OldSchool.com - Jae Jun
12 Investment Guidelines for My Grandchildren
No, I don’t have any grandchildren.
This was a piece published on AAII by Charles Ellis.
I don’t agree with it 100%, but there is a lot of meat in the letter to share around and to put up for discussion.
If you don’t have an AAII subscription, here’s the full pdf version.
If you have grandchildren or children of your own, print a copy, put it in an envelope and let them read it when they are ready.
The 12 Investment Guidelines
Here are my thoughts on each guideline to add to the letter.
#1: Always invest for the long term.
Even if you start investing at 40, you still have 30+ years of investing left. Fixating and chasing one year returns will get you no where.
You also have remember that even after you’ve retired, you have at least another 20-30+ years of investing to do. Just because you’ve retired, it doesn’t mean you will withdraw all your money. It’s never too late to invest for the long term.
#2: Diversify widely
The author is a big proponent of spreading your bets. He uses the main argument that it’s not possible for someone to know which stock will do better than another.
The whole diversification topic is always up in the air.
Honestly, it works to concentrate and it also works to diversify.
Just find the method that works for you.
#3: Ignore day to day price gyrations
Ignore day to day, week to week price movements and news reports.
Mr. Market is there to serve you, not to guide you. – Warren Buffett
Stock prices going down is actually good news because it lets you buy more for the same dollar amount.
Had you retired in 2008 at the peak of the recession, by ignoring price and focusing on value, your retirement account would have received a huge boost from the recovery if you stuck to buying when everyone is fleeing.
#4: Minimize trading to reduce fees and taxes
Wise advice. It’s amazing to see the fees rack up for day traders.
On Wall Street and among the funds, activity is achievement.
Don’t mistake activity with
achievement – John Wooden
It makes them look like they know what they are doing. Minimizing activity is seen as foolish because we are so used to being busy busy busy.
#5: Consider low-cost indexing
Warren Buffett has also said that for most investors, an index fund or ETF is the best choice.
Since this letter was written to the author’s grandchildren (all less than 10 years of age at the time of writing) it’s good advice.
#6: Beware of fees
1% fees doesn’t sound like much until you put it into context.
This is 1% of your assets annually.
If you have $100k invested into some fund or it is being managed professionally, you lose $1k.
That 1% also affects your returns as 1% of assets is closer to 15% of returns. Think of the compounding you can miss out on.
#7: Understanding investment history is certainly the best way to understand how best to invest
Learning about history is the best way to learn about the future. As I wrote last week, history repeats itself.
In the business world, the rearview mirror is always clearer than the windshield. – Warren Buffett
#8: Active managers cannot beat the market
The authors focus on index funds. The under-performance of fund managers is repeated a few times. This point in particular generalizes it a bit too much because if you look hard enough, you can find lots of smaller managers doing very well against the market.
The objective of beating the market is never a good one, so finding an investment manager focused on long term returns with a solid investment process will take you a long way.
#9: It is important to know yourself first
If you want the hottest stock in the market, you’ll be frustrated if someone managing your money is buying KO and vice versa.
What investment style and program best suits you?
You have a particular style and method that they feel comfortable and safe with. Choose the manager most compatible with your investing philosophy.
#10: Most investors make 3 classic mistakes
- Trying to beat the market
- Borrowing on margin to really beat the market (but leverage works both ways)
- Buying high and selling low because too much focus was put on short term price and market movements
#11: See the big picture
Instead of just focusing all of your investments into a brokerage account, think about other ways you can allocate and earn capital.
If you roll over a lot of credit card debt or other high interest accounts, paying it off is the equivalent of making the same type of return.
e.g. Paying off a $5,000 loan accruing 10% interest is the equivalent of achieving 10% on a $5,000 investment.
#12: Time and Saving is always the first step toward investing
The stock market isn’t a casino to strike it rich in one play.
Let time and compounding work to make money work for you and build wealth. Don’t fall into chasing riches.
In the past 2 months, there has been a sudden spurt among my friends aged between 25-35 getting into the stock market for the first time and dumping 100% of their “investment” money into IPO’s and chasing big one day returns without knowing a thing.
Wise Investment Guidelines
True advice doesn’t change much throughout the years.
You’ve definitely heard and read this before from a variety of sources. It’s nothing new, because it’s true.
A great letter to leave for your loved young ones.
http://www.oldschoolvalue.com/blog/investing-perspective/investment-guidelines-grandchildren/
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Discussions
4 people like this. Showing 16 of 18 comments
Tan KW, another very good article on investment. Sigh, as usual, few people here bother to read, and those who have read couldn't get the right message.
Everywhere here and there, people talk about buy this share, sell that share. Push this share, pull that share. This share price and that share price.
So your article is a refreshing for those who wish to invest, invest the right way. Diversify,save and invest for long term, low cost, avoid frequent trading,etc. It is suitable for most people who wish to earn reasonable return of their investment.
Good work, again.
2013-11-12 18:10
I agree with fortunebull.......sell when they rush and buy when they hide.....I made my little millions during the 1993 super bull after 5 years collecting the shares when the market was down....just be lucky and no need for any guidelines....next super bull will come in 2023......just you see.......
2013-11-12 18:23
For some people I am always wrong! I just keep quiet when I read someone promote PMCCorp like hell but gone after making profit pretending not to know about what he preach earlier!
2013-11-12 18:26
Tang! Good for you! Buy during panic sell during high! That's all! Keep it simply!
2013-11-12 18:30
Dear fortunebull....People who promote their shares like pmcorp are selling.....dont get traped....nobody promote shares like eita/uzma/prcorp/deleum and some other high dividen shares.... they move slowly up....these are the collectibles....keep long.....
2013-11-12 18:41
Posted by Fortunebull > Nov 12, 2013 06:26 PM | Report Abuse
For some people I am always wrong! I just keep quiet when I read someone promote PMCCorp like hell but gone after making profit pretending not to know about what he preach earlier!
-->Fortunebull, somoenoe mean calvin?
2013-11-12 18:44
Posted by Fortunebull > Nov 12, 2013 06:26 PM | Report Abuse
For some people I am always wrong! I just keep quiet when I read someone promote PMCCorp like hell but gone after making profit pretending not to know about what he preach earlier!
Who said you were wrong. Buy low sell high is one of the strategies of value investing. Who said it is wrong?
I promote PM Corp like hell? How did I do that? This was my posting on PM Corp.
Posted by kcchongnz > Sep 29, 2013 12:14 PM | Report Abuse X
Graham Net-Net Investment Strategy and Pan Malaysia Corporation Berhad
PMCorp’s latest balance sheet as at 30 June 2013 was used to compute the net tangible asset and Graham net net values. Besides cash, the net net values of quoted and unquoted investments owned are also taken as 100% of the book value. This is a fair assessment as it is believed that these assets are likely to worth more than their book value than otherwise. Note that tax assets, property, plant and equipment, Goodwill and “other assets” are taken as worth nothing.
The appended table shows that the Graham net-net value of PMCorp is 24 sen. This is 33% above its closing price of 18 sen on 27 September 2013.
PMCorp BS Amount Weight Net-net
Cash and equivalent 93950 100% 93950
Investments 81977 100% 81977
Receivables 21475 75% 16106
Inventories 18433 50% 9217
PPE 48040 0% 0
Goodwill 63190 0% 0
Other assets 1652 0% 0
Total assets 328717 x 201250
Less total liabilities -15471 100% -15471
Equity 313246 x 185779
x
Number of shares 773356 x 773356
NAB 0.405 x 0.240
NTA 0.323 x 0.240
This is a valuation of PMCorp. How do you construe it is a promotion? Sigh, I guess you can't differentiate what is promotion of stock,and what is valuation of stock.
Yeah when PM Corp share price went up way above the net net value, I sold it at 34 sen just end of last week. As I have sold, and its price also way above my net net valuation, and I see its ordinary business as a small one, what is that to make noise any more?
Nothing good to say any more so I just keep quiet lah. If not want? Talk bad about the stock?
2013-11-12 18:51
Like I said! Some people are 100% very correct! Better be stupid and let him win all the time!
2013-11-12 19:04
I thought you need to wait 3 or 4 years to see the real value! Never mind! I always wrong! I am stupid fool!
2013-11-12 19:06
If I say plenty of penny stocks gone up from 24 cents to 35 cents I am complete fool! But if someone else come up such stocks with backup from you know who, of course its 100% correct! So don't listen to me! Listen to you know who! He is 100% correct!
2013-11-12 19:16
Excellent article on Investment but my message will be very basic
I would advise young people fresh into working life as follows;
- Save 10% of your salary on monthly basis. Once you have enough money go buy property with savings as down payment
- Have only One credit card and use it sparingly...preferably spend money with cash...not with credit
- Invest to gain basic fundamental knowledge on investment first....Don't speculate on financial markets
- Create your own luck...Learn, understand and practise basic tools of Investment...If you want to invest and don't have knowledge.. Go educate one self with basic financial investment knowledge and Investment tools i.e FA, TA and understand, basic concepts of Money creation, basic global economics, role of Central bankers, govt policies..
- Always equip yourself with a helicopter view first
-Choose your partner wisely...Live happily....never rush into any relations that you may regret and pay heavily later...money saved is money gained
-MOST IMPORTANT...BE HAPPY, BE YOURSELF, HELP OTHERS WHEN U HAVE THE TIME & RESOURCES...
-TAKE GOOD CARE OF YOUR HEALTH...
2013-11-12 19:17
tsurukame,
Well done. What you have written here is exactly newbies and youngsters need to know and learn in their life journey to prosperity and financial freedom. Your writeup creates values and awareness here rather than just telling them to buy whatever, even rubbish when low and hope to sell high even though what you have bought is rubbish.
2013-11-12 19:22
kcchongnz,
OK....there are a couple of important message to youngsters...
-ALWAYS LISTEN, HEAR THE MESSAGE & THINK FIRST BEFORE ACTING OR REACTING...
-NEVER BE PRESSURED BY ANYONE AS YOU ARE AN INDIVIDUAL WITH YOUR OWN MIND,OWN VALUES, OWN THINKING PROCESS
-LIVE AND LET LIVE..SHOW RESPECT FOR OTHERS
-AVOID GROUP THINK....DON'T KEEP UP WITH THE JONES
2013-11-12 19:33
That must be another KC Chong, a financial adviser cum financial speaker believe. Not this KC Chong.
Although this KC Chong has been a financial adviser before, he is just a simple man, not an author of any book, as yet.
2013-11-12 19:43
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
Fortunebull
Why tell long story! Just tell they to buy during panic selling and sell during high of optimism!
2013-11-12 17:26