Why do you want to learn how to invest?
Most people want to start investing because they want to retire or retire early. Others want to be able to cover their medical bills, or pay for their children’s college, travel, or have extra money later.
No matter what your reasons, or where you are in life, learning how to invest is the best way to secure your financial future and that is exactly what I’m going to show you in this post.
Retirement Statistics in the US
The truth is, 45% of Americans have saved nothing for retirement, including 40% of Baby Boomers. Many have the notion in their mind that the stock market is dangerous and risky. This could not be further from the truth.
There is no other way for you to save as much money in any other type of account. A savings account may give you a .02% a year rate of return, a bond might give you 3% a year, and a mutual fund might get you 5% a year.
In the end, none of these will help you secure your retirement or make you very much money. In fact, they will provide little protection from inflation - which has hovered around 3-4% for the last 20 years.
If you follow these methods of saving your money, you’ll be lucky to double the money you have right now. That’s not going to be enough.
In 20 years, I want you to be a millionaire. My mission is to teach you how to invest smarter.
Investing doesn’t have to be complicated. I can assure you that if I could do it and retire a millionaire, you can too. It’s that simple.
I started out just like you.
Me as a river rafting guide in the Grand Canyon.
I was a river rafting guide in the Grand Canyon, I rode a Harley, and I had a beard. I made 4,000 dollars a year. I was about as far from investing as you could get. In 1980 I took a group of investors out on the rapids, and after a brush with death on one the nastiest rapid of the Grand Canyon, one of the investors decided to teach me how to invest.
I borrowed $1,000 and five years later I was bringing in over a million. By then I had mastered the basics of Rule #1 investing, and at that time I didn’t even know that the Rule had been used by the best investors for the past 80 years.
I’m now a New York Times Bestselling Author; I run my own company and my own hedge fund.
I want to show you that you can do this too. You can learn to invest and you can live the life that you want to.
I want to get you started investing today. You may be like many people that just don’t know where to start. I’m going to lay out an approach to get you started that should benefit new and seasoned investors alike.
Bottom Line: By the end of this article I want to give you the confidence to invest.
What Makes Rule #1 Investing Different?
Rule #1 is different from any type of investing you’ve seen before. We simply follow how the best investors in the world invest. These are investors like Warren Buffett, Charlie Munger, David Einhorn, and Mohnish Pabrai. These guys have been crushing the market for years.
For years, all headlines, articles and major websites have told us that the stock market is complicated, that you can’t beat the market, and that you have to be an expert to manage your own money.
All of these things couldn’t be farther from the truth.
Let me start by busting a few investing myths.
Myth #1: You Have to Be an Expert to Manage Money
The first myth I want to bust is that it takes a lot of time and expertise to manage your money. It would if investing were hard to learn or if getting the information to make a decision took a lot of time.
It doesn’t, even though the financial services industry wants us to believe it does. The industry stands to make billions from commissions and fees if it can keep you thinking you can’t do it on your own.
Myth #2: You Can’t Beat The Market
Okay, it’s true that 96 percent of all mutual fund managers have not been able to beat the market in the last 20 years. But you’re not a fund manager and you’re not judged by whether you beat the market. Your financial skill is judged by whether you’re living comfortably when you’re 75.
Myth #3: The Best Way to Minimize Risk Is to Diversify and Hold (for the Long Term)
If you know how to invest—meaning you understand Rule #1 and know how to find a wonderful company at an attractive price—then you do not diversify your money into 100 stocks or an index mutual fund. You focus on a few businesses that you understand. You buy when the big guys—the fund managers who control the market—are fearful, and you sell when they’re greedy.
If you follow our Rule #1 philosophy (more on that coming) you don’t have to worry about any of these things. You can beat the market without diversifying into 100 different stocks and without being an “expert”. You become the expert.
Stock Market Terms for Newbies
First, let's learn about some basic investing terms that will help you better understand the stock market and why investing is important.
What is a Stock?
A stock is a type of security that signifies ownership in a corporation and represents a claim to that company’s assets and earnings. Basically, when you buy stocks in a company you are buying a piece of that company. The best way to think about this is in terms of you owning the entire business. To be able to buy a stock in a company you should be comfortable owning the entire company.
What is Compound Interest?
Albert Einstein said that compound interest is, “The eighth wonder of the world.”
Compound interest is the game changer here. It is the amount of interest you earn on your investments plus all of the interest earned on the interest over time.
The effects of compound interest become especially powerful over long time periods when the amount of interest you earn becomes larger and larger.
What it means when people say “The Market”
When people talk about how “The Market” is doing, they are normally talking about the performance of an index. The two main indexes are the Dow Jones Industrial Average and the Standard & Poor’s 500.
These S&P 500 index reflects the performance of 500 companies in the stock market. If these companies rise in price, so does the index.
You can invest in an entire index fund. A lot of people recommend investing in index funds because you are instantly diversified. However, we want to find a few wonderful businesses to invest in. Great returns come from investing in wonderful companies that you understand, not in diversification.
Bottom line: Start saving earlier so you can take advantage of the effects of compound interest.
How to Find a Great Business To Start Investing In
There are what I like to call 4M’s when it comes to finding a great business. Since we model Warren Buffett style investing I’ll use Warren Buffett’s quotes about what he says about each ‘M.’ The 4Ms are Meaning, Moat, Management, and Margin of Safety. Let’s go through them below.
If you want to learn how to invest, this is exactly where you start:
1. Meaning - Understand the Business
"Buy into a company because you want to own it, not because you want the stock to go up." – Warren Buffett, in an interview with Forbes, 1974.
So where do you look for these mythical “great businesses?” Start with what you know and with what you love. If you don’t understand a business as if you owned the company, stop and move on to the next company. This is the most important, and perhaps the easiest to overlook, part of Rule 1 investing.
When you think of buying stocks, think of it as you purchasing the entire business. Once you find a business that you love, your next step is to research the company inside and out, by reading 10-K reports and any articles you can get your hands on.
Read everything you can on a company. Do your due diligence here and it will pay off exponentially in the future.
2. Moat - Find a Business That Has a Competitive Advantage
“Time is the friend of the wonderful company, the enemy of the mediocre.”- Warren Buffett
A competitive advantage is what gives a company its lasting power. It is what ensures us that the company will be around in 20 years. We call this a Moat. We compare a competitive advantage to a moat around a castle that prevents it from attack.
If the company is truly wonderful, it will be around in 20 because it has a competitive advantage that no one can touch. A company without one will fall prey to other companies.
For more info on Moats, I’ve created a downloadable guide to the 5 types of competitive advantages your investments can have.
3. Management - A Business That Has Great Management
"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." – Warren Buffett
Find a business with a wonderful CEO. The CEO has control over what the company does with your money. Would you rather them growing the company and paying you dividends or paying for a private jet and vacation? Would you want them to be honest with earnings and tell you exactly what they’re doing with your money on a quarterly basis?
4. Margin of Safety - Buy It On Sale
"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." – Warren Buffett, 2008
If the company isn’t on sale we don’t want to buy it. We are only interested in a company if it is on sale. This means finding the price that the stock is actually worth, and buying that for 50% off.
4 Things Rulers Do To Stay Rational
One of the most important things that investors can do when they start investing that fund managers can’t do is to stay rational.
The ability to stay rational separates us from other investors. It allows us to stay calm in situations where others panic. It allows us to buy amazing companies that are on sale while others are running for the hills.
We think long term and we don’t panic over short-term fluctuations in the market, because we know we own a wonderful business and if we’ve truly done our research on a company we’re grateful because we can buy even more of it.
There are no shortcuts to getting rich, but there are ways to go about it that will make you rich in time that are guaranteed.
When making your first few investments remember to keep these things in mind.
There are 4 really important things that you must do when you learn how to invest if you don’t want to lose money.
1) Buy Stock in Businesses That You Love
As investors, we have a duty to buy businesses that match our values. Purchase a business in something that you spend your money in, a company that you know. Over time we can expect to be rewarded for doing this in dividends and great returns.
2) Rule #1 Investors Do Not Speculate
We are investors. We do not speculate. We only invest in a company that we fully understand. We spend hours making sure that we have read everything on the company. Remember that when you buy stocks, think of it as you buying the entire company. Would you own a company that you hated or did illegal things? No, you wouldn’t, so why would you want to support one by buying stocks in it?
3) Focus on Value
Try not to focus on the ups and downs of the stock market. We are investing for the long term. We don’t need to worry about the market over the short term. When you buy a truly great company you know that over time it is going to perform. It will also help you sleep better at night.
4) Buy to Hold
We buy companies with the intentions of keeping them for the long term.
Investing Takes Time
Remember, that this is not going to happen overnight, although you may want it to. Rule 1 investors think long term because they want to work hard now and enjoy the fruits of their labor in retirement.
This means retiring a millionaire and doing whatever you want with that money. I’ve created an investing checklist that you can use to make sure that you’re doing everything correctly and checking all of your boxes.
Bottom Line: Always stay rational. Keep your emotions in check when you invest.
Where Do I Start Investing? Pay Down Your Debt First
So, you want to start investing now, but you have debt. Both things require money and you may be anxious to begin investing now – especially after reading this. Be wary of your debt and keep this in mind. It might also be helpful to know exactly how much you need to retire.
Good Debt vs. Bad Debt
The first barrier to success in investing is bad debt. Yes, there’s good debt and bad debt. Good debt is money you borrow at a low rate of interest, with which you make a high rate of return.
An obvious example is the money you borrow to buy an apartment complex. The debt is covered by the rental income – or it will be in a few years.
Bad debt, by contrast, is consumer debt – money you borrow at a high interest rate to buy things that don’t produce income or grow in value. Things like cars, refrigerators, clothing and trips to Europe.
All of us have done it, and all of us have paid the price.
The Price of Bad Debt
The price of bad debt is the impact of compounding rates of return working against you instead of for you. If you have credit cards or bank loans costing you 18 percent or more a year, that’s 18 percent compounding against your retirement.
Since Rule #1 is all about not losing money, the first thing most of us must do to become successful Rule #1 investors is to pay off bad debt.
First, Pay Off Debt
Think about it: If your target rate of return is 15% and we have credit card debt we’re paying 18% on, essentially that means we’re borrowing money at 18% and making only 15% on it.
Even though we’re doing well as an investor, we’re going backward at a rate of 3% compounded per year. That’s a heck of a barrier to successful investing.
The only way you’ll get rich is to hit the lottery.
Otherwise, you’re going broke with great certainty.
But notice that if we turn that around and take the money we were going to invest and instead pay off the 18% interest rate debt, then instead of losing 3% a year, now, even if we don’t have money left to invest, at least we’re breaking even and we’re not violating Rule #1.
Bottom Line: It’s better to pay off debt before you invest.
Learn How to Invest by Opening Your First Trading Account
You’re getting ready to find a proper account to open to begin saving. There are plenty of different types of accounts that will satisfy your savings needs for the future.
You have a few different options of savings accounts for your retirement savings. These accounts are set up solely for the purpose of retirement saving. Here are the two types of accounts we most commonly use:
An IRA or Individual Retirement Account allows individuals to direct pre-tax income toward investments. Individuals are allowed to contribute up to a year maximum dollar amount to these accounts. You’ll pay income taxes on when you withdraw money from these accounts.
A Roth IRA is similar to a traditional IRA however, the money you put into a Roth IRA is taxed before it goes in so you won’t pay taxes on the money you grow or when you take it out.
Both IRA accounts can give you more options in types of investments that you can make.
Both types of accounts have different benefits so do some research before deciding which one is right for you. The faster you can get one of these accounts set up, the faster you can get started investing.
Here’s an infographic on choosing the right investment vehicle for you.
Bottom Line: Do some research and find out what type of account is right for you.
Buy Your First Stock and Start Investing
So, you’ve paid off all of your debt and saved up some money for emergencies and you’re ready to start investing.
You’ve opened up a fund account and done your research on a company that you think is an amazing buy.
Are you ready to go?
Let’s do one more thing, just to be sure. Let’s practice for a while.
There is something called “paper money” or “fantasy trading” where you can practice all of your newly discovered skills on a business.
Sites like this will let you trade real time with fake money, so that you can practice a bit and “learn by doing before you get into the market.
Bottom Line: Open a free paper trading account before you start investing from a popular website and try it out.
You’ve taken your first steps to learn how to invest, become a true Rule 1 investor, and to become financially independent. With responsible living and saving you are ready to take control of your finances and enjoy an early retirement.
I’ve given you some guidance on how to begin researching, shoring up your finances, and practicing. But the first step can still seem incredibly daunting so I’m still here to help.
While you practice you can further your knowledge of Rule #1 Investing by checking out my FREE Digital Course: Intro to Rule #1. If you want to learn exactly how to put your skills into action and start making real returns, don’t miss out on this.
If you'd like another resource to help you retire sooner than you originally planned, click the button below to download my Retirement Calculator!
How to Pick Rule #1 Stocks
5 simple steps to find, evaluate, and invest in wonderful companies.