How should I invest?

On Facebook, I see a lot of peo­ple ask some­thing along the lines of “I want to get start­ed invest­ing, can some­one rec­om­mend where to start?”

Answers from well-mean­ing (and less well-mean­ing) group mem­bers vary wide­ly. Most of the advice is prob­a­bly good (good enough) and rel­e­vant. This is a prob­lem for many, begin­ners and expe­ri­enced investors alike.

So many think that invest­ing is like physics; that there’s a grand uni­fy­ing the­o­ry with a “right” answer.

There are many “right” answers.

There are prob­a­bly even many “best” answers.

Too much choice is prob­lem­at­ic, but that’s not the only chal­lenge. The fact is that there are a lot of cor­rect answers.

People ask the wrong questions (for me)

Now that I am social­iz­ing my book among my friends I am hav­ing a lot of dis­cus­sions about invest­ing. (Shocking, right? Truth is I’ve always had a lot of these con­ver­sa­tions, which is why I was moti­vat­ed to write the book in the first place.)

Let me share a cou­ple of high­lights.

Yesterday I was talk­ing with some­one (over shout­ing kids, so it was­n’t a real­ly coher­ent con­ver­sa­tion) and he asked me “what do you think of the price of oil?” I polite­ly respond­ed that I did­n’t real­ly care about the price of oil. It’s one of those things that the finan­cial news talks about a lot, but I’m so skep­ti­cal of finan­cial news… Financial news as it stands today is doing a lot of dam­age to American’s finan­cial health.

2/15: “Oil head­ed to $200/barrel!” http://t.co/BBmstnmIpj

8/15: “Oil head­ed to $20/barrel” http://t.co/ctoYqNo7rk

Make up your mind.

— Carl Howe (@cdhowe) August 19, 2015

As you can see from this tweet, finan­cial report­ing has no clue. This is a pret­ty typ­i­cal alarmist approach to news. In real­i­ty, no one knows the future and any insight into past behav­ior is more like­ly to be fil­ter­ing based on pre-exist­ing bias­es any­ways (so the reporters get the sto­ry they want; or get the views/ratings they want).

More inter­est­ing was my friend’s response:

Earlier in the year I bet that oil would…

I bet.

Not a phrase I’d want any­where near my invest­ing strat­e­gy.

Another friend texted me last Monday, the day the bot­tom fell out from under Apple’s stock (dis­clo­sure: I  hold a sig­nif­i­cant por­tion of Apple in my port­fo­lio). When I told him I had­n’t see Apple’s stock price his response was:

You have to look… NOW!

He then pro­ceed­ed to tell me what Apple’s price was, even though I had pur­pose­ly avoid­ed look­ing as it would serve noth­ing but to upset me. In my opin­ion, Apple’s fun­da­men­tals remain sol­id and there’s noth­ing I would have done any­ways (except buy more if I had mon­ey to invest, but I did­n’t).

The freak-out was com­plete­ly unwar­rant­ed.

In both cas­es, it shows that peo­ple aren’t sure how to invest. Part of invest­ing well, is under­stand­ing what news mat­ters and how the news impacts your com­pa­nies.

The stock markets have rules, those rules impact how the market behaves

Another time­ly point of view on the whole mar­ket volatil­i­ty thing…

https://twitter.com/ReformedBroker/status/638753338394300416

If the com­pa­ny’s fun­da­men­tals don’t change, but the stock price does, it’s relat­ed to one of two things:

1. some­thing about the com­pa­ny has changed, you just don’t know it, or
2. some­thing about the way the mar­ket func­tions is chang­ing the stock price

There was a lot of sar­casm on twit­ter as the mar­ket was falling along the lines of “the mar­kets now drop­ping because the mar­ket’s drop­ping”. I even saw a tweet about the US mar­ket falling because Europe fell after Asia’s mar­kets fell when they saw US mar­kets fall.

You might hear about algo­rith­mic trad­ing too. Or options expi­ra­tions. Or sum­mer vaca­tions (where many traders are out of the office). Or end of quarter/year when funds results are “tacked to the wall”.

None of these things have any­thing to do with a com­pa­ny, but have every­thing to do with the way the mar­ket works.

Well, when peo­ple are afraid, they sell. When there are more sell­ers than buy­ers, prices fall. There’s a crazy-counter-intu­itive mind­set where peo­ple sell their suc­cess­es, so they can post gains, instead of their bad invest­ments.

All of this speaks to why you could look at a sol­id com­pa­ny, with­out any­thing chang­ing, and see a lot of mar­ket volatil­i­ty.

What to do about it?

Two things.

First, mea­sure suc­cess using met­rics that aren’t sub­ject to mar­ket volatil­i­ty. I share four in my book, and think they’re quite inno­v­a­tive. The whole premise of the Elephant’s Paycheck invest­ing blue­print is to track the pay­check and rais­es, not the port­fo­lio size. Not only has my pay­check stayed the same over the last two weeks (since Apple’s August div­i­dend gave me a raise), but my month­ly pay­check rais­es are going to be high­er because each rein­vest­ment gets me more shares of my com­pa­nies. Check out these posts on my blog if you’re not ready to buy my book yet:

1. How to get a big pay raise every year
2. How to get 15 more pay rais­es a year
3. 25% Bigger pay raise this year vs last
4. Thinking about pay rais­es (read this one if you’ll only read one, it’s the most recent and goes into the blue­print­’s unique met­rics)

Second, get used to why the mar­ket behaves this way by edu­cat­ing your­self on why it hap­pens. Start with the first 14 min­utes of this recent pod­cast by Horace Dediu. Horace is an ana­lyst whose pod­cast is real­ly well done. You should sub­scribe to the pod­cast if you invest or work in tech­nol­o­gy.