A little knowledge is a dangerous thing.
I have a fair bit of experience when it comes to money. I used to read every financial blog on the web. (Rest in peace, Google Reader…) I was one of Amazon’s top financial analysts in Canada despite having a degree in a seemingly unrelated field – political science. I attended Warren Buffett’s annual shareholder convention in Omaha in person just to listen to his precious annual Q&A, and I did that eight years in a row. (Until they finally started streaming it on Yahoo Finance.) I even wrote somewhat successful e-books about saving money on college and Buffett’s biggest blunders. (Everyone talks about his successes, but there’s a lot to learn from his failures too.) I went from being a broke immigrant to retiring at 34 through self-education, finding unusual opportunities, and eventually taking advantage of a unique opportunity to sell Amazon stock high and buy a lot of value stocks low. Every once in a while, I manually review all 500 stocks in S&P 500 to find a few undervalued stocks to invest in.
Where am I going with all this? I know more about finance and investing than most people ever will. And my advice for most of those people is to avoid stock-picking. (Please note: I am not a certified financial advisor, and this post is for entertainment purposes. I am not responsible for your actions.) With that disclaimer out of the way… Most people should not be picking their own stocks to invest in, because a) they do insufficient research, b) they probably rely on hot stock tips (oh, Reddit…), and c) they don’t have the risk tolerance to hold a losing position or hold on to a winning position, so they get shaken off that ride.
At the height of the GameStop mania in January 2021, after I’d already sold for a nice 293% profit (because I’d found it early on, and triple-checked all the math, and found the exact time of day when the stock was usually shorted), things got so absurd that my estranged step-brother contacted me on Facebook for the first time in 15 years to ask how to set up a Robinhood account so he could trade GameStop. I told him that was a bad idea (if only because he didn’t know what he was doing) – I hope he didn’t lose too much money…
To be fair: yes, it’s possible to become a millionaire if you find the right stock at the right time. (Much like Keith Gill, aka Roaring Kitty, aka DeepFuckingValue, did when he kept buying GameStop at $5 or less). Every time some stock goes all the way up, there is inevitably someone who had bought in low and made a fortune. It is also possible – and far more likely – to lose everything because you did your “research” by watching YouTube videos where some stock got promoted, or you read an impressively long post on Reddit’s r/wallstreetbets, where all the comments were filled with rocket emojis and all your fun new Internet friends upvoted you when you said you were going all in.
If you don’t know what a pump&dump is, then you can look at subreddits of stocks (or stonks, if you will) that peaked and then kept on falling, turning a bunch of naive Internet dwellers into bagholders. There are very many of them: for example, r/SPRT, r/WKHS, r/BBBY, and many others. You can read a lot of tales of quiet (or not-so-quiet) desperation in those communities – or you can just look at “loss porn” posts on r/wallstreetbets itself to find examples of people who lost their life savings, or even more than that.
Why am I being such a downer about this? Because it’s important to know your limitations. There’s no shame in admitting your ignorance in one field or another. For example, I’m terrible at car repairs. In fact, I have a sneaking suspicion that my first lemon car literally caught on fire in the frozen mountains of Northern Nevada because I might have, maybe, possibly added oil into the radiator. (Hey, it was 5am after an 11-hour warehouse shift, and it was very dark, okay?) We’ll never know for sure whether my car spontaneously combusted because it was such a piece of crap (yay plausible deniability!) but it’s probably best to keep me away from any car repairs: there are professionals who can do that faster, safer, and more reliably.
There is no shame in admitting you know nothing about investing in stocks. The real danger lies when you decide to spend your hard-earned money on something you don’t fully understand. A little knowledge can be dangerous. (Even more dangerous if you buy on margin and end up losing more than you’d started with.) Most people, unless and until they can do a lot of reading and research, should stick with index funds. Personally, I’m a fan of Vanguard’s funds, especially VOO: it’s an ETF that tracks S&P 500 and has the expense ratio of only 0.03%. (That’s 0.03%, not 3%. That’s the best deal you’ll ever find, as fees go.) You’ll never become a billionaire or make 193% in one year by going with index funds, but you’ll also never lose everything you own. Index funds are boring, they’re not sexy or adventurous, and they’re reliable.
But if you’re hellbent on stock-picking in any case, here are four books that you must read in order to become even passably qualified. Investing isn’t magic, but it involves a lot of reading and learning. Otherwise, it’s just gambling. Don’t start until and unless you finish all four books, in this order:
- The Intelligent Investor by Benjamin Graham. This book is Warren Buffett’s secret origin story. Graham was his mentor, and all of Graham’s other students ended up beating the stock market for decades to come. (Thus proving that the Efficient Market Hypothesis is full of holes: inefficiencies and underpriced stocks exist, and they can be taken advantage of.) This book was published in 1949, and it’s 640 pages of concentrated wisdom and philosophy. Read it to understand what it actually means when you buy a company’s stock, or how to properly find a company’s value. Do not, under any circumstances, buy it as an audio book: not only will you miss out on all the charts, but there are some particularly dense passages that require you to stare at the page for quite a while before you comprehend them. This book was written several generations ago, and it’s not very user-friendly: there are no jokes or cartoons or fun trivia facts. Only knowledge – sweet, sweet knowledge. I recommend buying the paperback instead of the Kindle version because some charts might not look so great on your screen. I have this sneaking suspicion that most people who bought this book never made it till the end – it’s usually just a status symbol on one’s bookshelf – but if you power through it, and understand what Graham wrote 70+ years ago, you’ll be significantly ahead of your competition. (And stock market is a competition.)
- Berkshire Hathaway Letters to Shareholders by Warren Buffett. This particular paperback is 769 pages long and costs $66 as of this writing: you can always download the Kindle version for just $2.99 but a) chances are, some the charts will look weird on your screen, and b) having an actual paper book to flip through and highlight will make it a lot easier. Alternatively, you can just find most of the letters, from 1977 onward, on the Berkshire site for free in the PDF format. The downside is that you’ll miss out on the 1965-76 letters, which are important in their own way. Buffett’s annual reports primarily discussed the company’s performance, but he’d also include a few pages of his own wisdom: explaining how different accounting gimmicks work, or why he likes it better if the company buys back its own stock instead of issuing a dividend, etc. It’s not as dry as Graham’s book, but it’s not the most user-friendly book. (It does have more jokes, though.) If you power through it, you’ll get far better understanding of how different companies operate, how to find good deals, and how seemingly good deals can backfire. (I’ll give Buffett full credit – when he makes bad business decisions, he’s very forthright about them.)
- Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger – this is a collection of several speeches and commencement addresses by Charlie Munger, Buffett’s right-hand man. Munger’s thesis is that you should discover the overlap of your areas of expertise – and that you should beware the so-called Lollapalooza Effect where multiple biases and fallacies compound to make otherwise smart people commit ridiculous mistakes. (So, in essence, the pump&dump stock frenzy you see on Reddit and other social media.) Munger is a philosopher and, I suspect, a neo-Confucian. Some of his views aren’t very popular (e.g., blaming money-chasing house-flippers for the 2008 real estate bubble), but the book is still extremely educational. Personally, I’ve analyzed my core competencies, and I know enough about myself to avoid any technology or pharmaceutical stocks (too much manipulation, too little transparency) while going after safe but underpriced companies. (Energy and retail companies when the pandemic began, etc.) When people try to chase companies they can’t even begin to fully understand… Like I said before, a little knowledge is a dangerous thing. It rarely ends well.
- For dessert, but only after you’re done with the other three, you can have The Art of War. Thanks to Instagram, a lot of people may think that the Art of War is just a book of unusual sayings, like some ancient collection of fortune cookies. Nothing could be further from the truth: that book is an ancient psychological warfare manual, written to assist generals and commanders on the field of battle. It deals not with sword or arrows, but with human psychology. Because of that, the book is highly relevant when it comes to investing: in this Internet age, there’s a lot of misinformation, scare tactics, hired trolls who get paid $50 per FUD post (FUD = Fear, Uncertainty, and Doubt) on social media, etc. Every sufficiently big stock has some amount of psychological warfare going on – not only in social media but in financial publications as well. (No one is ever truly neutral.) This book is deceptively short but it’s not the kind of reading you can do in just a few hours. Take your time, reflect on what it says, and try to spot the same ancient patterns in the world around you.
Full disclaimer: all the Amazon links on this blog are affiliate links – I get a small commission if you buy something, and that helps me run the blog.
I’m writing this particular post in part to help all y’all internet strangers, but also to save myself time next time a relative or a friend or an estranged step-brother asks how to invest. Unless and until you can power through all these books (and if you make it through Graham’s book, I’ll be very impressed), it’s best to just stick with index funds. Your money will be much, much safer that way, and your portfolio won’t drown in the deep end of the pool.
What about you? What must-read material would you recommend to stock-curious people?
Sound off in the comments and let me know what you think!