you can identify the value of the business and there's a discrepancy between that value and the market and you given time, this is what Warren Buffett has done his whole career, and you will outperform the market and you will compound your money at a very rapid rate. So just one simple example where you don't have to be a total genius to do this. It's not. It's not that complicated. It's difficult because you have to be able to wait until opportunities arise or above. It talks about how good investing's is not a creative process where you just you know, you look and you find a business. You go, here's one and you and you invested tons of money. It's a discovery process where you basically it have to be opportunistic and wait, he says. You have to wait for a fat pitch. You know, investing. You don't have toe swing at every pitch. He's using a baseball analogy and baseball. You swing at three pitches that you miss all three, you're out done. But investing. Use that. The pitches go by. What the company's goodbye. Look at them. You don't have a sweet and you wait for a perfect fat pitch That's right in your wheelhouse , something that you understand and you can hit it out of the park. So Warren Buffon's partner, Charlie Munger, he had a bunch of money sitting around and some of the bank accounts of I think it was this company, Wesco Financial in California, cause they own so many companies because he's never fully invested, follows the principles that have been talking about in this course, had a bunch of extra money laying around in the market, and then when the financial crisis happened in 10,009 and all the banks were tanking. Once you realize that a bailout was probably coming in, the banks probably not fail even though they were trading at, like super low evaluations like trading like 23 times earnings training at like, half of what their book values are values, meaning the value of the assets minus all liabilities, stuff like that. You just took all the money that you know you like $100 million.102 $100 million or something. I think the accounts of a couple of his companies and they has bought the big banks, his bottle, big bank stocks because they were trading cheap valuation, it was obvious. And as long as they didnt go bankrupt, they were going to be worth many times what they were trading at in 8 4009 If they can just wait it out for, you know, a couple of years to three years is no way to know how long it would take for the valuations to go back upto whether to where they should be and for all the problems to get fixing all the bad debts to get to get, uh, you know, out of that system. But he just said he just knew that the intrinsic value of the bank obviously way higher and what they were trading at those super depressed prices during the bottom of that recession was with those dark dates in 2008. 2009 right? He just put the money in, and then lo and behold, a few years later, you quadruple his money. He made hundreds of millions of dollars in that case. And not maybe, you know, not all of us can do that or have have the, you know, the courage to put our hard earned money into situations that may seem really risking like that. That's just one example of these guys applying these principles and practicing with their preaching. That was a very concentrated bet. He invested a lot of money on, like, two or three bank stocks, and, you know, he couldn't diversify and put all that money into an index. But he knew that it was ah, high probability Bet you put it all in just a couple of income bank stocks and making a huge, huge, huge amount of money, and he would consider that to be not risky at all. Something will look at and say, Well, I was very risky, But the thing is, if you know what you're doing, it's not risky. You wanna have a concentrated portfolio, you know you're doing it because that's how you're gonna get really good returns. Don't know what you're doing. Then again, go back to what I've been saying by in this one. Now there is 1/3 choice if you simply find index funds too boring and you can divide your income among maybe an index fund and then by a few select high growth stocks and maybe you put most of your money into an index fund. But you take, you know, five or 10% of your money and you speculate with that, just just for fun. You know you might lose that money, but maybe you'll hit a home run. Maybe we'll get lucky and maybe you'll you'll make five times, 10 times your money. Who knows that could happen. The odds are you're probably gonna lose it when you behave in a way that speculative like that. It also creates bad habits and you. But sometimes you know, people just find it too boring despite index funds. So you put a small amount of money at risk, but you might get a large payoff is basically like gambling, and at least it gives you a chance to hit a home run and have a massive payoff. But when you do that, just know that your activities more like gambling. It's more like speculating that it is investing. And so that could be something that some people want to do just to keep it interesting. Um, and you know, not be bored. So instead of risking all your money on really risky investments, tryingto get rich quick. You can put most of your money into investments that you know are are stable and conservative and take a little bit of it and just kind of play with it and you'll still pay , you know, fees for trades and stuff. But, um, you know, again if if you get one really good winner by doing that, you interviewed about Microsoft or Amazon in the nineties and then held up stock for a few years and you have gotten pretty rich, even a small amount of money. So in those cases, it wouldn't take very much money toe get a really good result. It's just so hard to know what the result is gonna be in those cases. Obviously other West, of course, everyone just be rich. Okay. And then the next lesson we're gonna look at how important is really on. Lee used money that you're not gonna need for a long time. 9. Lesson 8 Only Use Money You Don't Need: a lot of people that I talked to you about investing, say to me things like, Well, what about if the stock market crashes or what if housing crashes and they act as if we have to have all of our money always invested all the time? This is a really interesting assumption to me. I don't see why people think that there is no other alternative. You could literally have no money in the markets, 10% of your money in the markets, happier wealth in the markets or you can have all of it in the markets. But there's a sort of weird assumption that we're gonna have, like all of our assets, invested in some asset class all of the time, of course, and this is not the case. And people like Warren Buffett, Charlie Munger, who I have inciting throughout the course. They constantly make the point when asset prices were high. They tend to let cash build up so they can take advantage of opportunities. And when markets dio crash from time to time, even though we never know when that's gonna happen. Hence the whole lesson on having your money in the market timing the market, not trying to time the market. It does happen, and sometimes it's really obvious. I mean, if you're flush with cash and a crash like 10,009 comes along, you don't really have to be a genius to know that asset values are really cheap and you can pretty much just put your money into the market and wait for things that bounce back. Same would be true of the Great Depression, and the same would be true during any of the bear markets that we've had in between. There have been seven or eight pretty bad bear markets, pretty much one every decade or so, give or take a few years. So if you don't feel great about where the market is that right now, it seems like it's expensive. Then you know, just take some of your money off of the table. You know, just don't invest in the first place. If you need any money for the next year or two, let's say toe live off of some people. Call that an emergency fund. Simply don't put that in the market. I mean, it sounds so basic, but the amazing thing is that people don't follow this advice. I mean, you don't have to worry about losing money over the long term in the markets. If you don't use money that you need, just use money that you don't need immediately. And if the market goes down, you don't have to freak out because you put that money into the market with long term. Anyway, just know that if you invested prudently originally by buying index phone or a house, for example, then you're gonna be fine over time. You don't need to follow the daily price fluctuations, so that's that's the main point. Of course, most of us will find it stressful. Toe watch, stock prices every day, and they're very few of us can look at that every day and not have it bother us, and not only when the stock prices were going down, but even when they're going up and start to get excited to go look at it has made you know $200 a day or whatever, but it's the wrong way to think about it. We shouldn't be following the fluctuations in the values of our investments, as if we made money or lost money. We should be basically tracking the performance or the appreciation of our investment over long periods of time. Warren Buffett talks about, you know, five year time periods. Anything less than a five year time period is too short. See the rial results of our investment because markets take a long time kind of sort everything out and to value and asset, whether it's real estate gold or, um, a stock, you know it takes time. The short term the market is a voting machine, racking the things like news and opinions, that sentiment in the long run, it's, ah, weighing machine. It will be efficient. It will be accurate over time as all the information kind of gets digested by all of the players in the market, you know? So if you find a stress on the watch stock prices every day, as most people do, you maybe more student to maybe not even invest in stocks. Maybe you should buy real estate in step, because then you won't be having to, you know, you will be tempted with looking at the price of your stock going up, down, up and down, which, of course, it will do every single day, whether it will go up one or 2% points or just, you know, a few basis points. It's still something that might stress you out or, you know, unnecessarily excites you. If you have a really great day in the market and then you start thinking, Oh, shut so much stocks and take profits or Shell would've been Leave them in there and then they go down tomorrow. It's the very sort of anxiety producing thing. And so if you just don't like that and maybe buy real estate instead and then you still don't worry about, of course, the downside of real estate, in addition to the fact that what I already mentioned before about having to use leverage because we basically you can't despite fractional shares of a house. And that's you buying to something about a real estate investment trust, which is like a stop for real estate investments, we get really high dividends what you totally can dio when you're basically buying a stock . In that case, you just buying a stock in a in a real estate vehicle. Um, the downside of those states that's not liquid, right? So you could buy this giant asset, and if you want to sell it, maybe it'll take you a few months. Or maybe you do run into a bad housing market and a bad time to sell and you run into problems, right? Stocks. Even though stocks might down rapidly, the market was bad. At least you could sell them immediately, so they're totally liquid. This is also one of the reasons why stocks in it sell at high prices there. So liquid. There's just a lot of value in being able to get in and out of them whenever you want to. But if your disposition is such that stresses you out toe, wash the David price fluctuations as a lot of people are, then maybe buying real estate is it's better for your better fit or your personality. Basically. So just something to consider using money that you don't need to live on. It's just much easier. Be patient. It's much less stressful, and I may sound a little bit repetitive, but I'm talking about these things. But this courses with the psychology of investing and in order to feel good and have better health and get good results with your investing. You should be behaving in such a way as to make it, uh, less stressful. Have less anxiety because that will make you also not do stupid things. You make more rational decisions. We make the best decisions when we are calm when we feel good when we don't feel fear. This is one of the reasons why I, like the best salespeople, use, um, compliance tactics to try to make you feel urgency to make a decision, because then you'll tend to feel like, oh, the clock is ticking. If I don't make a decision now, I'm gonna lose out on the opportunity. This is what, like people who sell timeshares and vehicles like that, they use time pressure on you to try to make you purchase something, and so that that stress makes you make, um, a bad decision in most cases and overpaid for an investment. So anything that we can do lower our stress and not worry about our money that's invested in these markets, which can be chaotic, they are volatile will be a good thing in the long run us that just means that not being fully invested, not using money that you need to live. You don't have fear of missing out. Don't fall victims in syndrome Where Oh, no. The market kept going up on Lee. I had more of my money in the market. I would have made $10,000.50,000 more dollars. A terrible way to think. Because you could you just torture yourself endlessly. No would have Could have should have you gotten Just get rid of this idea that maybe somebody else is getting richer faster than you. Or maybe you would have a lot richer if you have done, you know, a B or C. The thing is, you want to behave in such a way that no matter what happens, you will be able to sleep well at night. And usually that means to be only partially invested so that if stocks go down, you can opportunistically by I'm or if you want to or does not be bothered by the fact that you didn't have all of your money, you know, in there or if they go up, maybe you would have made mawr having more money at risk. But at least this way, you win. Either way, you still get richer but you didn't have to risk your whole entire nest egg to do so. You know, this also has the benefit of, you know, you not making you have to check your investments daily, weekly or even monthly. Sometimes you may not even have to check your investors yearly. I mean, if you're invested in an index, you don't necessarily have to even check the value of that index. You know, like I mentioned before that Charles Schwab studies show that people who, like, literally forgot they had brokerage accounts for years end up getting the very best result . The volatility is just so hard to ignore. It's very stressful, especially there's a bear market and you're softly down 20% or something. It's so hard not to sell. You're scared. You think? What if it keeps going down? Oh, my God, how long is it gonna take for that? We need to go back up. But if you're just not really thinking about it, and you just put this money aside, it's obviously easier to deal with. But of course, what we're really interested in is getting the results of building wealth, and it has that effect as well so just the overall result of this style of investing on your health well being, it really can't be overstated. It's an easier way to invest, and it's a better, more effective way to invest in general. Simply put, is the best way to invest for the vast majority of people. Unless you're Warren Buffet or Peter Lige, Or remember, you know, name the famous investor on the list. And yet, unless you're one of them, chances are you want to simply buy and hold index fund or real estate, depending on your personality, and then basically do nothing after that. And then that is the hard part. It's simple, but it's not easy. This stuff who was easy. Everyone would be rich. Everyone have money. We all know that. But the whole point is this is what you know. History of markets, a history of psychology and people's behavior and markets has shown to be true. This is what we know. We know this from the data we know this from the history of, you know, as we know this from the statistics. That is also what all the greatest investors basically preached. So the whole thing is being able to ignore all the noise and follow this pattern of behavior. And if you do so, you will end up. You know what really great results. And that's pretty much all there is to it. For many people, the only way to get started building an estate for investing is to become more frugal. I haven't talked too much about making money in this course because we're all different, different situations financially. Some of us may have 10 or $20,000 a month, Uh, salaries from being doctors or having a business. Some of us may only make this barely enough to get by and find it very difficult, save any money at all. But basically, if you look at anybody you build a $1,000,000 arm or net worth. Frugality came into the picture at some point. We spent less money than they are is long as you know, you are saving something and you're stopping away and you're investing in a productive asset, like the ones mentioned other course. You're going to be building wealth over time. You may not become millionaire overnight. You may not even ever become a millionaire, but even if you build up a network of, you know, a few $100,000 then you also get Social Security. You should be able to retire comfortably, maybe even retire early. At the very least, you have something to fall back on if there's an emergency or, you know, maybe you just want to take a year or two often working or something. A Tim Ferriss puts that he takes many retirements. He's a famous author who wrote The four hour workweek. You know, gives you options, gives you option out. And so, um, not enough can be said about trying to develop a frugal lifestyle. One thing you do is set a specific goal for how much you want, accumulate and let it compound on its own. You know, most people can save at least a few $100 a month. If you really try me, if you can't save three or $400 a month, then something is wrong. I mean, if you're working at a job and you can't say that much money if you need to find somewhere to cut fat, Um, you know the famous lot example. Give you expensive lot A's and you give up your cable bill. I mean, whatever it is to get started once you get to a certain point, maybe it's $50,000. Maybe it's $75,000. At some point, you could let that nest egg sit in the market and compound all on its own, and you don't even need to save any more money. I mean, I told you guys the rule of 72 earlier. If your money is invested at 10% double every seven years, so just think. If you can accumulate $100,000 and then it's leave it alone for 21 years, it will double three times, right at seven years times three years, 21 years it will double three times 100,000 doubling its 2000 don't think in its 400,000 and then doubling of third time will be $800,000. So, in 21 years of literally just waiting, if you bought in index and got average market returns once you saved $100,000 you have $800,000. That's just one example, or you could take 50,000 and then you have $400. But the point is you just got to get the get the ball rolling, get a snowball rolling. And a lot of people they misunderstand the nature of compound interest. They don't realize it. It seems like it's gonna take so long to be so hard. But once you build up a certain amount of capital, it will do the word on its own. I just wanted to make that point briefly. Okay, Next time, I'm just gonna emphasize even further how important is psychologically for you to get good results and to not follow the daily price fluctuations of stops. 10. Lesson 9 Don't Follow Daily Stock Prices: psychologically, this is one of the most damaging habits for your portfolio. This is why individual investors do so badly to follow the daily price fluctuations in the act. Is it the market is telling us? Oh, no, I've lost money or I've gained money. That's not actually what's happened, as Benjamin Graham taught Warren Buffett. And as they learned, the market is there for you to take advantage of not to take advantage of you. What that means is you are in the driver's seat. You can wait for advantageous prices before buying, and you gonna wait for advantageous prices before selling. The market is basically is coming and giving you quotations, offering to sell you shares or offering for you to buy share that certain prices every day . That's why it's called the stock market, right? It doesn't mean that the actual value of thing is correct. This is what a lot of don't understand the market and think about what's gambling. If you understand how to value a business or you understand the way that business valuation works, then you can use this to your advantage. And obviously, let's say you own a restaurant. Now you're gonna have sales, you're gonna have profits from that restaurant. You're gonna look at those probably monthly, quarterly yearly, and you have an idea about what that business is worth over time. If you look at the numbers, those numbers come in, right, But you're not gonna be able to change. You know the value of your business or how much you think that could be sold for on a daily basis is just is just unrealistic. But that's what the stock market does. It gives us a daily price based on so many transactions of buyers and sellers in the market place. If you understand that it makes a way easier to not panic and to realize you don't need to look at the prices of your stock, you need to check. They're going up and down on a daily, weekly or even monthly basis. As long as the businesses that you're invested in are getting good results and making a profit, hopefully growing profit over time. Then over time the stock will go up and you will be getting wealthier. Okay, so if you can break the habit of checking your stock prices every day, and I admit I find this difficult to do myself have to force myself because I know that it's damaging and at least the bad behaviours. It's one of the most powerful things that you can do. It just leaves the bad decisions and a lot of fear that is completely unnecessary. OK, as long as you own a high quality asset, which are shares in a leading company or good real estate, that asset will appreciate over time. It's never. It's literally never not been the case in the history of free market economics that asset values don't go over long periods of time. The scary thing is, if you buy, you know, a big asset like a house or a huge chunk of stock at the very peak of a bubble, of course, then you're gonna be waiting a some cases a very long time. Teoh make your money back, and that's the whole point of not buying things all at once. Now, when it comes to buying a house, you know you can It's hard. You can just buy it and chunks over time. But the great thing about buying a house is that you use leverages. We've already discussed and you're mostly using the debt from the banks. Will you have a mortgage? And if you do a 30 year mortgage, even if you buy it a bubble, we have a long time period to get your money back for that property to appreciate. And if you're living in it, well, you're also, you know, saving money on rent and all of those things that we all know about. So it's less risky than it appears, as long as you're buying stock in small chunks. That's why dollar cost averaging is so popular and touted by financial advisors, then things are gonna be fine over a long period of time. So whole point is an understanding economic fundamentals. We'll help you remain placid amidst market volatility, and there's really no reason to freak out or stress out. Unless, of course, you broke the rule that we talked about the last lesson and you were gambling with money that you needed to use for life, hoping that we could go up. You know, quickly it didnt happen. Then that could be very stressful. So please don't do that, Okay? This is why Warren Buffett trying longer state they have not made a single investing decision with any macro economic or political considerations in mind. So what that means is it doesn't matter what's going on in the news, whether there is a war or any of those things. They're just looking at the underlying value of a business. And if for whatever reason, the market is lowering the value or the price of that company, you know that stock and it looks like a really good value based on the probability that business, they will buy it. Now it may look to an observer like they're trying to time the market or that doing it because of some macro economic consideration, but they're not doing that. They're not doing it because of the news or because of a war or some something, a politician said. It just so happens that those factors may be causing the value of a company to go down below what they would consider to be its actual intrinsic value, and that's when they make their investments. So try to separate the noise, the news, the politician, politicians comments, You know what's going on in the world from the value of a company, and once again this is very difficult to do, which is why I recommend, and Warren Buffett recommends just investing in an S and P 500 index fund. That way you don't have to make any decisions. You have to worry about buying at a bad time. If you're if you're buying a few $1000 or a few $100 at a time on a regular basis, you're gonna get average prices, and you just don't have to worry about it. These guys, simply by high quality assets at good prices and then they wait years for compounding to do its job. They say the bill, you know, they take the results over a number of years, usually at least five years. And so that's done. Shocking view like five years ago. The results, um, that should, you know, it's good you took this course to learn that. You know, that's the time frames that we're dealing with when it comes to investing, anything shorter than that is speculating. You know you're buying and selling your training. You're hoping that your vestment grew up in a year or whatever. I mean, one year is actually an arbitrary time for him. I mean, who says that businesses should be getting a certain number of results or shouldn't a certain amount of profits or grow over a year. It's actually really arbitrated. Think about it. We have these reporting standards where every quarter, you know, fiscal quarters. Three months, we make reports or maybe you every month of businessmen, reports and things. But that's just giving you some results. When it comes to getting investment results in having stocks go up, it takes time for businesses to build accounts, get customers, have their marketing take effect. It all takes time. You know, Warren Buffett has a famous quote where he says, some things just take time. I can't use the baby in one month by getting nine women pregnant, right? We all know you can't change the rules of nature. It takes nine months to produce a baby. Well, the same thinking is true when it comes to economic results. It just takes time for a business to grow, to get customers and have you come more probable. So it's irrational to think that we're going to somehow get astronomical profits in some super short timeframe. And if you behave in a way where you're trying to achieve that. What you're doing is speculating or gambling and not investing. And, of course, that's risky. Most of the time you will lose money. You make it very, very, very lucky, just like you could win the lottery. But the thing is, you're probably not going to in the vast majority of cases you're not going to, it's stressful and you're likely to lose your money. So why don't you do the thing where probability is on your side? Invest with long term, not be stressed out about it and know that we're almost for certain you're going to build wealth and become financially independent eventually. I mean, it just it's logical. It's just hard to do because we humans psychologically, the way that we're wired is not to be patient. Were not wired to think about 20 years in the future. We're wired to think about today so we can survive. Produce offspring. That's the way that we evolved and that we were are wired to think so again. That's why we have these, um, evolutionary mismatches that make it really hard to be a good investor, which is all the more impressive when you think about how good some people are, like Warren Buffett, Charlie Munger set. So I mean, these guys, they know there's gonna be volatility, so they simply ignore the price fluctuates they just don't look at. And as long as you do that, you're not stressed out. Someone asked Warren Buffett. Often he checks the price of Berkshire Hathaway stock and he said, over every couple weeks or so, because when he cares, mostly about is how is the business doing in general over a longer period of time? The stock price is pretty much irrelevant unless he sees that, Oh, over the last, you know, month to Maybe it's gone down below what he considers to be the true value of it. Then he might buy some, and I'll be getting a good deal. And that's when he would be adding to stop. So they add the stocks as they go down, not as they go up, which is the opposite of what most people do, because when stock markets going up, we feel like they're gonna keep going up. It's a bull market, right? We follow trends, and that's a risky thing to do because you're actually paying more and more for an asset that maybe sales are growing. Maybe that's true that you know it's worth more and more over time, but you're also paying more. So it's a really tricky thing. Tryingto figure out what's the right value for this business? What multiple of earnings should I be paying for? And so that's what the margin of safety principle that I talked about before comes into play. The same way that you think about engineering is the same way that you should think about investing it. There's not some obvious margin of safety it business seem like, obviously, that you're getting a good deal, then it doesn't make sense To pay, for example, is like. That's like Everyone knows that when you buy a brand new car that you're over paying a little bit of the car loses 20% of whatever when you drive it off a lot. So it's a better value to buy a slightly used car, maybe one year old, maybe five years old. But we know if we're buying a five year old, um, Honda, let's say it's in good condition. We get a good price. What we know we're getting really good value for that car, right? You know, he is lost. No, there's not something wrong of it that we can drive for a really long time, and we're getting good value for money. You have the same value based approach when we invest in an asset, whether it's real estate or whether it's stocks. And just that very fundamental basic concept should help you not to over pay for things and then help you to be patient. Knowing you own something that has a lot of value is gonna go up over time as I bump into state that he only looks at the prices company stock about every two exits mentioned that some more examples of this principle. I've got some personal examples. My grandmother, actually, she inherited some stock from her father, and she never sold a single share of it, and she held it for 20 or 30 years. She inherited her 60 to think of her late sixties, and she has held it until she dies. She wanted to make sure that, um, my parents with the family and also my aunts and uncles of stuff, big family, um, you know that she was able to help them, but she didn't need it. She had a pension and everything that and it like, quadrupled in size. And I'm pretty sure the Onley stock that she inherit it was It was a utility stock used to be called Washington Water Power, but now it's called Vista. She's from Washington, Schuessler Visible Can and her dad used to work for that company, and he had some stock from when he worked there and she inherited all of it, and it wasn't a huge amount of money, but it, like like triple quadruple over the course of a couple decades. And she just just held it shouldn't do anything. And it made her pretty rich by most of our standards. You know, a lot of people probably would've wanted to catch that in or maybe use it. But I just think that was that was a good example, something I saw with my own eyes that wow, just basically doing nothing, and holding on to that really worked really well and it was just a average utility stock. I mean, it paid like a three or 4% dividend, and it went up a few percentage points on average every year that she probably got, like, a 78% return my mother money and shouldn't have to do a single thing. You don't have to make one single decision. I mean, all the all the dividends that came in, she just really reinvested. There was automatically and just bought more. And I think she had a financial adviser to do it for She just paid a guy to do that for and held, held all the money in an account with a financial advisor, and I shouldn't even need to do that. I mean, she paid him probably like one or 2% points of her capital from the manager for, But, I mean, really, she didn't She shouldn't have done that, should it is basically done it by yourself. But, you know, she just didn't want to worry about it all. And I think she came from a near when that was also more common. And we trusted the fiduciaries more than we do today. People that have ah fiduciary responsibility over, um, you know, our money, things like that. But anyway, I just thought that was a really good, uh, individual example from my own life. I have seen these principles in action and they work and you get really good results. And, uh, again, I can't emphasize enough how how awesome it is that you don't to make any decisions except for the initial decision to buy the asset in the first place. If you get into the habit, have the mentality of buying and holding, buying and holding You think you never sell. You never use money that you need and you never sell. You just hold it. You're gonna build Welcome. Your wealth is guaranteed basically, unless the history of the world economics all of a sudden changes tomorrow, which, of course, it's not going to dio unless we have World War Three or something and that in that case, um, money will be the least of our concerns. In a normal world, all this stuff will will bear out all right, The next lesson we're going to look at reading chapters eight and 20 of the intelligent investor because we're above it constantly prompts us to do so. If you want to understand how to invest just the basic fundamental principles, there are a couple concepts that have already mentioned that we're going to dig a little deeper into 11. Lesson 10 Read the Intelligent Investor: So the reason Warren Buffett recommends everyone reads, especially chapters eight and 20 of the intelligent investor that basically those chapters lay the foundation of what every investor needs to understand about any asset but especially investing in the stock market. They explain these all important concepts in a way that are very, very easy, understand, and basically it discusses how to deal with market volatility, which I kind of just went over the last lesson. But we're going to talk about it some or as well as a margin of safety principle, which we briefly discussed as well. So again, it's so important. Understand, this margin of safety is the idea that you should approach investing the same way engineer would approach building something like bridge you would never, ever want to have even close to the amount of weight on a bridge that is designed to hold because it's life or death, right? If you have too much weight on the vegetable collapse, people will die the same exact approach to be taken with investing. And so if you can't tell if you're over paying for an acid or not, that probably means that you are right. If you're asking yourself the question. Are we in a bubble right now? Our asset prices too high right now, The fact you're asking that question means that the answer is probably yes, because having a margin of safety, we mean the answer is obviously no. And again when it comes to the psychology of investing, this is really tricky because the best time to invest, you know, in our generation would have been in 2008 and 2009 after the giant real estate and stock market crash. Right? That's when Warren Buffett and Charlie Munger was super active, and they had a whole bunch of dry powder, right cash, ready to buy up all kinds of companies and stocks. And it was obvious that prices were so low that there was a huge margin of safety. But what we're most people doing, most people were freaking out because they were fully invested, and it was a dark time. It seemed like the market was never gonna bottom. It was a crisis. We didn't know whether or not the government was going to bail out the banks, etcetera, etcetera. But the thing is, if you understand valuation, it would have been really obvious to a rational person that there would have been a huge margin of safety buying bank stocks and basically just buying the S and P 500 index at a time when the market was that, like almost record low levels, you know, decades low levels, right? So that's why you have a margin of safety. It should be obvious. That's a good deal. I mean, it's the idea of getting, you know, buying a dollar for pennies. Sometimes if you buy a property at an option, you know you're getting a 20 or 30% discount. Sometimes people we'll get really lucky people will come up to, ah state sale or to an auction, and you'll be bidding on your own. And you have cash you condone get really, really a really good deal. So that's kind of the same concept, okay? And so you think about investing in the same way should be obvious that you're getting more than what you paid for. This is why things like Cryptocurrencies and even gold are controversial. If they're so hard to value, how do you know how much an ounce of gold should be work while you have tow uses, the basis is the history of gold prices. It's hard to say, like how much is golden mean worth in the future. We just don't know. It's based on, you know, Usually gold is a hedge and goes up because other assets go down. And so that's kind of the whole rationale for buying gold and cryptocurrencies. People talk about all the stuff that the Blockchain could do and that the technology could do but try to understand. Like how much one Bitcoin is worth is like impossible to deal with. What's it based on? But see real estate and stocks are different because they're based on profits, because there they're based on a value adding productive asset. A house can be rented out to somebody, and you could measure those cash flows. If you have a house for $100,000 you rented out for $500 a month at $6000 a year, you're getting $6000 a year in income at 6% per year, Plus whatever appreciation you're gonna get, you're probably going to get somewhere around nine or 10% over time on a housing rental in most examples, very concrete numbers that will build wealth that will get you rich over long periods of time in the stock market is the same kind of thing. You look at a company, you look at his cash flows, you look at his growth, and then you look at how much the whole company is training for and what its work, and you simply look for good deals. I mean, it's not that complicated. I guess it's simple, but it's not easy. You have to have the discipline to follow through on this stuff. Okay, so we seek some sort of margin of safety when considering investments. It usually means paying less than the asset is actually work, which is why this style of investing is something called value investing. A lot of times investing is broken into two missiles growth investing when you're buying super fast growing start up companies, tech companies, etcetera or value investing where you're trying to buy, maybe a boring company that's not growing that fast, but it seems to be trading at away, lower valuation that it should in actuality is Charlie Munger has said all good investing is value investing just because of stock is expensive doesn't mean that it doesn't have a margin of safety, and it is growing 50% per year. It might have great value. And if a stock is really cheap and it's training at lesson book value, it still may be over prices. It's a crap company, right? So you have to look at the company and the look of the results. And again, you know, it's difficult thing to do. You have to be trying to do so, and it's something that you can't do very well or you don't wanna have to do. Once again, that's a recommendation. Buy an index fund. Yes, you knew what I was going to say. So there are many ways, though, to approach this. You can even buy a company stock when it's training. Unless in his book Value book value was the term I just used. It just means the value of all the company's assets finest its liability. So if a company owns, you know, a $1,000,000,000 of property, plant and equipment and cash and maybe some things in the book value also include, like brand value and goodwill, things like that that you subtract out all this debt and all of its liabilities. Maybe all of us accounts payable, whatever. All the liabilities and whatever is left over is the book value. So if a company's book value is a $1,000,000,000 but the market cap of this company's stock that trades on the stock market is on Lee $500 million you go. Wow! The value of the actual tangible assets of this business, if it was broken up and sold off in a bankruptcy, is double what it is. Trading for the stock market. Well, that seems like a huge margin of safety. And this was what Benjamin Graham recognized way back in the 1933 the Great Depression. He became a very conservative investor because he lost a lot of money in the crash of 1929 as most people did. And back then, the stock market was so depressed. The all you basically do was find all of these companies that were trading it like half their book value. Now, far fewer companies will be trading at big discounts to book value, although everyone's will you find something? Are you still use the same type of approach, whether using your book value or whether using it a low p e. The whole point is you gotta try to find, like, what is appointment at what? You're getting more value for your money than the company's work. Um, so Warren Buffett and Charlie Munger that this is why you noticed that Berkshire Hathaway. They're always letting cash pile up as the value of businesses and stocks and all assets goes up. They stop buying. They buy less and less and less. And then as the markets go down, or if they crash as hog heaven day for them because they've accumulated all of this cash and they had to put it to work and they buy all these assets of very, very cheap valuations is also the same thing. That the thing was Rothschild banking, Family of Europe did in the 19th century is a famous quote by one of the leading Rothschild family members that said the time to buy is when his blood in the streets they were big war profiteers. But the whole point was that assets really, really cheap through these wars. There these tumultuous times during the French Revolution, etcetera, etcetera and that's when they were the most active. Buying all these assets. Of course, this is again the exact opposite of what most people dio most people bias markets go up and they are liquid when it crash comes. And still, instead of taking advantage of a decrease in market prices, everybody loses their shirts. And, um, it's a sad thing to see um, but understanding this basic concept of having a margin of safety when you buy an asset can help to protect you from this happening and then combining it with the idea of only using money that you don't need, always having some cash. All of these things have sort of combined together to make it so that you're pretty much guaranteed to get good investment results, right, safety of principal and adequate return over the long term. And, um, you know, that's all there is to it. Basically, um, you can also buy a stock when it's growing rapidly, and it seems virtually certain to continue to do so as far as the eye can see. So somebody's okay to pay a lot for a stock. I think Amazon is a good example of this phenomena. of those who bought and held Amazon early on in its history, like in the 19 nineties became like, really, really rich. Obviously, no one has a crystal ball. There was no way to know that this company was going to continue to grow for years and years and years and years and years. But if you had your finger on the pulse of the Internet and how it was developing, as some people did, and they thought that there was a lot of value and how fast Amazon was growing and how they were taking market share from other companies. If you understand how to do that analysis, then you're buying value. Even if you're excusing or paying a really high price for a stock, Long was growing rapidly. It's a difficult thing to do. It's a very difficult thing to do. But if you have the ability to do this, it could be the way to build the most wealth. Uh, you know, overall, by having a concentrated portfolio to talk about previously and then buying high growth socks like this, it seems risky to do. But if you understand how to value businesses, it's not that risky and this is what you should do if you want to get really rich. You took focus portfolio with only 5 to 10 stocks, which is exact opposite what the planets are always preaching diversification. Diversification versus cation. If you know what you're doing because of your portfolio of growth stocks, do you want to get rich? If you don't know what you're doing, you're not sure you have to ask that question. The answer is that you don't you should do what now? By the index, that is correct. So another thing to do is, if you want to maybe try and outperform the indexes. Just a little bit is to buy blue chip companies like Disney, Apple, Boeing, Caterpillar Big and companies that don't necessarily really old. But you know that really established that they have a strong Baran that are not going to, you know, obviously go bankrupt anytime soon. They're very profitable, even if they're not necessarily growing rapidly anymore. You know, they usually they'll pay a dividend. Usually they'll still be growing there. Sales and revenue and profits by, you know, single digits on average, and you could almost guarantee you're getting a good result It's kind of like building your own mutual fund. Essentially, eso. Most of those companies considered have a margin of safety safety super due to their large size and a strong position in the market. I mean, you know, it's basically impossible to unseat Disney, even building a brand for over 100 years. Same thing is true for Coca Cola. Nike blue chip companies like that. You invest in those it again. It's not that sexy, not that exciting. You're probably gonna achieve pretty slow growth, but you're almost guaranteed to also achieve financial independence. So just remember, that's our goal in the invest. And again, psychologically, it's much easier. It is very unlikely, Put it this way is very unlikely that buying and holding one of these companies will not produce inadequate investing. Return over a long period of time. That's the way to think about it, right? Disney is not going bankrupt. Apple is not going bankrupt. They are producing profits. You're in. You're out. You know, basically forever. As far as the eye can see, people going to buying planes, people are gonna be using heavy equipment and these air leading companies in the fields Yes , they have competitors? Yes, sometimes market share might be taken away from them, um, from time to time in certain areas. But they bounced back. They have cash. They have talent. We have brand names. They have weak, almost huge competitive advantages. And they're going to keep making money for a long time. So, you know, buying blue chip companies and developing your own sort of mutual fund your portfolio. If you just you just find indexing to be just a little bit too boring. Well, then this is another a safe way to invest over the long term and general trying to push your capital too hard in order to beat the market. It's likely to result in the exact opposite, you know, results, which is that you are likely Teoh lose money if you try to do that by Warren Buffett says that it's pretty easy to get well to do slowly, but it's very difficult to get rich quick. And if you keep some of those you know these ISMs, these buffet ISMs, he's Munger ISMs in your mind. It can really help to guide you as you make decisions with your money and in general, a few decisions, you have to make it better. Um, it's easier psychologically. It's better for your results. Helps your your health and your stress levels. And so, in terms of the psychology, the psychology, excuse me of investing, it's the way to go. So I was gonna kind of reiterate all of this and go over it one last time and our final lesson. 12. Lesson 11 Conclusion: So the whole point of this course and I really want you guys to take away from this is that understanding psychology will make you it far better. Investor. It will help you sleep well at night and enjoy better health. It will lead to better decisions, fewer decisions, and it will end up making you wealthier while you take fewer risks and have to make far fewer decisions. Overall, essentially, psychology is at the heart of investing, and scholars are only now. I started to understand what people like John Maynard Keynes, Benjamin Graham or Buffet and Charlie Munger and others have known and taken advantage of for decades. Finally, the scholars has basically figured out that we have to be looking at this stuff because it doesn't make any sense that these guys were getting such outsized results. Outperformed the market year in and year out, using strategies that go against what we call the efficient market hypothesis, Uh, which is taught and financed schools, and it's basically been proven to said to be wrong at this point because it doesn't take behavioral finance and psychology into account at all. Buy and hold. Investing in general is by far the best investing style. I mean, it's really the only true way to invest because all the other behaviors have discussed in the financial media really more akin to gambling or speculating than investing. Buying and holding, basically, is investing. Investing as such is any activity that is certain to lead you, preservation of capital and an adequate return. That's Ben Graham's definition from 100 years ago. Okay, preservation of capital and an adequate return. Don't be greedy and investing, trying to be greedy. These losing money, being conservative and not expecting miracles is the way to go. That was Charlie Munger who said that being conservative and not expecting miracles is the way to go. He's a billionaire, okay, so he knows of what he speaks. And while it may seem like a slow and steady wins, the race is really boring. And you don't have that much patients. Well, something will become millionaires with the strategy, so it will get you the results eventually and an adequate return. Give me defined as any return that will help you reach your financial goals in the long run . So I mean that that's, you know, define herbal like you when you decide is an adequate return. You know any return that outpaces inflation could be adequate. But long term inflation rate the United States around 2% in that case, and maybe even a 45% average compounded return over the decades is adequate time. That will probably make you wealthy up to retire. Um, you know, if your money doubles every 10 years at 7% well, then maybe it will double every, you know, 11 or 12 years at 5%. That's not a bad result. It's a lot better than losing money, right? So you could find yourself what you think it adequate returns. But we know that buying indexing foot and excusing index funds. As I've been saying throughout the course, when average you eight or 9% if we use the historical average, so investing, the whole point of this course for you guys remember, is that you are usually your worst enemy. We have loss aversion. We tend to buy high and so low. It's just the way that we haven't been wired due to evolution. It works against us people like Charlie Munger and Warren Buffett. It constantly said that people with high IQ's are often the worst investors. It's more about discipline than intelligence, more about behavior, patience and discipline than it is about being super smart. Some of the most intelligent people are the worst investors because it's about your behavior. It's not about being a genius, and what matters is controlling yourself and not doing something stupid and what, what time understand, she says. All we're trying to do is be consistently not stupid, but it's harder than you think. Basically, they're not trying to be geniuses, but they look like geniuses because the results, the track record that they have over the decades, is just phenomenal. It's almost unbelievable. But if you just listen to even what they say is, they're not even trying to get 20% return. They they ended up getting 20% returns, which is almost hard. Fathom what 20% compound returned to do for your money over like 30 or 40 years. That'll make you you either a multi millionaire or a billionaire, even if you're starting out really small amounts of money. But their whole approach was to be conservative, to not make mistakes, and when you do that you end up getting really good results. It was kind of paradoxical, but that's what we have learned. Okay, So I hope you guys go out there and take this to heart. Be careful with your investing. Don't buy into any scams or anything that is touted by you know, someone selling you something or someone in the news. Take money that you've earned from your hard work that you've saved, invested conservatively and wait for those investments to grow. And if you do that, you're almost guaranteed to get an adequate return and achieve financial independence. So I hope you guys enjoy the course and good luck with your investing.