May 25, 2021

As you become a more sophisticated investor, it is important to understand the journey of become a smarter, more handsome / beautiful and wealthy investor.

In this video, I’ve laid out the 5 stages of investing.

1st level: Little to no effort and you can get it done it a day To 5th level: Requires intense expertise across almost every domain and potentially making billions

As a retail investor, your goal is to get to level 4. If you are able to spend some time, you should be able to get to level 2. But don’t stay in level 3.

90% correct transcript

Level one of wealth, medium risk or conservative mutual funds. And this is usually where you get around 3% to 5% of wealth. When you walk into a bank, that's what the financial advisors would recommend. You would usually consist of a mix of mutual funds. That's very diversified. And if you think inflation is around 3% a year, then what you're making is around one to 2% above inflation. So your real return, when it comes to investing in medium to conservative mutual funds, it's only around a couple of percent max. Now the pro for this approach is really that it's very easy to do. You walk into a bank, you schedule an appointment with a financial advisor. That's out of university. You can get a set up within a day. Now the con is that it is very low return. After five, 10 years, you will realize you're not really getting anywhere with it.

And you're paying a lot in terms of management fee and the return you're getting. And that brings me to level two of wealth and level two of wealth is a hundred percent equity mutual funds that gives you around 8% to 10% return a year. This is usually when you start to learn more about mutual fund investing and you care more about your money and you realize that most mutual funds can't really beat the markets after fees. And after you deduct a fees, they usually underperformed by S and P 500 by a couple of percentage. So you're basically better off if you just invest in S and P 500 and get 8% a year, even if you don't have any financial knowledge, you don't want to be managing your portfolio that much, just put your money in S and P 500 mutual funds. We'll get you there and beat.

Most of the mutual funds. Dads are more diversified or charge a higher management fee. And if you're just looking at something like S P Y, they charge a management fee of less than 1%, which is pretty good based on today's standard. That is probably the most hands-off way to succeed and grow your portfolio over a long period of time. So the pro is really, you're getting eight to 10% with very, very little effort. It is a great low maintenance strategy. If you're starting early and I'm talking about if you're starting at 20 or 25, and you have 40 years ahead of you to just compound and compound and compound now to confidence. Strategy is that's. The compounding is a little bit slow. If you're a start investing late, maybe you started a family, you have a couple of kids, you bought a house and you didn't really come around to think about investing until five to 10 years away from retirement.

The compounding here will be a little bit slow, and it is very difficult to double your money. It takes around 10 years to double your money with this kind of return, which is around seven to 8% per year. And Warren Buffett's actually recommends the average investors to use this strategy. It is low maintenance. You don't need financial knowledge, and basically anyone can do it. But if you're looking for higher return, you would be at level three of investing in wealth, which is learning, investing without a strategy. This usually involves buying a bunch of random stocks based on your friend's recommendation or your family's recommendation. Even though this is a higher level, most investors in this category will actually lose money. Now, occasionally someone will get lucky and get a lot of money by investing in a stock like Tesla or E V stock, but they'll feel like they're gambling and a reason is because they don't know or understand the market well enough to repeat that kind of success.

So the pro is really, you have more control at this stage. You might get a higher return as well, depending on if you're lucky, because you don't really have a solid investing strategy. Now, the con is that you feel like you're gambling. You sometimes lose money and you have no idea why, and you just don't understand how the market works. So you feel scared. You might lose some sleep at night. The con is you might be successful one year, like for example, in 2020, when there's COVID and you started investing in March, or you're successful with one trade like Tesla, but you can't repeat this kind of results over and over again over the next 10 years. So you can't really enjoy a compounding effect. If you feel like you're gambling, then you might have trouble sleeping. Or you're under a lot of stress when you're losing money.

That's where most beginners sits at level three of investing. So now we jump over to level four of investing mastery of your own portfolio. And this is usually when you figure out your investing strategy and you're doing better than the markets. Now, it is possible to do better than markets and you have a solid strategy and you know exactly why it works. And when it works, you're no longer worried about investing. It is a matter of time until you become rich. You understand the major players in the markets and how they think, and you stay a few steps ahead of the general public. Now, the pro here is that you're making a higher than average market return. For example, it's something like 20 to 30% a year. If you are a little bit more aggressive than you should be making somewhere closer to 30 to 50% return, if you're looking to make a hundred percent return consistently, and you need to ask yourself whether it is sustainable, based on my experience today, I think the best hedge fund in the world only makes around 60% per year.

So if you think you can make a hundred percent per year, then you need to take a hard look at your strategy and yourself and see if you can do that for the next 10 years. The pro here is really, you're making a lot more money year after year. And money is no longer a concern because you understand that every year you invest, you outperform the markets. And that means the rest of the world. Everything is just becoming cheaper and cheaper. Now the con is that investing is now a routine it's like brushing your teeth is like washing your face. It is just a part of life. It's something you do to grow your wealth year after year. And it's not exciting. It's not surprising is just performing like a machine, like a car. When you start the engine and you realize that the bottleneck is no longer how much time you spend in front of the market is not about being glued in front of the computer screen all day.

It is about how much capital you have and how patient you are, because in the end, once you invested all your money, it is just a matter of time before the market goes up. Now, of course, if you invest all your money, then the bottleneck is money itself. Then it's a matter of saving money and putting money into your account level five of investing. That's where we get to do some intense stuff like private equity and startups. Now, this is really the next level. This is the rich people's game. Unless you have over a million in net worth, you wouldn't be able to invest in private equity funds and startups. And in this world, it is high risk, high reward. Everyone is using leverage in different ways. Strategies are extremely complicated. Deals are competitive, and it is either boom or bust. A pro here is that this is where you get instant millionaires or billionaires after investing in it next, Instagram, Facebook, and Google.

And this is where you invest in hedge funds that buys a company with billions of dollars and you use debt to buy it. So then you're getting leverage. The con is that you really need a lot of money to do this. You need to know what you're doing. This is an extremely high risk area. You might be able to make a billion dollars, but you might also be able to lose a billion dollars. And recently, just a month or two ago, a 20 billion hedge fund actually went bankrupt after getting margin called. This is where you actually get to invest in assets that might not have a public value today. And actually treat this as a con because you can't really priced asset properly. These are like private companies. These are startups people with just an idea, no product, no revenue. They just have an idea and a passion to pursue in that direction.

And if you invest in it, you can't really get out immediately. It's not like the stock markets. You need to wait three to five years to get out. It also has the potential to make billions of dollars. So that is level five of investing. That's it for episode one, investing basics five level of investing. And I just want to take a minute to celebrate three successful case study within investing a celebrator. So we got case study number two Oh four, where Bruno made 32% from saber in the course of five months. So that has fantastic congrats Bruno. The next one is two Oh five where Carolyn made 21% profits from Alto options and she held it for almost a year. So again, that has fantastic congrats to Carolyn. And finally for Asheville, he made 102% from Nordstrom. So that's roughly four months as a hundred percent return. So that is great. Congratulations, Asheville for doing such a good job. So in terms of investing a salary later this month, I'm looking to help 20 people. And if you want to learn more, you just need to go to the link in the description below. I'll see you in the next episode,

About the author 

Eric Seto

Investor, CPA (Canada) based in Hong Kong and Vancouver

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