Starting Investing

It’s easy to start investing well.

In Defense of Fat & Muscle

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Lean woman in fat pants

Fat gets a bad rap but it’s amazingly efficient for storing energy.  Having no fat is a serious and painful genetic disorder.   Muscles let us do things and live our lives; nobody talks down muscle but that’s a different thing from maintaining that muscle.

But we do things as nonsensical as eliminating all fat and losing all muscle and that’s what I want to talk about in celebrating Frank Armstrong Day.  It isn’t a national holiday (yet) but together we could make it happen!  Consider the success of  International Talk Like a Pirate Day.

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A Frustrated 401k Advisor

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Figure wearing a tie, carrying a pen, and showing a piece of paper
Image by Peggy und Marco Lachmann-Anke from Pixabay

I talked with my banker today, a young guy, who used to work for a major stockbroker.  He moved into banking after the frustration of seeing people not make the most of their 401k opportunities.

I asked him what advice he’d give to a young person just starting out.  It’s pretty good advice for any of us.

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Why is a stock worth anything?

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Two colored question marks among gray ones

Why buy a stock? Why is a stock worth anything? You can eat food–that’s worth something, you can live in a house–that’s also worth something but what about stock?

I’ve been running a personal survey for some time asking this question and most people provide one of three answers.

If your answer is:

  1. “I don’t know” — Keep reading and you can add knowledge to your honesty.
  2. “Because I can sell it to somebody else” — Don’t kick the can down the road, you need to know why that “somebody else” or you should want to buy it, so keep reading.
  3. “I don’t buy stocks, they’re not safe” — Read the answer to that next article, and read about stock safety and if investing is gambling, but you’ll get part of the answer here, so keep reading.
  4.  If you answer anything else you’re in a tiny minority so please write a comment; I don’t want to leave anyone out.

The real answer is: because a stock gives you money.

An important question is how it does that. Companies sell services and products. That makes them money. Owning a stock means you are an owner of the company, so a fair share of the profit belongs to you.

A logical follow up question — how does that money get to you. There are two ways: 1) a company pays you a share of the profits–that’s what a stock dividend is. 2) a company makes money and grows to be more valuable–now it’s worth more. Ultimately reason 2 only functions because reason 1 exists. I.E. Eventually you always want to get money, not just the thrill of owning a bigger company.

Another important question is: How should I invest?

To be fair, there’s an alternate view–my buyer is the source of my profit.

There are two variants of that belief.

  1.  The buyer is a Stupidly Trading Oddball Other Guy Entity (STOOGE) so he is buying too high and you are the Savvy Market Understanding Guy (SMUG). But the STOOGE thinks you are the STOOGE and he might well be right. In any case, you have made the stock market a casino and will have to endure the odds being against you and pay a commission. The decision on the buyer’s side is often made by people with multiple full time analysts–are you willing to spend 80 hours a day in research? A big buyer’s supercomputer is housed inside the stock exchange so it can react in microseconds. Exactly how fast are you?
  2. “But wait!”, you say, “I sell it to him because he thinks the price will go up, and he’ll sell it to someone else who thinks the price will go up.” This is the Greater Fool Theory, which we can thank for the Crash of 1987, the .COM bubble of 2000, the Japanese asset bubble of 2001, the credit crisis of 2008, and more. Much like believing the world is flat, this theory has a long intellectual history, just not a good one.

I hope this helps you clarify some basic realities of the stock market. Given the choice between speculating with the odds against you and investing with the odds for you, which is better? Speculators are foolishly trying to extract money from each other, but investors simply benefit from the fact that businesses produce. Which is more likely to succeed?

Your 401k and the New Year

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Little man leaning on a stack of coinsWe’re in the season now, aren’t we?  The season of telling your employer your benefit choices for next year.

In belated celebration of Ted Benna Day let’s think through the 401k.  The 401k is kind of like the Social Security system except that:

  • Contributions are voluntary
  • Returns tend to be much better
  • The system is solvent
  • The money is always yours

Unless you’re sure that the in-the-red Social Security system is going to become much more generous than it is right now, you should use your 401k  to maximize your chances for a good financial future.

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Frank Armstrong Day

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Life Preserver floating in the water

What gift could make a difference if someone’s retirement plans were going nowhere?  What if their best efforts to win in the stock market kept losing?  Seems as if nothing short of a large pile of cash would make any difference, doesn’t it?  Let’s look at a better solution.

In January 1994 Frank Armstrong began serializing an investing book.  He had an interesting premise, that the conventional wisdom on investing was wrong.  Admittedly his only proof of that was that the conventional wisdom hadn’t worked.  In principle, the things he said should have been known.  Every brokerage and mutual fund had access to the same data he used.  The difference is that he let the data teach him, instead of trying to find some once in a blue moon event in the data to justify his preferences.  He was way ahead of his time, pursuing big data.  He crunched the numbers to find the mutual fund managers who delivered top returns year after year.  His great discovery:

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