Investing 101 — Getting Started

Let’s clarify some terms and get you acquainted with my investing style:

Professionals / amateurs

Professionals get paid to invest, amateurs don’t. I consider myself an amateur investor as I am not paid to do it.

Of course, getting paid to do something doesn’t make one better at it, but it generally implies that such a person spends much of their time and energy on it and is therefore given some authority on the matter. On the flip side, with the money comes more ego, emotions, impulsiveness, shorter-term thinking, and the lure of a quick buck — all of which wreak havoc on an investment portfolio. Still, we should expect a professional with strong discipline and healthy incentives to outperform an amateur over the longer-term.

He is certainly a professional, but DID YOU KNOW the great investor Warren Buffett doesn’t actually get paid much to invest? Instead, his own investments reward him handsomely. I invest in Berkshire Hathaway $BRK.B with confidence knowing my investment manager / CEO Buffett is both invested himself and not as challenged by the temptation of a (bigger) paycheck.

Value / growth investing

Value investing essentially means getting more bang for your buck — buying at reasonable prices— whereas growth investing means paying a premium now in the hopes of more bucks in the future. Getting more bang for your buck entails having a surer share of profits and that’s what investing is all about: chasing profits. We invest in shares of companies and those shares/stocks represent pieces of a business. At some point we expect that piece to yield a profit on our initial investment.

Value stocks are companies with steady balance sheets, cash flows, and growth targets, whereas growth stocks emphasize future growth at the expense of current profitability, stability and predictability. Value investing is safer with less-dramatic price swings up or down. Lower risk, lower reward.

If you want to learn value investing your first big read should be the Intelligent Investor by Benjamin Graham, originally published in 1949. It’s age and timelessness should come as no surprise seeing as it’s widely considered the ‘Bible’ of value investing…or just, investing. Buffett — Graham’s investing disciple — contributed the preface and appendix and current WSJ writer Jason Zweig has been updating and commenting on it for the last two decades or so.

One big takeaway for me was that a value investor doesn’t buy a company based on the previous quarter’s results, let alone some future quarter’s. A track record of profitability and sound execution is preferred to hype and trends.

I wonder how Buffett — long known as a steadfast value investor — would characterize his own (newer) investment style along with his biggest stock market investment Apple $AAPL, a holding of mine as well. When he started buying Apple in 2016 its price-to-earnings ratio was in the ‘value investment’ range but it has since ballooned to roughly 3x that. He’s stopped buying but he’s also barely sold, and that’s quite telling because, thanks to Apple’s successes and Buffet’s big purchases, Apple now makes up ~40% of Berkshire’s equity portfolio at a value of ~$115 billion. Buffett’s next biggest equity position is $40 billion and in a large bank, generally considered a safer business. Apple's position on Berkshire’s books, especially its equity books at that whopping 40%, may loom large for a self-declared value investor like Buffett but it’s been the gift that keeps on giving for him and his fellow investors — especially after Covid hit his airlines portflio among other losses.

Can Apple be considered a value investment? No. At current valuations (p/e ratio above 30, PEG at 1.5) Apple is far from a terribly expensive stock but only a true Apple believer would dare call Apple a value pick, and it’d be because they fully believe in its continued execution, ability to increase their Services revenue, and their overall growth story. When it comes to growth investing it’s all about the story and Apple’s revolves around the iCar, iVR, and the AI race. [I might have made that up, iVR, but it’s not that hard to come up with ever since the iPod.]

I consider myself a hybrid value-growth investor. I love to find investments at bargain prices but I also do love a good growth story. And there are many of them, especially over the last two decades.

Passive / active investing

Passive investing is the far safer and easier and time-saving way to go. It’s not quite as exciting as active investing but for most people it’s the right approach.

Passive investing means fewer trades and fewer choices. It probably means you’re not looking at stock quotes regularly.

Active investors on the other hand are on the lookout for their next trade. They buy — and typically sell — more often and, hopefully, they spend lots of time doing research on individual stocks, market trends, and macroeconomic forces. Much of Graham’s book discusses what is required of this more ‘enterprising investor.’ Along with the time commitment this requires lots of knowledge, financial anaylsis know-how, and a voracious appetite for the details. If you are an active investor then hopefully you’re buying a lot more than selling. In that case, if you’re actively buying stocks, then you’ll probably do just fine. Heck, these last ~13 years you could’ve thrown darts at the S&P500 and you’d’ve made out quite nicely. I think Buffett said something like that.

Typically, passive investment portfolios include exchange traded funds (ETFs) and index funds, which essentially both mean a bucket of stocks. You can buy a bucket of US stocks or Chinese or European stocks, tech companies globally, US tech companies below $2 billion or over $10 billion, banks, gold/silver mining companies, and many more. The most common investment here is the S&P500 $VOO or $SPY — favored for their diverse pool of US stocks and rockbottom expense ratios. Vanguard founder Jack Bogle is credited with being the father of ETFs / index funds, and for that investors owe him a great deal. These investment vehicles have provided a large boost to the average individual investor, democratizing personal finance and wealth building in a big way. I own the flagship$VOO and others.

I aim to be a passive investor but picking individual stocks is just too much fun, while relying on indexes rather boring. I am a passive investor in that I (try to) transact infrequently but I am active in that I own lots of individual stocks, along with some index funds. Most of my time is spent passively though I’ve gone through spurts of active investing, primarily while deploying my funds as it takes time to build up an investment portfolio responsibly and incrementally.

When I reassess my holdings (in a year or so, I imagine) I will compare my results against the S&P500’s and most likely I’ll kick myself for making so many choices instead of just buying the S&P. But who knows, maybe this year I’ll come out on top.

The safety and efficiency of passive investing and the surety of compounding over a long-term horizon makes for a great combination.

Fundamental / technical analysis

If you are only interested in passive investing then this fundamental/technical section is less relevant.

Fundamental analysis entails looking at the financial statements, understanding the business, assessing management, competitors, and a host of other factors that contribute to the bottom line.

Technical analysis entails looking at the historical price charts and acting based on chart patterns. I avoid thinking in terms of these price curves because price is relative and based on underlying data such as the number of outstanding shares and valuation metrics. Don’t be fooled by thinking a high stock price means expensive and a low price means cheap.

I’m not a big believer in technical analysis when it comes to non-short-term investing, but assessing the charts and curves may be a good indicator of when to get in and when to get out. After all, a golden rule is buy low and sell high.

When I am assessing a stock the basic technical analysis I do is looking at the 3-month, 6-month, 12-month, 5-year, and all-time historical price charts to get a sense of where the stock is relative to its highs and lows, AKA its peaks and valleys. I may also check out the 50-day and 200-day moving average, widely viewed as two of the most important technical analysis tools, but I usually don’t pay much attention there. This data can all be found in a matter of seconds and for free on a plethora of websites.

When it comes to the curves, I love buying at valleys and I feel good about selling (hopefully infrequently, we prefer not to sell) at peaks. I don’t love buying at peaks, and selling at valleys hurts, but in any case I have to remind myself that these are just stock prices AKA abstractions or multiple of the underlying profits, premiums, purchase predilections, pro-forma predictions, prognostications, and pretend. The underlying business, along with my personal investment-versus-cash allocation considerations, is far more important — at the right price, of course.

For any given price, we use fundamental analysis in considering the stock’s underlying valuation metrics and multiples, both historically as a company and compared to their competitors.

Technical analysis may offer short-term indicators on price swings and momentum, but as investors we prefer to think longer-term where technical analysis is less relevant.

Fundamental analysis is where most efforts should be focused.

Day traders / investors

Day trading relies heavily on technical analysis and all but ignores the fundamentals.

Day traders are like active investors in over-drive except traders typically do less research. Day traders buy in and out of positions multiple times daily and often in the same company.

Leave day trading for the professionals and behave like an investor.

Web developer, amateur stock market investor, wannabe Torah scholar