I often write on Quora.com, where I am the most viewed writer on financial matters, with over 265.1 million views in recent years.
In the answers below I focused on the following topics and issues:
- Is it better to have more money in 5 to 10 stocks or less money in many stocks? Should an average investor act differently to a professional one?
- Does hard work really guarantee success, or are other factors, such as risk taking, more important?
- How do you invest in stocks? I explain a step-by-step process. I also explain how it is more important to invest productive, rather than just starting for the sake of it.
- Is it realistic that somebody like Jeff Bezos will become broke? I look back at some of the Japanese billionaires from the 1980s. Many are now former billionaires, even if they aren’t broke. What does this tell us?
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Is it better to have more money in 5 to 10 stocks or less money in many stocks?
Unless you are one of the best professional stock investor, it is better to be diversified.
There are many reasons for that. For one thing, only a small amount of stocks beat the S&P500.
A few extreme winners distort the market:
Think about the market in recent years. It has done about 12% per year, or much more in the case of the Nasdaq.
Yet the FAANG stocks like Facebook, Netflix, Amazon and Google have distorted the market, as has Tesla and some sustainable energy firms.
Plenty of stocks have gone down or sideways.
Think about firms in the following industries:
- Hospitality – restaurants and bars
- Traditional banking
- Oil & gas
- Commercial real estate, especially after Covid-19
- Many manufacturing heavy firms have been stagnant, or at least have fallen well short of the market average.
The same has always been the case through any bull market.
The stock market as a whole increases over time, but not every individual sector or firm does.
Then you have another issue. Let’s say you manage to pick the winners today or even for a decade.
You might assume you are a wizard, but the evidence shows that over performance doesn’t continue.
Many people picked tech winners in the 1990s and then had an awful 2000–2010.
If you have $100,000 in a previous winner, and it goes down to $10,000, you need the stock to 10x to break even.
Which brings me to the last point. Holding a diversified range of stocks, either through a fund or ETF, lowers your risk.
You don’t need to worry about holding the next Lehman Brothers, or even a whole industry like banking, which has never come close to recovering since 2008.
The only advantage of individual stock holding for average, DIY investors, is that if it works out, the returns can be incredible,
Few though have the self-awareness to “quit whilst they are ahead of the market”
Somebody who picks Tesla today, assumes they can pick the next Tesla tomorrow.
Seems logical enough, but the evidence suggests otherwise. Just like those who picked the tech winners of the 1990s, many people who picked Tesla did so based on emotional reasons such as liking Elon Musk.
The success in many cases is built partially on luck, but people seldom understand that, so risks grow.
Therefore, it is better to keep individual stock picks down to 10% of your total portfolio.
It will give you some excitement, whilst keeping risks low.
Will hard work guarantee your success, or for some people only?
Think about all the people you know, and have met in your life. Friends. Family members. Associates. Past and present managers and work colleagues.
How many would
- Work hard for one or two years if success was guaranteed? I guess many would. The vast majority in fact. Having said that, even this one knocks out some people. Last year, during lockdown, a mutual British friend living in India introduced me to somebody who knew. She is a reporter in India and I wanted her to help me with something. She was offered more money than her day job to help me, but eventually didn’t do it. When I spoke to my friend about it, he mentioned that as she is already comfortable by local standards, there is less motivation to work harder.
- Work hard for decades if success was guaranteed? Many would, but perhaps less than 50%, because many people would try and give up or think “what’s the point in being successful at 60”.
- Of course, in reality, success isn’t guaranteed. Therefore, how many would be willing to work hard for a few years if success isn’t guaranteed? Much fewer people as they would worry about gain with no big pain, but plenty would try.
- How about working very hard for decades with no guarantee of success? Even fewer people than the third question.
- Now let’s go further. How many are willing to work hard AND smart for decades with no guarantee of success? Even fewer, because working smart sometimes has to mean shallowing your pride. For example, reading a lot and changing your style over time, in order to do things differently. I saw so many businesses in finance fail due to this reason – older, previously successful owners, who weren’t willing to adapt to the digital age.
- Now let’s take this further. How many people do you know who are willing to work hard, smart AND take calculated risks along the way, for decades, without a guarantee of success? Even fewer still. In fact, taking risks in general scares most people. Even just taking loads of calculated risks for decades is less common than people willing to work very hard for decades
So, the reason why working hard is no guarantee of success is that many people are willing to do it, especially short-medium term, with a few being willing to do it long-term as well.
Working hard is great. It gives you a purpose. It does increase the chances of success.
But many others are willing to do the same. Working hard isn’t therefore unique.
What is much less common, is the ability to work hard, smart and take risks along the way.
That is being willing to do what (the vast majority) of others won’t. Be willing to do what others won’t.
I will give you a simple example. Almost everybody who has read about personal finances knows that if you start investing tiny amounts early, like in your teens or early twenties, you can become wealthy by retirement, especially if you increase your contributions over time.
Despite that, many people think “what’s the point in being wealthy by 50 or 60. I will be old then”.
Of course, people get to 30, 40 or 50 and start thinking differently. They start to realize that for no extra work they could have invested productively and heaped the rewards.
Investing doesn’t take any more effort compared to thinking about how to spend money or comparing savings accounts.
Same in private businesses. Few will emigrate, or take another big risk, if they are already doing OK.
How do I invest money into stocks step-by-step?
As a first step, it is rationally to learn about investing it outsource it to an advisor.
Many people invest by themselves, trade on emotion and then get results like this:
Then, practically speaking, you need to
- Find a DIY brokerage or advisor
- Give your proof of address and ID for international anti-money laundering
- Complete an application form
- Fund the account and trade once it has been approved
Investing is easy, unless you live in a place which has been sanctioned, like Iran, in which case few providers accept.
The difficult thing isn’t in the doing. It is doing it well long-term. Many people invest without a plan, or change plans unexpectedly if something like COVID-19 happens.
Often people get scared by the news media. The trick is having a plan and sticking to it long-term.
In terms of reading resources I would start with books like this
- Paul Farrell – The Lazy Person’s Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money
2. Burton Malkiel and Charles Ellis. The Elements of Investing
3. Larry Swedroe. The Only Guide to an Investment Strategy You’ll Ever Need
Larry Swedroe. The Quest For Alpha: The Holy Grail of Investing
4. John Bogle, The Little Book of Common Sense Investing : Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
5. William Bernstein. The four pillars of investing
6. John Bogle’s “The Clash of the Cultures”
7.Lawrence Cunningham. The Essays of Warren Buffett: Lessons for Corporate America, Second Edition
8. “Security Analysis” by Benjamin Graham
9. Benjamin Graham’s “Intelligent Investor.”
10. Carl Richards, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Your Money.
Do you know this man? Probably not. His name is Yoshiaki Tsutsumi. He ranked by Forbes as the richest man in the world over 30 years ago.
Now he is worth $500m. Not broke, but a fraction of his past fortune, especially adjusted for inflation.
This happened due to the bursting of the Japanese bubble economy and his Seibu Railway was delisted from the Tokyo Stock Exchange in 2004.
As the Japanese commercial, and residential, market fell, a lot of his wealth fell hard.
Here is the complete list of the top ten richest people (by wealth) in 1987
- Yoshiaki Tsutsumi — $20 billion
- Taikichiro Mori — $15 billion
- Shigeru Kobayashi — $7.5 billion
- Haruhiko Yoshimoto — $7 billion
- Salim Ahmed bin Mahfouz — $6.2 billion
- Hans and Gad Rausing — $6 billion
- Paul Reichmann and Brothers — $6 billion
- Yohachiro Iwaski — $5.6 billion
- Kenneth Thomson — $5.4 billion
- Keizo Saji — $4 billion
Many people haven’t heard of these people. Few of them are famous today, at least outside of Japan.
So, Bezos is unlikely to go broke, nor are any of the other billionaires on the current list, unless they are taken to the cleaners by a corruption scandal, prison etc, which won’t affect most people.
What is more likely is that fortunes rise, and fall, because most of today’s wealth is traded on stock markets.
There will be some former billionaires just like Yoshiaki. It might not be Bezos, but it could be, or somebody else near the top of the current list.
That is why rich lists are very misleading. They don’t focus on income, but wealth.
Wealth can rise and fall in seconds. If Amazon falls by 10% today, or rises by the same figure, that won’t affect Bezos’ income instantly, unless he sells the stock.
So, I would take headlines like “Bezos makes more in one hour than his whole workforce does in a month’, or “Bezos loses $5billion in a day”, with a pinch of salt.
“Bezos’ wealth fluctuated” is more accurate but also boring, so I wouldn’t expect the media to report it like that.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 265.1 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:
- What are some harsh truths people should know before investing?
- Will the stock market crash like in 2020 again?
- What are the best ways to spend less? I discuss some of the tactics that can save money, without harming your quality of life.
- Is it possible to invest so much in your 20s that you never have to invest even a penny or dollar from your 30s onwards? I look at the maths, and for that matter, practicalities, considering most people earn more in their late 20s and 30s.
To read more click on the link below.