TIB10: Where do I start?

Where do I start?

This is the question that a lot of people struggle with. If you go to any of the mainstream financial news sites like Marketwatch or CNBC, you will come across articles with headlines like “Where you should invest if you just received $10,000” or “Where every millennial should be putting their money this year”. If you are brave enough, you click on one of these links and it inundates you with advice without any context.

The advice is framed as sacrosanct. Word of God.

Everyone should be doing this one thing with their money.

Well that’s not very helpful.

If you are even more brave, you venture over to X (the artist formerly known as Twitter). Trying to find good financial advice on Twitter is like being in a room full of horse shit and trying to find a pony. There is so much shit in the room that you figure there must be a pony in there somewhere. But sifting through it all is going to be an absolute nightmare.

So what do you do if you are looking for a place to start? Well to frame the issue, let’s have a look at what Warren Buffett had to say to a woman who came to him looking for advice when she came into a bit of cash.

To summarize for those who didn’t watch the video, Warren recalls one of his friends coming to him and asking him for advice on where to invest some money that she had just received. He then explains how he approached giving her advice.

Did he ask her what her investment goals were?

No

Did he ask her what her risk tolerance was?

No

Did he ask her what the overall makeup of her existing portfolio was?

No

The first question he asked her was “Do you have any credit card debt? If so, how much interest are you paying on that balance?”

When his friend told him that she did have credit card debt and was paying close to 18%, his response is vital to all of us who are trying to figure out what to do with our own money that we have at our disposal.

“I don’t know how to make 18%. If I owed any money at 18%, I would pay it off as fast as I could with any money that I had because it will be way better than any investment idea that I could give you.”

As of August of this year, Warren Buffett’s career annual return has reportedly been 22%. That is almost double what any investment in the S&P 500 would have yielded PER YEAR had you made the investment when Warren started Berkshire Hathaway in 1965. The S&P 500 gained 24,708% between 1965 and 2022 and Berkshire Hathaway gained a ridiculous 3,787,464% over the same time period.

This is one of the greatest investors of all time, and even he is saying that he does not know how to reliably make 18% per year with any investment idea he has.

So what is the point of this? Many people assume that the first thing you need to do to get control of your personal finances is to figure out what you should be investing in.

The first place they go is to one of these financial news sites to see what hot stock or ETF has done well over the past 12 months.

Realistically, the first step for everyone starting out should be getting a handle on (i) what you have today, (ii) what you are making today, (iii) how much you are spending today and (iv) what debt you have on your books. You can only do that by doing some pretty boring work around putting together a budget, calculating your net worth and tracking how much money you are saving each year.

Personal finance is PERSONAL. Figure out what your unique financial position is first, then go about determining the best way to save, invest and pay down whatever debt you have.

Closing thoughts

I am in the middle of reading “Just Keep Buying” by Nick Maggiulli, a book that I recommend it to all of you. In the book, Maggiulli discusses his experience when he first started working. As he recalls, while he spent hours analyzing his investments, he never spent any time thinking about his income or his spending habits.

“With only $1,000 of investable assets to my name, even a 10% annual return would have only earned me $100 in a year. Yet, I was regularly blowing that sam $100 every time I went out with friends! Dinner + drinks + transportation and my year’s investment returns (in a good year) were gone.” - “Just Keep Buying” by Nick Maggiulli.

This further illustrates how important it is to focus on the right thing when you are starting out. Most of the time, when you are starting out, investing is the last thing you should be thinking about. Pick the lowest hanging fruit first and work your way up.

If you are paying 18% in credit card debt, then the lowest hanging fruit is trying to pay off that debt as fast as possible.

If you only have $1,000 saved, then focus on how you can cut down on spending or increase your earnings so that you can grow that pot of savings as fast as possible.

No matter how great your investment returns could be, you need money to invest first.

Sounds simple, but that’s the point. Keep it simple!

Recommendations from this week

Just wanted to give you all a heads up on some good stuff I have listened to this week. Hopefully you all find it useful.

For those who are a bit more advanced in their understanding of the markets

1. The Memo by Howard Marks

   Howard Marks is a legendary investor who is the co-founder and co-chairman of Oaktree Capital Management. In this podcast he argues that the trends he sees in the market today represent a fundamental change in the investment environment, and people will need to rethink their foundational investment principles in order to be successful in the future.

For those of you who are new to markets, investing and finance

1. Tim Ferriss with Richard Koch

   Richard Koch is a successful writer and venture capital investor. He is probably most well known for his book called “The 80/20 Principle”, which argues that 80% of all outputs in life comes from 20% of the inputs. In other words, if you run a business, 80% of your revenue will come from 20% of your clients. This interview is a bit of a long one, but it is worth every minute.

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