- How's it going today guys? Welcome back to the channel, so in this video today, we're gonna be talking about
investing in the stock market as a complete beginner. Now this is actually a video I covered, just about two years ago to the day. Back in October of 2016, I believe it's my first ever, one of my first ever YouTube videos I made was called Stock Market For Beginners, and that video is still good, it has some decent information, but a lot of the stuff that
I talk about in that video, I have a slightly different
opinion of it now. And largely, that is due to the fact that back when I made that video, what I was doing was swing trading. I was trying my hands as a swing trader, and so often times, in that video I'm referring to trading
as opposed to investing. And so I kind of want
to share with you guys what I've learned over the last two years of making videos, relatively frequently, about investing, being
invested in the stock market, reading dozens of different books. I have a lot of good information to share with you guys here. So I'm going to cover with you my top 10 stock market lessons that I've learned over the last two years and prior to that as well. So, it's an update video from
that video two years ago, and it's also, you know, a lot of information I've developed
and learned over the last couple of years as an investor. So, if you guys are not
familiar with who I am, my name is Ryan Scribner. I've been investing in the stock market for about five years now. Like I said, I started off
as kind of a swing trader. I've done many different things. I've never been a day trader, but I've tried swing trading, I've tried, you know,
betting on earning reports, and things like that, and what I've found over time is that the only time I was able to be predictably
profitable with my investing, was by being a long-term investor. Now my background is actually
in electrical construction. So, I don't have any kind
of finance background. I'm not a financial advisor. So, I am a self-taught
stock market investor, and so, basically that is my background and that pretty much gets
us up to this point here. Okay, so now that we have
that introduction there out of the way. Now I want to get into the basics and give you guys some
realistic expectations when it comes to investing
in the stock market or trading stocks, or whatever it might be
that you're looking to do. Because, anybody whose
watching this video, you could be in completely
different areas, in terms of what you're looking to learn. Some people might be
interested in day trading, some people might be interested in Forex, some people might be looking
to get into cryptocurrencies, some people might be looking
to be a long-term investor. And so, what I want to do at this point, is kind of give you guys
realistic expectations as far as what you should be looking for, out of these different
investing mechanisms, or methods of investing. So, first of all, I want
to share with you guys a statistic as far as active traders go. Now, active traders are people who are buying and selling
stocks on a regular basis. This could be day traders. This could also be swing traders. It's basically people who
are making short-term moves in the stock market. While they were able to look at data from different exchanges out there, and determine how many of
these short-term trades were actually profitable. And what they found was that 90 out of 100 active traders were losing money. So, 90% of active traders
end up losing money. Now, of those 10 who actually make money, one out of 10 of those
people are what you call, predictably profitable. So, essentially your odds of
being a predictably profitable, short-term trader or active
trader sits at around 1%. So, for every one successful trader, there's 99 who are unsuccessful. Now, am I discouraging you
from being an active trader? Absolutely not, I think you guys should do
whatever really interest you, but I just want you to
have realistic expectations getting into this, and not thinking that, you know, most traders are successful. That is not true. Most traders are unsuccessful, about 1% are predictably profitable. Now, lets talk about
investing in the stock market, and being a long-term investor. What are your odds of
really being successful? Well, what we can do is look
at data from mutual funds, to determine what is the
average rate of people who are actually beating the market. Now, when I'm referring to the market, what I'm talking about is the S&P 500. It is the culmination of the 500 largest, publicly traded U.S. companies. A lot of people will use
this as a benchmark to determine how the overall
stock market is doing, and when people refer to
themselves as beating the market, it means they beat the S&P 500 return. So, over the last 15 years, there was 15 years of data, that this was used to
calculate these numbers, 7.8% of large cap mutual funds were able to beat the S&P 500, and 92.2% of these large cap mutual funds fell under the S&P 500. Now, these are professional stock pickers. These mutual funds are managed
by professional investors. There managed by a teams of people, with billions of dollars of assets, and they have so much money
to devote toward research. They have so many different
members of their staff, that are researching
investments every single day. And even with all of
these different resources available to them, just over, I'm sorry, just under 8% of them were able to actually beat the market. So, if you want to take a
step back and think about, well, what are my odds
of beating the market if only 8% of the professionals, or less than 8% of the professionals are able to do it, you're odds of beating
the market are not good. Now, again, is it possible
to beat the market? It absolutely is, but I just want you to understand that the odds
are not in your favor when it comes to being an active trader or when it comes to
actively picking stocks and looking to beat the market. Am I trying to discourage
you from doing this? Absolutely not. My personal investing strategy is 50% individual stocks
and 50% into index funds. And so I do put half of my money, my portfolio, into individual stocks just because I really enjoy
the process of picking stocks, researching investments,
and so personally, that is why I choose to do it. In the long run, I do
hope to beat the market, but I know that really
its never guaranteed. And just in case I don't, that's why I have half of
my money in index funds, where I'm actually owning the market. Now, I forgot to mention this as well, but, if you guys are looking
to learn more about investing in the stock market, of course I have my YouTube channel here with over 100 different, or probably 200 plus
different investing videos. I also have a blog, I've been working on for
the last couple of months. It's called investingsimple.blog, and I actually put together
a article over there, that is more like an E-book. It's about a 10,000 word article called, A Beginners Guide to
Investing In The Stock Market, and it's going to go through
everything we talk about in this video, but into
a little bit more detail. So, if you guys are looking
to learn more about investing, that is a really good
resource I've put together. I'm very proud of it. Dozens of hours have
gone into creating that. So, I'm going to link it up, down in the description below, but I would appreciate it if
you guys will bookmark my site, investingsimple.blog, Cause there's going to be a
lot of really good information over there for you guys that
are looking to learn more about investing. So, the main takeaways
I want you guys to get from this introduction with
your realistic expectations, is that first of all, active trading is not as
lucrative as it seems. A lot of people are running ads saying oh, they're making millions
of dollars trading. Maybe they are, maybe they aren't. But, the data speaks for itself and it shows us that most
active traders are unsuccessful, and 90% of them are losing money. The second thing we
have to understand here is that it's pretty difficult
to actually beat the market, and under 8% of the
professional stock pickers are able to do this. But, there are some factors involved here, and there are some limitations that these fund managers have. Their managing billions of dollars, and they can't nimbly
move in and out of stocks, and they're limited to just investing in very large companies
because they have to invest so much money to have
a meaningful position. And, if they were buying small companies, they would have to own
half the company or more, just to have enough skin in the game. You, as the retail investor
have a couple of advantages. One of the big ones being
that you are not limited to just the largest 50, or the largest 100 publicly traded companies. You could possibly unearth, you know, small cap value,
and find hidden gems that these large fund
managers are overlooking. So, that is one of the
clear advantages you have, as the small retail investor. And, then finally like
I said if you guys are really just looking to own the market, you can be an ETF investor, you can go that self-managed approach, which is what I do. I buy ETFs, I buy index funds. You could talk to a financial advisor, but if you don't have a lot
of money to be investing, they may not take you on as a client. But, another option that has
come up in the recent years is these robo-advisors, and this is basically an
algorithm-based financial advisor. And, the key benefit to this
is a very low fee structure, and the fact that with Betterment, one of the most popular ones out there, there is no minimum account balance. So, if you were to go to
your financial advisor and say, hey, I want you to diversify and invest a $100 for me, they may not be able to do that for you, because it's not worth it for them. But, because Betterment is a robo-advisor, and they're algorithm-based,
it doesn't matter. They will take on very small accounts. And if you guys are interested
in signing up for Betterment, I have a link, down in
the description below, it is an affiliate link,
you do not have to use it, but understand if you do, it
helps to support my channel and allows me to make
more videos like this. Okay, so now we're going to go ahead and get into the first lesson here for the stock market beginners
that you have to understand. I'm sure you've heard it before, and that is to buy low and sell high. Now, I know a lot of
people are thinking that this is just common sense,
everybody should know that, the way you make money
in the stock market is buying low and selling high. But, it's not common sense
because most people I hear from, the comments in my videos,
most people I talk to, are doing the exact opposite of that. They're buying stocks high, they're buying at all time highs, hoping it's possibly going to go higher, and the thing is there's no guarantee at that point that the stock
is going to go any higher. They're buying high hoping
for it to go higher, but in most cases,
they're going to buy high, and then they're going to sell low. So, understand that,
especially as a beginner, you are very prone to
making this mistake of buying high and selling low, which is the exact opposite
of what you're looking to do. Now, the main place of that
this is actually happening is in something called
a speculative bubble. Maybe you've heard of these before, if you've heard of the dot com bubble, if you've heard of the
2008 housing market bubble. If you've heard of cryptocurrencies, possibly even marijuana stocks. These are speculative bubbles
that form in the market, and a lot of brand new,
or novice investors, get caught up in these, and they can be very
painful learning experience. Now, this chart over here is exactly what a speculative
bubble looks like, and I want to walk you
guys through this process. Now, while this might look like a fun ride if it's a rollercoaster, it's
not going to be a fun ride if you're an investor,
because most people, the general public, the
average retail investor, while they're getting
involved right about here, somewhere in this upper
movement of this trend, when the general public is learning about a particular investment,
and at that point, it's pretty much a
slippery slope downhill. I never invest in anything that is having any bubble like appreciation, but unfortunately, that's where
a lot of the excitement is. A lot of people hear about you know, crazy returns that were being
made with cryptocurrency or marijuana stocks, or
even technology companies, and internet companies in the 2000s, and they want to be investing
in the exciting new thing. Well, here's what you need to understand about these speculative bubbles. Number one here, all the way
at the very bottom left here, we have the early innovators. These are the people who really
understand the technology, or the innovation. If we're talking about Bitcoin, these were the people who
bought it in 2011, 2012, very early on, before it was mainstream. They really believed in the technology, and they were the ones who were the cutting edge
innovators of this trend. Now, number two here, that's where we have the
institutional investors, the large investors. They catch wind of these new investments long before the general public does, and if they see this as a good investment, they're going to say okay, we want to put
some money toward this. Remember that as we said earlier, these professional fund
managers have millions, if not billions of dollars
that they're investing. And, they have teams of people doing research every single day. They're going to hear
about stock before you do, it's just inevitable. There's no way you're going to hear about a particular stock, or
particular cryptocurrency, or anything like that, before
these large fund managers. So, they're going to take a look at it and they are going to say okay, yes, I want to invest
this funds money into it or maybe we want to stay away. But, right here at that number two, that is when these large, institutional investors
are getting involved. Now, where we see this line
really start to take off and go up like a rocket, that is when it hits the general public. That is when the general public catches wind of a particular investment, and the average retail investor is beginning to buy this particular asset. And, that is when we see it
start to shoot up like a rocket, and then come crashing down. It's happened so many different times. Guys, try to avoid getting caught up in these speculative bubbles. It's not going to a fun ride for yourself, but it will be a very
valuable learning experience. Now, the other lesson I
want to give you guys here, one of my favorite
analogies to share about, buying low and selling
high with the stock market, is by using an example of
looking at a grocery store. So, we all go grocery shopping, or we at least have a general idea of what we're going to be
paying for certain products. Possibly soda, or cold cuts, or chicken. You know, we have a general idea of what these things are worth. Or, laundry detergent. So, let's say for example
you regularly buy Coca-Cola, yeah, it's probably bad for
your health, but whatever. You're buying two liters of Coke, and you buy one or two every single week. And, you know that you
usually go to the store, and you expect to pay $2 for that two liter of Coca-Cola. Well, all the sudden you
go to the grocery store and you find out that two
liters are on sale for $1. Meaning that you can buy
this two liter for half, of what you normally pay. What are most people going to do? Are they going to buy just one? Probably not. They're gonna stock up, and they're going to buy multiple items. They're going to buy many
different items here, and they're going to buy a
bunch of different two liters because of this massive sale going on. So, when you see prices of goods on sale, people will stock up and buy more. Now, on the other hand,
we have Coca-Cola stock. Coca-Cola stock, obviously
this company makes Coca-Cola, and this stocks usually trades somewhere around $50 per share. But, let's say for example,
this stock has a pullback, and it goes on sale by
20% down to $40 per share. People don't buy it. They're afraid to buy stocks on sale. You'll go to the grocery store. You'll buy Coca-Cola soda on sale. You'll buy laundry detergent on sale, but you're not going
to buy Coca-Cola stock, or Procter and Gamble stock on sale, because, as soon as people
see stocks going down, they become fearful and
they don't want to invest. So, understand, this again is another one
of the cardinal reasons here why people are afraid
to invest in stocks. It's because when they
see them going down, they say you know what, I don't
want to be a part of that. But, that is the exact time
when you should be buying, is when these stocks are on sale. It's just like loading up on, you know, Coca-Cola when it's on
sale at the grocery store. Okay, now the second lesson
you have to understand, or learn as a beginner
in the stock market, is to ignore the noise. Now, there's a blessing and a
curse at this point in time, or in this day and age, and that is we are surrounded
by information streams and information outlets. Now, this can be good and it can be bad. But, what this means is that you always have
people sharing with you, their opinion about your investments, or pretty much anything in general. And so, you really have to
start to ignore the noise when you become an investor. When you invest in a stock,
or particular company, you're doing so because you
believe in this company. And, later on, we're going to
go over some of the factors I look into or my investing plan. So, you have outlaid or laid
out a plan for your investment, you know why you invest in this company. And so, your opinion shouldn't
be swayed by just anybody. But, today we have so
many different things or outlets out there that
could sway your opinion. It could be people at work, it could be the news stations, it could be your television, heck, it could be YouTube. There are a lot of people on YouTube now, sharing their opinions on
stocks, myself included. It could be Wall Street analysts, it could be friends, it could be bars, The thing is when you become an investor, and you're investing in stocks, it's almost kind of like sports. People talk about the
stocks they invest in, because it's kind of a fun social talk. But, you have to make sure you have a difference there between, the social side of being an investor and talking about stocks with your friends versus having anybody being
able to sway your opinion and make you decide okay, you know what, my friend, Joe, said I
shouldn't buy this stock or maybe I should sell
it because, you know, Sara's selling hers. You don't want to be following
other people blindly, or letting anybody sway your opinion. And, what you have to understand is that at the end of the day, activity is what makes
money for Wall Street. They're going to make
money when you're active. They want you to buy a stock on a Monday, sell it on a Thursday. Next week buy a different
stock, sell a stock that week. They want you to be buying and
selling stocks all the time, because they make money from commissions, they make money from trades. And, the more frequently
you are trading stocks and changing your mind, the more they are making money. So, they're going to do as
much as they can to share, you know, news stories. They know that when they exemplify details and blow things out of proportion, more eyeballs are going to
be on that news article. So, they're going to
do everything they can to make things sound more
dramatic than they are. And, this is why, typically speaking, you get more drastic reactions to events in the stock market then you should. Now, as a smart investor
or an informed investor, you understand that's were
opportunities might lie, is when there's a drastic over reaction to some kind of news report. But, understand that most
people are going to make that mistake of listening to too many sources, getting too much
information, and you know, maybe even possibly making bad decisions because of what their friends say, or what they're hearing on YouTube, or what they're seeing on TV. Now, what about stock
tips on the other hand? What if you're at the bar, or you're at work, and one of your friends
comes up to you and says, hey, I got this great stock tip for you, my friend works at this company, he says the stock is going to go up, or this stock is going to get, you know, acquired by another company. You should buy in right now. Should you listen to stock tips? Well, this is what I
have to say about that. Your investing strategy
at the end of the day needs to be two things. Number one, it has to be scalable, that way it works with $10, it also works with $100, it also works with
$1000, $10000, and so on. So, it works the same
amount of money you put in regardless if you have
a little bit of money, or a large amount of money. And, second of all, it
has to be repeatable. At the end of the day, your investing strategy
has to be something where you can consistently
put money into it, and it can pretty much
reliably put money out for you, and spit money out based on your strategy. Is this strategy of getting
random stock tips at the bar, or at work a good investing strategy? It's certainly not repeatable, because you don't know when
you're gonna get your next tip. Even if you're right, even if that person is right, and you buy that stock and
it goes up like a rocket and you sell it and you
make a bunch of money, what is your next move? Is your next move just to
wait until somebody else randomly comes up to you with a stock tip? Or, you overhear a conversation at work? That is not an investing strategy, and I would discourage
you from following it and falling into this mistake
of listening to stock tips. You need to learn to make
your own investing decisions, and if you don't want to do that, then you should just
be a passive investor. You should, you know,
you could be self-managed like I said, like I am
myself, by buying ETFs. You could look into a
robo-advisor, a financial advisor, but you should let
somebody else, you know, make these decisions on your behalf. Or, just be somebody that
owns the broad market rather than picking stocks. And, as far as keeping
track of your investments and reading news articles, and being informed as an investor, you need to understand
there is a very fine line between being informed and being obsessed. It's very easy to become
obsessed with investing or obsessed with your stocks, and you're just taking in
too much information at once. And, the issue with that, is it's going to cause you
to make jump decisions. Personally, I don't
read every news article about the companies I invest in. I do read earnings reports, and I do keep track of major
interviews with management. But, as far as the short-term noise goes, I pretty much just ignore it. Because, I make sound
investments based on my strategy and based on my own research. And, I don't let the, you know, the thoughts and feelings, and what others have to
say about my investment, swing my decision. Okay, so, the third lesson
I want to teach you guys is one that comes from
this book right here. It's called The Intelligent
Investor by Benjamin Graham. One of the best books, if not the best book
on investing out there. I have a link for it down
in the description below if you guys are interested. Now, it is a book that is almost, I think it's over 600 pages. So, it's not a light read at all. Very small text, but it
is a very valuable book. And, this is a lesson
about the stock market being like a pendulum. Now, this is something
that Benjamin Graham's said himself in this book. He says that the stock
market is like a pendulum, forever swinging between
unsustainable optimism and unjustified pessimism. And, it looks exactly like this. You at some point have people
who are fearful in the market, people are afraid to hold stocks. And, it swings over here and you get an overwhelming
supply of stocks hitting the market and the
market going into a selloff. And then, at other times, people are very, you know,
believing in the stocks. They want to be investing in stocks, and their buying them left and right. And, people are getting greedy and that is when you have demand. This is basically at the end of the day, the basics of supply and demand. That is all the stock market is. And, you have to understand
that this controlled simply by two emotions, and that is fear and greed. Fear causes people to selloff, that causes a supply to hit the market, and as such, the prices fall. And then, greed causes people
to buy stocks left and right. The demand goes through the roof, and then, prices surge. And, it's always going to be happening, and it happens on a
minute-to-minute basis. A week-to-week, day-to-day basis. A year-to-year basis. So, you're always seeing this
take place with the market. This swinging back and forth between unjustified pessimism
and unsustainable optimism. Now, one of the important things you have to understand looking at this, is that you should never fall
into something called FOMO. And, this is exactly what causes those speculative bubbles to form in the market. FOMO is the fear of missing out. A lot of people fall into FOMO when they see a stock or an
asset going up like a rocket. And, they say oh my gosh, I missed out, I should have bought earlier. I should have bought
last week, or last month. But, I'm gonna buy it now because it's gonna continue
to go up like a rocket. That is the mistake people make, because we know now that the stock market is always swinging between
optimism and pessimism. And, that particular stock, right now, is swinging toward
unsustainable optimism. And, rather than buying it
at this all time high price, and trying to get in on this moving train, you should be patient, and wait for that pendulum to swing back into the other direction. For example, one of the
stocks that everybody has been trying to get
their hands on is Amazon. Everyone loves Amazon, they want to be a shareholder. And, that stock has hit a high, I believe, of over $2000 this year. And, we are just now seeing a good pullback with Amazon stock. I believe it was around $1500 today, somewhere between 1500 and 1600. And, this is one of the first, sizable pullbacks we've
seen with the Amazon stock, because they had earnings that did not please Wall
Street investors or analysts. Now, that is time you want to say okay, I'm gonna be greedy
when others are fearful, take advantage of that sale. I understand that investors are prone to overreact to the news, so, I'm going to capitalize
on that overreaction. That is when you buy as an investor. You don't see Amazon
stock at $2000 a share, at all time highs, and say
okay, FOMO was triggered. I'm afraid I missed out, I better buy and get in on this now, before it goes even higher. So, always wait for the
right opportunity to buy. It might take awhile, but it almost always presents itself, just be patient. The stock market is
honestly a waiting game, more than it is any thing, it's waiting for the right time to strike. Waiting for the right time to buy. And, just being patient
and really, you know, understanding it's a long-term investment. If you're gonna be an investor, it's gonna be something you're
doing for the long-term. And, just be patient and wait
for that right opportunity. Okay, lesson number four
is very important, as well. This is a lesson that comes from both Benjamin Graham
and Warren Buffett. And, this is investing in
what you know or understand. Or, what Warren Buffett does, and that is investing in very simple, easy to understand businesses. So, all of these companies I've listed out on the bottom here, are companies that Warren Buffett owns. Now, I want you to think
about these companies as I go through the list here. We have American Express. We know everybody buys
stuff every single day, we need credit cards, we
need ATM cards, debit cards, American Express payment services. Very simple, easy to understand business. Number two, Bank of America. We've got to have a
place to put our money, we don't wanna put it under our mattress. Bank of America. Very sound investment. One of the largest financial
institutions out there. Number three, Apple. This has been one of the only investments that has really deviated
from Buffett's core strategy of avoiding technology companies. But, Apple has been in
the market so long now, they're not going anywhere. Their products have become a every day, a part of our lives and a
central part of our lives. So, at the end of the day, we know people buy iPhones. Every single year, people
love Apple products. A pretty easy business to understand. Coca-Cola. People buy Coca-Cola products. They have thousands of
different beverages. People drink them every single day. Southwest Airlines. We know people have the
need to travel for business, or vacations all the time. Airline stock makes a lot of sense. Delta Airlines, as well. Same thing. Phillips 66. That is a petroleum company. We know people are always
using gasoline to drive. We need gas for different things. Again, very simple, easy
to understand businesses. Do you see Warren Buffett
buying cryptocurrencies? Do you see Warren Buffett
buying into marijuana stocks? Or, bio-tech stocks? Or, mining companies? No. Because those are not simple businesses, they're not easy to understand. If you want to invest into
a bio-technology company, go ahead. You can invest into whatever you want to. That's one of the beauties of being an individual stock owner. There are thousands of different
companies that you can buy. But, I just want to encourage you to at least have a basic understanding of what it is that you are investing in. And, I would say, as well, the simpler it is the better. And, if Warren Buffett wouldn't buy it, maybe you shouldn't be buying it. Now, if you do understand
bio-tech companies. If that's the business you're in yourself. Or, you understand mining, or, you understand, you know, some of these really
speculative industries, then, by all means, you can invest in these things. But, if you don't understand them, how are you going to know what you bought? When the company falls on hard times, and that stock crashes. What are you gonna do? How are you going to know whether or not to hold that company? Take your loses? What should you be doing at that point? You're not going to know what to do, because you'll have no idea
how to value this company, or what exactly is going on, because, you don't
understand the business. Invest in the business
that you understand. Now, one of my favorite ways to test myself on the understanding of a company I purchased, is the thirty second elevator pitch. What this basically is, you can do it to yourself, you can do it your dog, or, do it to your friend. You're gonna give a 30 second pitch, basically explaining what a company is, and what their business is. And, if you're not able to
do that in thirty seconds, in a very clear manner, that anyone could understand, then you probably don't understand this company well enough
to be an investor. So, if you're looking
into a particular stock, and you wanna gauge whether or not you have a good understanding
of this business, try the elevator pitch with a friend, or like I said, with your dog. And, see if you are able to do it. And, if not, you might
have to do more research. Or, maybe you should consider investing in something else entirely. Okay, lesson number five, is to plan out your investments, and plan out your purchases
in the stock market. Investing without a plan, is pretty much the same as trying to start a business without a plan. You're pretty much doomed from the start. You need to have a plan
when it comes to investing, and what you're looking to purchase, and at what specific price. Now, this is a very, very basic plan with four different elements. And, this is the bare
minimum of what I would do if I were to be investing
in individual stocks. Now, you can go above and beyond this. I certainly encourage you to, but at the very least, these are the four things
I would be able to identify before I began buying a stock. Number one, the price. You wanna understand what is the price you're willing to pay for this particular stock. Are you looking for it to come back and fall back to a support area? What price are you looking to buy at? And, this could be a range. So, for this example here,
I'm gonna be using Amazon. This is a company that I
would be willing to buy at the price of $1350 to $1400. Now, the reason being is because I was an
early Amazon shareholder. Not super early, but I bought in about $950, and I ended up selling it at $1350. Now, that stock again went on
from there to $2000 a share. So, I sold out very early. But, if I could get back in, at a price around what I sold it for, I would be willing to get
back in on Amazon stock, because I believe in it
for the super long-term. Now, the second thing you wanna look, at as I mentioned, is the term. How long do you plan on
holding this investment? Is it for one year? Is it for five years? Ten years? For your whole life? You wanna have a general idea of how long you plan on
holding onto the stock. So, for me, if I were to
purchase Amazon stock, I know I would wanna hold on to this company for at least ten years. Because, I think it's going to have, you know, tremendous
success in the long-term. The third thing you wanna
look at, is the weight. And, that is how much weight the stock is going to carry in your portfolio. And, that is gonna make
a little bit more sense when we talk about the next lesson, which is to diversify. You wanna have an idea of
how much weight the stock is gonna carry in your portfolio. And so, for me, I would be comfortable with having a, 10% stake in Amazon stock, of my total portfolio. So, it doesn't matter if
you're investing $2000, $20,000, $500,000. What you should care more about, is the weight that that's
gonna carry in your portfolio. And, the fourth and final thing you should have is a thesis. Or, basically a statement of
why you are buying this stock. And, that is your general theory, towards why this stock is going to, hopefully, go up in price, over the next 10 years in this case. And, my bullish thesis on Amazon is simply that consumer shopping
habits have changed. More people are buying on line. I think E-commerce is going to be huge. It's gonna be even
bigger than it is today. And, Amazon is gonna benefit
from this growth of E-commerce. That is my bullish thesis
surrounding this stock. And, you should have exactly this in place for any stock
you're preparing to buy. Okay, lesson number six, when it comes to
investing, is to diversify. I'm sure you guys have
heard this saying before, of don't put all of
your eggs in one basket. That is the basics of diversification. If you've got a hole in that basket, all of a sudden, all of your eggs fall
onto the ground and break. You know you're out of luck at that point. You wanna have eggs in different baskets. You want to be diversified. Now, a lot of people ask me, do you need to be
diversified from day one? Let's say you're investing
a $1000 in the stock market. It's hard to diversify a $1000, because stocks all trade
at different prices. So, lets say, you want to invest in a
stock like Amazon, or Google. Those stocks are over a thousand dollars. You might not even be
able to afford one share. So, how would you be able
to be diversified without, you know, having tens of
thousands of dollars to invest? Now, there is an alternative to this. There's a new brokerage company
out there called M1 Finance. And, they allow you to buy fractional shares free of charge. It's really amazing what they offer. But, you can buy as little
as 1/10,000 of a share, which means you could build
a well diversified portfolio with as little as a $1000 dollars. So, I'm gonna link it
up in the description, as well, as a link to M1 Finance. It's an affiliate link. You guys don't have to use it. But, again, like I said, it helps me out. It helps support my channel, and allows me to make
more videos like this. But, M1 Finance is in my opinion, the best platform out there to build a diversified portfolio, with a very small amount of money. Now, if you don't want to do that and you want to be diversified, in my opinion, I feel that
you should worry about that once you have $10,000 or more invested. Up until that point, you don't want to put all of your money into
one particular stock. But, you don't wanna worry so much about, you know, sector diversification, and, you know, buying different companies and having money in different
areas that early on, because you wanna build
a meaningful position in these companies. And, so if you're investing
a $1000 to $10,000, like I said, in my opinion, you don't necessarily
have to be diversified. But, once we're talking
about $10,000 or more, that is when, I believe, it is more important to become diversified in the stock market. Now, on the other hand, there is such thing as
being too diversified. And, it's a trap that a
lot of people fall into. I can remember one person I talked to, I think it was a little
over a year ago now, and this was an individual who had $5,000 invested
in the stock market, and he owned 57 different companies. So, most of his investments were just, one single share of this stock. Now, that on the other hand
is not diversification. That is just stupidity. This guy had way too many stocks, way too many eggs in way
too many different baskets. And, it was just all over the place. If you're gonna do that, just invest in index funds
with diversification built in. Personally, I like to hold no more than five individual stocks. Right now I have five. Maybe I would have five to seven as I have more money to invest. But, that is as about as many companies I want to keep track of. As an investor, you're keeping track of earning reports and annual reports, and, you're keeping track
of these investments. And, every stock you
put into your portfolio, it's another company to keep track of. So, what that number is for you, it's gonna be different for everybody. But, for me, I know five
to seven is a good number, and, I'm able to keep track, you know, reports and be an informed investor on five to seven different companies. This guy who held 57 different stocks, there's no way he could ever keep track of all those investments, and that's pretty much what he said to me. He said, you know what, I have no idea why I own these stocks. I don't know why they're going up or down, and, I don't know what to do. So, don't be that person
that confuses this with overly diversifying, and buys over fifty different stocks. That is not diversification. Okay now, lesson number seven
is one of the most common mistakes I see with beginners
in the stock market. And, that is thinking that a
low share price indicates that that stock is cheap, and high share price indicates
that that stock is expensive. It is not true, and I'm gonna show you
guys exactly why that is. So, let's take two tele-com
companies for example here. On the left there, we have AT&T, that stock trades at about $30 per share. And, on the right we have
Frontier Communications, and, that stock trades at $5 a share. So, is AT&T six times more expensive, than Frontier Communications? Absolutely not. And that is because the share
price has absolutely nothing to do with whether or not a
stock is cheap or expensive. And, that is because it comes
down to a very basic formula for calculating market capitalization. Now, market capitalization is very simply, the value of a publicly traded company. For example, we know that
Apple has a market cap near or, I believe, above one trillion dollars. It might not be right now, but at some point and time, recently it's been over
a trillion dollars. The market has valued that company at around one trillion dollars. And, that is calculated by
taking the shares outstanding, and those are the shares out there, that are offered to both
public and private investors. All shares that could
possibly change hands, times the market price. Now, a company has no control
over market capitalization. Because, that is set by the market. What people are willing
to pay for the stock, dictates the overall
value of that company. But, what the company can control, is this number right
here, shares outstanding. This is the only factor in this formula that a company can manipulate. And that is the shares outstanding. So, let's look at two examples here, Company A and Company B. Company A, this company has a market capitalization of one million dollars. And, they have 100,000 outstanding shares that could possibly change hands giving each share a market
price of $10 per share. Now, Company B, on the other hand, they also have a one million
dollar market capitalization. The same exact evaluation. And, they have 1,000 shares outstanding, giving them a market price
of a $1,000 per share. If you don't understand this lesson here, you might look a this and say oh, Company A is really cheap, Company B is really expensive, it has nothing to do with the share price. It has to do with a lot
of different factors. You know, it has to do with
the price to earnings ratio, a lot of different ratios that are above-and-beyond
the scope of this video. But, as you become a
more seasoned investor, you're going to learn
about fundamental analysis. That is how you, essentially, determine the evaluation of a company, and whether or not a stock
is cheap or expensive. But, just understand, it has nothing to do with the share price, and penny stocks are not cheap. Penny stocks are not cheap. So many people make this mistake. They look at a stock that is
trading for pennies a share, and they think oh, you know, I can buy thousand of shares, versus buying, you know, one share of Amazon, and they think they are
getting a better bang for their buck. But, they are just not. It has nothing to do with the share price, it just has do with
the shares outstanding, the number of shares available
to the public, or private. And, a lot of people fall into
that trap of buying a stock, especially a penny stock, because they think it's cheap. Okay now, lesson number eight
for the stock market beginner, is understanding the time value of money. Or, basically, understanding
compound interest. Now, the basics of this is that there are two different
schools of thought out there. A lot of people believe that in order to make a lot of
money in the stock market, you have to have a lot of money. And, while it may help you, it is not a necessary prerequisite. So, it doesn't matter how much you invest, what matters is how long you invest. The stock market allows you
to earn compound interest, and compound interest is
that time value of money. It doesn't matter how much you invest, it matters how long you invest. So, even if you only have $50,
or a $100 a month to spare, or even less, it doesn't matter. Whatever you have, put it to work for yourself
for a very long period of time. Deploy that cash for 20, 30, 40 years, and you will be amazed
what that will do for you, as long as you apply
these other principles we've discussed going forward, and in the past here already. But, I want to show you guys, a basic calculation here
looking at compound interest. And, I encourage you
guys to play around with a compound interest calculator after watching this video. I'm gonna link one up, down
in the description below. Just to understand the
power of compound interest. You know, Warren Buffett
attributes a very large amount of his success to compound interest. Einstein called it the
eighth wonder of the world, all for a reason. So, what we're looking
at here is $100 invested, earning a 7% compounded rate here. And, you can earn compound interest through the stock market, through dividend stocks, you can earn it through your bank, through real estate. Some methods are better
than others obviously. But in year number one, you earn $7 interest on that investment. Now year number two on the other hand, you earn that $7, but you also earn $0.49. Where did that $0.49 come from. That came from a 7% return on that $7 you earned the year prior. Compound interest allows you to earn interest on the interest
you already earned. So, this is what makes you rich. It's not this little number. The $7 of simple interest you're earning. It's that compound interest you're earning on that investment. In year number two it's $0.49. Year number three it's a $1.50. Year number four $3.08. Year number five you're looking at $5.26. Year number six you're looking at $8.07 It's that compound interest, that is what makes you
rich at the end of the day. And, you need to understand it, you need to understand how to apply it. And, how powerful this
actually is for you. And, another common misconception
out there that people have is they think that investment is linear. They think that they are
going to earn simple interest, and their investment is going
to go up in a straight line. That is just not the case. What they're going to experience instead, is an expediential growth curve. And, that is what this is right here. Yes, it starts off very slow, but overtime that curve really shoots up. And, it just becomes unbelievable. And, this is what we call the snowball. Now, The Snowball is also the title of one of my favorite books. It is The Snowball, The biography on Warren Buffett's life. That title is there for a reason. It's because, like we said, Warren Buffet attributes a
large amount of his success to compound interest. And, he refers to this
concept as the snowball. Again, I'm gonna link it up
on the the description below. But again, it's almost a 1000 pages. So, it's definitely not a light read. But, the concept of the snowball is because that is exactly what
compound interest is like. It starts off very small. It's like packing a snowball together, and rolling it around in
your backyard as a kid if you're making a snowman. Well, at first you can't even tell if that snowball is growing. because it looks to be
the same exact size. But, the larger the snowball becomes, the more snow it can accumulate and the larger it can become. It grows at an expediential rate. And, that is exactly what can happen with your money if you allow it to take place over time. If you deploy your cash and
you earn compound interest, and you don't touch that principal. And, you just allow your
money to grow to more money. You're earning compound interest and you're building a really
massive snowball for yourself. And, at a certain point in time, that snowball just rolls on its own, just rolls on it's own. and accumulates so much more snow. That is exactly what
you can do for yourself by earning compound interest and understanding this powerful principal. So, what you need to understand here is that you need to start early. If you're a young person, you have a huge advantage on your hands. And, that is the fact that you have time. You have 20, 30, 40, 50 years to allow your money to grow and to allow compounding to take place. There are so many people that try to do this in their 40s or 50s, and they just don't have
nearly enough as much time. And, their not able to
see magnificent result, because they're only going to experience a very small amount of growth. As a young person you can experience this whole expediential growth curve, and build that massive snowball. So, you have to start early. And, the other thing you have to realize is if you're investing in any stocks that pay dividends, in order to earn compound interest, you have to reinvest those dividends. So, if you're not, if you're getting your dividend checks and not using that money, you should consider
reinvesting those dividends, because at that point you can earn dividends from dividends. Also know as compound interest. That's one of the best ways to earn it, is by being a dividend investor and reinvesting those dividends. Okay now, lesson number nine is another lesson from
this book right here. The Intelligent Investor,
by Benjamin Graham. Like I said, the link is
in the description below. And, that is lesson on, what is call a speculation. Now, this is a very important
quote from that book. I believe this is one of
the very first chapters in this book talking about the difference between investing and speculation. I want to check here. It's actually in the first chapter, it's chapter one for a reason. It's very important that
you understand this lesson, because so few get this. The difference between an
investment and a speculation. This comes right out of the book. "An investment operation is one which, "upon thorough analysis, "promises safety of principal "and a satisfactory return." That's a quote right out of
the book by Benjamin Graham. That is what an investment is. So, what is speculation? A speculation meets these three criteria. Number one, analysis is not thorough. Somebody had not done their research, and they're looking to deploy their cash. Number two, the downside
is in some cases a 100%, it's not a case where it promises any kind of safety of principal. There's no safety of principal
considered at all here. And, then number three, an unreasonable return is hoped for. They're not looking to make, you know, a satisfactory return. They're looking to make
an enormous return. And, those right there, are the characteristics of a speculation. I'm not discouraging you from doing them, I'm simply telling you, you should follow
Benjamin Graham's advise. And, that is to speculate
with no more than 5% of your total investment portfolio. So, if you have $10000, just take $500 and put it in a separate investing account and let that be your speculating account. Now, the reason you do that, and, this again is a recommendation
from Benjamin Graham, is because you do not want
to confuse investments, with speculation. You do it in a separate account. You make sure you realize
it's a different thing, and you don't allow it to affect
your investment decisions. Because they are polar opposites. And, what he recommends is, as well, is don't
continue to add more money to your speculating account. Because if it's working for you, and you're speculating
and you're making money. Well you can reinvest
the money that you made. But, if it's not working for
you and it's a losing strategy, why would you want to funnel
more money into a strategy that is not working for you. So, speculate with no more
than 5% of your portfolio and do so in a separate trading account. Okay, number ten, the
final lesson I have here, is timing the market is impossible. You really should not try to do this. So many people have this idea that they can get out of the
market at the perfect time. Sell at the top and
buy back at the bottom. And, it just doesn't work out in practice, the way that you think it's going to. The stock market is not an elevator. It doesn't get off at the top, and then get off at the bottom. It goes up and down and up and down, because we understand the
pendulum taking place there. Swinging between, you know, unjustified pessimism and
unsustainable optimism. It's always swinging back-and-forth. And, as a result that price
is always moving up and down. There are never clear bottoms
or clear tops to a market. It's pretty much impossible
to try and time the market. Now, there are some strategies
that you can deploy, if you believe the
market is nearing a top. And, I'll include an article
in the description below that talks about that. But, you don't want to
simply move into cash when you believe the
market is over valued. And, I want to share with you guys an example of somebody
that I know, who did. So, my dad is a financial advisor. He has people who come to him
and he manages money for them. And, in November 2016, when
Donald Trump was elected, he had somebody call him on that Monday, and he said the stock
market is going to crash. Trump is a maniac and he's
going to ruin this country and I want you to cash
out all my investments. And, my dad said, are you sure you want to do that? Because most people recommend regardless of what you
think of the short-term, you should stay the course. Money is made in the stock
market over the long-term. This guy said nope, cash me out. And, so he did and he
got out of the market with the S&P 500 was around $2000. That was November of 2016. So, fast forward two years. Just about. And, we've had one of the
most extraordinary bull runs. 2017 was an extraordinary
year for the stock market. And, that $2000 S&P 500
in September of 2018, just about two years later, was $2900. That is a 45% return from the market this guy completely missed out on because he was certain the
market was going to crash. And, he decided to get out,
because he felt he identified the top and he was going
to buy back at the bottom. And, as a result, he missed out on 45%
return from his portfolio. So, you don't want to be like that guy. You don't want to treat the stock market thinking like it's an elevator, you can just get off and, you know, get back on at the bottom floor. It's not going to work
that way in practice. When you do see a correction taking place, there are many false tops, and many false bottoms that
are going trip investors. It's not a game I recommend playing. And, what I would say instead, is more valuable is time in the market. Time in the market is always
better than timing the market. It's just not a great strategy to follow. Money is made through the
stock market in the long-term. And, even if stocks
fall in the short-term, if you're a dividend investor, you're still going to earn your dividends. You can still reinvest them, and earn a return through dividends. You can dollar cost average. There are all kinds of different
strategies you can follow. But, dumping all your
money and moving into cash is not a great strategy. I certainly would not recommend it. Okay, anyways guys. That's gonna wrap up this video. For those of you who actually
watched this whole thing, I want to thank you so much
for spending your time with me. I certainly do appreciate it. As I'm sure you can imagine, a lot of time and energy went
into planning this video. So, all that I ask is if you know somebody who is looking to learn
more about the stock market. Just share this video with
them, and maybe bookmark it for, you know, for some further
learning down the road, if you're looking for a refresher. But, thank you guys so much for watching. Feel free to check out my channel. Also, subscribe if you
want to see more, you know, investing related videos. And, like I said as well, investingsimple.blog. That is my investing blog, and I have an article over there called, A Beginners Guide To
Investing In The Stock Market. It is like over 10,000 words. It's basically like an
Ebook at this point. And, it goes into everything
we covered in this video here. So, if you were taking notes, you might find better pieces over there. Or, a more complete structure. So, all that is linked up
in the description below. But, thank you guys so much for watching, and I hope to see you in the next video.
