Stock Market
If you’re investing, chances are, you’re invested in the “stock market”. This is probably the most common way, world-wide to invest. But, what exactly does that mean?
What is a stock?#
A stock is fractional ownership in a company. Which explains exactly very little, so let’s dig in a bit more.
Let’s imagine you own a company all by yourself. It sells something, and we should probably have an example. So, you sell Self-Blinking Blinker Fluid. Because you own 100% of the company, if the company makes $100, that money is all yours to do with what you want. Next year sales double and you end up making $200, still all yours. And, at some point in time, when the great Blinker Fluid consortiums come calling to consolidate the industry, you can sell your whole company, and all the money you make goes straight into your pocket. Yay you!
But, what if you need more money than you can fund yourself? You need to expand into the U.K. where blinkers blink on the other side, and you need to build a new plant. Because you don’t have the money you need, you agree to sell part of your company (let’s say 20%) to someone else so that you can build your right-hand drive blinker fluid factory.
You do that is by having a certain amount of “stock” and you own a portion and your new partner owns a portion. That means they are owners and have all the legal rights of owners.
Now, if you sell the company, instead of keeping 100% of the money, you get to keep 80% and your new partner gets 20%.
I understand what a stock is, but what is the stock market?#
It turns out it is really hard to scale getting money when you have to make deals one at a time. So, a bunch of people got together and decided to create a place where people could offer up parts of their companies for people to buy, without having to know each other directly. This process is captured in the Initial Public Offering (IPO).
But even more importantly, now you can sell your parts of companies to other people for a “fair price”.
There has to be a reason I put “fair price” in scare quotes. That reason is because if determining what a “fair price” was easy and deterministic, there wouldn’t be a market. But the fact is, it isn’t.
Although it is not strictly true, in every stock trade, there is a winner and a loser. If I’m selling a stock, it is because I believe the value is not going higher. If you’re buying it from me, you believe the value is going higher. Thus, one of us is wrong. I don’t know which one, but I know it’s one of us.
I’ve got it! I’m now ready to go win this game!#
Armed with this valuable insight, you’re now ready to start just fleecing that idiot Buffett. But the facts are, if you're going to try to do this by picking individual stocks and timing the market, you are likely going to lose this game. And here is why...
I don’t care how good you are at your job. I don’t care how smart you are. I want you to think about what you do for a living, and assume you’re pretty good at it. What’s more you do it for a living because you like it. You like it so much that you’ve been doing it for 20 years. You understand the industry, the tools, and the people.
Now, someone comes along and says “You know what, I’m way better than you are at this, because I’m smart.” Assume they are twice as smart as you. But, they don’t know the people or the tools. They haven’t lived and loved this for 20 years. How would you rate their chances?
Now, that person is you, in arguably one of the most cut-throat industries in the modern world. I just don’t see how you can win, only get lucky.
Winning#
The only proven long-term winning strategy is to become a passive investor, which is a bit of a misnomer, because although you're not an "active" manager, you aren't going to be very passive.
A smart passive investor is one who does the following things:
- Has a balanced portfolio (The "Three Fund Portfolio" linked over in Equities is a good start)
- Is in this for the long term
- Invests early
- Relies on the power of compounding
Why does this work? Because most people won't do those things and instead will chase 10% returns over 8%.
TODO#
Add more#
Chances of losing money in the stock market over 30 years