A letter to young investors

I came across John Heinzl’s open letter to young investors the other week and thoroughly enjoyed reading it. Given that I have been DIY investing for almost two decades, I thought it would be an interesting exercise to write a similar letter to young investors from my point of view. So here we go…

Dear Young Investor,

I get it. You feel overwhelmed when it comes to investing.

There is so much investing related information out there on the internet – TikTok, Instagram, Facebook, Twitter, YouTube, etc. Not to mention you’re bombarded with more investing related information on TV, newspaper, magazines, books, other printed materials, your friends, parents, and even relatives.  

Where do you start? Who do you listen to? And most importantly, who can you trust?

That’s exactly how I felt when I started investing in my early 20s. I wanted to grow my money as fast as possible, but I had no idea what I was doing. I was a newbie treading and sinking in this confusing world called investing.

I have invested in GICs at various interest rates because it was considered safe; I have invested in penny stocks with the dreams that they’d triple, quadruple, or more; I have invested in high MER mutual funds; I have invested in momentum stocks using technical analysis; I have invested in mining stocks; I have invested in highly speculative growth stocks. 

So when I said I have wasted my time, energy, and money before, I really meant it. I’m writing to you so hopefully you don’t have to make the same mistakes as I did. 

It’s easy to get sucked into the hype. The dream of the multi-baggers, the get-rich-quickly schemes – investing a few thousand dollars and having that money grow into millions in a very short time. Needless to say, they’re all very seductive and attractive.

Be careful and be wary of those people that try to sell you the dream of getting rich quickly. Getting rich fast is a dangerous and risky game to play. If it’s easy to get rich quickly, why would these people bother to sell you $99 courses, $1 e-books, and $899 private one-on-one sessions? Shouldn’t they focus their time on getting even wealthier instead of charging a few hundred dollars in teaching people like you and me? 

Think about it… are they really trying to teach other people how to be rich quickly or are they trying to trick you into making them rich?

Making a million dollars is easy when you can get one million suckers to buy your $1 ebook!

Ask questions, be curious, and learn to trust your instinct. Would you eat something if it smells rotten? I bet you won’t. Similarly, if something is too good to be true or doesn’t pass the sniff test, don’t go on with it.

There are people and businesses trying to trick and manipulate you into spending your money on them. They have no interest in helping you to build your wealth and making you rich. They are using you to make THEMSELVES rich! 

You should always have the best interest of your money. Not someone else.  

Also, be wary of people that “talk the talk” but do not walk the walk. It’s easy to talk and show fancy graphs and charts to impress and convince people. It’s a completely different game when you have skin in the game.

If it’s too good to be true, there’s usually a catch. A fund with a yield of more than 15% with no risks? Is it too good to be true? I’d say most likely. Chances are, the fund is paying you a 15% yield but you’re probably down 15% or more in your principal. So ask yourself, are you really getting distributions or are you just getting your money back?  

Total return matters. It is always better to see your principal grow from $100,000 to $1,000,000 while getting a 1% yield than getting a 20% yield while seeing the principal shrink from $100,000 to $5,000. 

Let me repeat that – total return matters

There are significant psychological differences between investing with play money and investing with your hard-earned money. You most likely won’t feel anything when you lose $50,000 in play money by investing in Amazon. You certainly will feel some heartache, anger, and disappointment if you lose $50,000 of your hard-earned money by investing in Amazon, especially when that’s a year worth of your annual salary. 

So who should you listen to and learn from? Well, learn from those that have done it or are patiently building their wealth. There are people out there that aren’t boasting about their own achievements. They’re executing their long term investing strategy, watching their money compounding, and building wealth slowly. 

Would you rather get $1 million or have a penny that doubles each day for a month? If you took a single penny and doubled it every day, by the end of the month, you’d have $5,368,709.12. 

You’d be $4.3 million richer than if you were to take the $1 million on the first day.

Learn to build wealth slowly. Compound interest is indeed the seventh wonder of the world!

Before I get into what to invest your money in, there are two fundamental things as a young investor:

  1. Spend less than you earn
  2. Increase the gap between earning and spending, also known as the savings gap

If you can invest money regularly and consistently, you can build up your wealth slowly and let your money compound and work hard for you, so you don’t have to. 

So what should you invest in? 

Well, for most young investors, investing in a well-diversified passive index ETF makes a lot of sense. So take a look at some of these all-in-one ETFs like VEQT, XEQT, and HGRO, especially considering the fact that discount brokers  offer free ETF trades or commission-free trades

Be patient and develop a long term investing strategy. Avoid the short term “noises.” Most importantly, stick to your investing strategy, instead of trying to change it every six months. 

Stick to an all-equity passive index ETF fund may sound very boring. But investing should be boring. Building wealth should be boring. Allow time to be your friend. 

Once you have a sizable portfolio consisting of passive index ETFs, you may want to consider investing in individual stocks, like dividend stocks or growth stocks. That’s fine but make sure you don’t put all your eggs in one basket. If you want to branch out into dividend growth investing, consider a 50-50 mix of index ETF and dividend growth stocks, or 60-40, or 70-30, or a mix that makes sense for you. 

Invest in profitable businesses that have a high return on equity and have consistently increased their revenues, earnings, and profits over time. For dividend paying stocks, take a look at ones that have increased their dividends consistently at a high dividend growth rate and that have a moderate payout ratio. 

Don’t get too focused on the share price, focus on the fundamentals. Company A and Company B may both cost $500 per share but which one is a better investment? What if I tell you the following?

Company A

  • PE ratio of 30
  • PEG ratio of 0.5
  • Return on equity of 35%
  • Dividend growth streak of 20 years
  • A 10 year dividend growth rate of 15%

Company B

  • PE ratio of 20
  • PEG ratio of 3
  • Return on equity of 10%
  • Just cut dividends the previous year
  • A 10 year dividend growth rate of 2%

Which company is more worthwhile to invest your money in? If I were you, I’d lean more toward Company A because of a lower PEG ratio, a higher return on equity, and a consistent dividend growth history. So you should also know the basic terminology (as used above) as well as how to read a company’s annual and quarterly reports, as well as the income and cash flow statements.

What if you want to invest in high growth stocks that are more volatile and a little bit more speculative? I think that’s fine but do limit your exposure to these stocks. Therefore, if you invest in these, consider investing with less than 5% of your portfolio. This way, even if all these companies go bankrupt, you won’t end up setting yourself back for decades.

Some people believe investing is like gambling at a casino and you’d only lose money. But investing shouldn’t be like that if you do your due diligence. Investing is NOT gamblong; it is not even speculating. Investing, based on that sound plan mentioned above, is a thoughtful and considered analysis of balancing risk and reward in the optimum way possible for your own situation. Investing long term, done in that disciplined and thoughtful way, generates about 8% growth annually. 

Your portfolio is like a bar of soap, the more you touch it, the smaller it’ll get. Therefore, learn to be patient and let your money compound. Let your investing decisions be based on logic and reason, not on emotion and impulse. If you are patient and allow compounding – what Einstein referred to as the eighth wonder of the world – to take place, you will be richly rewarded.

Focus on investing in well-run and profitable businesses so your money can grow. 

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5 thoughts on “A letter to young investors”

  1. Who’s right?

    Compound interest is indeed the seventh wonder of the world!

    If you are patient and allow compounding – what Einstein referred to as the eighth wonder of the world – to take place, you will be richly rewarded.

  2. I really enjoyed the article and this sentence summarizes the article beautifully.

    “Total return matters. It is always better to see your principal grow from $100,000 to $1,000,000 while getting a 1% yield than getting a 20% yield while seeing the principal shrink from $100,000 to $5,000.”

  3. Another great post Bob…keep up the great work! The funny thing is I was explaining the concept of compounding with my 11-year old daughter a few months a go and I used the same “Receive $1 million now vs. receive a single penny that doubles every day for a month” example to illustrate the concept! Safe to say my daughter was completely blown away with the answer…I think she gets the power of compounding now! 🙂


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