EN: October 2020 – Starting the Investment Club Newsletter
2 years ago, on the 17 of December 2018 I wrote a long note on facebook which essentially started what we now call the Investment Club – a small group of friends would start investing in the stock market by opening investment accounts separately and investing in roughly the same companies. My enthusiasm came from my own experience and profits (10% profits at that time) since 2016 but also from the exciting ideas I was reading in investment books which had convinced me that the stock market offers incredible opportunities to intelligent investors (The Intelligent Investor – Benjamin Graham).
The day I announced the investment club – only 3 friends had chosen to join me and they opened investment accounts and deposited anywhere between 5.000 USD and 10.000 USD – and before the club was 1 year old we had a small gain in one of the companies we had invested in (Berkshire Hathaway) and a significant loss in Tesla – the company was bleeding money and reached a low of 178.97$ on June 3, 2019. We had purchased Tesla at 300$ a share so we had a loss of about 40%:
This was close to being the end of the Investment Club and I was so disappointed that I wrote to the 3 members that investing is risky and even if we were right about Tesla it could take years before the market also saw what we see so I would not be upset if they chose to leave the investment club – one investor chose to leave us. I had no way of knowing that in the next year Tesla stock would grow incredibly from 178$ a share to more than 2000$ a share – making those that stayed in the club between 50.000$ and 100.000$ net profits. The fact that I had a Tesla Model 3 helped us massively hold on to the shares through the hard times. Here’s a screenshot of my desperate message before this massive run up – unfortunately it is in Romanian but trust me – it’s sad.
This success investing in Tesla stock which many had anticipated and were waiting for for the last 4 years, created a lot of millionaires in the US and is the reason why I’m writing this newsletter and why the Investment Club is now stronger than ever.
A lot of people wrote to me afterwards with the same message: “I have some spare cash and do not know how to invest it. Can you help me?”
Unfortunately I can’t invest for 30 people like I do for the original members of the Investment Club especially since a drop in the stock market would be incredibly hard to explain to 30 people you’ve never met in real life. So investing on behalf of 30 people is both dangerous and impossible time wise.
What I can do however is create this newsletter: the Investment Club Newsletter – a monthly, long-read article which will help you invest, give advice and allow you to “copy” the moves I do inside the Investment Club.
Important: Investors buy stocks with their current cash – anticipating future profits but this isn’t a risk free transaction. The RISK is that the stock market drops or the companies they invest in drop and don’t recover for years. Below is a picture of the S&P500 index, the top 500 companies in the united states combined in a single index fund anyone can buy shares in:
If you invested only once in October of 2007, it would have taken you 6 years just to return to your original purchase price and have 0 profits. This is the risk of investing and if someone wants to double their money quickly – they should fold it in half and put it back in their pocket. There are no reliable ways to get rich quickly – and they should not invest in the stock market. Similarly, someone should not invest in the stock market if they expect to need this money in the next 5 years. There is always a risk that the stock market will have a recession in the next decade – especially now at the end of a massive stock market growth period. Another famous method of losing money on Wall Street is to try and guess what the stock market will do tomorrow, in a week from now or in the next months. This is speculation – not investing and is not the type of activity we do in the Investment Club or in this newsletter.
Our investment method:
With the warnings and our history out of the way – we can move on. The primary investment method that we use is called Value Investing and the bible of value investors is the book called “The Intelligent Investor” – by Benjamin Graham. In this book Ben builds on his experience of stock investing and analysis of 30 years and proposes this simple idea: Buy stocks when nobody wants to buy them and they are dirt cheap (in recessions or when investor sentiment is low) and hold on to the shares of these companies for a long time until they grow to their true value. In many previous decades and recessions – stocks of companies sold for less than the ground their factories were sitting on. Warren Buffet – the founder of Berkshire Hathaway became a billionaire using this strategy and this is no accident: Buffet was the student of Benjamin Graham in the 1950’s. Today Warren Buffet is CEO at Berkshire Hathaway and people who invested in his company made 19% annually for 50 years straight. 1000$ invested in Berkshire would have been worth 16.000.000,00$ (million) dollars today. Berkshire continues to be a great investment – undervalued by the market and we hold a significant position in it inside the Investment Club.
Two types of investors – which one is for you?
Passive investing: For many people the best path in investing is not to invest in specific companies like Tesla, Berkshire or Apple because retail investors do not have the time to follow these companies for 10 years or more and understand their situation in sufficient details. For them, there is a better alternative : The S&P500 index, the one I was referring to earlier. This index tracks the top 500 most valuable US companies and the committee that administers it decides which companies to include and which companies to take out of it. Esentially they take care of the hard part for you. This index returns on average 10% a year and despite drops and recessions it has done 10% a year on average for most of the last century despite two world wars and the Great Economic Depression that destroyed the stock market for a decade. 100$ invested monthly in the S&P500 during 40 years would have netted you a nice 550.000$.
The same 100$ saved on a bank account for 40 years would have only added up to 48.000$. That’s a massive difference – capital grows exponentially when invested at 10% a year. Investing in an index fund or index funds is a safe and tried method and it’s what most Americans use for their retirement investments. All you need to do is to open an investing account, find the S&P500 index and invest 100$ every month from here to eternity and unsubscribe from this newsletter or any other newsletter. If it sounds like I’m trying to convince you to do this it is because I am – those that choose to follow this newsletter into active investing will have to read a lot more and be aware of the companies we invest in.
Active Investing: As proved by Warren Buffet and many others and even us in the Investment Club, an investor, especially a small investor has the opportunity of finding companies that return a lot more than 10% a year.
Warren Buffet had incredible returns in his first 10 years when the amount of money he had to work with was small. In the Investment Club we knew the market was not valuing Tesla properly so we ended up with 300% to 600% in profits in our first 2 years. It would have taken decades for us to achieve the same from the S&P500. Although we also invest in Berkshire Hathaway our profits there are only 5-10% which is something we expected there and it’s preferable to us over the S&P500. Peter Lynch is another value investor who succeded in making 29% yearly for 13 years – which is more than double what the stock market did as a whole.
What is a stock and how do I buy one?
Simplifying a lot we can say that a stock represents a small slice of a company. Depending on how many slices of a company you own you can calculate how many % of a company you are an owner of. Companies can issue new stocks diluting existing shareholders in order to raise capital to grow. If you buy more than 50% of a company’s stock you become it’s majority shareholder and essentially own a public company(barring companies whose stock does not have voting rights). Stocks are bought and sold thousands of times in a single trading day with huge price swings, as long as the stock exchange is open – typically between 9:00 and 17:00. Two popular stock exchanges are the NYSE(New York Stock Exchange) and Nasdaq. Although in the past stock owners were given a paper certificate – representing their stocks, today the entire process is online. You open an investment account, press buy and the stocks appear in your account. Your broker will show you how many stocks you own, how much money you invested as well as the gain/loss you’ve made:
What is the right price to pay per share?
The price of a stock is typically established using consensus on the open stock market between the buyers and sellers. You don’t need a lot of math to figure out when something is cheap or expensive. For example, Apple stock dropped in January and April of 2018 , which is when a value investor would have considered purchasing it, then grew to new highs which is when a value investor would have been careful and then dropped 20% in the December 2018 stock market correction of 20%. Nothing was wrong with Apple – the whole stock market tanked. A value investor would have considered this a great opportunity to accumulate shares.
That’s a layman‘ s approach to investing – there are better technical indicators for when a stock is under or over valued. You can divide the price of a share to the earnings per share. Better yet, Google “Apple PE ratio” and this calculation was done for you already. This is the Price/Earnings ratio by which stock prices are judged. Typically a reasonable valuation means a 20 PE ratio – or that the share price is 20 times what the company earns per share. During recessions the stock market drops to a PE ratio of 10 which means the it is cheap. Unfortunately human nature loves excess – which means when the stock market grows for a few years investors are willing to invest at a 40 PE ratio, which just means they pay 40 times more per share than the company’s yearly earnings. That’s a high price to pay. Once investors realize they’ve paid too much – they sell everything they own. This triggers a sell-off in the stock market and a correction. These are the economic cycles the market goes through and the PE ratio is a good – but not perfect indicator for where we are in the cycle. A case study is Apple, in 2013 Apple was considered a hardware manufacturer with no competitive edge and a PE ratio of 8.73 and stock price of 15$ (Not surprising then that Warren Buffet invested in Apple at that time). Once the market realized just how profitable Apple is their stock price jumped to an astounding 115$ and a PE ratio of 36 which is extremely expensive.
For Value Investors – Apple was a great stock to purchase at a PE ratio below 20 and an incredible value at 8.73. However, investors who buy Apple today and the entire S&P500 index as a whole are paying a bit too much for the earnings of these companies – the PE ratio is high. This is what always happens in the late stages of a stock market cycle – people look back and only see growth – so they conclude the only thing ahead is further growth. Eventually a correction strikes.
A very high PE ratio is justified for fast growing companies (Netflix, Tesla) because it‘ s possible that in a few years their profits will grow significantly. So looking at existing earnings is not the proper way to go. Tesla for example has earnings of 2$ for every share worth 400$. So Tesla’s PE ratio is 200. It’s not because investors are willing to wait 200 years to get their invested money back, instead it’s because they think’s the earnings will grow a lot in the next 10 years making today’s stock price look cheap. However if they did not plan on growing their earnings, let’s look at just how crazy a 200 PE ratio is, and let’s say you’re not buying into Tesla but an Apartment that you plan to rent out. Let’s say you purchase a 100.000$ Apartment at a 200 PE ratio. That means it will make you every year 200 times less than what you invested. A 100.000$ apartment that makes you 500$ a year in rent (41$ a month). Nobody would invest for such a low return.
At the other end of the spectrum of growth companies are value companies – like Berkshire Hathaway. Berkshire has a real PE ratio of about 10. That means they make in profits the price you paid per share in just 10 years and those earnings will double in the next 10 years. If we return to our apartment analogy – that’s a 100.000$ apartment that makes 10.000$ a year in pure profits from renting after subtracting taxes, maintenance and any other expense. And the rent will grow steadily to double in the next 10 years. Sounds like an incredible deal to me and it describes exactly what Berkshire Hathaway investors get today. Not accidentally, we have a large position and I invested a large amount of money in Berkshire.
How to open an investment account:
Opening an investment account is a simple but time consuming process – similar to opening an account anywhere else. Among recommended Brokers are RobinHood(USA), DeGiro(EU), Stake(Australia), Etoro(E.U.) and Trading212(Moldova). Opening an investment account requires a passport, and a bank statement with proof of address sometimes. These requirements are justified seeing as your broker holds your shares so you want to never lose your shares by forgetting your password for example which is why a broker will want to know a lot more about you than just your email. In most developed countries selling stocks at a profit means you have to pay capital gains tax. Investors from less developed countries typically try not to deal with tax questions – but it’s simple and it helped me a great deal in life to learn about taxes and their quirks. I recommend to all original Investment Club investors and those reading this newsletter to educate themselves on the topic of taxation. Just google for keywords like “capital gains tax”, “dividend tax”, “wealth tax”, “tax free investments”.
In order to buy a stock you would open your investment account, find the company you’re looking to invest in and click buy. You would choose how many stocks you want to buy, the maximum price you are willing to pay for them (typically one dollar above the market price) and click confirm. The stocks appear in your account and you have to do now is wait for a few good years.
Important: Some brokers force you directly or secretly to use leverage(CFD) or loaned money to buy stocks – they lend you the money. These brokers don’t tell you that by buying 5 times more stocks that you can afford, they will liquidate your position if the stock drops more than 20% and you will lose your money. This is called a Margin Call. Using borrowed money to buy stocks and losing it all at the first stock market correction is a very very bad idea but this is how Trading212 and Etoro make money so take care when buying stocks there – ask if you are not sure. Margin Calls are a significant part of how the 1929 Great Depression started – people used loaned money to buy stocks because they thought the market could only go up. Once the market crashed – people were forced to sell their stocks, further pushing the price of the stocks down, pushing more banks to liquidate people’s accounts. My advice? Buy whole shares with your own free money – leave the financial wizardry up to Wall Street.
In which companies do we invest in the Investment Club?
We invest in only 3 companies and the 3rd company just recently joined our portfolios. A very common idea in the investing world is that you must diversify and invest in many companies – preferably in a healthy index fund like the S&P500 to protect yourself against sudden problems a specific company might have. However this diversification also “protects” you from the spectacular growth that comes with being concentrated in specific, undervalued companies. Passive investors are not interested in this – they just want to let the index do the work for them. We, however, as active investors, are looking forward to such opportunities and looking to outpace the S&P500 which is why we concentrate our efforts, not diversify.
Peter Lynch – another Value Investor(check out YouTube for his funny videos) explains investing in specific companies plain and simple: You must have story associated with each company and you must check if the company is fulfilling that story. Here are some examples:
Some companies are growth companies with small profits today, but incredible futures (MCDonalds in the 60’s, Microsoft in the 90’s, Apple in 2000’s).
Some companies are stable and mature with slow growth (Coca Cola, Berkshire, J&J, McDonalds today).
Some companies are going into the sunset and slowly disappearing (IBM, GE).
Some companies are cyclicals – like auto companies that grow in a boom and decrease in a recession (Ford, GM)
Most companies will not remain in the same category and will change during their lifetimes – will start out as a fast grower, reach maturity and produce good cash for investors, then go up and down and then go into the sunset. It’s important to know your company and where it is in it’s lifecycle.
Here are the companies we invest in the Investment Club and their stories and the percentage we have invested in them:
30% Tesla(stock market symbol TSLA)
65% Berkshire Hathaway(stock market symbol BRK.B)
5% Square(stock market symbol SQ).
Tesla – a fast grower company with 30-50% annual growth rate and heading towards 3mln car sales in 2025 and up to 20 mln car sales in 2030. Tesla also sells solar panels, batteries and has plans for many more products. Tesla revolutionized the auto industry and pushed it towards electrification by launching the ~45.000$ Tesla Model 3 – a high performing , cheap to drive sedan – which I bought and is the reason I knew it is a special company. However what’s driving the growth now is that Tesla announced during their event called Battery Investor Day that they’re aiming to produce 30% of all sold cars/batteries in 2030. They are scaling up their battery production as we speak with the 4680 cylindrical cell. Tesla also sells software to their car owners – either the 2000$ performance boost or 7500$ Full Self Driving software making their margins much better than traditional automakers. Our target share price in 2030: 4000$ (10 times more than today’s price).
Berkshire Hathaway – Warren Buffet’s company is a conglomerate that owns GEICO, DURACELL as well minority stakes in Coca-Cola, Apple, Bank of America and others. Berkshire is so large it hires 1% of all US workers and brings incredible profits at a PE ratio of 10 when you take into account it’s unreported earnings from Apple, Coke and others. Target share price in 2025 is 400$-600$ (Current price 212$)
Square – another fast grower although a small part of our portfolio. Square has recently launched a viral app called Cash App which replaces all of the banking needs of end users – it is a bank account, offers a debit card, allows you to invest in stocks, bitcoin and even offers personal loans based on your income. Cash App has seen incredible growth at 30 million monthly active users and our bet here is that it will grow to 70 million users in 2025 and will act as their main banking app. Target price in 2025 – 600$ (Current price is 185$)
Mindset of a value investor during recessions:
Unfortunately the media and Wall Street analysts panic when the stock market drops. They instill the panic into investors and convince them to sell their stocks when the market is dropping and buy them back when the market is recovering. That’s the exact opposite of what a value investor should do. A value investor should do the opposite:
- Buy stocks when everyone is selling them for cheap and want to get rid of them.
- Wait until the investor sentiment turns and the market is ready to purchase back the same stocks they sold, at a much higher price.
This cycle typically lasts 2-7 years so value investors need a lot of patience and need to learn how not to panic. In the Investment Club we are just starting to invest with only 2 years of investing as a group. We buy stocks monthly in order to ensure we dont buy a peak like the Oct 2007 peak of the S&P 500. However we buy a lot more when the market is crashing. Who wouldn’t want to buy their preferred company at a discount? Who wouldn’t want to buy an apartment for half the price it was a month ago?
This mentality gives us an unique psychological edge other short term investors – we are happy when stocks go up as our portfolio grows but we are also happy when stocks go down as it allows us to accumulate more at cheaper prices. It’s hard to express how much mental confidence this gives value investors.
Next steps for readers of the Investment Club Newsletter:
Now that we’ve established the risks of investing as well as how we invest, you can choose one of the mentioned brokers (RobinHood(USA), DeGiro(EU), Stake(Australia), Etoro(E.U.) and Trading212(Moldova)) and you can open an investment account and deposit the amount of money you have for investing. This will take you anywhere from a couple of days to a couple of weeks depending on Country and Broker.
Once you have an investment account you will buy shares as described above: 30% Tesla, 65% Berkshire, 5% Square.
A typical investor who starts with, let’s say 5000$, will purchase the following shares leaving about 2500$ so he/she can purchase more next month as we go through the US elections which might provide buying opportunities:
- 2 Tesla shares (800$)
- 8 Berkshire shares (1600$)
- 1 Square share (185$)
I will start a virtual Newsletter Portfolio with 5000$ and will add 500$ monthly to it and purchase the same stocks I recommended above so you can see how a typical investor does after reading this newsletter.
For those who choose to invest as described I have also chosen a private Facebook group(https://www.facebook.com/groups/655294328456705) where we can help each other as everyone tries to open an investment account, deposit money and purchase shares. I added some topics for us to discuss already. The original members of the Investment Club will also be a part, hopefully helping newer investors.
When purchasing shares I do recommend doing it very carefully as the stock market often has multiple stocks with the same name and you want to buy the real one not a derivative that has no connection to the real stock:
- For Tesla search: TSLA or US88160R1014 stock exchange NDQ (Nasdaq)
- For Berkshire : BRK.B or US0846707026 stock exchange NSY
- For Square: SQ or US8522341036 stock exchange NSY
Why did I create this newsletter and why is it free?
My reasons are simple – I want to invest for myself and retire early. I also decided to help a few friends as part of the Investment Club. Once I realized just how many of my friends are thinking about investing I decided to start this “newsletter”. The newsletter will be published every 4-6 weeks and will be free for the foreseeable future. There will also be a 10E a month premium version that will come out more often, ahead of the free version. For those that want to support my efforts anyway here is my patreon link(https://www.patreon.com/user?u=43731866). The 10E a month subscription only offers access to premium content (which does not exist yet) and the 15E and 25E subscriptions offer Q&A and 1-1 calls with me in case you need more help than you can get in our private Facebook group. In my opinion you should be able to get all the help you need there. Once I prove to myself and to you, the readers, that this newsletter produces consistent profits, I will re-visit the patreon subscription question.
Warning: The stock market can drop any day, either slowly due to a recession or quickly as it did in 1987 during the flash crash(https://en.wikipedia.org/wiki/Black_Monday_(1987)). The strongest part of an investor is his stomach – to accept and overcome the strong desire to sell his stocks when drops happen, and go against every cell in his body and instead buy more – because it’s cheap. Unlike in the original Investment Club in this newsletter I won’t manage your money for you so it is up to you to find the courage needed to invest consistently through good and bad times. Not doing so is guaranteed to loose you money.