Financial Decode

We are here to learn about stock market investing

We will focus on the US stock market, as it’s more transparent and accurate, due to tighter regulations given its rich history with fraud and manipulation

I only need 3 things from you in order to succeed in the stock market:

  • Capable of loving to read
  • Capable of becoming rational
  • Capable of becoming open-minded

Note that I emphasize the word capable, which means that these are skills that can be developed by anyone. If you already have 1 or all 3 of them, god bless you. I didn’t have any of these when I started out: I had read fewer than 5 books by 26, was too emotional, and was too deep in my own comfort zone. Therefore, if I can do it, so can you. First, let me impart a few words before we get started.

What’s your motivation? I’m not here to judge, but what we’re doing here is not some get rich quick scheme, more like a become wealthy at a medium pace. Most get rich quick schemes either don’t work and/or are scams. What’s the difference between rich and wealthy anyways? Rich means having a lot of material possessions and wealthy means having long-lasting wealth. Wealth is more akin to financial independence, which is what my life has focused on since learning investing. By the way financial independence means having living expenses covered without any active work, whether it’s from a job or a business i.e. your life is governed by passive income. Note that there’s nothing wrong with making money and treating yourself to luxuries. In fact, I argue it’s a necessity to not have a completely dull life. But! If riches are all you care about and are learning to invest just for that goal, you’ll be disappointed. Let me reiterate, money is neither good nor bad, but having an interest in money, not greed, is a necessary requirement for success in investing.

What is money? Money’s a form of exchange between people. How does someone “make” money? By delivering value. The more value is delivered, assuming the subsequent reward is captured, the more money that person receives. So, the extremely short version is: your job delivers value to your employer so you make money, your business delivers value to your customers so you make money, and lastly your stock market investment makes money because you own the business that delivers value to your customers. The longer version below.

If you work at a job, you deliver value to an organization, and your reward is based on how much value you deliver for that organization; a CEO delivers more value because his/her decision affects a broader scope of that business than other employees. If you start a business, whether a startup or a small business, you deliver value for consumers/customers; the greater the value, the greater the revenue, assuming your business model appropriately captures the reward for that value. Now for the interesting part, becoming an investor. If you’re an equity investor, you deliver direct value to a business by injecting it with more cash in exchange for ownership stake. Again, the more value that business delivers, the more money you can capture as you are an owner of that business. Of course, the technicalities of that business’ balance sheet, profitability, noncash expenses and such are ignored for now but will be covered later. Our success in investing is not based on technicalities, but rather the correct mindset when it comes to investing, especially investing in the stock market.

People often forget and think that stock market investing is different from other types of investing. They especially forget that an investor is no different from an owner of a business, whether it’s a private or public business. Stock markets are filled with only public businesses. After learning more, you will recognize how fulfilling it is to own a public business e.g. no need to run business operations by being a passive owner, no need to hire lawyers to acquire stakes in a business, benefitting from the expertise of the people running the business. All of this is not to mention that long term returns in the stock market compound at a respectable rate, dare I say at times superior to private businesses. Don’t get me wrong, as it’s not all roses and rainbows, and in most cases quite opposite actually. To achieve this requires many common sense decisions, such as picking the correct business that you understand along with its industry, buying it at the correct price, occasionally monitoring it in case of changes in business or industry dynamics, control fear and greed by being rational in order to not let your emotions be the decider. Remember, the technicalities of valuating a business in order to buy it at a reasonable price and monitoring it is the easy part. The hard part is being rational by staying within your circle of competence, and controlling your emotions so you don’t sell solely on fear and buy solely on greed.

That’s enough from me, for now. Let’s begin with the lessons.

I’ll divide them into only 2 parts, but each of which is HUGE.

Don’t forget that you’ll eventually have to learn to love to read, as there’ll be a ton in real world investing.