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.
-- John Heinzl, Globe Investor columnist
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Stocks to ponder
Revlon Inc. (REV-N) Retail investors who bought Hertz shares after it filed for bankruptcy in May 2020 ended up with handsome profits when a group of investment firms offered US$6 billion a year later to take over the car rental firm. Now, retail investors’ fascination with Revlon has pushed its shares up by more than 300% since it filed for bankruptcy 11 days ago. It is unusual for a bankrupt company’s shares to trade in such a way, because investors usually worry that its assets will be insufficient to settle the claims of creditors and suppliers to leave equity holders with any value. But retail investors, who often exchange ideas and organize on social media platform Reddit, became emboldened when those who invested in Hertz got lucky.
The Rundown
Short sales on the TSX: What bearish investors are betting against
Larry MacDonald reviews the latest moves by short sellers, including an appearance on the most-shorted list by a market-neutral ETF. He also takes a look at the latest bets against Canadian banks.
Bruised U.S. stock investors brace for more pain in second half of 2022
With U.S stocks on track to mark their worst first half of the year in more than 50 years, investors are studying a range of metrics to determine whether the coming months could bring relief, or more of the same. Historical data paint a mixed picture of the trajectory markets may follow in coming months.
It might be time to admit we just don’t know that much about inflation
Why did economists fail to see inflation coming? Why did central banks stumble in the battle to control rising prices? It’s easy to blame the problem on politics, on complacency or on the specific issues around the pandemic, but what seems to fit the facts best is a simpler explanation. There is just a lot we don’t understand about inflation. Ian McGugan explains.
Even with the recent market pullback, Gordon Pape’s Buy and Hold Portfolio is ahead of its targets
It’s great to be a buy-and-hold investor in a bull market. You can just sit back and watch as the value of your portfolio increases a little more each month. Bear markets are another matter. It’s stressful to see your hard-earned profits melting away each month as the markets slip to even lower lows. Bear markets are the real test of whether you can stick to a buy-and-hold philosophy or cave to market pressure. Gordon Pape’s Internet Wealth Builder Buy and Hold Portfolio is a testimony to why sticking to the plan through good times and bad will pay off. Despite some slippage in the latest review period, the portfolio shows an average annual compound rate of return of 11.43 per cent since it was launched a decade ago. Gordon reviews the portfolio and does a bit of shopping using the cash that’s been accumulating.
Prove your mettle and stay put on copper
The slumping price of copper is signalling trouble ahead for the economy. But investors in the base metal or related stocks should keep their eyes on the long-term case here: Copper’s importance to renewable energy should get it through this setback. David Berman tells us more.
Why this portfolio manager isn’t shying away from technology stocks
While many portfolio managers are holding more cash right now, waiting for the markets to stabilize, Jamie Murray is all in. “We’re typically fully invested, and that’s how we’ve been through this period,” says Mr. Murray, a Winnipeg-based portfolio manager and head of research at Murray Wealth Group, who manages about $215-million in assets. Mr. Murray, who heads the company’s Global Equity Growth Fund, also hasn’t shied away from stocks in some of the hardest-hit sectors such as technology and consumer discretionary. Brenda Bouw finds out why, and what he’s been buying and selling of late.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s Insider Report: CEO invests over $2-million in this stock nearing oversold territory
Monday’s analyst upgrades and downgrades
For investors, ‘a great opportunity to increase their energy weighting’: Scotiabank analyst
What’s up in the days ahead
Portfolio manager Biff Matthews will have some advice on how to think about falling stock prices.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff