Personal finance, investing and the question what to do with my money is omni-present for people, especially when they paid off their loans and start having money on their bank account that is beyond what they would need for a living.
During the last years, I read a couple of books to get myself familiarized with the topic and really think about how to do it the right way. I said to myself “why not taking a look to examples of financially successful people?” and tried to identify a few people that share a similar value system like I have. This would allow me to relate to their strategy and adapt it to my personal needs.
To start investing you don’t need a finance degree
In some countries like Germany, a broad risk-averse behavior exists when it comes to money. Many people, especially non-millennials didn’t spend any time with personal finance at all (maybe by listening to a financial advisor, buying poor products such as life insurances) or made poor experiences with the last economic downturn. As a kid and teenager I was never taught about investing money or building a business, neither at school, nor at home. Not gonna talk about Education these days and why they don’t teach more life relevant things like doing my taxes every year.
When I first approached the stock market I experienced this emotion that trading is just a way to get rich and there is no deeper meaning to than making money. Frankly, it took me a while to change my mindset into “building wealth for the greater cause” and “building a retirement plan” mindset. I discovered the possibility of being financially free one day, but I don’t want to use the money for buying stupid things, but rather to re-invest in assets, people or non-profit organizations that I share a vision with.
In addition to investing in the stock market and after listening to a couple of very good podcasts like “The Investor’s Podcast”, I found real estate as an additional investing option as another layer to build a plan around the points mentioned above.
First, get your finances organized
If you read this, I assume you have started making up your mind in some way, but just worth mentioning here: Only invest money that you can afford to loose. Investing money into the stock market or real estate, may lead to losses, temporarily. There are risks that cannot be calculated (for example the Corona Virus situation).
My key learning is setting up a budgeting plan and to visualize what amount I was spending on food, rent, car, and so forth. I started to create an emergency account that is comprised of 3 monthly salaries (which is very valuable in times like this). How this is done doesn’t really matter: There are tons of tools on the App Store such as digital banks (N26, Revolut, Bunq, …) that provide a digital envelope system with which you can save for things you want to buy or just for investing purposes. Personally, I am using the “Shared Spaces” feature in N26 together with my girlfriend.
If you want to check out my experience with N26, check this article I wrote on that.
Investing rather than speculation
Before digging into company analysis or investing figures I found it very helpful to start my investing journey with some investing books focused on the right mindset (see below). These books helped me building a mindest founded on values which I can relate to. The successful people I was referring to ihe beginning are people like Warren Buffet, Benjamin Graham or Peter Lynch.
I was intrigued by how fundamentally different their approach is compared to modern portfolio theory, capital asset pricing model or any day trading technical analysis. The long term view on investing (such as value investing) is something I relate to personally, because I want to see companies grow and want to invest, rather than speculate. Benjamin Graham actually defined it well when referring to speculation versus investing:
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
When investing in a company, essentially you purchase a small part of the business and you become an owner of the company. It only makes sense to do this if you believe in the value proposition and that it is valuable for their customers, so it generates increased cash flow in the future. Ideally, these companies sell for 40 cents, but are worth a Dollar.
Actually, the most boring part of investing is the buying and selling process is and it always should be. Value investing is clearly a buy and hold strategy, because you believe in the compounding of reinvested cash flows and therefore hold it for many years. Once you identify that the stock is overpriced, the strategy changed to something you don’t view as promising as before or there is a new management team you disagree with, then sell it.
Investing books to start with
- The Warren Buffet Way
- Einfach Investieren: Grundlagen des Value Investing (German)
- The Intelligent Investor, Chapter 8 and 20
When reading these books, I collected several key figures and ratios that help me assessing a company. I summarized them in this article here. Don’t underestimate the value of qualitative analysis, it is not only about numbers, figures and ratios. In the end, the management team has to have a strategy in place that is customer-focused. Warren Buffet adds the “moat” that a company should have to be protected against economic downturns. This moat comes in many forms: Brand, dominance in the market, financial and price advantages, etc.
What if you don’t want to analyze companies?
If you want to approach it as a true passive way of managing investments, I recommend searching either for a fond based on an approach you can relate to (sustainability, value investing, artificial intelligence, …). Actually, Buffet and others suggest investing in an ETF (Exchange Traded Fund) that matches an index for example the MSCI World or S&P 500. There or some low/no-cost brokers out there in the Fintech industry that you might want to check out, such as Robin Hood or Trade Republic
On another note, in his book “The Intelligent Investor” Benjamin Graham talks about the enterprising investor versus the defensive investor, where the latter only holds 75% in bonds and 25% in stocks an vice versa for the enterprising investor. Now, I am suggesting to invest in bonds, but it can be an index fund, for example. The recommendation is to balance based on how risk-tolerant you are and considering the time you have to manage your own portfolio.