Robert Leonard 1:46
Sure thing. So I want to start this episode by talking about the very first step you have to take in your investing journey. And that is opening a brokerage account. The first thing you have to do is determine which brokerage you want to open an account at. You shouldn’t have a problem finding variants to choose from.

If you just Google online discount brokers, you should find plenty to choose from. But when you want to do, is you want to do a little bit of research into these brokerages, and specifically look for trading commissions and minimum account balances, as these are the two biggest factors I recommend looking for when you’re a new investor.

When you start investing, you want to make sure that your commissions, when you buy and sell stocks, isn’t too high. And this is just a fee that the brokerage takes for facilitating your trades. So what this means is when you buy a stock of a company, they’re going to charge you a fee up front. And then when you sell the stock, you’re going to pay another fee. Usually you can get these for around $4.95 or about $5 these days, which doesn’t seem like a lot.

But when you consider it on both ends, that’s $10 per full trade. That amount adds up quickly. And if you’re trading a small balance that can significantly hurt your returns. Say you’re starting with a $1,000 balance, and you make one full trade and you spend $10 in commission. That might not sound like a lot. But that’s 1%, right there, already of your total balance that you’re losing just on commissions. And if you trade multiple times, that 1% starts to add up and it can really hurt your returns.

So I highly recommend looking for the lowest commissions fees that you can find when you’re deciding your brokerage. And you’ll also want to look for low minimum balances. If you’re a new investor, you likely don’t have a ton of money to invest. So you want to make sure that you’re not going to get charged any fees for having an account at that brokerage, just because you don’t have a high balance. There are a lot of brokerages that have really cheap or even free trades that have no minimum account balances. I personally like to use Robinhood. They have free trades, no minimum account balances.

Stig Brodersen 3:44
I think you bring up a really good point and you bring up the part about an online discount broker. And that’s more or less all that we’re going to talk about, like when we on this show talk about buying stocks, we are talking about buying stocks through an online discount broker. Because essentially, there’s no extra value gained from buying your Apple stocks or whatnot through your bank, just because they might be charging $20 for a trade or $30 for trade or whatnot. There’s no extra value. Stuff like those, Apple shares, would be worth more.

So it’s all about being cost-efficient, which is why we are using this online discount broker. So you’re not calling another person on the other line, you know, someone who works at the bank to do that for you. That is the reason why it’s more costly. You’re going to, you know, pay that guy a salary. And it’s a lot easier than we might make it sound here. It’s just a few clicks, really.

Robert Leonard 4:34
We have a guide on the TIP website under the TIP Academy, with recommendations and more information on some of the most popular brokers and some other investment tools that you can check out. I’ll be sure to put a link to that in the show notes. Once you decide on which brokerage, you’d like to open an account at, and you need to decide which type of an account you want to open. In general, there are two main types of accounts that you’re gonna have to decide between. And those are retirement accounts, or just an individual brokerage account.

The differences are how taxes are handled, and what you’re going to use that money for. Essentially a retirement account, they’re usually tax benefits, and you’re saving that money for retirement, once you have it in that account. In general, it shouldn’t be touched until you reach retirement age.

When you’re using just a regular individual investment account, you can essentially touch that money whenever you want. It’s not saved specifically for retirement. But you do pay taxes on that on any of the gains that you have when you come tax time. Now, I’m not going to go into the tax nuances here of the different accounts. But just keep in mind that, in general, you’re going to have to decide between a retirement account or an individual investment account.

After you’ve decided which of those you want to go with, you just need to submit an application online. And then generally, you’ll have your decision on whether your account is approved or not within just a few hours or a few days. It shouldn’t take too long. And then, once you have your account opened, you need to fund the account so that you can actually start investing.

Usually, what you need to do here is you need to contact your bank or look up the information on your online banking to get your routing and account numbers. You’ll enter the routing and account numbers in your new brokerage account platform. And then you can set up an electronic transfer from your bank to your new investment account. Once that money is shown as cleared in your investment account, you can then start investing.

Stig Brodersen 6:15
Perfect, Robert. Now we have our brand new brokerage account, it’s funded, it’s ready to go. Which type of assets can we invest then?

Robert Leonard 6:23
Usually, the most common things to invest in with a brokerage account are stocks, ETFs, mutual funds, bonds, commodities, and options. Purchasing individual stocks is sometimes considered risky, but it also has higher potential returns. But the biggest thing I want to talk about here is when you buy stock, you are actually buying a fractional ownership of that business.

And then ultimately, your investment returns hinge on how that business does. A lot of times new investors don’t realize that when you buy a stock, you’re not just buying a blip on a screen. You’re actually buying ownership in a business. So the outcome of your investment really does rely on how that business does.

So in general, when you buy a company stock, when you buy an individual stock of a company, say it’s Apple… If Apple does well, in general, your stock should go up and you should have positive investment returns. But if Apple does poorly, then your investment returns might suffer and you might have poor returns. Like I said just a few minutes ago, this is sometimes considered risky. And it’s certainly not for everybody.

Buying individual stocks takes a lot of time and research. If you don’t have a lot of time, or you don’t want to put in the research or you’re not interested into it, then I don’t recommend investing in individual stocks. But if you are interested and you want to research companies, you want to look at their future prospects and consider the value of their company versus what you’re able to buy it at, then I believe that investing in individual stocks is a great opportunity. But you just need to be sure that you’re ready to put in the effort that it takes to invest in individual stocks.

There’s a lot of debate out there whether individual investors should pick specific stocks themselves, or they should just buy an ETF and diversify their money and just let it compound over the long-term. Being an individual stock picker yourself, Stig, what do you think about millennials picking their own stocks?

Stig Brodersen 8:11
This is such a great question. And it’s also a very complicated question to respond to because I think that whenever we start out investing, very often we think about, you know, “Hey, I’m really happy about you know, Starbucks, or I noticed how many people will go to Starbucks all the time. I’ll probably go in and invest in that company, because it seems like they’re running a really smooth business.”

There’s a lot more to be said obviously than that whenever it comes to stock investing. But I think a lot of us had this idea that we should buy individual stocks from the brands that we know and we can identify with. And I’m not saying that is a bad way of looking at stock investing to begin with. But I think that there might be a few other steps you need to take before you make that consideration.

Really, to answer your question, I do think individual stock picking is great. However, if you are just starting out, I would rather recommend that you start with a so-called ETF. For instance, if I can track the stock market, because as much as stock picking is a skill, perhaps the most important skill whenever it comes to investing is learning how to control your emotions.

And that is a lot easier to do if you own a low cost investment vehicle that tracks hundreds of stocks. And it might sound counter-intuitive. Like, why would there be any difference between losing 10% of your portfolio if you own just one stock, compared to owning the entire stock market? For instance, through an ETF. Really, based on experience, emotionally it can be surprisingly challenging, because rather than only considering your own profit and loss from investments, it’s so hard whenever you do that, to not to help compare yourself to the performance of other investors. Losing money is really a part of investing. And the best way to train yourself if, and really only if, you want to pick individual stocks is to first learn to cope with loss in general.

Robert Leonard 10:17
I think you make a great point there, Stig, because new investors need to make sure that they’re not getting discouraged early on in their investing career. I think that’s very important because investing is a long-term game. If you buy an individual stock, and it goes down in value, you might feel like a failure, and you might get discouraged, and then you might not want to invest anymore.

Whereas, if you buy an ETF, and then that goes down in value or the market goes down, now you’re not the only one and you don’t have to put the blame on yourself. You know that other people owning this ETF made the same decision as you and you’re not alone. So it’s not not your fault, per se. And hopefully, because you can realize that you didn’t make a bad pick, you won’t get discouraged. You’re still being confident in investing and it will allow you to continue to invest for the long-term in your future. Like I said, I think it’s extremely important for millennials to not get discouraged early and so that they could continue to invest for the long-term.

The biggest benefit that millennials have is time. For myself included, time is the biggest thing on our side when it comes to investing. And if you get discouraged early on, and you don’t take advantage of the time, you’re really going to be hurting yourself over the long-term.

Stig Brodersen 11:23
Yeah, you know, it’s kind of weird. You have a different emotional attachment whenever you own single stocks. Like, you can almost be, you know, mad at Starbucks or be mad at whatever kind of brand that you’re invested in. Whereas it’s different with the stock market. It just seems like it’s not your personal failure, in a way, that if you specifically picked this company, and then they’re not performing well, because at the end of the day, the stock doesn’t care that you own it. And it’s weird. You feel this attachment, “I bought this stock for $20. It should go up.”

The stock does not know that. The stocks know you bought it for $20. It doesn’t know how you feel about their frappuccino or whatnot. It’s just it’s difficult to control your emotions. This is why we emphasize so much, like, learn how to lose, learn how to lose for a small amount of money, and generally do that with the entire stock market. Enough with specific individual stocks.

Robert Leonard 12:23
Yeah. That’s right, Stig. I agree completely. Let’s dive a little deeper into what an ETF is. Basically, what an ETF is, is that it allows you to buy ownership in many different companies. So for example, if you buy an S&P 500 ETF, you’re buying an index fund, which tracks the largest 500 companies in the US. And as a result, because you bought that ETF, you now have a small ownership stake in each of those 500 companies. You’re not just buying one company. You’re getting a diversified basket of stocks, like Apple, Microsoft, and Facebook.

When you buy that ETF, you’re essentially buying an instrument that owns all of these 500 companies. And by owning that, you get a small percentage ownership of all the companies that that financial instrument owns. You can buy ETFs that cover large indexes like the S&P 500. But it doesn’t have to be because ETFs have become so popular, you can buy ETFs on almost anything you want, almost any sector industry and they will still allow you to buy a basket of stocks within that specific sector or industry. For example, you could buy a specific tack or retail ETF that would cover many stocks in those different areas.

You might be wondering where ETFs came from? Well, years ago, mutual funds were all of the rage. Everybody was investing in mutual funds. That was the best way to diversify and get great returns. But then, ETFs were created to disrupt the mutual fund industry by providing a lower cost product and better tax advantages.

You know, that being said, mutual funds are still around today. And they’re still very popular, but ETFs have gained a lot of popularity and have been growing rapidly over the last decade or two. To dive a little deeper, Stig, can you talk to us about what a mutual fund is and how it differs from an ETF? And which do you think is more useful for a new investor?

Stig Brodersen 14:11
At the face of it, ETFs and mutual funds are quite similar. So they can both be active and passively managed. And perhaps those are the terms that you hear whenever you’ve thought of investing. Really, what that means is that if you’re an active manager, you’re trying to beat a certain index, you know, that might be the S&P 500, you know, the general stock market. Whereas a passive fund is simply tracking the performance of that index. And you mentioned technology before, it could be an index tracking, all in gas industry, and index tracking goal… It could basically be anything, but you’re tracking the performance.

The main difference is a little technical. And here I refer to the difference between a mutual fund and an ETF. But it really has to do with taxation. When you own a mutual fund, the fund itself would have to pay taxes on any capital gains on any stocks that it owns. Whereas if you own an ETF, no tax will be paid before you, as an investor, sell that ETF. In other words, you will only be taxed once with an ETF, but you will potentially be taxed twice with a mutual fund, even though that they are investing in the same stocks, and they are selling and buying stocks at the same time as the ETF would.

Now, generally, but not always, ETFs are also a cheaper investment opportunity. And since you will likely be investing in the same stocks, regardless, it’s usually a good idea to choose the cheaper option. You know, this goes back to the discussion we had about a discount broker. Why would you just go for the cheapest option?

The stock doesn’t know that you own them. The stock doesn’t get any extra benefit of…. you haven’t paid a lot of money to own that stock. And whenever we think about it, you know, in math terms, it’s actually pretty simple. We don’t know what our term will be on our investments. But we know our costs. And we’ll get a headstart if we focus on minimizing costs.

Robert Leonard 16:08
You made two great points there, Stig, that I want to dive into a bit more. The first is about actively managed funds. When you have an active fund, a team is generally hired to run that fund. And a portfolio manager and a team of analysts are then put together to actively make stock picks. And their goal is to beat the market. Of course, those analysts and portfolio managers need to earn a living they need to earn a salary.

So not only do the fees that you’re paying as an investor has to cover the normal administrative items that a fund has. Now, you also have to cover that team’s salaries. Now, not only does the fund have to beat the market, they also have to beat the market by more than what their fees are, in order to make it worthwhile over a passive fund. And history has shown that most active managers cannot consistently outperform the market.

Now I want to turn the page and talk about another choice you have when investing with your brokerage account. And that is investing in bonds or bond funds. Now a bond is different from a stock because when you buy a bond, you don’t have any ownership in the company. Whereas with the stock, you get a small ownership of that company, like I said before.

When you buy a bond, you’re actually just providing debt to that company, just like a bank would give a loan to you or provide debt to you to buy, say, a car or a house. When you buy a bond, you’re giving cash, you’re giving money to that company so that they can invest in their business. Ideally, they could invest in R&D, they could build a new facility, they can invest in starting new products. They can do whatever they want with the cash.

But really, what you’re doing is you’re providing cash to the company in the form of debt. And then over a period of time, that company pays you back with interest. And that interest is then your return. In general, the interest is paid quarterly, but it doesn’t have to be. It can be any interval that the company defines. It can be semi-annually, it could be annually. It could be anything that the company defines when they’re issuing their bonds.

Bonds are set up so that at the end of your investment period, you get all of your initial investment back. But of course, that is only as long as everything goes as planned and that the company is doing well. If the company ends up not doing well, and they aren’t generating enough cash to pay back their debt, then there is no guarantee that they could pay you back. And you can think about that, from a consumer standpoint, or from your own standpoint.

If a bank gives you a loan for a car, and you lose your job, and you can’t pay for that loan, you can’t pay for your debt. And it’s the same for a company. If they get debt from you, and then they run into issues and they aren’t generating as much revenue or they’re not making as much profit, they may not have the cash to pay back their debt holders, which would be you, the investor. And then in that case, you may not get your interest or your principal back at the end of the period.

Now, that being said, there are some bonds that are considered risk-free. And those bonds generally come from the US government. And they’re considered risk-free, because they’re backed by the government. Essentially, the US government isn’t going to default on their debt. They could just print more money to pay back the bonds if they needed to. You know, it’s not quite that simple. But in general, the US government isn’t going to default on their debt. So those are considered risk-free bonds.

Stig Brodersen 19:15
It’s very interesting. You talk about risk whenever it comes to bonds. And I think it’s important to emphasize that you should compare that to the dividend, a dividend of a stock, meaning that you get a share of the profit of that company. It’s different. You have to pay the bondholders before you are potentially paying anything to the shareholders of that company. So you can actually declare the company bankrupt. You can actually take them to court if you don’t meet their debt obligations. You can’t do that with a stock because you have a different upside. But you also have a different downside.

And then you talk about the government, you know, it is slightly different. If you’re a Starbucks. I don’t know why we keep talking about Starbucks. But if you’re Starbucks, you can’t print your own money, right? Like if you have no money, you have no money, you might try to raise capital where the other but if you need money, and you don’t have it, well, it’s just like for you and me, we don’t have money, the government can continue printing money. So that’s why Robert is referring to that as risk-free.

So I also here would like to emphasize that, you know, risk is always one side of it, the reward should also be included. So that’s why these so called risky investments, I call them 2%, the 2 1/2 % that you can get from the government. That’s why that is so low. And why, if you’re going to a corporation, even a well-known corporation like Starbucks, or McDonald’s, Coca Cola… why they are forced to pay you significantly more in interest, simply because there’s a risk attached to that because they can’t print their own money.

Robert Leonard 20:50
Then you have an individual organization that’s well-known, like, say Tesla, who’s considered to be even more high risk than other individual organizations. And that causes investors to require an even higher rate of return. So really, it is that dynamic of higher risk requires a higher rate of return. Now, an important distinction I want to make here is that when investors buy bonds in their brokerage account, they are actually buying a bond fund. They’re not actually buying the bond itself. And I would say today that it’s far more common for an investor to buy a bond fund than it is an actual bond itself.

When you buy an individual bond, it’s sort of like owning an individual stock. It’s different in the sense of debt versus ownership in the company. Like I said, just a few minutes ago, but how it’s similar is that you’re relying on that one entity, whether it be a corporation or municipality. You’re relying on that one organization, that one entity to pay you back and you have a direct relationship with that entity. Just like if you invest in an individual stock, you’re then relying on that one company.

But when you buy a bond fund, like a bond ETF say, the ETF owns the actual underlying bonds, and then as the investor of owning ETFs, you then own a percentage of those underlying bonds. Just like the stock ETFs, now you have a diversified portfolio of bonds within your ETF and that’s usually a low cost way to greatly diversify a holding of bonds. I personally haven’t owned an actual bond itself. I have briefly owned a bond fund before a bond ETF, but I’ve never actually owned a bond itself. How about you, Stig? Have you ever owned an actual bond?

Stig Brodersen 22:26
Yeah, good question. No, I actually never owned an actual bond, for the reasons that you also mentioned. And as you suggest, when you start up a bond ETF, it is typically the best choice. It’s definitely a lot easier than to go into a specific company and try to read their financial statements and figure out like the debt situation.

Yeah, I’m a buy and hold investor. And like everyone else, I haven’t been able to make a decent return and government bonds for a long time, given the low interest environment we’re in. And when the interest rate being low, I’d say that, typically, stocks are a better investment. But we have had periods of time, even decades, where the return on bonds exceeded that of stocks.

Another thing to keep in mind is that generally, bonds are not public with millennials, at least not at the moment. I need to emphasize that. The reason is that fixed payments, which is what you get from bonds, and often low expected returns are more appealing as you approach retirement. And you need to replace your income with a steady stream of cash flows, rather than accumulate your wealth, which you very often would do in stocks.

Robert Leonard 23:36
Yeah, I think part of the lack of interest with millennials is the fact that they’re not, quote-unquote, cool. You know, it’s rare that anyone is going to brag about owning a bond or a bond fund. Whereas you could talk to your friends and kind of brag about owning a high-flying tech company like Uber, Snapchat. You know, you’re not going to go to a cookout or your family’s house or, you know, holiday event, and say, “Hey, I own US government bonds.” And be excited about that.

Whereas, if you’re investing in a company, like say, Uber, Snapchat, Apple or Facebook, or anything like that, you can go to those parties or those events. And you can brag or talk about that to the other people who are there. And you can be excited about it. And that can add a cool factor because you now own those companies. And I think that plays a big role, specifically for millennials.

Another interesting point about buying a bond fund or a bond ETF versus actually buying a bond itself, is the liquidity factor. And I think this is important, because when you have a physical bond, when you have an actual bond itself, in general, it’s hard to get rid of that early. You know, if you have a 10 year period, it’s difficult to get rid of that bond early.

You can, but when you cash it in, you’re going to pay a penalty, or you’re not going to get all of the interest. And so it’s difficult to get rid of that actual bond. Whereas if you have a bond fund or a bond ETF with your brokerage account, you can just buy and sell that with your account, just like you would a stock. So it’s much more liquid, it’s much easier to buy and sell the bond fund than it is an actual bond itself. So that’s just something to keep in mind when you’re considering potentially investing in bonds or bond funds.

Another financial instrument you can purchase in your brokerage account is commodities. And commodities are things like oil, gold, silver. And there’s somewhat similar to bonds, in the sense that when you buy it with your brokerage account, you’re generally buying a fund. You’re buying a commodity fund or ETF that tracks the underlying value of those assets.

You’re not actually buying the assets themselves, because you’re not taking physical delivery of a barrel of oil. You’re not going to have gold delivered to your house or silver, you know. Of course you can, and that would still be investing in a commodity. But in general, when you’re using your brokerage account, you’re buying a fund, which then, like I said, tracks the underlying value of those assets.

And so if the value of one of those commodities, say you bought a gold fund, if the value of gold goes up, then the value of your ETFs should go up. And you would have a positive investment. But if the value of gold goes down, then you’re going to have a negative investment, and your ETFs should lose value. This is an overly simplified version of commodities. They are somewhat complex, and they are a more obscure financial instrument to invest in. I don’t personally do any investments in commodities myself. But I did want to go into that briefly. So you’re aware that that is a possibility.

Stig Brodersen 26:24
Thank you for the elaboration, Robert. The last of the very published securities that we will cover here on the episodes, that’s options. So please take it away, Robert.

Robert Leonard 26:33
Options are a powerful financial instrument, but they can be complex. And I could talk for over an hour, I could take up an entire episode talking about just options in themselves, which I’m not going to do here. We’ll reserve a future episode to go deep into exactly what options are, some different options strategies. But here in this episode, I just want to provide a brief overview. So you’re aware that these are a possibility for you to invest in. And so you generally have two types of options, you have “call options” and “put options.”

Let’s start by going over a “call.” So a “call option,” when you buy a “call option,” you have the right, but not the obligation to sell the underlying asset at a given price. And the seller have that option from which the buyer bought. They are required to sell that underlying asset to the buyer at whatever price they agreed upon.

So let’s use Apple as an example. If say the stock is trading at $100, and the buyer thinks that the stock is going to go to $120, they could buy a “call option” for say, $105. And then if the stock goes to $120, they can then exercise their option to buy the stock from the seller at $105. And then instantly sell the stock in the market at $120. And that $15 spread is their profit.

However, if the stock doesn’t go to $120, or if it doesn’t rise above their strike price, the buyer of the option isn’t required to exercise the option. They can just let the option expire worthless. And they do have to pay a fee to buy the option, of course, and so they’ll lose that option. And they’ll lose a little bit of money for whatever they paid for that right to buy the option. And the seller will be able to keep that premium.

And so “put option” is almost the exact opposite of a “call option.” When somebody buys a “put option,” they’re buying the right to sell a stock at a specific price. They’re not required to sell it, but they have the right to. And the seller, on the other hand, has to buy the stock from that individual at their agreed upon price, if the buyer of the option wants to exercise their right.

Like I said, options can be complex financial instruments to trade. So I’m not going to go more in depth than that here in this episode, but I just want to make you aware that they are a choice for you to invest in with your brokerage account. If you’re interested in learning more about options, I’m going to dedicate a future episode entirely to covering options. So be sure to check that one out when it comes around.

And so of the six financial instruments that we’ve talked about that you can invest in, which do you think is the best for millennial investors, Stig?

Stig Brodersen 29:07
I think it really depends on the investor. But if I should generally give a piece of advice, I would recommend that millennial investors should start investing in stocks. Now, keep in mind that not at any cost. There’s one thing that is the price of equities or the price of stocks, and then you also have the value of stocks. And I know that you, Robert, later would do an episode specifically about stock valuations.

But having said that, conceptually, I think stocks should be preferred. Primarily because stocks, and keep in mind, whenever you own a stock, you own a real company. If that company makes a profit, that money will one way or another be returned back to you, as the owner or part owner of that company.

But in the environment that we have right now, we’re recording this in June 2019. And we just have a low interest rate environment. So the cash flows from bonds, you can generally get… it’s just not that attractive. And even if the interest rate should go up, you need to consider that the cash flows from bonds continually to be expected to be lower than stocks, since it’s a guaranteed payment. Whereas there is no guarantee but more upside with stocks.

Gold or oil doesn’t generate a profit in itself. And just that makes it much harder to make a profit for you as an investor, especially if you’re a long-term buy and hold investor. And that’s really what we’re talking about here. We’re not talking about buying gold, because you think it will go up in price over the next three weeks. We’re talking about buying an asset and holding it for many, many years. And that you just have a lot of tailwind from investing in stocks. Now bonds also have a cash flow. Since again, this is money you lend to someone else that pay you an interest.

If you’re not completely sure about how to value stocks, and it can be a bit tricky, I would really recommend for the new Millennial Investor that you look into a low cost ETFs, tracking this stock market first. And whenever we talk about the stock money here, it the might be the S&P 500 and might be Dow Jones, Russell 2000. Generally, a large basket of stocks. That’s really what you’re looking for, if you’re just starting out.

Robert Leonard 31:29
I agree completely. Investors can absolutely build a great portfolio by keeping things simple and just buying a few individual stocks and ETFs, and then just letting them compound over the long term. And as you mentioned, Stig, I will dedicate an entire future episode to how to value specific stocks and ETFs.

Let’s shift gears and talk about, from a high level, the different investment strategies that can be implemented using the assets that we just talked about. There are many different strategies that you can use as an investor. And I plan to do a few future episode where I dive really deep into these strategies. But for now, in this episode, I just want to briefly discuss them and point out a few of the most common strategies, as well as some of our favorites.

I personally use a long-term buy and hold value strategy similar to Warren Buffett’s. But I also mix in some options and momentum. I know you’re a really big Buffett fan, Stig. So I’m assuming you implement a value strategy as well. Can you talk to us a bit about your current investment strategy and how new investors might be able to use a similar strategy to benefit them?

Stig Brodersen 32:32
Yes, I’d love to do that, Robert, and like you, I look at Warren Buffett. I’m not saying in any way that I’m as smart as him. I think it’s quite evident for everyone that I’m not. But Warren Buffett is really the pinnacle, when it comes to investing. And the investment strategy that he preaches and the one that I’m trying to follow is actually very simple. I buy into individual stocks at a price that is lower than what I estimate the price to be. And then I simply wait.

Keep in mind, you know, price is one thing, you’ll hear this again. Value is another. We really have to separate those two. So if you watch CNBC and you hear the Apple stock is trading 470 bucks, that’s not the value of the stock. Now, the journalist, might say that that is now the value of Apple, but it’s not, you know. That’s the price of one Apple stock. Your job as an investor is to estimate the intrinsic value for that stock.

In other words, you need to provide an estimate of what you think it’s truly worth. Yes, the price might go up 1%, one day, go down 1% the next day, but the value of the stock changes very slowly. And if you’re right on both the price to value assessment, I mean that you might buy one share of Apple at $170 with the true value, or the intrinsic value, as is often referred to as, say $250, you’ll make a decent profit as long as you’re patient.

Robert Leonard 34:04
I think you hit on a very important key point right at the end there, Stig. And that is patience, as long as you’re patient. This is one of the biggest problems investors have, especially millennial investors. It seems that today, most people and millennials, in particular, want instant gratification. And that can be very detrimental to an investor’s returns.

Now, that being said, just because Stig and I both use long-term value investing strategies as our main focus, that doesn’t mean that that’s the only one available to investors. There’s certainly short-term strategies that investors can use. Now I don’t particularly use them or recommend them. But investors can day trade stocks, generally using technical indicators.

Day trading is when an investor buys a stock with the intention of holding it for a very short period of time, usually just a day or, or maybe a couple of days, and then hopefully selling it for a profit. Some investors do this by studying how the chart of a stock looks, and then trying to predict where that stock will go based on what the stock chart has shown in the past. That’s how many people are actually introduced to investing, through these types of short-term day trading strategies from quote-unquote gurus that promise to get rich quick. Like I said, I don’t personally like these strategies, because I believe no one knows where the market is going.

Stig Brodersen 35:27
You know, another way to look at this is really to look at the Forbes 400. How many investors do you find in there, like long-term buy and hold investors? Okay, quite a few. How many day traders do you find there?

Robert Leonard 35:40
I don’t think I’ve ever seen one. So I’m not saying that, I don’t respect your belief that you can make a few bucks. Like if you think that, you know, tomorrow at 2pm, this stock will do exactly this, because you’ve seen a trading pattern. I’m not saying that it’s not possible to make a little bit of money out of that. I think that it’s a very difficult way to make money compared to making a sound analysis, and just wait, hold that stock, or that ETF for years, for decades, and not jump in and out on an hourly or daily basis. I think not only that will be very stressful. I also think it’d be very difficult for you to make money in that way.

And it’s hard to do over the long-term. You might be able to do it for a short period of time and make a little bit of money. But it’s very difficult to do consistently and successfully for a long period of time. And when you’re learning about investment strategies, like day trading from quote-unquote gurus who are posting ads all over the internet, I find it very important to consider how that guru is actually making their money. Is it from trading? Or is it from selling their courses? The answer to that question can be very telling as to whether you should trust them with investment advice or not.

So after all of this discussion about various different instruments, you can purchase different strategies you can implement. The next thing you have to do is you actually have to buy that asset. You have to buy that financial instrument. You have to buy this stock or ETF or bond or commodity or whatever it may be. You have to actually place the order.

I know that this might seem simple. And some of you might be thinking, “Why is he even talking about this?” But just the other day, I was reading the second edition of Ramit Sethi’s book, “I Will Teach You to be Rich.” And he had a story in there that just blew my mind. And so I knew I had to talk about it here on the podcast for you guys. Even if it’s simple, I just want to make sure that everybody knows this so that nobody else makes this mistake. If I can save even one person from making some mistakes, then this conversation is well worth it.

So what you have to do is you have to actually purchase that asset. What happened in the story is there was a woman who invested in her account for about a decade or maybe even longer. She was continually putting money in the account every week or every month, just like she should, like everybody told her to do. But as you get to retirement, you should have much more money than what you put into the account. And she was shocked to see that because hadn’t her investments been growing over the last decade or two decades?

What she realized when she went to retirement is that she never actually bought anything in her investment account. And so her money just sat in her brokerage account in cash. And so it wasn’t really earning any interest. It wasn’t really growing. Even though she did all of the right things, she just made one small mistake, and she didn’t actually purchase anything.

And so all of that time that she invested, or thought she was investing, she wasn’t actually getting the benefit of time. And so she missed out on all of that time that she could have used. And so I just want to make sure that everyone listening to the show today is aware that even though you’re putting money into the account, just because you put the money in the account, it’s not like a savings account, it doesn’t automatically start being invested or anything like that, you have to actually pick the investments that you want to put it in. So that is very important.

And just going forward, make sure that you’re doing that for the next few decades before you hit retirement. Because that’s so important.

I want to talk about how to actually place the trade. Now every platform is going to be different when we talked about the different brokerages you can invest in. Depending on which one you chose, it’s going to be different on how you do this. So it’s going to vary a bit. But in general, it’s pretty similar.

I’ve put together two guides on how to actually place trades on Robinhood and Fidelity. I put those in the show notes. So be sure to check those out. So you can see how to actually place the trade. Like I said, your platforms are probably going to be different, but it should be very similar. And you should be able to find similar wordings on your platform. So you should be able to follow it.

But basically, what you want to do is you want to look for somewhere on your brokerage platform that says trade, and then click on that. And then it should bring you to another screen or another box that pops up. And you’ll need to enter the ticker symbol for the security that you want to purchase, whether you’re buying or selling, and then how many shares for that transaction.

And then the order type. The two most common order types are market order and limit order. A market order will purchase your security at the next available price, whatever that may be. A limit order does exactly what the name implies. It limits the price you’re willing to pay or sell your security for. So if you’ve set a limit at $5, and the stock is trading at $5.10, it’s not going to buy the stock until the stock falls below $5.

Now both of these transaction types have merit in different situations and in different strategies. But I would argue that for most newer investors who are not looking to time the market and you know a few cents here and there, or even a few dollars, isn’t a huge difference over the long term over 30 or 40 years, a simple market order should suffice.

I know this information might be difficult to visualize or remember if you’re driving, running, working out or doing yard work. So again, refer back to the guide that I’ve created and put in the show notes with step-by-step instructions and photos showing you exactly what you need to do. And like I said Fidelity and Robinhood platforms aren’t going to be the same as every other platform. But they should be similar and they should give you some ideas to what you’re looking for in your specific platform.

Stig Brodersen 41:08
Robin, I really liked what you said there before, you know, put your money to use as soon as possible. And providing a guide, which buttons should actually look like. That was actually one thing that really confused me whenever I began because that was just something I heard all over the place just, “buy this, buy that.” But how do you actually do it? But having said that, the next topic here, I know you have a great example of compounding and why it is so important to start early, Robert. So I’ll just like to hand that off to you.

Robert Leonard 41:38
Absolutely. Compounding is likely the most powerful thing a millennial investor has on their side. Albert Einstein once said that compound interest is the Eighth Wonder of the World. And I completely agree with that. It is so so powerful, especially for those with many years to really let it work for them, like millennials do. It’s so important to get started early so that you can let your money compound for you as long as possible.

And I know, I know, this is simple. But once that time is lost, it’s gone forever, you can’t get it back. You’re not going to be able to go back in time and invest. And a lot of people, a lot of successful investors, one of their biggest mistakes, or their biggest regrets, is that they didn’t start sooner. So get started as early as you can.

And so what exactly is compounding? Compounding is just the idea of you earning interest or profits off your previously received interest or profits. So for example, if you had, say $10,000 in a savings account that pays a 10% interest rate, you’d receive $1,000 in interest after one year. But then in the second year, you’ll receive 10% on your new balance of $11,000, which includes your thousand dollars of interest from the previous year.

So now instead of earning just $1,000 in interest on the $10,000, now you’re earning $1,100 dollars on the $11,000 that you had in your account. So then in the next year, instead of earning interest on just $12,000 you’ll earn it on $12,100, and so on. I know this doesn’t really sound like a lot of money when you hear it like this. So I’m going to give an even more drastic example from money under thirty.com. And I’ll be sure to put links to other examples and illustrations in our show notes so that you can really see the true power of compounding.

So the money Under 30 example goes like this. There were three people Michael, Jennifer, and Sam. Michael saved $1,000 per month from the time he turned 25 until he turned 35. Then he stopped saving but left his money in his investment account where it continued to accrue at a 7% rate, until he retired at age 65.

And then there was Jennifer who held off a little bit and didn’t start saving until 35. She still put away the same thousand dollars per month from her 35th birthday until her 45th birthday. Like Michael, she left the balancing or investment account where it continued to grow at the same rate of 7% interest, until age 65. And then lastly, there was Sam. Sam didn’t get around to starting to invest until 45. Still, he invested the same thousand dollars per month for 10 years, and then stopping his savings at 55.

Still, he invested the same thousand dollars per month for 10 years. He also left his money to accrue at a 7% interest rate until his 65th birthday. Now their situation seems similar. They all put $1,000 away per month for 10 years. But the big difference is the amount of time that they let it compound in the time in which they started. The earlier people had longer for their money to compound.

So despite them all saving the same $120,000. Their ending balances at their retirement was very, very different. Michael had over $1.44 million. Well, Jennifer had about $730,000. And Sam had about $373,000. Now I know these balances still sound like a lot in comparison to $120,000 they put in. So of course $120,000 to $373,000 is still a lot of money and and that still shows why you should invest. But if you look at Michael’s, he turned the same $120,000 into $1.44 million. And that right there is the power of compounding.

Stig Brodersen 45:29
So I’m ashamed to say that I knew about the power of compounding, but I still feel I was late to the party. I was in my mid-20s and I was done with college. You know, I got my first job paid off my student debt. And then I started compounding. But compared to you, that’s old. Right?

Robert Leonard 45:51
Yeah, you know, I was very lucky, I can’t take too much credit. It was just myself being in the right place at the right time. But basically what happened was when I graduated from high school, I got a job at a local credit union. And part of their orientation and training program was that they required a financial education course. And in the course, they taught me why it is so important to start investing early.

They talked about what compound interest is, and they showed about how it impacts investment returns over the long term. For me, being young, it really made a big difference to me seeing how just at 18, I could have a huge difference in my retirement if I just started now. So I really took everything they taught me to heart and I started to invest for retirement at 18. And I know that sounds kind of crazy, because at 18, who’s thinking about retirement at 65, right? But when you learn about compound interest and see how powerful it is, it’s hard to not take advantage of it at that age.

So fast forward to today, I’m very thankful that I had that course and that I got started as early as I did. And so now I want to shift to the last part of the show. And I want to talk about having realistic expectations, especially for a new investor or a millennial investor. Like I said briefly earlier, a lot of the investors that I’ve worked with, that I’ve spent time with have heard about investing from get rich quick schemes from the so-called gurus. And I can’t tell you how many times I’ve had friends of mine come to me and ask about investing in some new craze or hyped-up company or something like that.

I believe it’s very important to have realistic expectations and goals. So you’re able to make rational data-driven decisions that make you money over the long-term, rather than making emotionally-driven decisions that are going to hurt your investment returns. If you listen to the hype, or the get rich quick schemes, you’re going to make bad decisions based on your emotions, which will likely lead to you losing money. And therefore you’re not going to want to invest anymore.

But the reality is this, if you’re not starting with a lot of money, you cannot expect to replace the income from your job and live off your investments right away or retire tomorrow. You’re not going to double your money overnight. You should be targeting between 5 to 10% annually. That’s historically what the stock market has done. Anything you’re able to earn above that is a bonus. And of course, that’s great. But you should not plan for it.

Your investments are going to go up and down over time. Sometimes irrationally, without much of a reason. But if you continue to make well-informed, data-driven decisions, and you have a long-term strategy that you’re committed to, you invest early and often, you keep your fees low and you don’t let your emotions get the best of you, you can do very well over the long-term in the stock market.

If you had to summarize everything we talked about today and everything you’ve learned in your investing career so far, Stig, what is that one final piece of advice that you’d give to a millennial investor that’s listening to the show today?

Stig Brodersen 48:44
Really, to dodge your question there. First, I would say that I think you provided a great guide to investing in this episode, Robert, and I’m excited to follow your journey. But even more on the journey of your audience here on the sideline. Really, to answer your question. What a learned about investing is that you meet so many great people on your journey into the world of finance, and you’re never really done.

You never reach your destination where you know everything that you need to know. It’s a field where you can continue to learn regardless of your wealth or expertise. So I guess my piece of advice would not be related to what to invest in and how to invest, but rather encourage everyone to love the journey. Of course, the proceeds from investing wisely is great. But if you don’t love the journey, and if you don’t learn the process, you likely won’t be successful.

Robert Leonard 49:38
Stig, that is very, very good advice. And I could not agree more. I personally love the journey myself. And I hope I can help the audience love their journey as well. Thank you for coming on the show today.

Stig Brodersen 49:51
Thank you, Robert, for allowing me to co-host the very first episode of your newest show. And thank you for helping our generation become smarter at finance.

Robert Leonard 49:59
Alright, guys, that’s all I have for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro 50:06
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