A good friend of mine who has just graduated is looking for a good place to start investing. She's young, and time may be her side, but today's youth won't find it nearly as easy as their parents did to build their wealth.
Global growth has stalled, and many are even calling a top on our decades-long growth in Western production. Riding a company's success for 30 years until retirement could be a distant memory, say the naysayers... Corporate revenues are stagnant, and dog-fights over the last scraps of market share ensue while companies race to reduce costs.
It sounds hopeless... Investing could actually be a young person's only chance to ensure their future well being and make their fate less reliant on employment or the value of a home. And the odds are immediately stacked against them!.. But the good news is with a healthy amount of research and an equal amount of smarts, the chances of success significantly increase. But where to start?
It's easy for us to forget the most fundamental strategy of investing: to buy something now with the expectation that somebody will want to buy it from you at a greater price in the future. Sounds straight forward, but the key is the price of anything you buy and sell is set by markets, not by what you personally believe it's worth. Those unfortunate underwater home owners in the U.S. know this all too well. If only they would have understood - even at a basic level - what was fueling all that cheap credit and questioned whether the situation was sustainable, they might have been spared in the crisis.**
Financial instruments such as stocks, commodities, bonds, and their ETF proxies should also be approached with the same level of diligence - that is to ask yourself what is the current driver behind prices and how much will people feel they are worth in the future?
To answer such questions we rely on a number of widely accepted indicators, such as corporate earnings, advertising, greed/instincts, or whatever our peers and family members happen to be buying. Many fortunes have been made by this method, and many more have been lost. More disturbingly, a good number of financial advisors exploit this and write up feel-good stories to manipulate people into thinking assets will be worth more in the future than their present value... right or wrong.
To wit, this funny story sums up how markets are made (author unknown):
"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10, and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20.
This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further, and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf. In the absence of the man, the assistant told the villagers, 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.'
The villagers rounded up all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere! Now you have a better understanding of how the stock market works."
To be a successful investor you need to know when people want monkeys, be one of the first villagers to round up them up, and avoid being the last to sell them. To do this consistently and with confidence it's important to understand how markets work and the mechanics of the trends that fuel them.
In future posts I will highlight some of the trends I have been watching and which stocks or ETFs I think could be used to take advantage them.
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** In Canada, future housing prices are not so easy to discern, and professional opinions vary. Many direct factors of the US housing crisis are either weak or non-existent in Canada, such as the overuse of derivatives and securitized mortgages. However, many prominent factors do exist, such as a growing demographic of over-leveraged dual-income young couples who could default on their mortgage should one of them lose their job, triggered perhaps by an interest rates hike, combined with a generation of baby boomers downsizing their existing homes - this could do major damage on housing demand should the situation reach critical mass... a conceivable scenario as Canada has strong ties to the US economy, and rates cannot stay at near zero forever.