TOP QUORA ANSWERS THIS WEEK – PART 1

This article will list some of my top Quora answers this week which were asked by readers.

If you want me to answer any questions in the future, don’t hesitate to contact me.

If someone has no experience investing money, what is your advice on the first steps they should do prior to investing and early on in investing?

Realistically, you can avoid most of the pitfalls of investing by:

  1. Reading and implementing
  2. Delegating to somebody who knows what they are doing

What is the biggest reasons why investors, newbies and even experts fail?

Lack of knowledge? Lack of ideas? No! Lack of implementation, especially during the bad periods. Emotional control is difficult in those periods.

Let me make a comparison for you. If you go to medical school and study nutrition in your spare time, it doesn’t guarantee success in terms of weight and health.

Only self-control can do that. That self-control gets harder after bad life events such as divorce, depression and losing your job.

That’s why even some doctors hire a personal trainer, for the emotional support:

In investing too, many more people these days know the basics because of the internet.

However, what usually happens is people don’t follow through. Like a person going to the gym who makes New Years Resolution and briefly feels motivated on January 1, many people start investing but then get into bad habits.

I can’t tell you how many people have told me that they have done things which they know, deep down, are silly.

Things like selling stocks during a crash, speculating on 1–2 individual stocks and so on.

So what I would do is read if you have time. Don’t just read pure investing books though.

Those books only focus on investing knowledge. Read some “behavioural finance” books as well like these ones:

If you start investing for yourself, watch yourself carefully during the first stock market crash.

Do you panic or stay calm? If you stay calm, maybe you have the emotional stability needed to invest by yourself.

If you panic you either shouldn’t be investing in the first place, or you need to delegate your investments to somebody that can help you.

Everybody says they won’t panic during a crash, but look at what happened in March.

Some early reports by companies have suggested as many as 30% of people sold out within a month in March and April! It is silly decisions like that which you want to avoid.

So if you want a step by step guide I would:

  1. Read if you have time. If you don’t have time delegate.
  2. After reading, ask yourself some questions honestly, such as “am I really emotionally ready for seeing big stock market swings”. If the answer is yes, try investing yourself. If no, try another route.
  3. Actually observe your own behaviour from an unemotional point of view once you start investing. See how you react to huge swings.

What are some bear market do’s and don’ts?

In terms of the don’t….

  1. Don’t assume you can predict when a bear market will come and go, and how long it will last. Look at the last 12 years as a great example. Most people didn’t expect markets to recover from 2008–2009 so quickly. Almost “everybody” didn’t see the huge falls of March coming. Even fewer saw the big increases after that slump.
  2. Assume that a bear market is a bad time to invest. It isn’t. It is a great time to invest if you are a long-term investors as you are buying units at cheaper prices. Imagine how much money you could have made if you were an investor in the 1930s………10 years of cheap valuations.
  3. Don’t panic if a bear market starts. They are a part of investing. If you invest for your whole life, which is recommended, you will face 5–10 bear markets most likely. Look at the last 50 years. So many bear markets yet a buy and hold investor has done well
  4. Listen to the media. If they could accurately predict these things they would be too busy making money from timing the market. Study after study has shown that stock market gurus that come on TV can’t help you beat the market.
  5. Fail to reinvest your dividends and be diversified into both stocks and bonds.
  6. Assume that a bear market is more likely to happen in a country with weak GDP. The Shanghai Stock Market has had one of the biggest bear markets in the world since 2006, but growth has been good in China.
  7. Following on from number 6, don’t assume there is any correlation between GDP and markets, or markets and most variables. That is one of the reasons why it is almost impossible to time the markets long-term.
  8. Forget history. Every time, whenever there is a bear market, we will hear this old chestnut which is nonsense.

That doesn’t mean that we can predict how long a bear market will last based on history.

I am merely saying be sceptical of anybody who comes out with this statement. It was said in the 1930s, oil hitting $8 in the 1970s, after 9/11, in 2008, after the lockdown etc.

9. Forget that almost anybody who has gotten rich investing has done it with a patient approach.

10. Forget the basics. Remember things like how much you invest and for how long is more important than short-term investment returns. Yet few people worry about their spending habits or how long they will invest for, even though these things indirectly affect total returns a lot. Investor A that invests $1,000 a month for 40 years, getting 6% per year (4% lower than the average for the S&P500 and Dow Jones) will still do better than Investor B who invests just $500 a month for 15 years, getting 13% a year for that shorter time period.

So basically, don’t be afraid of bear markets or think you can predict when they will come and go.

Therefore, that leads me to the dos’. Do keep investing every month, into both stock and bond market indexes.

Do rebalance from the winnings and losers every year. Do completely ignore anybody claiming they can predict when bear (or bull) markets will start and end.

So the fundamentals of good, long-term, investing stay the same through bull and bear markets.

What mistakes that one shouldn’t make while investing in stocks?

  1. Assuming that a cheap price is always a good buy. Sometimes that can be the case, but not always. Look at the banks after 2008. The market recovered and then some, but the banks have never reached their 2007 heights since. Likewise, the airlines and some stocks in travel have looked incredible cheap this year. That doesn’t mean they will automatically bounce.
  2. Assuming that governments will bail out a specific company, and allow shareholders to profit. That can happen, like in 2008, but it is a gamble. You might buy the next Lehman brothers.
  3. Not know the difference between an investor and a speculator. A speculator does things alluded to in point number 2.
  4. Panic selling when the markets go down. In March-April, some brokerages, especially the DIY ones, reported up to 30% sold their stocks! So buying high, selling low. It happens again and again as well. Vanguard saw a huge inflow into their stocks in the late 1990s and then a huge outflow after the 2000 and 2008 crisis.
  5. Listen to gurus and the media. This contributes to issues like number 4.
  6. Waiting for the markets to crash before coming in. It never works long-term and even when it happens, most people ironically wait until the markets go even lower before coming in. I saw that a lot in March and April. People who had been waiting for a crash for a few years, who then wanted to wait until the Dow, S&P500 and Nasdaq crashed more. Now they have fully recovered and they missed out. That happens every time there is a crash it seems.
  7. Only focusing on individual stocks. The evidence is clear. As a DIY investor you might beat the market over 5, 10 or even (very seldom) 15 year period. But over 50 years investing from 20 until 70? Almost impossible adjusted for fees, taxes etc. Only 2%-5% of professional investors manage it, so most DIY investors struggle much more.
  8. Having a short-term time horizon. It is 5x easier to get rich slowly with the stock market than get rich quick, unless you already have a lot of money to begin with.
  9. Only focusing on stocks. A well diversified portfolio should have dividends as well.
  10. Not reinvesting your dividends. Dividends can impact returns considerably. Look at one of the worst performing stock market’s in the world in the recent past (the UK). Reinvesting the dividends changes the picture:

11. Only invest in “hot markets” that China of the early 2000s or tech now

12. Only invest in your home market. Be globally diversified.

13. Investing without learning. To be a long-term successful investor you either need to educate yourself, using that knowledge and self-control (hopefully) to come up with a long-term strategy, or outsource to a good advisor. If you invest without basic knowledge, it is like going to the gym and not knowing how to use the equipment, but most DIY investors fall into this habit.

14. Deviating from a long-term plan due to events like corona, 9/11 or any other new event. Investing works well when you align your long-term life objectives, for example retiring early, investing for kids education or accumulation for security, with the right investments.

15. Assuming you are smarter than everybody else. A lot of people assume they can magically see global business and market trends, despite the fact that all the information is available to the public.

16. Not focusing on controlling emotions. Most people only focus on things like returns and investment knowledge. Those things are important. However, controlling your emotions is even more key to good long-term returns…..especially during a raging bull market or a big crash…….

Why are some people poor, no matter how much money they make?

Many reasons. But the fundamental reason is spending too much.

Some of that spending isn’t voluntary, such as divorce bills/lawyers, or unexpected healthcare costs in places without free healthcare at the point of use.

However, some of the spending is voluntary. Usually it is either linked to showing off, or habits.

Showing off is all around us and easy to spot, especially on social media.

This quote says it all, and it goes beyond spending and showing off:

What is harder to see is a creeping lifestyle inflation. When people start earning more, it is easy to spend more.

That in and of itself isn’t always a bad thing, if people can scale down their lifestyles if they stop earning so much.

Most people can’t do that though. If it becomes a habit to overspend for 20–30 years, it is hard to rein in spending once you earn less.

This is an issue because the majority of high earners are in careers where there is a 10–25 year peak earning period.

Examples include sports and entertainment celebrities, corporate lawyers and bankers who often burn out, and private business owners who usually don’t maintain over-performance forever.

That is one of the reason you see many retired sports stars in their 40s going broke, but you don’t see so many like that when they are playing.

The income partly dries up, but the spending doesn’t, at least proportionately.

As a final comment, marketing is another reason. Most people have been trained to assume the following things are true:

  • Price and quality are almost always linked. You get what you pay for.
  • You work hard. You “deserve” this or that. In other words, what’s the point in earnings loads of money if it is just invested or saved. You might die tomorrow after all!
  • “Rich people” all spend a lot of money
  • You should get the most housing for your needs, with a mortgage at 4x your income, because housing is the best investment.

From looking at the data, we know a lot of these things aren’t true.

It takes most people a lot of experience, and often years of failure, to realise this.

What are the advantages of life on different wealth levels?

Imagine this. You are running your own business, or you are a manager working for somebody else, and you are doing quite well.

Not exceptionally well though, and you need to work for a living still.

Would you really come out on social media and say something controversial?

Maybe not otherwise you might get sacked like the people making tweets like this:

And it isn’t just tweets that are this controversial that can get you sacked.

Many people have been sacked for tweets which are much more tame.

In comparison, if you have enough wealth where you can live off the money if you get sacked, you are more likely to say what you want and take bigger chances.

So it doesn’t so much matter how much wealth you have, compared to whether you have enough wealth to live on if you lose your first income.

If you are worth $5m on paper but it is linked to a huge mortgage, and you have huge spending habits, you probably can’t retire tomorrow.

In comparison, the person living in Bali, on $40,000 income from a $1m investment portfolio, doesn’t need to work another day in his or her life if they invest it productively.

So the main benefits of wealth which is able to generate a second income beyond what your number living costs are, is you are able to have more choices.

So you can take more risks if you want to do that. Those risks could be quitting your job, or being controversial on social media.

If you merely have a high income but lack wealth, you might tread on eggshells more, and be worried every time something like coronavirus or an economic recession comes along.

The advantages of going from wealthy to super wealthy are much harder to quantify.

You might get even more choices and options, but the difference is less compared to going from living pay cheque to pay cheque to having enough to quit your job or business at any time.

Why are people so intolerant of wealthy people?

It is interesting, but whilst answering this question, I was asked to write an answer to another question – Why is everyone obsessed about becoming rich, but no one wants to read how?

I would re-write the question if I was the questioner to “why are the vast majority fo people obsessed about becoming rich”.

Nevertheless, the question is an excellent one. It leads us back to your question, especially the second part of the question “but no one wants to read how”.

Most people have been lead to believe that there are “secrets” about getting wealthy.

If only you know these secrets, you can become very wealthy, often very quickly.

When they try to get wealthy quickly, or even slowly, they realise it isn’t as easy as they expect.

Or at least it requires some form of sacrifice. For example, it is true that anybody can get rich slowly by investing small amounts of money for decades:

Indeed many of the world’s millionaires, even multi-millionaires, come from middle and upper-middle income backgrounds as this book showed:

14% of the world’s millionaires are estimated to be teachers!

Managers in many countries are more likely to be millionaires than lawyers and doctors.

60% of former basketball players are broke within just 5 years of retirement.

So what’s the bottom line? The choices we make contribute hugely to whether we end up wealthy.

The decision to invest early even if it is uncomfortable and hard.

The choice we make with life partners which influences how likely we are to get divorced.

The choice to take calculated risks in our careers, lives and investments.

The choice to spend all the money we have, even if we make a lot of money, as this questioner asked – Why are some people poor, no matter how much money they make?

All of these choices compound and make a huge difference over our lifetime.

It is far easier to blame others; politicians, bankers, the rich, the poor, immigrants, our parents and others.

A poll of millionaires once found that 95% thought that taking personal responsibility is one of the keys to wealthy and success.

We have seen this again this year with the lockdown. I saw some people, in my industry and beyond, who saw lockdown as an opportunity.

They adapted (a choice). Some are making more money than ever by pivoting to social media, not focusing on one country for business to diversify risk etc.

I saw many take advantage of the lower prices for Facebook and other ads during March and April.

Others make the choice to not put themselves out there and just to think “2020 is a write off. Let’s see what happens”.

Ultimately choices compound over time like compounded investment returns do.

In other words, those small daily choices don’t show up for months or even years, but make a huge difference over a career.

Choices aren’t a guarantee. Look at health. Some “lucky” people over drink and smoke for decades and live until 95 healthily.

Others make the right choices and die young. The same is true in wealth; you are much more likely to “win” with the right choices but it isn’t a certainty.

So many people are intolerant of wealthy people, even though the majority of them want to be wealthy themselves.

Kind of ironic and not helped by the media.

Is it a good idea to invest in the NZ stock market during the pandemic?

Not really, unless you are living in NZ or plan to retire there. The reasons are:

  1. There is no correlation between geopolitical uncertainty and the stock market. Just look at the US Markets! The US has been criticised by many countries for its response to the virus, yet its stock market has done better than most others. It isn’t all due to stimulus either as many European countries and Japan have also thrown money at the markets.
  2. NZ is less international than the US, UK and even the German market (the Dax) when it comes to capital markets. Now sure, most NZ companies export around the world, but it isn’t the same thing as investing in MSCI World (below) or the S&P500.

3. Don’t try to be too cute with “market picking”. So many people got burned doing that with Japan in the 80s/90s and China in the 2000s. People assumed that high GDP growth would result in superior stock market returns. It is better to simply be broadly diversified around the world in stocks and bonds.

4. Picking niche positions (NZ, Chile, Paraguay or whatever other niche pick) is always riskier than picking a market like the US or an international index like MSCI World.

5. You won’t get a higher return, almost for sure, for your risk. Emerging markets are riskier than US markets or MSCI World. They haven’t beaten those markets long-term. They just sometimes do. NZ isn’t an emerging market but the same fundamental fact is at play. You would be taking a risk with little chance of long-term over performance.

6. The market benefitting the most from the pandemic is the Nasdaq, followed by the S&P, due to technology stocks. That might not last forever but it once again shows that The US Government’s poor response to the virus didn’t lead to lower capital market returns.

7. Even if there was a correlation between GDP and markets, which there isn’t as per my last comment, it could be argued that NZ’s strict response could be a huge risk for the economy, even though their deaths are low

For people living in NZ, or NZ expats, it does make sense to hold 3–4 indexes/positions.

The NZ stock markets to reduce currency risks, a bond index + an international one makes sense.

The markets just reached all-time highs in the midst of a recession. Should we be worried?

This is an excellent question. One thing I have learned is that people that are worried about markets that are at record highs, tend to worry when they are crashing too!

This year is a typical example. In January and February, these kinds of questions were popular.

Then in March, you would think people would want to get in. But those people assumed that markets would go lower. Now they are back to assuming that markets are overvalued!

So the simple answer is no.

The main reasons are:

  1. Markets have always gone down. It comes with the territory. look at the history of most major stock markets. -10%, -30% and even -50% happens sometimes but markets always eventually recover.
  2. If an investor is in 3–4 indexes, including a bond index, that is very different to an individual stock. With an individual stock, sometimes you should worry, but the general market is different
  3. If you have a 10, 20 or 30 year time horizon, that is very different to wanting to retire next year. If you want to retire next year, you shouldn’t be 100% or even 80% in stocks though.
  4. Only US Markets are at records. Many other markets aren’t. If you hold 3–4 indexes, you will gain access to those markets too
  5. Long-term, markets will hit new record highs almost for sure. If we look historically, markets hitting record highs is so frequent that it is barely newsworthy.
  6. Nobody can predict which years will be better than others
  7. Interest rates are 0% or close to zero globally. I would be much more worried about losing to inflation than experiencing a bit of volatility.
  8. There is little or no correlation between markets and GDP in any case. Markets have regularly risen in recessions and also sometimes fallen in good times.
  9. Nobody can predict these things so worrying doesn’t help. Markets could soar by 30% in the next year or crash. Nobody can predict it so worrying isn’t profitable long-term
  10. Market timing isn’t profitable full stop.

The major point is this. The biggest risk in investing isn’t what people assume it is.

The biggest risk by far is yourself. A market decline or crash isn’t a problem but panic selling due to one is a huge problem.

A market increase isn’t a problem either, but it becomes one if you try to time markets.

That’s the key mistake to avoid. Self-imposed mistakes are what costs investors in the long-term.

Yet people seldom worry about this risk.

Could it be the stock market is doing well because some speculate we will have rapid inflation as a result of the Fed/Gov’s financial intervention?

During times of uncertainty, putting money into successful businesses on the stock exchange, is a lot more productive than in cash or bonds paying close to 0%.

What’s more likely? A currency crisis or stocks being down in 30 years? Of course, the former.

There have been thousands of currency crisis in the past, in the majority of countries, where the S&P500 has never been down over a 20–30 year period.

However, let’s not overthink this. Stock markets can go up or down for any number of reasons.

If the US Stock Market has only gone up due to the Fed, then the UK’s stock market should also have risen to record highs.

In fact, the FTSE100 is about 30% below its all-time peak, with countless stock markets always below their peaks.

Also, don’t forget the lessons of the last 12 years. After 2008–2009, many people expected big consumer price inflation.

It didn’t happen in almost all developed countries. Japan and the Eurozone has had close to 12 years in low inflation/deflation mode. The US and UK have had 2%-2.5% above inflation.

In 2010, after the worst of the financial and economic crisis was over, economies were in recovery phrase.

What did we hear throughout 2010? We heard these things:

  1. Gold, silver and commodities are hitting new heights due to QE. 2008 stopped “peak oil” pushing oil to $150-$200, but that could come soon enough!
  2. The USD is getting weaker due to QE. I even heard some people suggest that the Brazilian Real and Chinese RMB would hit parity with the USD
  3. US markets are more overvalued compared to many others
  4. The US mid-term elections of 2010, and the UK’s 2010 election, could affect markets, as could the Eurozone crisis.
  5. Emerging markets would have a great time, especially Brazil, Russia, India, China and South Africa (BRICS)

Should familiar!? Then what happened? Well, gold fell for years from 2011 until about 2018, and has still yet to hit its 2011 peak adjusted for inflation.

Silver, oil and other commodities haven’t even came close to hitting their nominal highs never mind inflation-adjusted highs!

The USD got stronger for years against almost all currencies, but especially emerging market currencies like the Brazilian Real.

Even though emerging markets had a great 2010, they have been easily beaten by developed markets since then.

Various political events didn’t affect markets, including the 2010 Eurozone crisis, 2016 (Brexit and Trump) etc.

Many BRIC economies went into recession or low growth, despite the consensus back then.

The point? Don’t try to second guess the future. Just keep investing. The people claiming that QE will cause consumer price inflation are the same people who claimed the same thing in 2008–2009.

All the while, those patient and robotic investors who just invest every month, without market timing or watching the news, have been accumulating wealth.

I am only going to make 2 predictions here, even though I said that I don’t like predictions:

  1. The markets will be much higher in 30 years, adjusted for inflation, unless something like a nuclear war happens ensuring there are no markets. However, nobody will know which years will be better than others
  2. Every time there is a crisis in the next 30 years, there will be people predicting doom and gloom, and the “QE will cause consumer price inflation” crowd will try to make it third time lucky. In other words, it didn’t after 2008. If it doesn’t cause it again in 2020–2022, even though the QE was more this time, they will claim come the next crisis (whenever that is) that “this time it will cause inflation!”.

I am not saying there won’t be any inflation. In fact, the process of localisation of supply chains back from China and other countries, could cause more inflation than anything else.

So we could have an uptick. But those claiming out of control inflation aren’t the kind of people to take seriously.

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