How to Invest (continued)

Chapter 4: How to Get Started

Becoming an investor is a psychological shift. It is the moment you transition from being a consumer of products to an owner of the means of production. To move from the default role of a consumer to the role of a shrewd owner, follow these 5 steps:

1. Open Your Gateway: The Brokerage Account

Before you can acquire assets, you need a brokerage account (examples amongst the giants include Charles Schwab, Fidelity, and Interactive Brokers). This is your portal to the global markets. After answering their KYC (Know Your Customer) forms and having your account approved, you first step is to deposit some cash at the brokerage so you can buy your first shares.

• Avoid Scams: After selecting a stock brokerage, be sure to check their reviews at Trust Pilot and Google Reviews to make sure they are both legitimate (highly used) and favourable.
• Tax Efficiency: Utilize tax-advantaged accounts (like IRAs or ISAs) to protect your compounding engine from the Taxation Drag shown to have a horrific post-inflation effect in Chapter 2.

2. Selection: Choosing Your "Money-Soldiers"

Decide which companies you wish to own. As a shrewd starting point, many choose an ETF that tracks the S&P500 Index such as 'SPY', but if you are hunting for individual stocks to outperform the index, look for companies trading at high IV10 / Price ratios and with deep Economic Moats. For insights and fresh ideas, call upon the collective wisdom of the many Shrewds at the Shrewd'm Hub to battle-test and refine your thesis. For those studying the gold standard of business ownership, the #1 Berkshire Hathaway board is an essential resource, whilst those hunting for value in distressed assets may find kin on the ever-popular Falling Knives board.

3. Execution: Choosing Your Order Type

This is where you tell the market how to execute your trade. In both cases, you need to specify the ticker symbol for what you want to buy, and enter the number of shares. The multiple of these two should be less than the cash available in your Brokerage Account. When buying or selling shares, choose between:

• Limit Order: Price guaranteed but not execution. The preferred shrewd method. You set the exact price you are willing to pay, ensuring you never overpay during a momentary price spike. For reliably executed transactions, set the limit price somewhere between the Market Maker's bid and ask spread, and if the transaction does not go through within several minutes, then adjust the limit price unfavourably in small increments until the order goes through.
• Market Order: Execution guaranteed but not price. An instruction to buy immediately at the current price. This is acceptable for highly liquid stocks and has the important advantage of the trade generally going through nearly instantly.

4. Deployment: Becoming a Genuine Owner

When you enter your order and hit the "Buy" button, something profound happens. You are not merely buying a digital ticker symbol who's latest quote moves up and down on a screen; you are becoming a genuine owner of a business. You now own a piece of the factories, the patents, the brand loyalty, and the future cash flows of that enterprise. As an owner, you are entitled to your share of the profits for as long as you hold the stock.

5. Expansion: Feeding the Engine

You do not need a fortune to start. Shrewdness allows you to start small and incrementally increase the size of your "engine" over time. Every time you divert a portion of your savings into your brokerage account, you are adding more fuel to your compounding machine. By repeating this process relentlessly, your small "sprinkle" of today eventually becomes the torrent of income that buys your future autonomy.

Note: Becoming shrewd is easier when you are surrounded by a community of like-minded owners. For those just starting out, the Investing Beginners board is a great place to start.

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Chapter 5: The Index Imperative

The S&P500 index tracks the performance of nearly the 500 largest public US firms. Outperforming this index is worse than a zero-sum game. For every group of fund managers who outperforms by 2%, another group must underperform by 2%. Once you introduce the "friction" of promotion and high salaries, though, it becomes a negative-sum game for these poor funds.

Many funds diversify their holdings with cash, but even 100%-stock mutual funds start every year with a 0.5% to 1.0% handicap due to their Expense Ratio. Over 20 years, this ensures that roughly 95% of all managed funds underperform the S&P500 index.

If you thought a 5% success rate, over 20 year periods, for managed funds is bad enough, it gets worse again: Many investors move in and out of funds at almost the worst time - becoming more enthusiastic after a series of good years (and friends in a good mood) leading to new commitments being added.. and conversely; tending to ditch the idea of investing, or more commonly moving to a 'more sensible stance' and reduce holdings exactly during the lows (with friends and news articles underlining how bad things are going to get). Thus reduces the dollar weighted return (the actual investment return experienced) even lower than the time weighted returns that Managed Funds publish.

A shrewd starting point is to have an investment return that tracks the S&P500 (such as by holding the ETF with ticker symbol 'SPY') through thick and thin—without changing the exposure according to the latest news. The S&P500 had a total return of 12% (8% after inflation) over the last 50 years, which is an incredibly tough hurdle to beat with individual stock selection after passing through thick and thin. And you'll leave the managed funds in the dust; just like that, you've secured a better return than almost every 'Pro' who spent six figures on an MBA.

Once you appreciate the mathematics of compounding, and the beauty of index investing, you then have the option of moving to the "adventure" of long-term stock outperformance. But it is important to know that have already become a shrewd investor if you stop right here. (You will, however, need to skip any plans to use margin debt, and apply a gigantic degree of patience, and nurture a capacity to avoid the cognitive biases that cause many to jump in and out of the market, playing havoc on their long-term CAGR.)

A strategy of remaining invested in an ETF tracking the S&P 500 Index - far from being merely an average return - is likely to beat the returns of almost every other investor over the very long-term.

Visit the wonderful Index Investing Board at Shrewd'm to discuss the pros and cons of different ETFs to follow even higher performing indexes to the S&P500.

Chapter 6: Phil Fisher (Growth and Scuttlebutt)

Phil Fisher looked for "Super-Growth" companies, a key pursuit for anyone wanting to become shrewd. His Scuttlebutt Method involves talking to everyone except the CEO—employees, suppliers, and competitors—to find the truth. True shrewdness is finding out what management isn't telling you.

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The Shrewd Scuttlebutt Checklist:

• Employee Vibe: Are they excited or just clocking in?
• Supplier Power: Does the company bully them or partner with them? Shrewd companies build sustainable ecosystems.
• Competitor's Fear: Who do the rivals lose sleep over? If it's this firm, then great.
• Sales to Research Ratio: Is R&D building the future or fixing the past?
• The Bench: Would the company survive the CEO's departure?
• Accounting: Is the math simple or suspiciously complex? If complex, is each added element justifyably adding value? It can be so, but if not, Shrewd investors run.
• Loyalty: Do customers love the brand or feel "trapped"?
• Management Candor: Do they admit mistakes? Shrewdness requires honesty.
• Management Depth: Does the company have depth in its management?
• Management Determination: Is management determined to develop new products to further increase sales?
• Long-Range Outlook: Does the company have a long-range outlook on profits?
• Margins: Ask competitors who is the lowest-cost producer in the industry—This identifies if the margin is an industry fluke or a specific company strength. What is the company doing to maintain or improve margins? Ask about "labor-saving" equipment or "process improvements" that haven't been implemented yet.
• Skin in the Game: Does management own the stock? This is the ultimate sign of shrewd leadership.

Fisher's second great idea is the one that divides investors to this day: that a genuinely superior business can keep its high earnings multiple for years, rather than reverting to the market average as conventional wisdom insists. Get that judgement right and the "expensive" stock turns out to have been cheap all along—get it wrong and you have simply overpaid for a good story. It is worth an essay of its own: Phil Fisher: Growth and the Enduring Multiple »

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