Investing Guide

I knew absolutely nothing about investing a few years ago.  I knew I was interested in stocks and I had no idea what they were.  I never learned about personal finance and investing in school.  No one taught me how to invest or encouraged me to learn about investing.  I decided one day to do some research online to learn.  I had hundreds of questions with no background in finance.

I remember coming across Investopedia.com.  I read all their tutorials and looked up any definitions of words that I did not understand.  It took awhile.  I was learning a lot because no one was forcing me to learn.  Instead, I wanted to learn.  I also went to other websites like Fool.com (they used to be good, now they’re articles are watered down with advertisements), finance.yahoo.com, forbes, bloomberg, and msn.  There are so many resources out there.  Anyone wanting to learn have an unlimited amount of resources out there.

I then started buying books.  I borrowed books from the library.  I mainly focused on value investing.  I read and learn about investing from legendary investors such as Warren Buffet, Benjamin Graham, Peter Lynch, Philip Fisher, John Bogle, William Bernstein, and Burton G. Makiel.

Investing is not difficult.  All it takes is discipline and basic knowledge.  People with higher IQ do not necessarily better investors.

I’m still learning about investing everyday.  There is so much I still want to learn about and it’s so fun.
My long term goal is educate people about personal finance and investing.

1.  Start my own mutual fund. It costs about 100,000 to start a mutual fund.  I plan to start one in a few years.  I still have a lot to learn, so I am going to buy some books and do some more research.  The strategy will be a Nano/Small Cap Deep Value Fund.  It will focus on companies with with less than 1 billion in capital with low P/B, P/S, and decent ROE.
2.  Retire early.  I plan on trying to retire from the corporate world before the age of 45.  I will still have my own mutual fund.  Having enough capital to work whenever I feel like it will be great.
3.  I want to write a children’s book for fun.  There are not many good investment/personal finance books for children.  With our negative savings rate in the US, people need to learn how to manage their money better.  And what better way than to teach children at an early age.

It’s never to late to learn.  Investing is fun.

I just attended the Schweser 3 day seminar in Manhattan Beach,  Ca.  I must say, it is the best seminar I have ever attended.  The lecturer Nathan Ronen did a phenomenal job explaining the most important concepts.  There are 439 learning outcome statements on the level 2 CFA exam and attending that seminar really did help me focus my attention on the more important subjects.  The seminar was worth every penny.  Nathan Ronen did a very good job explain difficult concepts such as currency translation, swaptions, CMOs, multiple regression and free cash flow calculations.  I learned a lot in the 20 hours that spanned the 3 days.  I would recommend attending a seminar if it was taught by Nathan Ronen.

Back to studying.

Here is a general guideline for proper investment categories based on liquidity needs.

For money that will be needed within:

0-1 year, invest in money market, savings, treasury bill or checking account.

1 - 3 years, invest in a bond fund, REITs (Real Estate Investment Trust), or balance fund (mix of stocks and bonds).
> 3 years (>5 years if you’re more conservative), equities and any other investments.

Money should be put in less risky assets in the short term because investors do not want to lose principal they may need in the near future.

As the time horizon lengthens, investors can choose to invest in riskier assets such as stocks. Stocks perform better than other classes in the long run, and the chance of losing money goes down the longer the investor stays invested.

You can see from the chart below that the worst annualized return on stocks drop as the investment horizon increases. Worst return in a 1 year holding period is 26.5%. For a five year holding period, the annualized return drops to -2.4% per year. There is no 10 or 20 year period where stocks(S&P index) has lost money.

As you can see from the chart from 1943-2003, stocks have an average annual return of 11.6% compared to 6% of bonds and 4.7% for cash. Investors need stocks in the portfolio if they have a long time horizon because the inflation adjusted returns for bonds and cash is 1.9 and .6% respectively. A person’s buying power will not increase by much if they invest mainly in bonds and cash. Stocks have an inflation adjusted return of 7.5%. In the long run, bonds and cash are riskier because those asset classes have a difficult time keeping up with inflation. At best cash can only maintain a person’s buying power in the short term, but it does not generate more wealth when compared to stocks.

Source:
Stocks: Standard & Poor’s 500
Bonds: Intermediate-Term (5-Year) Government Bonds
Cash: Treasury Bills
Source: “Stocks, Bonds, Bills and Inflation-2004 Yearbook,” Ibbotson Associates, Chicago.