Yong-Long Lai

Several people have asked me about stocks in general and investing in the stock market. First of all I don’t want to be the person giving them any advise especially since I don’t know what their risk profile, their financial circumstances and their financial plans for the future.

That said, I also don’t want them to just go blindly into the stock market and make all the mistakes I made. First thing to know is that there are two main types of stock market investors:

• The speculator (Usually the technical chartist)
• The Investor (Usually the fundamental investor)

I’ve done both in my life, and I can assure you that during the good times I think both of them will do well…. I know I did. Obviously with the market “falling off a cliff”, I am seeing the importance of fundamental/value investing. i.e. buying the company for what it is worth and not the actual stock that you trade in the market. For this reason, I highly recommend they read, The Intelligent Investor and for the more serious people, Security Analysis. Both are written by Benjamin Graham, the mentor of Warren Buffet.

Through my study of those books and many of Warren Buffet & Benjamin Graham’s material they recommend that for a person who does not want the trouble of stock selection or wanting to ‘beat the market’ etc. then they should invest in a low cost index fund (Australia ETF). Below is a question and answer session from one of Berkshire Hathaway Annual General Meeting. If this is the only thing you read from this blog, I truly believe it will be the best thing that has happened to you, so don’t take it lightly!

Q: “If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

A: Buffet:“…Put it all in a low-cost index fund like a Vanguard 500.” Munger: “Professionals take croupier profits out of the system. No one will give you this advice [index funds] because no one gets paid for it.” Munger: “The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity.” Buffet: “There are situations, for the full-time investor, where it’d be a mistake not to invest 50% of your net worth in one business.” If more aggressive: small stocks and specialized bonds, but no currencies.

- The Four Hour Work Week

Now, if you’re in Australia here’s the good news! there’s only 3 low cost index funds (Australia ETF) so its easy for you to pick one. You can trade them like stock and all their Management Expense Ratio (MER) is less than 0.4% which is very low compared to normal managed funds where you have MER of 2% or more.

So if you’re looking for Australian ETF, look no further you can start investing like the big boys and get all the diversification benefits without the stress and pain of knowing what is actually going on in the Stock Market. Obviously we are ‘hoping’ for some future reward/gain in the very long future, ie. 10,20,30 years. Hope this helps!