THE STOCK MARKET
Basic Glossary Explained in Braden’s Terms:
I say in Braden’s terms because I know I was once sitting in most people’s position where I was keen to start, but needed someone to start at ground zero. Instead, I learned through years of reading, researching and listening to the best investors of all time. Luckily, I did that all for you and happy to help.
· Publicly Traded Company – I am going to use my favorite analogy of explaining the stock market which was explained to me by author Andrew Hallam in his book, The Millionaire Teacher.
Willy Wonka has a chocolate factory and wants to open another factory to double his revenue. Willy Wonka’s second factory will cost $100M to build and he doesn’t have that much capital available. He lists his company on a stock exchange, gives up some ownership of the business, becomes a publicly traded company, raises money for his factory, and investors can buy partial ownership of the business through publicly traded stock.
· Stock – a small piece of a publicly traded company. Think about how you now own some of Willy Wonka’s chocolate business.
· An Index – an important topic of the course. Indexes simply track the performance of a basket of companies. We will focus on broad based indexes.
· Exchange Traded Funds (ETFs) – ETFs are a low-cost way to buy a large basket of company stock on the stock exchange. Hence the name, exchange traded fund. ETFs are how we will buy “an index”.
· Discount Brokerage – The means of cheaply buying investments that were once only available to investment professionals. If you don’t currently have a portfolio, I suggest Questrade as they let you buy ETFs completely for free. Also, they will give you a free $50 in your portfolio in trade commissions from a partnership I have with them.
Explaining the Index Fund
The Index Fund is a simple and low-cost way to own an index. An index is simply tracking a basket of companies in a particular sector. We will focus on broad based indexes like the entire stock market from a given country. For instance, we can buy the entire American stock market with one simple low-cost index fund. To achieve this, we will use Exchange Traded Funds, from here out referred to as ETFs, from low cost ETF providers.
"A low-cost fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth."
– John Bogle, Founder of Vanguard.
Ben Graham, Warren Buffett’s mentor, is telling John Bogle the beauty of index funds. This must have resonated enough with Mr. Bogle enough to start Vanguard, an industry leader in broad based index ETFs.
Let’s look at how a broad-based index portfolio would have performed over the last 90 years. This chart is the S&P 500 – which is an index of the 500 largest companies in America. Through one single ETF, you can own a small sliver of all 500 companies. This includes some of the most rough economic times in history.
10% is the average annual of the US stock market over the last 100 years. All you have to do is consistently invest money into index ETFs over a long period of time to achieve incredible long-term results. There may be several years of negative returns, but with good patience and continued investing when markets are being punished will provide you with amazing success.
Lets look at 2017-2003’s annual returns of a broad based index like the S&P 500. Some years were fantastic and some were horrible. Look at 2008, the financial crisis and stocks sold off at a loss of 37% which investors call a bear market. The market then rebounded 26% and has had consistently great returns all through to 2017 which investors call a bull market. If you had the temperament to invest money as you would normally in 2008, you would be buying the market at a discount. Now we are buying literal pieces of companies like apple, google, amazon, McDonalds, Tim Hortons, TD bank and many more at a fraction of what they are truly worth.
Crashes Are Inevitable
When we look at more years of data, from 2002 to 1988 we find a similar story. Crashes are inevitable as investors get over excited and run with emotion for many years of a bull market, that naturally the true value of the underlying companies in the index have to correct themselves. Look what happened in 2000-2002 after an insane run of stock gains from 1995-1999. This is completely normal and should be expected. If you are able to think rationally and continue to invest during these time periods of fear, you will come out on top. As Buffett says, be greedy when others are fearful and vice versa. This era from 1995-2000, investors were excited from the potential implications of technology on business and thought the sky was the limit for company valuations. Obviously, this cannot continue forever, and the market needed to come back down to life.
This video is taken from the How To Start Investing with $1,000, a 7 part course taught by myself.