See all blog posts

#cash_talk

How to Start Investing? (Ex Investment Banker Reveals His Unique Strategy)

By Sam Abrika

You want to learn about investing because it’s the smart thing to do. You tried to do some research but there is so much information and jargon that you don’t even know where to start! With the rise of social media, anyone can pretend to be a financial expert, but most of them have never set foot on a trading floor.

I used to be an engineer who didn’t know anything about investing. When I wanted to learn about the financial markets 10 years ago, I couldn’t understand a damn thing. Everybody who was talking about finance seemed to contradict each other, and I got the impression that they didn’t know what they were talking about.

So with my tech background, I moved to investment banking to understand the financial world and how the rich make money. I learned some industry secrets that completely changed my understanding of investing.

I believe that everybody deserves access to the best financial education, so today I will summarise my 10 years of experience in very simple language, and reveal my personal investment strategy.

Investing principle

Have you ever heard of the expression “money makes money”?

It’s not just an expression, it’s real. The reason the rich get richer is because they use their money to make more money. And the money it makes makes money. It’s a virtuous circle.  If you were not born rich, then your only chance is to start investing little by little every month until your investment makes more money than your job.

Actually, 88% of American millionaires were not born millionaires. Most of them just invested from their 20s until retirement and became self-made millionaires thanks to the magic of compounded profits.

“Compounded interest is the 8th wonder of the world. He who understands it earns it. He who doesn’t, pays it”

This quote is not from me, it’s from Albert Einstein. Einstein made many amazing scientific discoveries and won nobel prizes for it. But I think he also deserves a prize for this quote which perfectly summarises how our financial system works.

There are 2 types of people:

  • Those who save and invest, earn compound profits and will eventually become millionaires
  • Those who don’t invest and will be financially squeezed by the rising cost of life that we call inflation

You get it, smart people invest their money to build financial freedom.

Where can you invest?

When you invest, you buy what’s called a financial ASSET. An asset is a resource that has economic value. Its value can either grow over time or pay you money. Either way, assets are your friends, they make you rich.

The places where investors can buy and sell financial assets are called financial markets. You can think of them as marketplaces where on one side there are buyers, and on the other side, sellers. When a buyer and a seller agree on a price, then they have a deal and execute a transaction.

The marketplaces are typically organised by type of asset. Here are the main markets:

  • The bond market is where our governments and companies issue debt and pay interest rate to investors
  • The stock market, also called equity market, is where large companies issue shares. Buying a share gives you a tiny ownership of the company
  • Crypto exchanges is where people trade bitcoin and other crypto currencies
  • The Real estate market is where people buy and sell houses or commercial buildings
  • The commodity market is where companies buy and sell electricity, oil, wood, food, metal and other raw material
  • The foreign exchange market, also called FX market,  is where companies exchange foreign currencies

For today, I will focus on the stock market which is the most accessible, easiest to understand and most profitable for long-term investing.

The stock markets are huge. There are 60 major stock exchanges across the world listing more than $69 trillion worth of shares.

Just to help visualise how colossal the stock market is, with 1 trillion bills of $1 each, you could go around the globe 3 times.

Now imagine 69 trillion dollars, you could cover the entire land on earth! The stock markets are absolutely gigantic. Do you know why they’re so big? Because this is the place where investors make big money, and the more money they make the more they reinvest, the more companies grow. This is the virtuous circle of capitalism.

While people who keep overspending go into deeper and deeper debt, those who chose to invest get richer and richer.

how to invest

To build financial freedom, you want to belong to the bright side of capitalism. If you want to learn about the other markets which won’t be covered today, hit the subscribe button to be first notified of my future videos.

Investing vs trading?

When beginners think of investing, they often confuse it with trading. But these are 2 very different things.

Investing is believing in the long-term future of a company and ignoring the short-term noise. When you invest, you just buy and hold the stock for 10-15 years. It works because thanks to technological progress and innovation, our economy grows.

Trading is making money out of the short-term noise driven by irrationality, speculation or short-term strategies.

Trading means that you believe you’re smarter than the market. If you think that the price of an asset is too low, you’re going to buy, and if you believe it’s too high, you’re going to sell. And you’re going to buy and sell to another trader who is doing the exact opposite. So you both individually think that you’re smarter than the other, but there can be only 1 winner. What you win is what the other side loses and vice versa. In other words, trading is a zero-sum game.

Top traders can make considerable profits. But trading is ruled by very sophisticated players. You’re playing a zero-sum game against the world’s top investment banks and hedge funds who not only have billions, but armies of traders, data scientists, researchers, risk managers, and market data that you don’t have, and infrastructure that you don’t have. I’ve been on the other side, and honestly you don’t want to play that game.

It would be like trying to take over the US army with a slingshot. If you want to see the data, look at that. Brokers have the obligation to disclose which percentage of their retail clients lose money at trading, and it’s staggering. Look at this bloody massacre, nearly 80% of retail traders lose money at this game. This is the data from the top 100 biggest brokers in the world, it’s as comprehensive as it can get.

That’s why I don’t trade, and encourage all beginners to leave trading to the traders and instead focus on long-term investing.

How do you make money in stocks?

Before you invest in any type of asset, you should always understand the mechanics of that market, and how it’s going to generate profits. Never put a cent into something you don’t understand! It’s the best way to lose your money.

Long-term investors make money in 2 ways via the stock market:

  1. Capital gain

Imagine you bought 1 share of amazon 5 years ago. At that time, one share was priced at $800. Now at the time of this video, the share price of amazon is $3.656.

Doing the maths, your investment appreciated by $3.656 - $800 = $2.856 in 5 years

Thanks to uncle Jeff Bezoz and the hard work of his 1.3M employees, your initial capital of $800 is now worth 457% more! This is called capital gain.

Young companies like Amazon and Tesla are in the hyper growth phase. They are sexy, glamorous and all new investors are chasing them because they generate the most capital gains, as long as they can sustain their growth rate.

Does that mean that investors should only look at high-growth companies? It’s true that mature companies are not growing at the same pace. And from that angle, they lack sex appeal. So to make themselves attractive, they pay dividends to their shareholders.

  1. Dividends

Dividends are a redistribution of a company’s earnings to its shareholders. To understand how companies pay dividends, I first need to explain the basics of company accounting.

Companies listed on a stock exchange are called “listed companies”. They have the obligation to publish their financial performance on a quarterly basis. One of the key documents outlining their financial performance is called the “Income Statement”.

On the income statement, companies publish their gross revenue and expenses. Gross revenues - expenses = Net revenues.

If and only if they have positive net revenues, they may take the decision to pay dividends to their shareholders. What’s left after paying dividends is then called Retained earnings.

Paying quarterly dividends is harder than it seems. It requires businesses to be profitable every quarter, which is possible only when they have a fairly stable predictable business. Dividends are great for investors but it involves taking cash out of the company, which is money they won’t be able to reinvest into their expansion, R&D or to improve their productivity.

Even if they’re profitable, companies have no obligation to pay dividends, but many mature businesses are known to pay steady regular dividends. And the more a business is predictable, the higher the dividend they can pay.

If you want to check how much a company pays in dividends, look at what’s called “Dividend yield”

Dividend yield = dividend paid per share / share price

For example Apple is a sexy fast growing tech company that generates a lot of capital gain. Apple’s dividend yield is only 0.59%. It means that if you buy $100 of Apple stock, you would earn 59 cents of dividends.

Whereas Coca-Cola is a mature established business. They would pay 2.95% to their shareholders.

To recap, the stock market goes up when companies are doing well.

And investors make money through capital gains and by receiving dividends income.

Now you should be thinking: Ok but what am I supposed to do? Invest in high growth or high dividend companies? Do I need to spend days and nights comparing all the companies in the world to know which ones are the best?

No, don’t worry. I’ve explained to you the mechanics of the stock market because I want you to understand how it works. In practice, investing is simpler than that.

To recap, the stock market goes up when companies are doing well.

And investors make money through capital gains and by receiving dividends income.

Now you should be thinking: Ok but what am I supposed to do? Invest in high growth or high dividend companies? Do I need to spend days and nights comparing all the companies in the world to know which ones are the best?

No, don’t worry. I’ve explained to you the mechanics of the stock market because I want you to understand how it works. In practice, investing is simpler than that.

My investment strategy

I’ve spent 10 years in the financial industry, I’ve worked with many traders, asset managers, analysts… who managed billions of dollars. I’ve seen their strategies, their returns, their risk. And after all these years, I came to the conclusion that there is only one strategy that I should follow. And you might be shocked by how simple it is.

Before I reveal my investment strategy, please like this video and subscribe to my channel. I’ll share everything you need to know to be financially free!

My investment strategy is dead simple: I buy ETFs!

ETF stands for Exchange-traded Fund. It’s an instrument that replicates the whole performance of a stock index such as the S&P 500, or FTSE 100…

To give you an analogy, stock indices are like football leagues. Indices categorise companies into different leagues. The S&P 500 is the equivalent of the 1st league. It regroups the 500 largest American companies from 2 stock exchanges: the NYSE and NASDAQ.

The S&P index replicates the average performance of these top 500 companies. If a company underperforms, it will be kicked out of the index and be replaced by a better performing company. At the end of a football league’s season, the losers at the very bottom are relegated to the 2nd league and replaced by new contenders. Same for stock indexes.

Buying an ETF on the S&P 500 is equivalent to investing in the top 500 highest performing US stocks, in just one click. So by holding an ETF, my money is always invested in the top companies. Stocks that generate a lot of capital gain make me money. Stocks that pay dividends make me money. I just have exposure to the whole market.

Investing in ETFs is called a passive strategy. It has been made possible thanks to John Bogle, the founder of Vanguard. He wanted to give small investors a simple way to get into the stock market. John famously said: “Don’t look for the needle in the haystack. Just buy the haystack”

At the time, John was mocked and ridiculed by Wall Street. But today, investing in ETFs has become the #1 most popular strategy of educated retail investors, and recommended by all good Youtubers:

And by Tony Robbins, and Warren Buffet. And this is what beginners can’t get their head around.

“What?! Your entire strategy is to buy the whole haystack! I thought investors were supposed to be smart and find the needle in the haystack!” Guess what, the entire Wall Street tries to find that needle. And here is the dirty secret of Wall Street: they are incapable of finding any needle. Apart from exceptions like Warren Buffet, nobody can freaking predict the stock market!

You can’t believe it? Look, it’s even on the headline of the Financial Times: 99% of actively managed US equity funds underperform.

What does “underperform” mean? It means that their investment strategy generates less profits than their benchmark. And benchmark is just financial jargon that means S&P or Nasdaq index.

Let me read that out loud for you:

“According to the analysis, 99% of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, only two in every 100 global equity funds have outperformed the S&P Global.

That’s for the US market. But you might wonder if it’s better outside America. Let me keep reading:

“Almost 97 percent of emerging market funds have underperformed.”

Daniel Ung, director of research at S&P Dow Jones Indices, said: “The figures are startling." And yes they are!

Let me repeat to make it super clear. More than 90% of the guys graduating from MIT, Harvard, Oxbridge, wearing £3000 bespoke suits, talking jargon language on Bloomberg news and the FT, trying as hard as they can to beat the market, can’t do it.

It’s not because they’re stupid. Most of the asset managers I’ve met are between quite smart and extremely smart. They just can’t beat the market.

Researchers have tried to understand why mutual funds underperform, and you can read the whole report if you like intellectual masturbation - the link is in the description of this video. But the short answer is that companies are driven by humans, and humans are not easily predictable.

In case you’re still not convinced, I have interviewed Will Rainey, a former asset manager with 15 years experience. He has managed billions of dollars of pension funds and researched all the investment strategies you can think of. Hear what he has to say:

In summary, ETFs are the simplest and most efficient way to invest. I told you! My investment strategy is dead simple.

Most people try to automate their savings and try to actively manage their investments. I do the complete opposite: I manage my expenses very closely and leave my investment on autopilot. Saving is the only hard part of investing, but the more I save, the more I can invest, the more money I’ll make.

What to expect?

Since 2000, the US stock market has grown at an average of 10% per year. This is an average, there were good times and bad times. And no one has a crystal ball to predict when the bad time will strike. That’s why you have to see investing as a long-term game. Don’t expect to get rich overnight. If you ever come across a “get rich quick” easy money scheme, stay away from that, it’s a scam.

Investing means taking a short-term risk for a long-term expected gain. In the short term, the markets are volatile, they can go up or down and no one can predict the short-term direction. And personally, I don’t really care because in the long-term, companies tend to make more money. And when they make money, I make money!

So when I invest, I think forward and ignore the short-term noise. US companies have been so far the best performing, will it be the same in the future? Well, no one can tell for sure, but here is what I have noticed. All the rich people, large companies and pension funds are heavily exposed to the US economy. If there is one thing I learned about rich people it’s that they HATE losing their money.

For example, when the world entered lockdown, the whole market crashed by nearly half. People who had jobs were screwed, investors were screwed, everyone was screwed. So governments stepped in, printed trillions of dollars to stimulate the economy, which caused high inflation.

What’s inflation? It’s the general rise of all prices in an economy: goods, services, assets…

The stimulus helped the stock market to recover in no time, and it even reached record high levels. Governments can’t let the stock market crash forever, because this causes a domino effect:

  • Unemployment rises, people get angry
  • Pension funds crash and retired people get angry
  • The big companies financing the politicians’ campaigns get angry
  • Rich and affluent people get angry

Basically, politicians can’t let companies down if they want to be reelected!

In other words, the financial system is using the political system as a safeguard against downturns. The good part is that I don’t even need to lobby, the world’s most powerful people are already doing it for me. The second I become an investor,  I join the side of the most powerful people in the world. And they are the ones working to make my money grow!

That’s why we say that investors have money working for them, rather than working for the money.

Is it the right time?

It’s time to invest if you meet these 2 requirements:

  1. You’re free from any expensive debt like credit cards or overdraft. The best you could hope for when investing is to generate a 10% annual return, so if you pay a 20% interest rate on your debt, then start by getting rid of it. I see people investing because it has become cool and trendy although they’re still in debt. They always come up with some funky reason “Yeah but I need to buy Tesla and GME right now”. The math is very simple: 20% > 10% so I don’t care what your reasons are to invest while in debt, if you’re against the maths, then you’re wrong.

  2. You already have built your safety net. You need to have enough savings to survive without income from 3 to 12 months. How long to survive is up to you, what matters is that you have enough money to feel safe and cover the unexpected.

When you know that you’ll be safe for one year no matter what happens in the world, you feel more confident about investing.

For example, if you have nothing in the bank, the idea of investing and losing £100 will feel dangerous. But now imagine that you have saved £10k, then investing £100 is just 1% of your money. Your mind will be at peace to play with 1% of your net worth. As an investor, it’s super important to feel comfortable with your financial situation. Because the last thing you want is to panic when the market is down. Scared money is loss-making money. When people panic, they sell at the lowest point instead of waiting for the storm to pass.

How to get started

There are ETFs to replicate the performance of almost any market. I like to invest in the S&P 500 because it’s the most diversified and gives me exposure to the US biggest companies.

There are many platforms where you can invest in ETFs.

I use Vanguard because I’ve always respected this institution. John Boggle created Vanguard to democratise index investing, to help people like you and me take control of our investments without paying expensive fees to Wall Street. While the likes of Robinhood and Citadel paid millions of fines for screwing retail investors, Vanguard always remained true to the value of its founder and always acted in the best interests of their clients.

They offer the cheapest and most transparent access to ETFs. However, their website and interface are really not sexy.

I’ll show you quickly how I navigate through my Vanguard UK account. In the UK, the most tax-efficient account to open is Stock and Shares ISA where you can invest £20k year tax-free. It’s crazy when you think about it, people who work are taxed at 50% but those who invest can pay 0 taxes.

I don’t like blended funds because they have higher fees. So I go to Equity Funds, there is a selection of 33 indexes, and I like to invest in the US market, and here I pick the S&P 500.

I can either transfer a lump sum, but it has to be at least £500 or set up a monthly direct debit of at least £100/month. I know it’s not as friendly as all the platforms that allow you to invest from £1, so Vanguard is better suited for those who can already afford to invest £100/month. If that’s not yet your case, then I recommend you watch my video on my method to save money and I’m sure you will be able to spare 100/month.

I like Vanguard’s transparency because most investment platforms hide their real fees behind so much jargon. The Vanguard ETF on the S&P 500 costs 0.07% and their yearly admin fees are 0.3%. If you guys know a cheaper platform, let me know, I would be happy to review it, but to my knowledge this is the best deal we can get as retail investors.

Then I always keep track of my finances with Nova Money which categorises my transfers to Vanguards as investment and not as spending. So at the end each month, I know exactly how much I’ve spent, saved and invested.

Conclusion

All right folks, I’ve told you everything you need to know about investing and how I do it.

Investing is super easy, the only hard part is saving your money. The more you save, the more money you’ll make. Now it’s your turn to take action, I’ve included the links to Vanguard and Nova Money in the description.

Make sure you’re investing in your financial education, make sure you’re building your financial freedom, and I’ll speak to you in the next video!

Build your financial freedom with Nova

YouTube Twitter LinkedIn YouTube


Start the adventure now

4.4 Stars
4.6 Stars
Tags

all

ethical consumer

money saving tips

how money works

consumer behaviour

consumer psychology

spending habits

money mindset

cash talk

debt

christmas

how to cancel

reflection

podcast

eat well for less

coronavirus

consumerism

Nova Money (former Cash Coach)