I often write on Quora.com, where I am the most viewed writer on financial matters, with over 279.9 million views in recent years.
In the answers below I focused on the following topics and issues:
- What is the biggest issues with trading apps like Robinhood and E-trade, and are they a good option for non-Americans? I look at how these firms make their money, which impacts on incentives.
- Is it better to create a business or invest in other businesses? I look at the question systematically from a risk point of view in particular.
- Buying a house can take decades to pay off. Is there any logic to spending decades paying off a house, and is buying a property always a great investment?
- Is investing in big tech stocks like Amazon, Facebook and Google the way to go? I introduce the idea of “performance chasing” and why it is a bad idea for investors.
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Is it better to create a business or invest in other businesses?
Most business owners, including most successful ones, make a huge mistake. More on that later.
Firstly, let’s look at two statistics to begin with. Firstly, most business owners fail:
If we were to continue this graph, the results would look even more stark.
In comparison, 100% of people who have bought and held stock market indexes (which is other people’s businesses – in this case public businesses) have made money if they have invested very long-term:
In many ways, that isn’t a fair comparison. A better comparison would perhaps be comparing starting your own business with investing in your friend’s business.
Of course investing in a diverse basket of hundreds or thousands of publicly listed companies will be safer than just starting one private business.
The ideal situation is to do both. Get a job in an industry, get good at the job.
Observe the problems that customers complain about. Then start your own business with that knowledge and try to solve other people’s problems.
If you do that, you are dramatically reducing your risks of business failure.
Too many people go into industries that they have no experience in based on a good idea.
Ideas are worthless. Execution of good ideas is worth everything. It is easier to execute if you have experience.
Once you have experience and a stable business, it makes a lot of sense to reinvest back into the business.
You can make much more from your own business than public stock markets.
However, don’t make the mistake that most business owners make.
Namely, complacency. So many business owners think “what’s the point in getting a maximum of 10%-11% per year (the historical average for the S&P500) if I can get 20%-30% (or much more) investing back into my business.
The issue is, those returns don’t usually last forever. A fast growing, new, business can grow very fast.
Eventually, the growth usually stops, and besides the risks are higher.
We have seen how so many previously successful business owners have suffered during Covid-19.
Few prepared for black swan events like a lockdown that would render their businesses, which often depended on face-to-face interactive, close to useless for months.
Previously, people in the airline businesses didn’t prepare for an event like 9/11.
I have lost count of the number of business owners who have told me in the last year that they want to invest now, “but only wish they had diversified when their business was doing great”.
Fix the roof when the sun is shining, not when the roof is about to cave in!
Is Robinhood a good app to start trading on, or should I pick something like E*TRADE?
Robinhood is good if:
- You are a beginner
- An American or live in America. I wouldn’t use American-based apps if you are non-American living outside the States, due to the potential tax complexities.
- You don’t have very niche needs like some expats or high-net individuals do. By definition, most beginners don’t.
With that being said, I would ask a simple question with all investment apps – how do they make money?
This leads to a second question – what incentives do they have?
Most fee-based financial advisors get better results than those who are paid on commission for a simple reason – incentives.
The incentives are to see the account grow so when the customer makes more, so does the company.
With trading apps, plenty make more money if you trade more.
Yet the evidence is clear – long-term the more you trade the more you lose!
The statistics are starling
- Dead people’s accounts perform the best
- From the living, the people who perform best are those who act as though they are dead – in other words they never or seldom login and check the valuations
- Most people lose in investing due to emotions. For example, 35% of DIY investors panic sold in the first half of 2020 due to the crash
- Vanguard has done some research which suggests that the average DIY investor in their ETFs underperforms the index by 2% per year – because they buy high and sell low. Many researchers have called this “the behaviour gap”.
- Many people lose money investing even though the general market has just kept going up. The Dow was 66 in 1900, 2,000 in 1990 and 34,000 today, and yet quite a few people still lose money.
So, usually the people who do the best on these apps are using them in the complete opposite way to how the app companies want you to use them!
Saying all of that, the biggest problem has traditionally been that people never invest to begin with.
Too many people think “investing is just for the rich”, and few seek advice.
Therefore, long-term, I expect apps like RobinHood to bring more people into investing.
Sure, some will fail. Many will realise they need to buy and hold or seek more traditional advice.
But 80% of success is just showing up, so if more people invest when young with small amounts of money, that can only be good.
The bigger issue is when people never invest (an overly cautious approach), or take silly risks when they are older and have more to lose.
Why are house prices so expensive that most people need to pay their whole life to own them? Is there any logic behind it?
Human nature is more emotional than rational. People make decisions, more often than not, based on emotion, and then justify with logic later on.
There are many ways people can justify buying a house they can barely afford such as:
- I would need to pay rent anyway
- The house will go up in value
- The property will act as my pension if I downsize it
- Everybody needs a place to live in
- Interest rates are so low now….this is a great deal!
- Prices are going higher. If I don’t buy now I will never get onto the market.
Yet if you were going to look at this from a purely logical point of view, people would only buy a property if renting is clearly more expensive, when it isn’t in some locations.
Beyond that, even if renting is much more expensive than buying, which it is in some locations, people would just buy the least property for their needs and would only buy if they knew that they would be staying put for decades.
The last point is quite key. Due to the hassles and costs of moving house, it doesn’t usually make sense to buy if you keep moving around every few years.
It is possible to do things differently in some countries. People can build their own house, or live in non-traditional forms of accommodation.
People who are lucky enough to have more money than their needs can also decide to live in a more modest property.
Yet familiarity is key for most people. That is why many Swiss or Germans don’t own.
It is normal to rent all your life in such cultures. In other places, it is considered weird not to want to buy.
The exception to that rule is former homeowners. I do know some people who sold up after getting a job offer abroad.
When they came back home they often preferred to rent, as they didn’t want all the buying hassles.
Is investing in big tech companies stocks the best choice for a long-term investment?
One of the biggest mistakes do it yourself (DIY) investors make is performance chasing.
They see that big tech has done well (the 1990s) and now, so they go in during the peaks and sell during the worst times.
How many people do you know who have bought and held the Nasdaq for decades?
Maybe nobody. Yet I am sure you personally know somebody who got in during 1998–1999 or recently.
I am not saying we are back in 1999. We aren’t.
That is because
- Interest rates are 0% in most countries
- Bonds pay little whereas in 2000 they paid 6%, so people could get a “safe” yield elsewhere. These first two points mean investors have fewer places to place money compared to the early 2000s, and even commercial real estate now looks riskier due to the pandemic.
- 1999 became about speculation. Technology wasn’t a huge part of our lives in 1999–2000. Only Microsoft and a few other firms produced products that we were using on a daily basis. These days, technology will only get bigger.
- As more people are investing in ETFs, money is naturally flowing into big tech stocks. In other words, if you buy the S&P500, you will naturally have a large allocation to Facebook, Amazon and other big tech firms.
- Many of the top firms actually have huge revenues and profits now, whereas in 1999 there were a greater number of non-profitable firms with overly generous valuations.
Yet all of that doesn’t mean big tech will continue to outperform the market.
They might underperform, especially with pressure coming from regulators, including proposals to have a minimum global corporate tax on the largest players in the market.
As always, stay diversified. If you buy an S&P500 or Nasdaq ETF, you will naturally see growth if you hold it for decades.
Even if you buy MSCI World, you will have a huge allocation to tech.
If tech does badly, it will be knocked off the index, or at least some of the firms will be.
In comparison, if you buy an individual tech stock, you are taking a huge risk unless you are a professional investor.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 279.9 million answers views on Quora.com and a widely sold book on Amazon
In the article below, taken directly from my online Quora answers, I spoke about the following issues and subjects:
- Is now a good time to invest in UK property? I explore the relative positives and negatives of the current state of the UK housing market, and how the pandemic has affected the market.
- Are stocks a good idea for gaining passive income, or should people focus on accumulation through compounded investment returns?
- Should we worry about whether the social security system will go broke when we are old, considering the ageing population, Covid-19 and other pressures?
- What are the list of assets you can invest in, apart from stocks, bonds and real estate?
- What are some of the best places to live in Thailand as an expat? I look at locations such as Bangkok, Phuket, Pattaya and beyond/
- What do investors need to know about treasury bonds, in an era of zero percent interest rates? Are they now a worthless investment?
To read more click on the link below.