Five Reasons to Let Others Invest for You

Five Reasons to Let Others Invest for You

I’m all about getting educated about money, finance, and stocks and making your own investment decisions.

Sometimes, however, there can be some sound reasons for letting others invest for you instead of doing it yourself.

Over the last four years, I have blogged and made videos and content about making your own investment decisions.

But this week, I took a very important step in a new direction. I got a preliminary yes from 10 partners who are going to let me invest their savings through my new investment firm, Grünbaum Value Invest.

All of them would be able to do it on their own. In fact, 8 out of 10 have taken my 2-month long value investor course.

They are well informed and know how to select wonderful companies and invest in them.

So why do they choose to let me do it instead of doing it themselves? Because it makes sense.

In this blog post, I want to give you the five main reasons that my partners let me manage their money instead of doing it themselves.

1. Too Busy to Get It Done

Some of them have a full-time job, small or large children, a hobby, a house and maybe even a summer house as well.

Some partners would actually like to spend some time researching companies, but they can’t squeeze more time out of the week. It is already a completely juiced lemon.

As one of the new partners said to me:

“I have a baby, and we just bought a house. There’s still a lot of work in the house. I can’t see when I’ll have time to sit down and get it done.”

2. Too Nervous to Handle It Yourself

Warren Buffett says you don’t need to have a very high IQ to be a good investor.

The right mental attitude is far more important. Investing requires a calm mindset.

If you are very nervous when it comes to money, it may be a better idea to remove yourself from the immediate decision of buying and selling.

Money-nervous people tend to buy and sell at the wrong time because they are driven by fear. Fear of losing out and fear of losing.

As someone told me this week, “I get very nervous whether I’m making the right decision. What if the company goes bankrupt? What if all the money disappears? Even the thought of having to pay taxes makes me very nervous.”

This might make some people smile, but it’s no laughing matter to feel this way about money, bills, and investments.

Some people get uncomfortable just paying a restaurant bill. That type rarely becomes good at investing.

3. Need to Focus on Something Else That You Are Building

It’s not quite the same as not having time.

This is about the luxury of reserving your time for something you know you are even better at.

One of my new partners runs a successful business. He told me:

“I want to put my time in the business because that’s where I make my money, and I can make a lot of money there. It makes more sense to put my time there and let you handle the investments.”

4. Not Satisfied With an Average Result

One of my new partners has inherited some money that the bank has managed for the past 20 years. The bank has made a profit from managing the money, but the savings have stalled.

The verdict is very clear.

“It’s quite disappointing,” she says about it.

This comes as no surprise to me. I’ve talked to a lot of people who have been disappointed with the way the bank manages their savings.

They’ll often invest in a mixture of bonds and stocks. The bank clerk will ask the person about their tolerance towards risk, and most normal people will say that they don’t like too much risk because no one likes the thought of losing all their money.

This means that the bank will place a large part of the portfolio in bonds and in a low-interest environment, which is a lousy investment.

Let’s say they get an annual return of 4 percent and charge 2 percent in fees. That means there is only 2 percent left for the investor.

After inflation, this actually means your portfolio is shrinking.

5. You Do Not Want to Own a Bite of the Whole Market

Today’s popular DYI investment advice is to invest in Exchange Traded Funds (ETFs) that follow a stock index.

Following this advice, you will quickly own a small bite of everything.

If you buy a fund following S&P 500, you become a co-owner of 500 US companies.

Few people stop at one ETF, as this passive investing school advocates spreading over many investments.

Most people take this pretty far and buy many different ETFs. That means they end up owning shares in thousands of companies. As a result, they own a bite of the whole market.

It’s like going into the supermarket and saying you want to buy one of each item without looking at what you place in your cart. Do you get black oil, weapons, Russian companies, and companies that use child labor? Yes, you do.

If you want to be a responsible investor, it’s necessary to select your investments, just like a responsible shopper at the supermarket. Turn it over and look at what’s in it. Then look at the price. Is it fair?

Imagine half of the customers in a supermarket automatically bought one of each item in the shop regardless of the price and the quality? What do you think would happen with the prices?

Yes, they’d explode to an unreasonable level because they can sell anything. The index types buy no matter what. That is exactly one of the reasons behind this massive bubble we are in the middle of.

You Can Both Be Informed and Choose to Outsource the Process

If you choose to outsource the process, it doesn’t mean that you aren’t able to be a good investor on your own.

Something surprised me when I had conversations with my partners-to-be. The vast majority of them had taken my 2-month long value investor course.

Of the ten partners in the investment firm, eight are former course participants.

I have taught them how to analyze wonderful companies. Why spend time and money learning about value investing and then leave the decisions to me?

Because that makes the most sense to them, and in fact it’s a win-win situation for all.

As one of the new partners explained:

“I have in no way regretted taking the course. The way you have taught us to analyze a company gives me a feeling of security. I have confidence in the method. I just don’t have the time for it.”

It is a win-win situation to have informed partners.

When an investor is informed about the process of value investing and believes in the method, it means they can sleep peacefully at night.

It’s also a great advantage for the investment company to have informed partners who knows that a dive into the market is a great opportunity to the firm – not a threat.

They will be calm investors who can ask the right question at the right time.

To learn more about my investment method, you can download my book right here.

 

Ten Key Takeaways from Charlie Munger’s Daily Journal Talk

Ten Key Takeaways from Charlie Munger’s Daily Journal Talk

A few weeks ago, Charlie Munger answered questions at the Daily Journal’s general meeting, which is an event that many value investors look forward to.

They do so because Charlie Munger – like his friend and partner Warren Buffett – is one of the best stock market investors the world has seen. He is wise and knowledgeable.

Since his speech at the Daily Journal, Charlie Munger has resigned as chairman of the board where he managed the Daily Journal’s investment portfolio for 45 years.

In other words, it was most probably the last time Charlie Munger went on stage to do a Q&A for the Daily Journal investors.

This week’s blog post reflects on his response and gives you the ten most important takeaways from Charlie Munger’s last talk as chairman of the Daily Journal.

But beware, what Charlie says and what Charlie does reveals a mismatch.

1. Munger Views China as a Society of Modern Capitalism

Charlie Munger’s discussion of China is confusing and contains conflicting messages.

The Daily Journal invested heavily in Chinese Alibaba, but recently it has become public knowledge that they sold half of their shares in Alibaba at a loss.

Why the change of heart?

We don’t know yet.

Yet, at the Daily Journal meeting in February, Charlie Munger only gave green signals about investing in China, even though the big divestment had already begun.

What did he say about China?

He is very impressed with how China has fought poverty and created prosperity in 30 years by introducing their own form of capitalism.

“China is a big modern nation. It’s got this huge population and this huge modernity that has come in the last 30 years,” he said.

He praises the agricultural revolution. The Chinese realized that farmers produced 60% more grain if collective farming was abandoned.

“And they just changed the whole system. I greatly admire what they did. I think Deng Xiaoping is going to go down as one of the greatest leaders that any nation ever had. Because he had to give up his own ideology to do something else that worked better,” he says.

2. He Trusts the Chinese Not to Pull the Rug Away

When you buy shares in China, there are some special risks. You’ll probably be investing through ADR (American Depositary Receipts), which means that you only indirectly own shares. There is a risk that the Chinese government can decide that ADRs are not worth anything.

The Chinese government can also decide to nationalize a whole company – they are communists after all – and your investment will go to zero.

To such threats, Charlie Munger responds:

“When you buy Alibaba, you do get sort of a derivative. But assuming there’s a reasonable honor among civilized nations, that risk doesn’t seem all that big to me,”

Whether the war in Ukraine has changed his view of honor between nations, we do not know yet.

3. He Sees a Greater Risk in Getting Stuck in Cash

The US government has been printing money on a large scale since the coronavirus pandemic shook the world.

High inflation has followed.

The risk of losing money due to inflation is a real risk.

“If you hold a depreciating currency, that’s losing purchasing power. On balance, we prefer the risks we have to those we’re avoiding,” says Munger.

It is of course confusing when he says this while simultaneously making a huge selloff of Chinese Alibaba. Why doesn’t he just say that they are selling Alibaba? Because revealing it could make the stock price drop further, make it hard to get rid of and make the Daily Journal lose more money on it.

“We disclose what we have to under the rules because we don’t want people to know what we’re buying and selling. So we tell everybody what we have to under the rules and we keep it confidential until then. That’s our system,” he says.

The clarification will come later. But for now, take note. They are selling Chinese stock, not buying.

4. Crypto Is (Still) Beneath Contempt

Charlie Munger is notorious for speaking out against crypto and calling it “rat poison.”

That is his clear and official position. That hasn’t changed much.

“Well, I certainly didn’t invest in crypto. I’m proud of the fact I’ve avoided it. It’s like, you know, some venereal disease or something. I just regard it as beneath contempt. Some people think it’s modernity, and they welcome a currency that’s so useful in extortions, kidnappings, tax evasion, and so on.”

He adds that he admires the Chinese government for banning it.

On the whole, he seems very impressed with some of the major brushstrokes that the Chinese government can take because it is a totalitarian regime. Whether it’s to introduce a one-child policy or ban crypto.

5. He Proposes a Tax That Would Make It Difficult to Speculate in Stock and Make Short-Term Gains

Some people use the stock market as a gambling den, he says.

There is a contradiction between that and those who try to think long-term and create security for themselves even in old age.

He would make stock less liquid, probably by a higher tax on short-term gain.

“If I was the dictator of the world, I would have some kind of attacks on short-term gains that made the stock market very much less liquid and drove out this marriage of gambling parlor and legitimate capital development of the country. It’s not a good marriage and I think we need a divorce.”

6. He Steers Clear of Any Predictions

He doesn’t try to guess how an index will develop. He focuses exclusively on good investments in individual companies.

“I don’t have any opinion about which index is better at a given time. I never even think about it. I’m always just looking for something that’s good enough to put Munger money in, or Berkshire money in, or Daily Journal money in. I figure that I want to swim as well as I can against the tides. I’m not trying to predict the tides.”

7. He Sees a Bubble, a Drunken Party and Socio-Economic Hangovers

He refrains from making predictions, but he still has an opinion about the overall state of the market and what could go wrong. He believes there is a bubble and an excess that drives it all up.

“Everybody loves it because it’s like a bunch of people at a party having so much fun getting drunk that they don’t think about the consequences. We don’t need this wretched excess. It has bad consequences. You can argue that the wretched excesses of the 1920s gave us the Great Depression and the Great Depression gave us Hitler. This is serious stuff.”

8. He Doesn’t Keep Cash

What does a person do when they see a bubble, great dangers and inflation ahead and they don’t believe in crypto?

What is the answer?

Cash?

Charlie Munger rejects this:

“In my whole adult life, I’ve never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find. I don’t think I’m going to change now. The Daily Journal has used up its cash.”

9. The World is Driven by Envy – Not by Greed

There is a huge dilemma: even though people are better off financially, they are not feeling better.

“The world is not driven by greed; it’s driven by envy. So the fact that everybody’s five times better off than they used to be, they take that for granted. All they think about is somebody else having more now and it’s not fair that he should have it and they don’t.”

He says he has conquered envy on a personal level.

“I can’t change the fact that a lot of people are very unhappy and feel very abused after everything’s improved by about 600% because there’s still somebody else who has more. I have conquered envy in my own life. I don’t envy anybody. I don’t give a damn what somebody else has.”

10. Keep It Simple

Many companies and organizations will be more efficient if they trim down.

Generally, there are too many meetings that make it harder to make decisions – not easier.

Companies have become “fat”, and most are more effective on the other side of a serious diet.

“Many places, after they run out 30% of the excess costs, they run better than they did before,” he says. 

He offers the example of Heinz, who has a directors’ table worth 600,000 USD and Costco, who has one worth 300 USD.

“The excess just creeps into these places. Of course, it isn’t good,”

He also snorts at the over-consumption of wealthy individuals.

“Who in the hell needs a Rolex watch so you can get mugged for it?

His advice to young people is simple: “Don’t go there.”

You do not need all those things at all.

“To hell with the pretentious expenditure. I don’t think there’s much happiness in it. But it does drive the civilization we actually have. And it drives dissatisfaction,” he says.

If you want to learn about investing like Charlie Munger, you can download my investment book Free Yourself here.

 

How Warren Buffett Ran His Early Partnership

How Warren Buffett Ran His Early Partnership

If you invested with Warren Buffett in 1957, and until his partnership was dissolved in 1969, an investment of 10,000 USD would have grown into more than 160,000 USD.

If, on the other hand, you had invested in the US stock index Dow Jones, it would only have grown to a bit more than 25,000 USD.

Warren Buffett began investing for friends and family in 1957, and he got a stunning 25.9% compounded annual return.

This is referred to as the Warren Buffett “partnership.”

How did his partnership work, and what can we learn from it.

What can be copied? What did he do?

Here are the ten most important takeaways.

1. You Can Start Small

In 1956, he set up his first partnership.

The partners consisted of seven friends and acquaintances: his sister and her husband, an aunt, his father-in-law, an old roommate, the roommate’s mother, and Warren Buffett’s own lawyer.

That’s it.

These seven people put in 105,000 USD, which corresponds to about one million in today’s value. Buffett only put in 100 USD.

More partners were gradually added. His old professor Ben Graham closed down his fund and pointed to Warren Buffett as an option.

In early 1957, the different partnerships he ran amounted to 300,000 USD. This corresponds to around 3 million USD today.

What can we learn from this?

It’s fine to start small with friends and family. People will be attracted when you do well.

  1. He Didn’t Have a Track Record

He had studied with and worked for Benjamin Graham, but Warren Buffett had no real track record himself. 

He still had to prove that he was able to manage other people’s money.

Benjamin Graham recommended him, but only one or two took the bait initially because he looked like an 18-year-old kid.

As the money manager Lou Green said at the time (as quoted in Roger Lowenstein’s book Buffett: The Making of an American Capitalist),

“Graham-Newman can’t continue because the only guy they have to run it was this kid named Warren Buffett. And you’d ride with him?”

3. These Were His Terms

One of Buffett’s first outside partners was a urologist named Edwin Davis.

Here’s the deal they cut:

  • Davis, as a limited partner, would get all of the profit up to 4%.
  • The remaining profit would be shared like this: 75% to Davis and 25% to Warren Buffett.
  • Warren Buffett didn’t get any management fee, which was and still is very unusual. A hedge fund today usually takes a 2% management fee of the whole amount and 20% of all profits. This means that Buffett would get no money to cover the costs or nor salary if he didn’t make more than 4%.
  • Davis could only withdraw money once a year – on the last day of the year.
  • Warren Buffett would only make a yearly summary of the result and disclose nothing about how the money was invested.

4. This Was His Goal

Warren Buffett’s target was set relative to the Dow Jones stock index. In the beginning, his goal was to beat the Dow Jones by 10%.

Starting in 1967, when the market was a strong bull market, Buffett became nervous. From then on, he aimed at beating the Dow Jones by 5% or getting 9% in average annual return – whichever he hit first.

5. This is How Well He Did

In his first full year, 1957, he got a return of 10%, while the Dow Jones fell 6%.

I’m curious – so how much did he earn in the first year of investing other people’s money?

The first 4% was “free,” so he only earned 25% of 6% of 300,000.

That means he earned 4,500 USD. In the beginning, running the partnership was not a fat deal.

This is how it went afterwards:

1958: + 40.9% against Dow Jones +38.5%

1959: +25.9% against Dow Jones +19.9%

1960: +22.8% against Dow Jones -6.3%

1961: +45.9% against Dow Jones +22.2%

1962: +13.9% against Dow Jones -7.6%

1963: +38.7% against Dow Jones +20.6%

1964: +27.8% against Dow Jones +18.7%

1965: +47.2% against Dow Jones +14.2%

1966: +20.4% against Dow Jones -15.6%

1967: + 36% against Dow Jones 19%

1968: +59% against Dow Jones 9%

1969: + 7 % against Dow Jones -11 %

If you had invested 10,000 USD in the Dow Jones in 1957, it would have given you a profit of 15,260 USD. If you had, on the other hand, let Warren Buffett invest your savings, it would have given you a return of 150,270 USD – even after Buffett’s pay.

His partnership had an average annual return of 29.5% against Dow Jones 7.4% in the period.

(All data from Roger Lowenstein’s book Buffett – the Making of an American Capitalist)

6. He Was Frugal and Worked From His Bedroom

Warren Buffett was very concerned about keeping the cost of the partnership down.

He did the bookkeeping himself and worked from the family bedroom to save money.

It wasn’t until 1962 that he rented an office and hired a secretary.

Also, Warren Buffett didn’t use many experts.

He probably felt that outside input from experts confused him more than it clarified matters.

He has made major acquisitions without the help of experts. Other funds would conduct due diligence. He did his own due diligence in his mind and settled matters with a handshake.

7. He Educated His Partners

The purpose of the annual letters to his partners seemed to be to keep their interests aligned with his.

As many of the partners were friends, family, neighbors, and acquaintances (plus a growing number of outsiders), the tone was informal.

He spoke to them as one who teaches his disciples. He has said somewhere that he imagined he wrote to his sister.

The original partnership letters are a really worthwhile read even today.

He also invited the partners home for dinners in groups, evenings that the partners looked forward to.

8. His Investment Ideas Were Kept Secret

Benjamin Graham gave all students and co-investors plenty of stock tips, but Warren Buffett didn’t.

He treated his investment ideas as trade secrets.

At one point, he was so secretive that he didn’t even talk about work with his wife Susan.

If a partner showed up at the office unannounced to ask about the investments, they would be thrown out of the partnership.

Just like that.

There were no exemptions.

9. He Saw Stocks as Businesses

He avoided trying to predict how the stock market would do.

He also avoided being influenced by other people’s analyses and opinions.

He analyzed the long-term perspectives of each business – not the stock movements.

He assessed a stock based on whether he would want to own the entire company without being able to sell the stocks again.

He asked himself if he would buy the shares if he were forced to buy the entire business.

He also asked himself whether he would buy the shares if he landed on an island and couldn’t check the stock for ten years.

10. His Portfolio Was Unusual and Concentrated

He sometimes bought entire companies that were not listed on the stock exchange.

This was unusual for a fund manager.

He also invested large amounts in individual companies.

At one point, 40% of the portfolio was invested in one share, American Express.

What about spreading the risk?

Warren Buffett calls diversification “risk management for dummies.” He believes in being thorough and focused.

Knowing what you invest in is better risk management, he says.

Want to learn how to invest like Warren Buffett? Get my e-book right here.

 

 

 

Five Steps to Get Prepared for a Market Crash

Five Steps to Get Prepared for a Market Crash

Shares are falling, and it’s making headlines.

In the media, different experts predict an impending crash.

Does that make you nervous?

You don’t have to fear a meltdown in the stock market. You can actually prepare for it and use it to your advantage.

Here are five things you can do to prepare yourself.

1. Make Sure to Tidy up Your Portfolio

You need to take a good look at your portfolio and make sure you have the right mix of stocks and other securities.

Some companies are doing better in a stock market crisis, while others are doomed to crash. The so-called cyclical companies will be among those who suffer the most. Cyclicals shares can be found in everything related to transport and construction.

 Stocks with an unrealistic price level have the longest way to fall, so make sure to check valuation versus price on the companies in your portfolio.

Maybe you’ve stopped rooting for some of the companies but keep them just because you invested in them once.

A portfolio has to be reviewed and cleaned up from time to time. Just like your closet. Just like your bookshelf. Just like your fridge.

You need to make sure you are mainly invested in companies that you believe in in the long run.

2. Build Savings Pots

It’s said that “cash is king,” and this is especially true in a crisis.

You need to make sure you have cash savings for unforeseen expenses in your personal finances – and also ensure you have money to buy more shares in your portfolio.

Let’s start with your personal finances. It’s important to be able to find peace of mind and to know for certain that you’ll manage no matter what happens out there.

You must build cash savings for immediate mechanical problems such as car repair or new refrigerator.

You also need to have security savings so you can manage for at least half a year should you get fired.

When crises come, they tend to hit the stock market and the job market simultaneously, and the combination of being fired and seeing stocks dive is a stressful scenario.

Make sure to have a buffer that keeps you calm so you avoid selling off in panic.

3. Find Your Bucket

“When it rains gold, reach for a bucket, not a thimble.”

That’s Warren Buffett speaking there.

What does he mean by that? He’s saying you have to be ready to buy stocks when good opportunities arise.

In other words, you also need to have cash savings that you can activate in your portfolio.

How much? That’s entirely up to you.

The truth is that when stocks plunge, opportunities arise that are very, very rare. You need to be able to take advantage of them by buying up.

4. Educate Yourself

It’s not just your investments that are growing with compound interest.

Your knowledge of investing grows exponentially if you make sure to expand it all the time.

You can expand it by reading blog posts like this, reading books, and taking investing courses.

Courses?

Yes, I teach value investing, and I recently launched my first live investing course in English.

Be sure to receive emails from me and join the Facebook group – and keep an eye out so you can sign up when I launch a new cohort, which will happen this spring.

5. Build Your Wish List

You need to know what you want to be invested in.

You need to build a wish list of at least 20 companies that you know you want to invest in if they hit a reasonable level.

Many people postpone doing the work now because they think they’ll do it when the so-called crash hits.

Well, that’s a bad idea. Most likely the opportunities will fly by you like rockets. It takes time to learn the tools and to find the wonderful companies.

It’s important to prepare for a possible crash by spending time today learning and researching those wonderful businesses.

There is actually no time to waste. Get started now.

In my e-book Free Yourself, you can learn a lot more about how to research companies. You can download it here.

 

 

 

Five Ways to Get Cash Flow to Pay the Bills With Shares

Five Ways to Get Cash Flow to Pay the Bills With Shares

How do you make money so you can pay the bills?

Most people go to work and give of their time, effort, and energy so they can collect a paycheck at the end of the month.

Most people make money this way because they haven’t really thought of any other way. It’s what they learned in school.

Then you learn that there is another way. That you can become financially independent through investing in the stock market.

If you were to live off your stocks and shares, how would you get money out of them to pay the bills? Because you have to pay rent and buy food for the family. That’s a question I often get.

How do you get a cash flow from stocks? Do you sell shares every time you have to pay a bill

In this blog post, I show you five methods to create a cash flow.

1. Sell Shares to Get Capital Gains

One method, of course, is to sell some of the shares.

This method works best if you only sell a few of the shares, so there is still something left that can continue working for you.

Hopefully, the shares have risen a lot since you bought them, giving you a good return.

If, for example, you invested $100,000 in Apple in 2018, which has grown to more than $400,000 since then, you can choose to sell some of the shares. If you sell to get $50,000 out, you still have $350,000 in Apple shares.

The problem with this method is that your net worth shrinks every time you sell some stocks to make a living from them.

Another problem with this method is that you have to have a fairly large fortune and a lot of patience to be able to become financially independent only by gradually selling shares.

2. Go For Dividends

When companies make profits, they can choose to pay part of it to the owners.

Let’s say you’re one of the three owners of an architectural firm. At the end of the year, the architectural firm made a profit after tax of $500,000. The firm can choose to pay the three owners $100,000 each and keep $200,000 in the firm for future investment (or just a buffer for bad times).

The same goes for listed companies. When they make a solid profit, they can choose to pay some of that to the owners, who in this case are the shareholders. It’s called dividend and goes directly into your account without you having to do anything.

A lot of people love this method, because it feels safe – and obviously you don’t have to sell any of the shares.

The main problem with going for the so-called Dividend Kings (companies that pay a lot in dividend) is these companies are often very mature. They choose to distribute the profits because they have difficulty finding new areas to invest in.

Companies that see a future with high growth, on the other hand, will prefer to invest in expanding into new markets, hiring new talent, inventing new products, and supporting the growth opportunities in any ways they see fit. So they’ll prefer not to pay dividends.

3. Sell Options

First a warning: Do not begin trading options without thoroughly understanding what it is.

It’s too complicated an area to explain in a blog post, but if you want to know more about options, I teach it in my value investor course, which I run twice a year.

In short, options are a type of contract that gives the buyer and seller of the option contract either the right to buy or sell 100 shares or an obligation to buy or sell 100 shares if they reach a certain price.

When you sell options, you can create an income without buying or selling your shares, which means you can become financially independent quicker.

4. Do Swing Trading

Swing trading is a method of buying and selling stocks in a way where you leverage the natural waves of a stock’s movements to get a cash flow.

You use technical analysis to find out when it’s a good time to buy and sell the stock.

It’s not the same as day trading, as day traders are often in and out of a security in one day (hence the name).

The natural wave in a stock’s movement can last for weeks or months.

5. Combine Value Investing, Options, and Swing Trading

If you combine options trading with techniques from swing trading, you can get a really effective way to create a cash flow so you can become financially independent faster.

If you go on to combine these with value investing, making sure to do options trading and swing trading on companies that you have taken through your checklist and analysis, you have a solid machine to create an income that you can make a living from.

To learn more about value investing, download my free e-book Free Yourself right here.

Five Tips to Stay Cool in a Nervous Market

Five Tips to Stay Cool in a Nervous Market

To be a successful investor you have to avoid the natural human instinct to follow the herd.

When the stock market goes down, your natural tendency is going to be to want to sell, and when the stock market is going up, your natural tendency is going to be to want to buy.

In bubbles, you should be a seller, not a buyer. In busts, you should be a buyer.

You have to have the discipline to stomach the volatility of the stock market.

Here are five key ways to develop the strength to go against the herd. 

1. Be Financially Secure

First of all, you have to have some savings.

You’ve got to feel comfortable that you have enough money in the bank that you don’t need what you have invested for many years to come.

Some people think it’s a shame not to invest every penny that they have. In their world, cash not invested is a waste. 

If that’s your thinking, I suggest you think about it this way instead: your cash savings are buying you something very valuable and specific, and that’s peace of mind and the ability to stomach market volatility. You should have at least two types of savings:

A. An emergency account for a car repair or a new fridge. This should be at least $5,000 that are always available.

B. A security savings of either three months’ salary or six months’ expenses. This should also be ready in cash. Apart from giving you peace of mind on the stock market, it will also make it easier for you to take some bold career moves and set boundaries at work. 

2. Don’t Leverage  

Don’t invest with borrowed money.

Most people know not to take an expensive bank loan and invest the money or speculate with the money. 

But there is a different way of borrowing money that is not so obvious to the eye. Many platforms let you invest with leverage – almost without you noticing it: it’s called a margin account. You should avoid this. You should never invest more than you have. 

Investing with leverage has destroyed many good investors, even good value investors who were peers of Warren Buffett.

Call your brokerage platform to make sure that you’re only investing your own money if you’re not sure.

Some more complex financial products contain leverage, but if you are just selling and buying stocks, you’re safe. 

3. View Market Volatility as an Opportunity

Just because something goes down in value after you buy it, it doesn’t mean you’ve made an investing mistake.

Keep your focus on the long term prospect. 

The stock market moves up and down all the time.

In the short term it’s a voting machine, whereas in the long term it’s a weighing machine.

It’s affected by all kinds of events in the world, and few of these events have anything to do with the business of the company that you are invested in. This is just the nature of volatility. But don’t worry, if your company is sound and has some competitive advantages, the stock price will straighten itself out in the long run.

If it’s any consolation Warren Buffett has also invested in companies just to see the stock price drop further. One example is The Washington Post which he invested in during the 1970s. More than a year after he initially invested in the newspaper, the stock price was down 25 percent.

This investment later turned into a profitable one. Four decades later, Buffett exited the position (the original investment of $10 million) in a tax free swap worth more than $1 billion.

4. Research Your Companies

Don’t buy a stock because someone in a podcast predicted high returns and a glorious future for the company.

Research the companies you invest in. Analyse it the way you would, if you were buying the entire company.

  • Make sure it’s a business you understand.
  • Make sure they are profitable. 
  • Make sure you like the management.
  • Make sure that the company has some kind of competitive advantage.
  • Make sure the company doesn’t have too much debt. 

It’s a good idea to use some kind of checklist. You can borrow mine here.

5. Pay a Reasonable Price 

The price of the stock should be reasonable compared with the earnings of the company.

I usually say ‘buy it when it’s cheap’, but I fear that many people will think a stock is cheap if it has fallen from a recent high, and that isn’t necessarily the case.

You really have to look at the value in the company and compare the stock price to that.

Let’s go back to Washington Post for a moment.

Warren Buffett had calculated that it was priced at 25 percent of the intrinsic value before investing in it. That’s like buying one dollar for 25 cents.

That it fell to 20 cents on the dollar does not make the original investment bad. It means you might want to consider buying some more since it’s an even better investment now. 

What if they have no earnings? Don’t invest in it then.

Companies with no earnings or negative earnings are too risky to invest in.

How do you know if the price of the stock is reasonable? If you want to learn how Warren Buffett calculates the value of companies, you are welcome to download my free e-book here.