I'm an international investor. I'm going to sharing my experience, and some tips and tricks. How did I become a millionaire? What obstacles did I have to overcome to become a millionaire? My life would have been easier if someone had told me these things earlier. I will tell you about all these things and give you some advice. Which will help you become a very big person in the future.
The way of making money from shares is sort of like with houses in that you get the capital gains over time.
So for example, let's say you bought 10 shares in Apple in 2010, at the time those shares were selling for $9 each. So yoU.S.pent $90 on buying 10 shares in Apple. As of October, 2020, Apple shares sell for $115. So your 10 shares are now worth $1,150 just by the fact that you only paid $90 for them 10 years ago.
Okay, so we've talked about what a share is and how you make money from them. And at this point you've probably got a few questions like how much money you need to get started or how risky is buying shares in a company. And I promise we're gonna get to that. But point number six is how the hell do you buy a share in the first place? And this is where it can kind of get complicated because it's not as simple as going on apple.com/buy and just buying a share in Apple. It doesn't quite work like that. Instead you have to go through, what's called a broker. And back in the day, a stockbroker was a physical person usually a dude who you would call on the phone and say "Hey, Bob, I want to place an order for some shares in Apple." And then Bob would type stuff into his computer or a place like a paper order. And then you would own shares in Apple. Thankfully these days we don't really have to talk to Bob because there's loads and loads of online brokers instead. And so you make an account on an online broker and then you can buy shares in a company through that. A bit annoyingly, every different country has their own different brokers hat operate in that country. Because to be an online broker in a country you have to abide by like a zillion different laws.
And so in the UK the system is different to the U.S. which is different to Canada and Germany and so on. And the UK, for example, most banks do have their own online brokerage type things. So with most bank accounts you can also open an investment account with them and then invest online. But usually the interface is a bit clunky. It's a bit old fashioned. And so you're usually better off going with an online broker. In the UK, the two that I use are Charles Stanley Direct and Vanguard, but before we get ahead of ourselves and make an account on Vanguard or whatever, we need to understand a few more things. And so question number seven is how the hell do I decide which shares to buy? And the easy answer to that is that you actually don't want to figure out which shares to buy. You do not want to buy individual shares. And I'm gonna tell you a little bit more about that once I've had a haircut, so see you shortly. All right? So new hair, I've got my Invisalign braces on. So I'm gonna sound a little bit different but where were we? Oh yeah, we were talking about why it's not a good idea generally speaking to invest in individual stocks. And I'm gonna do a video about this some other time, but essentially the issue with investing in individual stocks is it's kind of risky. Like, yes, if you invest in something like Apple, chances are it's gonna be around 10 years from now. But historically there've been quite a few companies that people were like, "Oh my God, this is amazing. This is the thing to invest in." And then that company went bust.
So you're automatically exposing yourself to more risk if you're investing in individual stock, also in general, like it's easy to say, hey, Amazon grew 10X in the last 10 years.
Therefore it's gonna continue to do the same for the next 10 years. But that's trying to predict the future. And the past is no real indication of future performance. And so the advice that most people would give for beginners is that you should not invest in individual stocks. You should invest in index funds. And this is what Graham Stephan, one of my favorite YouTubers also says as well. He says, "The index funds are the best, safest, and easiest long term investment strategy for most people." Which begs the question point number eight, what the hell is an index fund? So there's basically two bits to understand here: there's the index bit and the fund bit, let's start with the fund bit. And a fund is basically where investors will pool their money, so multiple investors would invest in the same fund. And then that fund would have a fund manager. And the fund manager decides which companies the fund is gonna invest in. For example, let's say I were managing a fund and I called it Gringotts and let's say a hundred people from my audience decided to invest in my Gringotts fund. I as the fund manager can say, okay, the Gringotts fund now that we have a hundred people's money let's say it's a 100 million. So everyone's invested 1 million each I've now got a 100 million. I'm gonna put 20% of that in Apple, 10% in Facebook, 10% in Amazon, 10% in Tesla, 10% of Netflix 10% in Johnson and Johnson, all of that sort of stuff. And so you, the investor don't have to worry about this because you trust me and my fund Gringotts to manage your money. And as you know, the fund performs well, because the prices of these stocks and shares increase when you get the returns and I take a 1% or 2% management fee. So I make a load of money because I'm earning 1% or 2% off of this 100 million that I'm managing and you're not worrying about having to pick stocks yourself. You trust me as a seasoned professional to do that for you. So that's what a fund is?
Now, the index bit refers to a stock market index. And so a stock market index would for example, be the FTSE 100 which is the a hundred biggest companies in the UK or the S&P 500, which is the 500 biggest companies in the U.S. or the NASDAQ or the Dow. And these are all different indices of the stock market. And if we use the S&P 500, for example, these are the components of the S&P 500. So we said, it's the 500 biggest companies in the U.S. So number one is Apple and Apple makes up 6.5% of the S&P, Microsoft makes up 5.5, Amazon makes it 4.7, Facebook has 2.2, Alphabet, which is a Google makes 1.5 and 1.5 is about 3% of the total S&P 500. And essentially we've got these 500 companies if you go all the way down… Oh, Ralph Lauren is 496, but chances are, you've not really heard of many of the other ones at the bottom of the list but chances are, you've heard of most of the companies towards the top of the list. So the S&P 500 is an index of the U.S. stock market. And if you look at the performance as a whole of the S&P 500, you get a general idea of how the U.S. economy is going as a whole. So this is currently what the S&P 500 looks like and if we do a five year time horizon, in fact, let's go max. So you can see the S&P 500 started in 1980. And since that time this is what the us stock market has been doing. So as you can see, there is a general trend upwards but for example in 2000, there was a bit of a crash, in 2008 famously there was a bit of a crash. And earlier this year, when Corona was first starting to be a thing there was a bit of a crash but then the market basically immediately recovered after that. Okay, so we know what a fund is, i.e. a way of pooling money. And we know what the index is, something like the S&P 500, when you combine those, you get an index fund which is a fund that automatically invests in all of the companies in the index. And so with me, for example basically all of my investments, all of my money is in the S&P 500, which effectively means that 6.5% of my investments are in Apple, 5.5 in Microsoft, 4.7 in Amazon, 2.2 in Facebook, 3% in Google, 1.5 in Berkshire Hathaway and so on. So why is this good? Well, it's good for a lot of reasons. So firstly index funds are really, really easy to invest in. A big problem that beginners have to investing, it's like, well, how the hell do I know which company to invest in? How do I read a balance sheet? How do I do any of this stuff? If you invest in an index fund, you actually don't have to worry about any of that. Secondly, index funds give you a decent amount of diversification. There are all sorts of companies in the S&P 500. So you're not entirely reliant on the tech sector or the oil sector or the clothing sector or anything to make the bulk of your money. You are very nicely diversified across all these U.S. companies. Thirdly, index funds have very low fees. So because it's not a real person who is deciding what to invest in and doing all this research and trying to make loads of money is essentially a computer algorithm that automatically allocates your money based on the components of the index fund. The fees for those are really low. And one of the main things about investing for the long term is that even a slight increase in your fees is gonna massively impact your financial upside . And so for example, an index fund with a 0.1% fee is so much better for you than an actively managed fund where a fund manager is charging you even 1% because the longterm difference between 0.1% fees and a 1% fee is sort of absolutely astronomical over the long term. And finally, if you look historically and, you know technically historical performance is not the same thing as future performance, but if you look historically very few funds have managed to actually consistently beat the market i.e. outperform the index. And in fact, someone like Warren Buffet famously says that if you gave him a hundred thousand pounds and asked him to invest it right now he would just invest in an index fund, like the S&P 500. And in fact, in 2008 Warren Buffet challenged the hedge fund industry to try and beat the market. He said that hedge funds are a bit pointless because they charge way too high fees and they don't actually get the sort of returns they claim to get. And so he set up this 10 year bet which this company called Protege Partners LLC accepted, where Buffett said that he was gonna bet that the index fund outperformed the actively managed fund. And he ended up winning that bet and sort of gave lots of money for charity or something like that. But that just sort of goes to show that it's really hard to beat the market with an actively managed fund. Basically, no one can predict what the market is gonna do in the future. And therefore if you hit your ride on index, i.e. you're gambling on the entire market, rather than thinking, you know what I've got some amazing insight that I'll know exactly which 10 stocks to pick that are gonna beat the market. You might as well hit your ride with the whole market rather than individual stocks. Okay, so we've sorted out the problem of which stocks to invest in by completely circumventing the problem and instead, just investing in index funds. The next big question people usually have about investing in stocks and shares is the amount of risk. And that brings us to point number nine. And the argument usually goes as follows that, "Hey, okay cool. This is investing in stocks and shares stuff. It sounds kind of interesting, but my uncle Tom Cobley, invested lots of money in the stock market. And he lost a lot of money. And my parents have told me that investing in the stock market is a really risky thing and I shouldn't do it. And I should instead invest in real estate because real estate is safe." That is usually the sort of thing, the sort of idea that people have about investing in stocks. And naturally there is the anxiety of what if I lose all my money.
Anybody can ask anything, I'll reply all of your questions.