Ready to create a wishlist of companies to buy on sale?
The conversations she would have with Phil over 12 months forms much of the book, where we learn along as she goes from a total beginner to a confident value investor. The lessons she learns are based on the principles of Warren Buffet and Charlie Munger. In sum, their basic approach is to invest in a handful of companies that will give great returns in the long-term.
That said, let's dig into the main take aways from this great book.
Lesson 1 – Conquering your fears.
While Danielle and Phil give practical steps to investing, the book is also about Danielle getting over her fears and anxieties around investing. How do you even get started? What if you made a bad investment? What if you lost all your savings?
With this fear, Danielle initially just wanted to hold on to her money. After all, with a well-paying job, she had a sizeable amount of savings and her own apartment.
This idea was put to rest once she realized that with an average of 2-3% annual inflation, her savings would lose their value with each passing year. And since most retirement funds don’t account for inflation, she was not putting aside as much as she thought she was.
Her next instinct was to place her money in the hands of money managers like unit trusts, robo-advisors, market index funds, etc. Surely, getting a professional to invest for you would be the safest choice. But as she learned from Phil, money managers all charge fees, and aren’t necessarily motivated to do the best for you. After all, they get paid whether or not they make money for you.
Reluctantly, Danielle admitted that her best option was to learn value investing herself. Her financial security and happiness was her own responsibility. As she learned during the process, it’s possible to manage your own money, invest confidently, and earn above average returns.
Lesson 2 – What does financial freedom mean to you?
For Danielle, financial freedom meant being able to quit her job, get healthy, and not have to work ten hours a day. It meant flexibility, being debt-free, and not worrying about the bills.
Whatever financial freedom means to you, brainstorm and write down what you would do if you achieved it.
Would you travel?
Would you quit your job?
Would you buy your dream car?
Would you pay off your loans?
Would you support your family?
What would you be thinking or feeling day to day?
Once you have an idea as to what financial freedom means to you, it's time to discover your number.
To make it easier to imagine financial freedom, it’s important to calculate your number. Your number will be the amount of money you have to save or invest before you can quit your job or retire early. Look at the life you have now and how you want to live in the future.
To get your number, consider these four suggestions:
- suggestion 1 – how much you actually spend every year?
- suggestion 2 – how many years you have left to build your investment income?
- Suggestion 3 – how much you can afford to put into investments?
- Suggestion 4 – based on these first three things, what is your required rate of return?
Visualising a future of financial freedom gives you something to work towards, and gives you a purpose to keep going when learning and investing are frustrating and hard.
Lesson 3 Building a wishlist of businesses you want to invest in.
There is an overwhelming number of companies you could invest in.
To narrow down your choices, find companies that align with your core values.
Maybe it’s important that the companies you invest in are environmentally sustainable or treat their employees well.
As someone interested in a healthy, balanced lifestyle, Danielle wanted to look at Whole Foods because she felt that their values aligned with hers.
Not only will defining your values and mission make your investing practice more focused, it will also give you an added motivation to really understand the companies you choose.
To start creating your wishlist, determine which companies you want to research by creating a Circle of Competence from a venn diagram.
In the first circle, write down what you’re passionate about. In the second circle, write down what you spend on.
For example, groceries, household goods, startups, yoga, cool cars, healthy food, travel, clothes. etc.
In the third circle, write down where and how you make your money.
This exercise helps you narrow down the industries you can start researching, because they would already be familiar to you.
Once you have your circle of competence, it's time to do some research.
Before you even put any money into a business, you have to do some research on the companies you are interested in.
This means regularly reading business news, annual reports, and anything you can get your hands on that helps you understand that business.
This research helps you form a good idea of the company is about.
As part of her research, Danielle also read Warren Buffett’s letters to his stakeholders dating back to the 1960s because he had a way of explaining complex ideas in simple, transparent language.
Charlie Munger had four basic criteria that a company had to meet before you invest in it.
Criteria 1 – It has to be a business and industry you are capable of understanding
Criteria 2 – It has a durable competitive advantage which is intrinsic to the company
Criteria 3 – Its values and mission align with your personal values, which also means that its management has shown integrity and talent
Criteria 4 – It is available for a good price that gives you a margin of safety
Once you have done the research, you will ideally have a few companies on your wishlist.
Munger and Buffett believed that if you played it smart, you wouldn’t need to invest in more than 10 companies over your lifetime.
Lesson 4 – Building an antifragile portfolio with patience.
10 months into learning investing, Danielle started itching to invest real money.
This was partly because of FOMO, that feeling of being left behind.
Phil cautioned that buying because of pressure is not investing.
Instead it is the speculation that the typical unit trust manager do everyday in trying to predict the direction of the industry or crowd.
The Efficient Market Hypothesis suggests that humans are rational actors who buy stock based on what they are worth, which is why professionals won’t be able to ‘beat the market’ because the market will adjust stocks to their best possible price.
However, Phil believes that investors and professional traders will often sell based on fear and panic, causing stock prices to crash.
This is when investors like Warren Buffet would swoop in to buy stocks at prices far below their actual value.
By being aware of this, you can avoid the mistakes of those who base their decisions on their emotions.
Instead, you can prepare yourself, do your research, and remind yourself that the market has its upturns and downturns.
This way, even if there’s a sudden event or catastrophe that affects stock prices, you can remain calm and make the most rational decision.
Now that you have a wishlist of companies that you understand, have a strong moat, and align with your values, it’s time for patience.
Wait in cash and be ready to take action when the price of one of your wishlist companies drops.
Markets fluctuate often, but antifragile companies are the ones that will be able to bounce back even stronger than before.
Price is calculated in a variety of ways, but it’s up to you to identify what is a good price for a company based on your research.
One tactic to use is to buy in tranches (or slices), in case prices keep falling after you buy.
When your target company price hits your buying level, buy 25% of the total you aimed to buy.
If the price goes down more, buy the next 25%, and so on.
Remember: the goal is to buy low and hold for the long term.
Lesson 5 – When to sell
Phil believes that you shouldn’t sell unless the story of a company changes.
That is, when something very fundamental to the company has changed.
Maybe it no longer has a strong moat due to a new innovative competitor
Or maybe the management no longer shows integrity or talent.
After you build your portfolio, it’s necessary to manage your risks by keeping track of your companies.
Read their annual and quarterly reports, and continue regularly reading the news.
Sometimes sudden events happen that you can’t anticipate.
A while after Danielle invested in Whole Foods, Amazon decided to acquire it.
Of course, this changed Whole Food’s story, and its price shot up.
After 12 months of learning about value investing with her dad, Danielle transformed her fears into confidence, and made a tidy profit in the process.
In this invested summary, we covered 5 main lessons:
- Lesson 1 is to conquer your fears.
Accept that it will be scary and things can go wrong, but the chances of success is much higher if you're willing to put in the time and energy.
- Lesson 2 is to understand what financial freedom means to you.
Once you know this, and have an idea as to how much that is, you now have a investment goal you can strive for.
- Lesson 3 is building your wishlist of companies that you would want to invest in. These companies should be companies that you fully understand, and believe that they have a competitive advantage.
- Lesson 4 is to be patient. Wait for the price and value of these companies come to you.
- Lesson 5 is to know when you should sell. And that is only when the company starts to lose its competitive positioning or the management team is someone that you cannot trust.
Our Thoughts from More Money Malaysia
Invested is one of the best books to start to learn the fundamentals of value investing.
But more importantly, it is written in a way that makes it easy to understand.
We believe that if you are willing to put in the time and energy to learn value investing, it can truly make you financially independent.
However, it does require a lot of time and energy in order to build up your knowledge and confidence to be able to put all your money in the market when everyone else is running away.
If that sounds like too much work, we would not suggest you go into value investing.
Instead we would suggest you invest your money into index funds.
How you do it is up to you. You can personally invest in it, or you can use a robo advisor (see in the description for options in this area).
Now that you know what the main lessons are in Invested, here are the next steps.
- Write out your fears about investing and ask yourself if you're willing to let those fears limit your life.
- Determine if you're willing to invest the time and energy to learn value investing.
- If you are willing to learn it, start by reading all of Warren Buffet's shareholder letters.
If you are not willing to put that time in, explore investing in index funds.
This is what Warren Buffet actually suggests that most people do.