How Should An 18YearOld Get Started In Investing

Post on: 21 Май, 2015 No Comment

I was in a similar position once. Here’s what I did:

Read The Intelligent Investor Investor by Benjamin Graham. This is your go to and will give you a good frame for how to think about investing (like an owner) and how to think about the markets. Graham is considered the grandfather of value investing and was Buffett’s direct teacher. Try to get the one with the Zweig commentary because he updated it for today’s environment.

Then read Margin of Safety by Seth Klarman. who has done incredibly well leading the Baupost fund since the late 80s. It expounds mostly the same ideas because Klarman follows Graham’s teachings but also has his own touch that is quite different from anyone else. It’s very hard to reverse engineer Klarman’s plays. This book is also great because of its near current examples (early 90s).

Then one more book and that’s You Can Be A Stock Market Genius by Joel Greenblatt. Terrible name but great book because of all of the special situations (these aren’t unique, but are a way of identifying specific investment plays like spin-offs or mergers) it details and how to take advantage of them/what to look for.

Ok, that’s three books which should take

2-3 months. After that, start investing in things you know and understand. If you don’t understand anything, then start researching.

But while doing it, the best education you can get is to be reading the Buffett Partnership Letters and then the Berkshire Hathaway Berkshire Hathaway Annual Letters. These span 40+ years and are a goldmine of investing and business education. I strongly encourage this last step, especially for people new to investing and those without the time to focus on anything but their industry of choice.

The correct answer is to put about 90% of your money into the Vanguard S&P 500 ETF and about 10% in 10-year U.S. treasury bonds .

Here’s why:

You can’t outsmart the market. There is a gigantic industry dedicated to calculating the correct value of each common stock, bond, derivative, etc. They do a very good job—their salaries depend on it. If GOOG is priced at 1134.89, that’s your best guess for the current value of one share of GOOG. The investment bankers who set the price at 1134.89 know everything you can legally know about Google, and if you know enough to think GOOG is mispriced, then you could probably be arrested for insider trading.
Mutual fund owners can’t outsmart the market either. Owners of mutual funds claim to be smart enough to beat the market, but they aren’t. About half of mutual fund owners beat the market, for the same reason that you win half of your coin flips. They don’t make their money by outsmarting the market, they make it by outsmarting you. They take a small fee from you when you give them your money to invest, so they care more about people thinking they’re smart than actually being smart. (Often, they buy stocks that have recently done well and show you pretty graphs about how those stocks beat the market in the past and therefore will continue to do so in the future—a blatant lie.)

You lose money whenever you buy or sell. You can’t buy or sell a stock at exactly the listed price—there’s something called a “bid-ask spread” that makes every trade a little bit bad. If you can buy GOOG for 1134.89, you can only sell it for 1134.88. This is because the “true” price of GOOG is probably something like 1134.88263, but it’s illegal to list prices that aren’t in cents. So if you buy or sell, you’re losing a fraction of a cent for every share. If you have a significant amount of money in your portfolio, every time you sell out of one company and buy into another, you may be losing hundreds of dollars.

Diversification is good. Every company has a chance of disaster, so investing in any one stock is a risky proposition. If you want to make money if tech companies do well, you don’t want to invest in just GOOG—what if their HQ is flooded? Instead, you may want exposure to a large number of tech stocks. But even that isn’t completely safe, because some major world event might hurt all tech stocks! The safest thing to do is to be invested in a large number of big, well-established companies that have a low chance of failing and cover a lot of diverse sectors, tech and otherwise. Averaging over a lot of stocks gives the same expected return for much lower risk.

Fees are bad. There are fixed costs involved with moving money around, and you can’t invest in hundreds of companies on your own very easily. Mutual funds and ETFs will gladly invest your money for you—for a fee. Remember that no fund owner is markedly better than any other, so don’t accept anything more than the lowest available fee.

There’s always a possibility of catastrophe. Even the safest common stocks have some risk, so you need some extremely safe assets. If you put all your money in stocks in 1928 or 2007, no matter how well you diversified, you would end up with a huge loss a year later. That’s just how investing works: no risk, no reward. If you want to have some money in the bank when disaster strikes, put some small amount of your money in very safe assets that won’t crash, like government bonds.

These facts lead to a clear course of action: passive investment (no buying or selling) in a market ETF (a fund which diversifies as much as possible) with minimal fees.

The Vanguard S&P 500 ETF invests your money in the 500 largest companies in the United States, for a fee of 0.05%, compared to the industry standard of

1%. This fund has historically outperformed three-quarters of mutual funds, which means that mutual funds are worse than a coin flip compared to the market average (because they buy and sell so much).

And to prepare for the worst, it’s prudent to stick something like 10% of your money in the world’s safest asset, U.S. government bonds.

If you trust rich men in suits more than the above logic, this is also the strategy Warren Buffett recommends to casual investors in his latest letter to shareholders.

NOTE: It’s been pointed out that this answer is rather U.S.-centric, which is true. The points made above still hold, but you can likely increase your reward-to-risk ratio by diversifying even further with foreign indices and government bonds.