What’s the point of telling you what value investing is? If you noticed, it would take you a great amount of effort to be a successful investor. The amount of research that goes into a single company alone, may not be the most interesting activity for you. You may have jobs or family to take care of. So, the objective of this post is to give you some alternatives if you do not want to spend time and effort to choosing companies, but you still want to be invested.
Mutual Funds / UITF
If you don’t have time to research, you can give the money to a manager and have it invested for you. Mutual funds are good starting point or a gateway for beginners of investing. They offer easy access to the market by having a professional handle the money. But that convenience comes at a price. Most fund managers, 90% of them, can not beat the market. Meaning, they can not beat the average return of the overall stock market. Which means you are underperforming most of the time. That is because most mutual funds are actively managed. Incurring costs each time they make investments. And with all the mutual funds around, which one is the best?
Warren Buffett has a solution to that. Instead of giving your money to active managers of mutual funds. You can go the passive route to match the market. Most academics believe that you can not beat the market, so the only solution is to match the market. This is by investing in INDEX FUNDS.
You can invest in index funds by asking a bank about index funds or investing in mutual funds that invest in the index.
ETF INDEX
This is much like a mutual fund. But different. You buy an ETF like a stock. But this etf stock has inside it 30 of the largest companies. Which means, its an index. An ETF index. Why would you pick ETF index than a mutual fund? Because of fees. Mutual funds on average charges more fees than a low cost ETF index. Say for example, a typical mutual fund will charge 2% per year on management fee. The lowest cost for an etf index fund is 0.14%.
What about those people who offer stock picks, signals and memberships?
Forget all of them. The best investment for you, as a beginner, who don’t want to invest any time and effort in picking stocks, is in an index fund. The next best is, you have to do it on your own. NEVER OUTSOURCE YOUR THINKING. That is your most competitive edge. Do not give it away. If you’re not ready to do the effort of researching, stick to index funds until you are able to do so.
Stock picks, signals and memberships will only train you to be dependent on others’ ideas.. That’s not how a value investor think. A value investor thinks independently. Most of these memberships are created by businessmen, not investors, who wants to train you to be dependent on them. That’s why they charge monthly fees. You need to break free of that. You need to learn how to think for yourself. Or just invest your money in an index fund. That’s the only 2 choices that I think are worth taking.
Besides, remember that 90% of managers can not beat the index? That statistic goes to the people who stock pick, give out signals and offer memberships.
But they say all good things about the membership!
Yes. That is because you are being referred. They make money by referrals. So of course, they’re going to tell all the good things so you will join. Even if they have to lie a little bit. You see, these people who claim that the membership is good and they are already a member, are just like you after they joined. They can’t make money off investing that’s why they just refer you to get commissions and make money off of that. Just look at their link. You’ll see what I mean.
You should remember to think independently. Which means, you should make your own decisions and not believe what other people are saying face value. Especially if there are incentives involved. Like referral commissions.
What about Life Insurance + Investment Funds?
Most life insurance companies offer the investment part of their insurance product with a mutual fund. And that mutual fund, if you choose, can be an index fund. That’s great if you need insurance. But most of the time this is just a cost you don’t want to bear. Especially if you’re on track to building wealth. If you buy a product like that (insurance + investment) most of the money goes to the insurance part than the investment part and then a part of it goes to the commission of the agent. The best course of action is, just buy the cheapest insurance you could get (the insurance only that you need) without the investment part. And invest the money in an index fund in a different company without anything attached. What I’m trying to say is, buy insurance only from insurance companies. And buy index funds from people who offers it, separately.
Its all Value Investing
Even if you think this post is not value investing, trust me, it is. Value investing principle is about buying more value for your money and knowing your circle of competence to make the right decisions. And what I just told you was to buy more value for your money by avoiding unnecessary costs. And your circle of competence is knowing yourself and what you know. Do I want to invest time and effort into researching companies? No? Go index fund and stop reading this tutorial. Yes? Good, then read on. I’ll see you on the next lesson.