I get asked all the time what I buy for my investments. Do I own Apple stocks? No. Did I buy Bitcoin? No. Did I buy weed stocks? Nope. Do I own multiple properties in Toronto? Nope.
Everyone wonders how I grow my portfolio by double digits percentages when I’m not investing in any of these “hot” assets. It seems highly improbable to my audience to believe that I can obtain such high gains over the last few years without actually owning a single thing in the above list. One… I’m either lying through my teeth or two… I have a tree in my backyard that’s growing $100 dollar bills.
The secret to my success hasn’t been due to the fact that I’ve timed the stock markets correctly. It certainly hasn’t happened because I’ve picked the right stocks to buy either. In fact, I haven’t bought individual stocks for a long, long time. Some would believe that I do because I talk about a few, but that’s because I’ve held a few individual stocks for about 8-10 years now from the time I first started investing. See my portfolio.
The Warren Buffet Way?
I follow money managers just like any other amateur investor. It’s interesting to see what the “pros” are buying, but that doesn’t mean I try to emulate the success of those individuals. Far from it.
It’s pretty simple why I don’t invest like Warren Buffet or Mark Cuban. I don’t network and have lunches with powerful Fortune 500 CEOs. I don’t belong on any economic development board that consults with the Prime Minister or President. I also don’t have vast resources to use and rescue distressed companies that are in dire need of capital like Home Capital. No one in the business world would see me as a knight in shining armour.
I also don’t have the time to research and perform the due diligence that the “pros” do to make an informed decision on whether an investment is a good one. It’s their job, not mine. I just sit in front of a desk and write this blog for your entertainment purposes for no monetary benefit. Hey, at least I hope you enjoy reading this!
So I own nothing that’s “hot”. I’m not copying Warren Buffet. What they heck do I do? Like many of you with regular day jobs, it’s impossible to have enough free time to actively manage an investment portfolio. If I did I’d have a career as a personal finance manager or an investment broker. I’m neither of those.
What I did learn on my own is that I can be very successful with my own investments without having to manage them full time. That’s great! I can have a life and not worry about what my investments are doing on a day to day. Isn’t that what we all want?
That’s why I’m a big fan of index investing. You might be wondering what the heck index investing is all about and how it has provided me double digits returns in the last few years. That’s quite simple actually.
Index investing is essentially just investing in a basket of stocks. Rather than buying just one stock, I end up buying thousands of them for a low cost. You might be wondering why the heck I would want to buy stocks of so many companies. Why not just stick to Apple? Why not stick to the “winners”?
When you put all your eggs in one basket you expose yourself to higher risk. What happens when Apple goes out of favour for Google or Samsung? Remember BlackBerry? That used to be the hottest cellphone company, now the kids think it’s just some kind of disgusting fruit. So why restrict yourself to one stock when you can have them all? Queue the Pokemon analogy.
Another argument I hear is that indexes contain companies that just plain suck. Why own companies that are doing poorly when you can buy the good ones only? Well indexes are like the BillBoard top 500 of companies. When a company falters and drops out of the index, an index fund will automatically switch over to the next company that joins the top 500. This automatically guarantees that I’ll always be holding the top 500 companies! Isn’t that amazing? It’s better than trying to predict which Justin Bieber song will be the next big hit, if any of them are good at all.
Avoiding Canada Bias
If I’m only using index funds, that still doesn’t explain how I’m getting double digits returns. The market in Canada hasn’t always been providing double digits gains. In fact we just had a down year last year with falling oil prices.
The great thing about index funds is that there are many of them. Enough to help you build an investment portfolio that spans companies across the globe. Remember that Canada only represents 2% of the entire world’s economy. I didn’t want to restrict myself to investing in a country with just 36 million when I can invest in the entire world’s population.
Has anyone noticed what an outstanding year the European markets have had this year? Probably not. We’re self absorbed with what’s happening around us that we only see what’s before our eyes. Just like how recency effect exists, regional biases exists as well. Every day we watch America get ruined by Donald Trump and Justin Trudeau taking more selfies for Instagram while the rest of the world continues to grow and be productive.
Diversifying my investments gave me greater exposure to the global marketplace. Now I’m exposed to a marketplace with billions of people rather than just 36 million. Call me a defector or a traitor, but that’s not going to stop me from buying stock abroad.
Fear Of Losing It All
My mom told me a story of how my grandmother lost her entire investment by buying a stock while she was younger. She probably got the tip from a colleague. No doubt that colleague was boasting of big profits and how fast the stock had risen just like Nortel or Bitcoin.
Of course that adventure didn’t end well. It never ends well for the uninformed investor that chases after gains. So what makes index investing any different? Why won’t I suffer the same fate as my grandmother. My mom already warned me. Shouldn’t I be listening to her instead?
Most people still fail to understand what the index of a stock market represents. The popular S&P and TSX indexes in North America represent some of the largest companies in the world. If you really look at what those indexes are comprised of, you’ll see a list of popular names. Apple, Facebook, Microsoft, Merck, Johnson & Johnson, Coca Cola, Pepsi, etc… The list goes on and on. When an index stock is purchased, it buys a little piece of every single stock in the index. That means I’m part owner of every single stock in the index. My $100 allows me to own thousands of companies, something I couldn’t do if I tried to buy them individually.
Since my money now represents a small fraction of every company, for my investment to be completely wiped out to $0 means that every company I own needs to go bankrupt. That means no more iPhones, no more Instagram, no more Coke, no more Pesi, no more Tylenol. Everything that you’ve come to rely on in life everyday will no longer exist. Can you imagine that day happening? It’s called Armageddon.
My anecdote only covers North America, but the fact that I own indexes around the whole world means that I’ve essential declared that the only way that I can lose all my investment capital is if humanity, as we know it today, ceases to exist. That means no one buys a single thing, no jobs exist, it basically means humans no longer exist. So really I probably wouldn’t care about money at that point. I’d be dead. How negative is that? But that’s what some people think about when investing in stocks. They think the world is ending and their money is going to get wiped out. So go buy that bunker and load it up with beans and water, I’ll enjoy my sunshine and cocktail.
When I’m buying the index funds of the world, I am essentially betting on humanity. It represents the value and productivity of essentially the world’s marketplace. So long as humans continue to evolve and improve, or the population continues to rise, the values of the companies that support our world will continue to rise as well. We will always need food, shelter and water. So why not bet on the world?