General investing dos and don'ts


(Yannick Brunner) #1

This room is to discuss investing in general: good/bad habits, how to get started, debunking myths, etc. Pretty much anything holding you back from getting started.

Why should you care? In the UK (and abroad) millennials are underinvested. Yes, we’re cash-strapped + would all rather spend what we have on travel or more enriching experiences. But investing is hugely important, today more so than at any point in time. The world of investments is slowing changing inline with the demands of its customers. Socially responsible investing (SRIs) is one of the fastest growing segment in the industry. And this is only the beginning, as more well-informed investors deploy their money into companies focused on making the world a better place, they exert more influence on the management. Today’s norm of greed capitalism has been largely driven by shareholders only concerned by profit (note: this is a gross exaggeration on a very nuanced topic, if anyone wants to debate it further, let’s start a different room). As our generation matures in the workforce, so will our savings. Collectively, this is one of our best option for exerting a macro scale influence towards shifting today’s imbalanced economic paradigm in the right direction.

My experience with investing. I have been investing for 20 years (I started when I was 11 with an awful investment in EuroDisney). Throughout those 20 years, I have blown up 3 times: I took too much risk or got carried away with my opinions. Prior to moving to Technology, I worked in financial services as a Trader in various types of institutions (banks, hedge funds, proprietary companies), and have had exposure to ETFs, bonds, government securities, exotic structure products, options, cryptocurrencies and foreign exchange.


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#2

Before even getting in to the subject of share portfolios I think it starts at an early age, having a piggy bank at 4, having your first bank account or card at 12, etc. That is how the concept of saving develops. If we leave it to 18 to open a bank account or suggest we save it is too late, most 18 year olds will be wanting to go out and spend money not save it.

Personally I got a building society passbook to save money in then got an account around 15 or whenever they were willing to offer one. Was so excited to get my first chequebook, whereas nowadays my preteen was excited to get his first bank card.

My first attempt at making money beyond a bog standard savings account was converting currencies and saving in countries where interest rates were better or their currency was strengthening so I would get a benefit by the altered exchange rate. My second attempt was to buy shares in IPOs.

In more recent years I have dabbled in crowdfunding but I do think that is much more long term and higher risk.

WiseAlpha is of real interest where you lend money to huge corporations and may get 8% or similar return from your lending thru some loan bond. (interest rate quoted is an example and no guarantee can be given as to the performance)


(knows someone who knows Tom quite well) #3

A subject close to my heart!

I must caution that you should always have a baseline boring portfolio before you start trying to beat the market. Remember that most online bragging is extremely selective - people tell you about their winners but not the losers, and in general very few people beat the market over significant investment horizons.

I really like Lars Kroijer’s approach - diversify with a world tracker, balance with ultra safe bonds, then if you are so inclined, try to beat it with individual investments.


(Yannick Brunner) #4

I couldn’t agree more. As a means to an end, namely getting more yield than on your savings account, boring and human bias-free is the name of the game. That being said, finding companies you love and backing them can be very enriching as it keeps you engaged in the whole process. In the perfect world you could invest 95% of your money in something boring, well diversified that adapts to your financial situation (how much risk you should be taking), with the 5% invested in things you believe in and want to see succeed. Even with only 5%, you should still make sure the company is trustworthy, etc (I say this because what I see in ICOs is a bit worrying these days).


#5

For longer standing firms: Personally I like the approach to only invest in industries you have good knowledge of and not gamble on the unknown. Where you have met some of the senior staff like the CEO and CFO helps too as you get an impression of the ethos and direction of the company far better than reading their brochure. I take most people’s opinions on investment with a pinch of salt and go by my own gut and research. The only guy I may listen to is Warren Buffett, CEO of Berkshire Hathaway.


#6

Investing is something I’ve never dabbled in (outside a managed pension or Australian Superannuation fund), but become increasingly interested in. Especially the idea of ethical investments.

The prospect of an app like Freetrade that might make the process easier to understand and engage with is something I think would be useful.

Do you guys have any good resources that would be good, for a millennial without a lot of experience investing, to start to get an idea of how to approach it?


(Yannick Brunner) #7

As MIROW said, I think Warren Buffett is a great role model when it comes to developing good habits. The Warren Buffett way was my bible when I started. I also really liked Peter Lynch’s “one up on Wall Street”. Both are short and fun reads.


#8

New startups are one area of concern to me. Betting on their long term success is a real gamble.

One firm may be successful in the long run but while it is still early days we can not tell, but then other new entrants in the same field pop up in close succession. Some people try and invest in them too on the assumption if one is successful they may all do quite well.

I am more wary and assume there is a natural limit for how many firms can be successful in any particular field, only some will be successful, some will fail and others just keep ticking over not successful but not a failure.

Of particular concern among them are tech ventures. If you judge just on an app appearance or company brand that IMHO is not enough, you need to see a clear statement of aims, ambitions, intents, their long term focus.

They may not reach that long term aim or may have to change it but at least they have one and it helps provide clarity and direction. Where a firm is too vague and wafflely about their direction and aims it is a red flag for me.

Any company just focused on a short term USP can find that USP lost overnight when a competitor comes along with the same USP or a better one.


(knows someone who knows Tom quite well) #9

But Warren Buffett says you should invest in a tracker!

And remember, he had a slight edge that he leveraged into becoming fabulously wealthy by using other people’s money… monevator.com/how-did-warren-buffett-get-rich/


(knows someone who knows Tom quite well) #10

DaveTMG’s rules:

  1. FEES FEES FEES - it is almost never beneficial to pay fees, the stock market is a zero sum game and on average your investments will underperform the market by the amount of fees you pay. Anyone telling you different is trying to make money from you.

  2. Maximise your pension and ISA contributions - tax advantaged accounts, don’t give the taxman more than you have to. Even better with employer matching - FREE MONEY. Always take this, it’s like picking winners ahead of time.

  3. Pay yourself first and the earlier you start, the better, as you should save at least (the age you start)/2 percent of your income - for life. Start at 20, save 10% each year. Start at 40, you need to save 20% each year.

  4. Get out of debt! Especially credit card debt. The only debt you should carry is mortgage debt. Debt is stealing from your future self.

  5. The bulk of your long term investment should be in boring safe stuff - well diversified index trackers, such as Vanguard World, government bonds etc. Extremely well paid and resourced fund managers can’t beat the market. You can’t either.

  6. Ignore the day to day noise of the stock market.

  7. Enjoy life knowing you are better prepared financially than most of the population.


What would you tell your younger self about finance?
(Yannick Brunner) #11

Solid summary of good practices!


#12

Solid points, whereby 1 and 4 are potentially contentious. With regard to point 4, debt isn’t in of itself inherently evil - or as you put it “stealing from one’s future self”. Borrowing i.e. dissaving is just a tool that if utilised optimally will allow the consumer to consumption smooth over their lifetime. So I disagree that a mortgage is the only debt someone should have as there are situations in which debt can be used to maximise utility. I think a more solid point 4 would be to say build equity ie net assets or net worth by working to achieve maximise assets and minimise liabilities (debts owed).


#13

Love that you mentioned FreeTrade. I’m also a millennial keen on investing, so am highly anticipating the launch it.
For everyone else in the thread basically FreeTrade is aiming to be the UK’s version of Robinhood. It promises 0% commission stock trading (see roadmap link for more info).

To sign up to the queue if you’re interested then use my link please (it bumps me up higher): http://freetrade.io?kid=MBXGB


(Yannick Brunner) #14

This is quite interesting, curious to hear some opinions on the subject. I actually feel very strongly against free trade services (such as Robin Hood). The first reason being that most incentivise users to follow poor investment practices, such as frequent trading. For people new to investing (often those lured into such services) this is a very costly habit, as loss is often crystallised where a more stable holding strategy is better at weathering volatility. Second, their path to monetisation (with Robinhood at least) is to increase the leverage (the risk) their clients can take. This to me is the most contentious point. I think for people interested in investing for fun or educational purposes that’s all fine. But beyond that, it promotes behaviours that runs contrary to what maximises returns over the long run (buy and hold). That it markets itself as a service helping the less fortunate is a little ironic. As a side note, this is a feature we considered for a company I recently launched. The outcome of free trades was finding otherways to monetise our client base, either by upgrading them to a different service or asking them to share data with us. All in all, it didn’t feel like our interests were aligned so we dropped it in favor of a different approach, only charging an account when it’s profitable.


(Sufi) #15

Hey, Viktor @v18n, Just wondering what are your thoughts on this?


#16

Thanks for asking.

I think in @Ybrunner’s comment there is an assumption that if trades are free, people will trade more, which is incorrect.

Our data shows that our community, on average, plans to add up to a few hundred pounds per month to their Freetrade account, and do a handful of transactions:

  • ~60% of our community plans to do 3 or fewer buy transactions per month
  • ~50% plans to do 0 or 1 sell transactions

This is consistent with classic pound-cost averaging.

Again, the assumption that free trades incentivise reckless behaviour is incorrect, and I’m not sure where it comes from.

What free trades do though is they make you substantially better off.

Happy to answer specific questions!

P.S. We will not offer leverage, nor do we see a role for it.


(Yannick Brunner) #17

I think we can both agree that all things considered, fewer fees improve the performance (significantly in the long run). Although in my view the frequency of trade trades has a negative correlation with performance, in part because of fees (non-issue here) and in part because of crystalising losses. That being said, this entirely depends on the user and their experience. Someone more experienced will benefit more from this type of service than someone new to investing (more exposed to typical investor biases). A nice to have would be to benchmark users against a buy and hold strategy, so they know where they stand and if they’re causing detriment to themselves.

It’s unfair for me to consider all services in the same light. What I feel strongly against is Robinhood’s approach to monetisation - in fact I’m pretty sure it breaches rules in the UK’s regulatory framework.

As a skeptic, this leaves me with only one question: how does Freetrade plan to monetise its service?


(knows someone who knows Tom quite well) #18

How is point 1 contentious?

Every academically rigorous study has shown that no one can pick a priori who will beat the market. Buffet just won his million buck bet against a hedge fund supremo on this issue.

Look at the current hoohaw about Woodford, that investing darling of the last 20 years. His fund is doing terribly.

So you are not going to pick the winners unless you are lucky, 'cos something like 88% of the players fail to even match the market over 10 years and it’s closer to 98% over an investing lifetime.

So paying any extra fees simply detracts from your results because the market on average is all you’ve got. We are all part of the market, so our summed total returns can only be the total return of the market. So on average, our performance is that of the market minus the fees we pay. This can’t be contentious, it’s simple mathematics.

For the vast majority of people, they should simply invest in the market as a whole and balance risk with bonds. Then leave it alone apart from rebalancing to adjust for risk as you get closer to retirement. If you don’t understand rebalancing, use a target date retirement fund like vanguard’s. Minimal charges, and statistically most likely to give you the retirement fund you want.

But there’s one born every minute.


#19

I am not in disagreement and value your detailed response.

I don’t want to get into the academics of the CAPM, Efficient Market Hypothesis, Smart beta, Seeking Alpha, etc because to be quite frank I’m still studying Finance so am not as well versed as I’d like to debate this & to be fair I haven’t heard any compelling arguments in favour of fees so I’ll concede happily.

This recent FT article linked below is one I think you’d appreciate too which makes for a great read on the topic of indexation. https://www.ft.com/content/b81c7540-1bd4-11e8-aaca-4574d7dabfb6

Yes, vanilla passive investing in tracker funds or ETFs provide great starting points for savers. However, on a personal note, while I’m still young and less risk averse, I want to be an active investor as I’d rather selectively hold the FAANG tech stocks among others - which over the last decade have bolstered the standard S&P market portfolio. As yet, there hasn’t been a fee-friendly platform that would allow me to gain ready exposure to my desired stock portfolio and FreeTrade is hopefully the one that will democratise the stock market for fellow U.K. millennials like me beyond the available Stocks&Shares ISA.


#20

Through premium services