# Investing summarized

*The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect anyone, and these views and opinions do not qualify as investing consultation or advice.*

Investing is committing money to financial instruments with the broad [purpose](purpose.md) of gaining a profit.

We technically "invest" when we [lose weight](body-2_diet.md), [organize](organization.md), [advance our career](jobs-1_why.md), and [succeed](success-1_why.md), but *financial* investing is strictly using [money](money-1_why.md) to make more money.

## Don't invest full-time

Start by build your wealth on your [expertise](professionals.md).

- When you don't have much money, you will receive dramatically more gains in learning specific trade-based knowledge and experience than in the returns the market can give you.
- Investing by [borrowing loans](money-2_debt.md) (made popular by Kiyosaki's Rich Dad, Poor Dad) will dip heavily into your returns, and exposes you to plenty of risk.
- Only look into investing *after* you've acquired some wealth.

Barring dividends, all investing is a [zero-sum game](math-gametheory.md).

- If 100 people each hold $100 in a small market, and one person makes $1,000 more, that person's money came from the other 99.
- Behaving above-average means you'll sometimes win, sometimes lose, but on average win more than everyone else.

While anyone *can* make investing a full-time lifestyle (and many people are greedy enough to try), great investors have 4 key elements:

1. A legitimate interest and [desire to learn](education.md) about the intricacies of investing.
2. Plenty of math skill, specifically regarding [statistics](math-stat.md).
3. A firm grasp of [economic](economics.md) history, including as far back as the Great Depression and South Sea Bubble.
4. [Emotional](mind-feelings.md) discipline and [stubbornness](purpose.md) to stick with what they know to be true.

A vast minority of people do *not* have all four:

- However, anyone can still invest casually if they simply have 1-2 of them.
- People can still find luck in the markets.
- Making investor groups with [friends](people-4_friends.md) can also offset some elements you may lack.
- *Anyone* can invest with money they're willing to risk.

## Start soon

Compound interest profoundly affects wealth over time:

- Most investors are [debt collectors](money-2_debt.md), and their returns become exponential over time.
- Even if you don't have much, invest as often and as soon as possible.
- Calculate out how much you must invest to reach your goals.

As you age, your risk tolerance must change.

- A general rule of thumb is to invest a high-risk percentage of 100 minus your age:
  - Age 35: 65% high-risk, 35% low-risk
  - Age 55: 45% high-risk, 55% low-risk

Watch for idle cash in your accounts:

- Inflation sabotages cash's value, so it's only useful to quickly swap out assets.
- The average investment account has $31,000 in idle cash:
  - Assuming 30 years at 7% growth, that can be a $20,000 loss on returns.
  - Cash can redeem mutual funds, but shouldn't be *that* large.
- Never let idle cash persist for long.
  - Synchronize your accounts with a financial service.
  - Automatically reinvest dividend payouts to avoid idle cash.
- However, if your broker doesn't allow for fractional shares, keep plenty of cash available so you'd be able to buy 1 share.

## Keep your portfolio organized

Good investors have a common-sense [understanding](understanding.md) of [how we exchange goods and services](economics.md).

- Everyone else investing is just as self-interested, and it helps to have a basic understanding of [game theory](math-gametheory.md) and the [types of investments that exist](money-investing-types.md).

Keep track of your entire list of assets ("investment portfolio") [organized](organization.md).

- Keep a document that tracks all your investments together:
  - Investment company name
  - Type of investment
  - Amount invested and on what date(s)
  - Contact information to follow up or make changes
- While it may make sense to use software (e.g., an investment website), you should make sure it tracks *all* your investments.
  - If you have too wide a range of investments, just use a spreadsheet.
- Create a routine where you revisit your investments (e.g., weekly, monthly, quarterly).
  - You should be prepared within a day or two to make changes when you see new information.

To avoid making a silly mistake, keep your large trades to a minimum.

## Buy low, sell high

Successful investing, across *any* industry, is knowing when things are cheap or expensive relative to what they will be in the future.

The concept of value, however, is [a philosophically complicated one](values.md), and investing uses a combination of several possible approaches to parse the value of money:

1. Momentum investing - looking at the current price of something and [creating expectations](imagination.md) about future price, then purchasing the things that will go up in price and selling things that will go down.
   - The idea is that the right mode of [intuitive](mind-feelings.md) analysis and understanding alone can predict future performance.
   - This is patently ridiculous, since we can't [predict the future](imagination.md), but it's our default behavior when we're [inexperienced](understanding.md).
2. Value investing - find the investment's intrinsic underlying value, [without distortion](image-distortion.md), then buying or selling based on the divergence from that value.
   - It tends to emphasize tangible factors like [assets and cash flows](money-accounting.md) and discount factors like [talent](mind-creativity.md), [fashions](trends.md), and long-term growth potential.
   - Its primary focus emphasizes cheapness and concrete facts, but it can become myopic to bad decisions.
   - At the far end, net-net investing directs funds to places where a company's stock is less than the company's current assets.
   - However, enough unwise money-losing operations or acquisitions can still burn up a company's assets, and the measurement of value *must* be accurate.
3. Growth investing - find the price of something, then closely observe [trends](trends.md) that would make that value go up.
   - The focus is less on the company's current attributes (like value investing) and more on its potential future value.
   - At the same time, it incorporates the [trust](trust.md) that the investment will appreciate in value (like momentum investing).
   - Growth investing often fails because it concerns itself so heavily with known-good investments that it disregards what [technology's fashions](technology.md) can do to a company.

A market maker will provide bids and offers to purchase assets, then ask for a higher price later.

- The bid price will always be lower than the ask price, and they'll make a profit on the difference.
- Technically, every investor is a market maker, often with multiple middle investors between a person and the actual assets being traded.

No matter what you invest into, there's *always* a lead time.

- Investing into something and receiving back the same amount later is technically a loss (because of inflation).
- For financial reasons, being *too* far ahead of the right time is the same as being wrong.
- Value investing is better in a declining market (because it obsesses with intrinsic value), while growth investing is better in a growing market (because it captures more of the positive effects of [the unknown](unknown.md)).

Watch for frequently overlooked investments the public has turned its back on.

- Focus on assets with below average price-to-earnings ratios.
- To find unconventional returns, you must [think unconventionally](mind-creativity-how.md).
- In some situations, people may be forced to sell at a loss, but it's not a good investing strategy because it's not frequent enough to rely on.

Only sell short if you see a looming negative change.

### Steadily invest

The market will naturally cycle up and down:

- A market cycle is a [trend](trends.md) that rises, crests, and falls.
  - There are predictable seasonal trends, such as from [weather](science-earth-weather.md) or [elections](politics-systems.md).
  - It tends to go up more slowly than it falls.
  - When it falls, it can devastate entire nations, but only happens periodically.
  - In any randomly given month, the market is likely to go upwards a little.
- [Government decisions](groups-large.md) can dramatically slow or speed up market crashes, but they always happen.

Timing the market ("speculation") is so ubiquitous that most people think it's the essence of investing.

- Precisely timing the market for a buy or sell is statistically unlikely, but great investing wisely manages assets across years and decades to make returns.
- Your investments *should* naturally grow over time from a [well-budgeted lifestyle](money-3_budget.md) and wise decisions, irrespective of what the market is doing.
- Focus more on intimate familiarity with your investment than timing a buy or sell.
- Only speculate with money you can withstand losing.

Don't sway [emotionally](mind-feelings.md) toward industry [trends](trends.md) unless you know exactly *why* you want to invest there.

Try Dollar-Cost Averaging to make safe, non-emotional [habits](https://adequate.life/habits/) out of investing:

- Put the same dollar amount every month towards the same ratio of investment types you want.
- Whatever the market does, don't change your ratios.

As you come closer to retirement and your investment goals change, re-balance your ratios.

- To avoid an irrational decision, do it when the market is *not* extremely hot or cold.

## Research

The [efficient-market hypothesis](lawsaxioms.md) indicates that the price is essentially a fair value, and no individual can consistently identify and profit nuances in that market without [specialized information](jobs-specialization.md).

- Returns on any investment are no different: high returns typically means higher risk or lower cash-in-hand by the end.
- The only time this hypothesis diverges is when there are inefficiencies (i.e., insufficient information), and it takes an unusual perspective to find those situations.

The efficiency of an asset class as an investment vehicle is proportional to a few things:

1. They're widely known and have a broad following.
   - [New](trends.md) asset classes do *not* have much information on them, so they're extremely high-risk.
   - The information should be widely distributed, and preferably approved by a reputable [government](people-rules.md).
2. The asset is socially acceptable and not [controversial or taboo](morality-taboo.md), which exposes you to non-financial risks:
   - [Potential legal issues](legal-safety.md) if a [law](people-rules.md) *might* forbid it.
   - Potential [publicity](image.md) problems, irrespective of legality.
   - [Ethical issues](morality.md) you won't be immediately aware of through the [culture](people-culture.md) of the people who engage in that asset.
3. The benefits of that asset class are instantly clear and comprehensible.
   - The risk of a scam increases with how opaque their system is (see below under Scams).

An inefficient (and possibly profitable) market will have a few characteristics:

- The market prices are often entirely wrong, sometimes [hilariously](humor.md).
- The returns, adjusted for risk, are *way* out of line with other asset classes.
- Some specific people are making spectacular returns, and they're also typically praised as a [celebrity](trends.md) (sometimes [controversially](trends.md)).

Don't invest, or do *anything*, you don't understand.

- You'll almost always improve your odds of being right if you can do things that give you more (and [more accurate](information.md)) information.
- To comfortably learn more about an asset class, only invest in things you *would like* to know more about.
- Only withdraw if you're perfectly aware of the [tax](money-accounting.md) implications.

High-quality [analysis](logic.md) and [experience](understanding.md) can give a competitive edge if you can apply it to the psychology of [large groups](groups-large.md).

- Understand how investing and banking works, as well as how to read [accounting reports](money-accounting.md) and applicable [laws](legal-doctrines.md).
- Stay at least somewhat familiar with that investment's industry and related industries.
- Your best opportunities to invest usually come from personal experience.

When you're ready to make the investment (and only then), intimately learn where your investments are going.

- Simply reading the annual statements makes you more informed than 98% of investors.
  - Reading the notes in the financial statements takes you ahead of 99.5% of them.
- Do you know the industry?
  - Are you familiar with resources a company in that industry needs to operate?
  - Is that industry growing or shrinking?
  - How many competitors are actively in that industry?
  - How successful is the average company in an industry?
- Does a company's business model make sense?
  - Is that company's current mission focused and consistent with their brand?
  - Is that company making an impact?
  - How does that company make money?
  - Does that company have any distinctive competitive advantage?
- What's its current [financial position](money-accounting.md)?
  - What can you infer from its 10-K filings?
  - What's its debt-to-equity ratio?
  - Has it grown year-over-year?
  - How are their industry ratings (e.g., Moody's, Standard & Poor's)?
- Do you know the history of that company?
  - Have you reviewed that company's performance history?
  - Have you compared their performance to competitors and relevant indices?
  - Do you know that company's financial health?
  - Have that company's profit margins steadily trended upward or downward?
- Does that company provide value you believe in?
  - Is the product a sufficient quality for the market it goes to?
  - Is the company leading or following a [trend](trends.md)?
- Do you know what the management team is like (such as their website or [LinkedIn](http://www.linkedin.com/))?
  - Are they well-respected and trustworthy?
  - Are the executives given fair compensation compared to others in the industry?
  - Does that team have a history of good management in the past?
- Can you [identify with their customers](marketing.md)?
  - Are you a customer or want to be one?
  - Do you know who the customers are?
  - Is the customer base loyal?
- If it's in another region of the world, what's their [culture](people-culture.md) like?
  - Is their country's government [corrupt](mgmt-badsystems.md)?
  - Do people have respect for the nation's [laws](people-rules.md)?
  - How prominent is that country's black market?

However, too much information can be a bad thing.

- Avoid [over-information](information.md), and take a step away from the news if you're emotionally affected by it.
- The information should be the platform for thinking *beyond* what everyone else is thinking.
- The more you hear from others, the less you'll chew on the information you have.

The best choices have more benefits than downsides, but still have downsides.

- Since *every* decision has a downside, you simply aren't paying attention to it if you don't see it.
- As much as possible, live in the world of *[probabilities](math-stat.md)* more than *[possibilities](imagination.md)*.
- Focus on [managing risk](money-investing-risk.md) as a known element instead of removing it entirely.

## Advisors

Getting a second opinion can weed out your shortcomings.

- Find [friends](people-4_friends.md) who you can discuss your investing strategies and ideas with.

Average out your five closest friends' income to see the financial lifestyle you'll have in five years.

### Investment advisors

An investment advisor can [safely](money-insurance.md) manage your portfolio, but you can more easily build wealth without one if you're willing to learn and work for yourself.

- A professional investor can't predict markets, but they can sometimes find and capitalize on accurate market patterns.
- Most brokers' fees are based on investment returns, so they're more [risk-averse](safety-riskmgmt.md) than you could be.
- If you have wealth over $1M, they may be able to add complexity and fine-tuning, but it's not worth it for almost everyone else.

The test of an investment advisor's skill is *persistent* achievement.

- Look back at least 5 years to see how well they've done, but preferably 10.
- If they cut off the data point at any time (e.g., 6 years), look further back than that.
- However, *no* professional advisor is a skilled-enough expert that they'll consistently outperform the market.

The less you pay in commission and management fees, the less drag on your return.

- One of the most common causes of fees comes from investors failing to read the materials from the investment firm.

The worst fees are ongoing for every period.

- Ongoing fees charge fractions of a percentage repeatedly.
- Some of those fees can be from merely keeping the account open!
- An employer-sponsored retirement plan will sometimes have higher-than-average fees.

Many investment advisors might have a minimum investment requirement:

- Minimum investing amounts are set by brokers to ensure they make a profit.
- There are many options with a low initial investment.

Brokers invest for a living, so their services are never free:

1. Investment advisory fees can be expensive, especially on mutual funds.
2. Watch for management/maintenance fees, shareholder service expenses and distribution fees (12b-1 fees).
3. These fees are added together and called operating expenses and create the expense ratio.
   - Avoid anything with an expense ratio above 1% annually.
4. Costs are then passed down to the investor.
5. Beyond that, transaction-related costs can double or triple the total fees:
   - Markups - the broker-dealer sells their investment to you at a premium to the market price
   - Front-End Sales Loads - a fee when buying something
   - Back-End Sales Loads - a fee when selling something
6. Further, brokers can often "churn" investments to make more returns for themselves.

Automated brokers can't advise well, but their brokerage fees are typically very low.

- Use an online discount broker, or online automated investment firms, for a more hands-off experience.

## Inflation and taxes

Expect a 7-11% return across your investments.

- Any more return than that is pure speculation.

Take your investment, then expect inflation and taxes to remove your returns.

- Inflation and taxes will turn a 10% investment into a 4% return.
  - e.g., each $100 will yield $10, then the [economy](economics.md) will take away 3% from inflation, then the government will and 3% to the government.
- Learn to think in inflation-adjusted numbers to have an accurate estimation of your returns.

Further, [depreciation](money-accounting.md) is one of the most substantial expenses in the world.

Good investing guarantees that the asset will combat or beat inflation:

- Besides opportunity cost, inflation makes a dollar today worth *far* less than in the future.
- Across decades, the average inflation rate floats around 3-4%.
- Any good investment will, at the very least, stand steady with or beat inflation.

Most investing activities are taxed, so paying taxes may test how disciplined you are at [saving money](money-3_budget.md).

- With some exceptions, you *will* [pay taxes](money-accounting.md) before you can use your money.

Max out your IRA/401(k) and Roth IRA.

- If you expect to be *very* wealthy later, do the Roth IRA first (and get taxed first).
- If you don't ever expect to be particularly wealthy, do the IRA/401(k) first (and get taxed later).

Investments across national borders may incur taxes from *both* countries!

- Staying in your country avoids the tariffs/duties you may have to pay.
- Staying regionally local prevents you from risking losing your investment if a political upheaval redefines what you're allowed to do.
- Try to use tax-sheltered accounts (e.g., IRAs) for international investments.

Taxes usually engage on each trade, so try to limit (or at least time) how many trades you make.

Beware of tax-avoidance schemes.

- Many of them are scams.
- Even if they work temporarily, they may leave you paying more in lawyer fees and back-taxes than if you had paid the taxes in the first place.

If you make *any* significant investing income, [get a good accountant](money-accounting.md) to find your most favorable tax situation.

### Time your losses

Losses are guaranteed, and some years will be better than others.

- If you don't offset your gains with your losses each year, you *will* be taxed.
- Every time you sell at a profit, make a habit to look for anything you can also sell at a loss to offset it.

Selling losses can significantly lower your tax burden.

- Tax loss harvesting is a perfectly legal way to write off a loss:
  1. Buy investments in any given tax year (i.e., between January 1 and December 31).
  2. Wait 1 tax year (i.e., at least the next January 1st).
  3. Sell them at a loss and repurchase a similar-but-different investment (to avoid [wash](money-accounting.md) rules).
  4. File that sale and purchase on the next relevant tax filing.

Closely track your losses to time them to offset your income.

- The loss isn't realized until you sell it, so you can sometimes hold that loss for a little longer until you can match it with a major windfall.

### Cashing out

If you acquire any capital gains, take advantage of donor-advised funds.

- Donor-advised funds are essentially mutual funds directed toward charitable organizations, which means they're tax-deductible.
  - They can also be invested now to claim the credit, but disbursed to the charity at set intervals.
- Donating capital gains to donor-advised funds can clear out any capital gains tax *and* grant the normal charity tax deduction.
  - This is more advantageous than simply donating to a charity, since you can use the saved capital gains tax to invest even more.

Pulling all your money out at once is a terrible idea because you'll immediately pay taxes on it.

- Instead, draw out as little as possible and try to invest the rest:
  1. Tax loss harvest all losses.
  2. Donate capital gains to offset any taxes on other gains.
  3. [Live frugally](money-saving.md) to take more advantage of markets.
- If you do well, you can deliver wealth to your [next of kin](parenting-babies.md).

In general, a good investing/retirement strategy should involve:

1. Don't touch your investment until it reaches 10 times your annual salary needs.
2. Start spending 7% of it per year.
3. If you keep investing safely, your wealth will never be exhausted.
4. If you desire any further than that, you should be trying to climb [the social ladder](classes.md).

You should have at least a few idiosyncrasies resolved regarding your retirement:

- Know when you can start collecting on [Social Security](https://www.ssa.gov/), and how much.
- To stay compliant, know your required age for Required Minimum Distributions (RMD).

## Focus on what matters

The markets are driven heavily by luck, so stay both optimistic and humble.

- Your most important investment is in yourself, beyond the [money](money-1_why.md).
  - Your [personal life](fun.md), [professional life](jobs-1_why.md), and [health](body-4_health.md) are more important than your portfolio or wealth.
- Learn to cool off anytime you start thinking you're a financial genius.
  - Even if you *are* a genius, your hubris will become your undoing.

The same rules for gambling [addictions](addiction-substances.md) apply to investing:

1. Set a hard limit on how much you're dropping into it, and how far ahead or behind you'll go before you stop.
   - That limit should reflect on something *not* related to money (e.g., a house, freedom to travel, etc.).
2. Walk away when your feelings become intense.
3. Like a casino, there's no [value](values.md) or [meaning](meaning.md) created *in* the activity, but only what you do *with* it afterward.

Understand, before you invest, when your returns are "enough".

- People have enough money when they no longer need to think about it.

Never loan to friends as an investment.

- Simply give the money to them, and clearly let them know.
- If you treat it as an investment, you will lose your friend as well as your money.

Don't let the rush of market investing overwhelm you.

- Beyond the intricacies of jargon and technical details, most of the hype is driven by the vice of greed.
- Think how much time and money you're spending, and whether you enjoy it.
  - If the market starts dropping, get your mind off it by going for a walk or having fun with a non-investing hobby.
- If you're having a hard time breaking free from the investment rush, you may have an [addiction](addiction.md).
  - If you like the returns but don't like the work involved in investing, you should probably invest your time into [finding a better day job](jobs-1_why.md).
- Try to make the experience a [routine](https://adequate.life/habits/) [mathematical](math.md) experience instead of an emotional one.

To understand how each of your investments fit with your financial goals, focus on what you want instead of the tools themselves:

1. Avoid asking yourself about options or tax treatments like IRAs or bonds.
   - Instead, consider things like your children's college tuition or your retirement.
   - While it's tempting, ignore what other people may say or do.
2. Calculate returns you've received to see if you'll hit your goals.
3. Estimate how much you're willing to lose and how bad things could get.
4. Make your exit plan as thoroughly as you want.
5. Never think about it again until you want to or need to adjust things, then [live the rest of your life](goodlife.md).

The faster you give away money, the more it flows back to you.

- It's not because of "good karma", but more that you spend less time defending it and more time making more of it.
- If you start growing rich, you *must* isolate yourself to avoid further [social problems](classes.md).

Listen to your [significant other's](relationships-marriage.md) advice, since they share your life with you, and it's their money too.

[Satisfaction](mind-feelings-happiness.md) and [meaning](meaning.md) *never* come directly from money.

- Money is only one way to accomplish most [purposes](purpose.md), and also happens to be the least [creative](mind-creativity.md).

## Additional content

Books:

- [Pricing Money](https://www.jdawiseman.com/books/pricing-money/Pricing_Money_JDAWiseman.html)

Articles/Courses:

- [Bogleheads](https://www.bogleheads.org/wiki/Main_Page)
- [Investopedia Academy](https://academy.investopedia.com/)
- [What You Should Know About The Stock Market - BetterExplained](https://betterexplained.com/articles/what-you-should-know-about-the-stock-market/)

Educational Games:

- [Wall Street Raider](https://www.wallstreetraider.com/)