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investor clinic

Dear Young Investor:

There’s something I need to say, and I hope you’ll take it in the helpful spirit in which it’s intended.

You have no idea what you are doing.

Please don’t be offended. When I was your age, I didn’t know what I was doing, either. But that was a different time, before the internet and crypto and WallStreetBets and enablers such as Elon Musk turned the investing marketplace into a carnival of get-rich-quick noise.

Wait. Don’t go back to scrolling TikTok just yet. I’m not finished.

You need to understand what you are up against here. There have always been – and always will be – unscrupulous people who try to profit by selling you on the dream of getting rich. The difference now is that entire industries, backed by multimillion-dollar advertising and marketing budgets, are trying to manipulate you into making bad decisions with your money.

Your own government buys airtime to convince you to throw money away on its lotteries. Online sportsbooks dangle “deposit bonuses” and “risk-free bets” to hook you on the dopamine rush of gambling.

Lotteries and online bookies are just the start. Mobile trading platforms make it easy to buy and sell meme stocks as GameStop and cryptocurrencies such as bitcoin and ethereum. Don’t be fooled; trading shares of money-losing companies and crypto assets with no intrinsic value is just another form of gambling – but with potentially more serious financial consequences.

Have you seen the price of Coinbase Global Inc. COIN-Q shares lately? The crypto-trading platform closed Friday at US$62.71 on the Nasdaq Stock Market, down about 83 per cent from its opening price of US$381 on its first day of trading in April, 2021. That was back when people still thought crypto was going to change everything, and before bitcoin tumbled nearly 70 per cent from its November peak.

Something in the DNA of humans makes them susceptible to schemes that promise easy wealth. It’s been going on for centuries, from Dutch “tulip mania” of the 1630s to the U.S. “bucket shops” that appeared in the 1870s to modern-day trading apps such as Robinhood that are popular with the WallStreetBets crowd on Reddit.

But none of this is true investing. None of it will help you build lasting wealth or retire in comfort. It’s all bright lights and loud music – the financial equivalent of an amusement-park ride that will probably leave you wanting to throw up when it’s over.

Now that you are starting out on your investing journey, you need to understand this above all: There are no shortcuts to building wealth. It is a slow, methodical process that rewards patience. It may even seem boring at times, but the long-term rewards will be very exciting. If you start early and follow a few simple rules, you will be amazed at how prosperous you can become.

What are these rules, you ask?

First, to make money consistently, you must invest in profitable businesses, especially those with a long record of increasing their revenues, earnings and dividends. Many banks, utilities, power producers, telecoms, infrastructure companies and real estate investment trusts meet these criteria. (See my model Yield Hog Dividend Growth Portfolio for specific examples.) Remember, a share of stock isn’t just a piece of paper or pixels on a computer screen; it represents an ownership stake in a business, which entitles you to share in the company’s growing cash flow and rising market value.

Not comfortable owning individual stocks? No problem. You could invest in a couple of exchange-traded funds that give you instant exposure to all of the stocks in major indexes such as the S&P/TSX Composite Index and the S&P 500, eliminating the need to monitor individual companies.

Second, whether you buy stocks or ETFs, you must regularly reinvest your dividends to harness the power of compounding. You can do this automatically by enrolling in a dividend reinvestment plan, or manually by acquiring additional shares when you have sufficient cash to deploy. Compounding – also known as exponential growth – is one of the most powerful forces in investing. Its impact will be small at first, but over time it will generate bigger and bigger dollar returns.

Finally, you must trust the process. Buying and holding great companies or index ETFs may sound easy, but many investors struggle with it. Focusing on the growing dividends your companies or ETFs produce – instead of worrying about short-term stock price changes – is an effective way to cope with market volatility. You must also learn not to be distracted by shiny objects, whether it’s go-go growth stocks with unsustainable valuations or the latest non-fungible fad.

The world has changed. But the principles of successful investing have not – no matter what the crypto fanboys and Reddit gamblers tell you.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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