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Investing lessons we learn too late

October 02, 2020

Issue #46.

Happy Friday everyone. For months now, Wall Street professionals have characterized retail investors as hyperactive and risky traders. As we've read in the media, Robinhood investors are irrationally exuberant. Right?

Well, interestingly, fresh new academic research conducted by Ivo Welch, a finance professor at UCLA’s business school, found that retail investors as a group have outperformed the market.  Based on data from 2018-2020, his research found that retail investors have a preference for extreme market winners and losers, having held on to their beliefs even during the March-2020 COVID crisis. Thus, retail investors acted as a small, market-stabilizing force. Welch concludes that the narrative of pure irrational exuberance among retail investors is somewhat misleading—because together they bought and held stocks with large share volumes, rather than placing small and obscure bets. Call it the revenge of ‘small’ investors! 

You are receiving the Gist because you’re a Finny Premium member or enrolled in a paid subscription trial. In today’s issue, we’ll cover three important questions that are top of mind for you:

  • What are the critical money lessons most investors learn too late in their lives?

  • Where are your thoughts on investing in small-cap stocks?

  • What trends are driving the tech sector boom, and which companies are positioned to profit from those trends?

As a reminder, the Gist is not meant to be financial advice or a recommendation to purchase any product or security.

Here’s the quick take on today’s topics.

Quick Take

  1. Here are the top lessons most investors learn too late in their lives: start investing as early as possible, have a simple (& boring) investment plan, pay attention to taxes, don’t listen to money “experts,” and always have a plan for your trades.

  2. Tech and large-cap stocks have disproportionately benefited from the 2020 market rally. This, however, leaves an opportunity for small-cap stocks (e.g., IJR, IWM, SCHA, and VB) for long-term investors. Take a look at the chart below that depicts the 5-year price range for major market segment ETFs.

  3. Tech growth is driven by two significant trends: the shift to online and digital commerce, and the shift to cloud computing. Many companies are positioned to profit from moving in-person experiences to online, but here are a few to mention: Netflix (NFLX), Facebook (FB), Amazon.com (AMZN), Alibaba (BABA), JD (JD), Pinduoduo (PDD) and MercadoLibre (MELI). Companies that are exceptionally well-positioned to profit from the shift to cloud computing include Microsoft (MSFT), Salesforce.com (CRM), HubSpot (HUBS), MongoDB (MDB), and Elastic (ESTC).

More Thoughts

  1. Here are the critical money lessons most investors learn too late in their lives:

    • The number-one investment lesson for young investors is to start investing as early as possible. A few years of waiting can cost you immensely down the road, because of the power of compounding returns. If you don’t have much money to invest, start with a small, but regular contribution each month!

    • Have a simple investment plan, and stick to it. Investing is not a flashy sport. For the vast majority of investors, a relatively boring strategy that involves a well-diversified portfolio of low-cost, high-quality index funds is probably a smart strategy.

    • Pay attention to taxes. As an investor, choose tax-efficient investment vehicles whenever possible, and take advantage of tax-sheltering (not being taxed on gains) for retirement savings and health-related expenses. Also, choose long-term over short-term capital gains—long-term investments are taxed at a much lower rate. It’s incredible what a big impact seemingly small changes to your tax strategy can have.

    • Don’t listen to self-proclaimed money “experts.” First of all, financial media is not financial advice. When you begin investing, start with tried and true methods—low-cost index funds. As you grow more confident in your investing capabilities and accumulate more wealth, there might be a time to put your money into something you truly believe will outperform the market over the long term. And rather than taking tips and trusting the “experts,” make decisions for yourself. That way, if something goes wrong, you only have yourself to blame!

    • Always have a plan for your trades! If you have a plan before entering a trade, you are taking control and removing emotions from the process. Your plan must include reasons for exiting your position and clear reasons for proving your thesis wrong. It is important to have a plan in place before acting because it allows you to be objective about the actions you are going to take.

  2. Small-cap stocks may have the potential to pleasantly surprise investors who seek them out as alternatives to expensive large-cap and growth stocks. The valuation spread between large- and small-cap stocks reached an all-time high in 2020, so some investors are taking a chance on mean reversion, hoping that small-caps will come back.

    The reason for the disparity is that few investors feel small-cap stocks are the place to be invested in right now. Pessimism for an asset class is needed to create historically low prices.

    If you’re interested in small-cap equities, check out the following ETFs: iShares IJR, iShares IWM, Schwab SCHA, and Vanguard VB. Here is a comparison of those ETFs.

  3. Tech growth is driven by two significant trends: the shift to online and digital commerce, and the shift to cloud computing. Businesses that are moving traditional offline experiences online and those that are helping other businesses make better data-driven decisions have profited from the most recent tech boom.

    Companies that have benefited from moving in-person experiences to online (such as watching movies, shopping, or socializing) include Netflix (NFLX), Facebook (FB), Amazon.com (AMZN), as well as international e-commerce giants Alibaba (BABA), JD (JD), Pinduoduo (PDD) and MercadoLibre (MELI). See the comparison of global e-commerce giants.

    Big data is the other trend that’s driving tech growth—research firm IDC says the amount of data will increase by 28% a year through 2025 globally. There are a few companies that are uniquely positioned to build cloud services around the treasure trove of data across different layers of the IT stack—infrastructure, platform, and software. Those companies include Microsoft (MSFT), Salesforce.com (CRM), HubSpot (HUBS), MongoDB (MDB), and Elastic (ESTC). Here is a comparison of cloud services players.

That’s it for today’s issue. Have a personal finance or investment question you’d like us to answer? Feel free to ask us on Finny. We’ll feature the best investment insights in our next issue.

Have a nice weekend ahead!

The Finny Team

Disclaimer: Nothing in this communication should be construed as a solicitation or offer, or recommendation, to buy or sell any security or product. The Gist reflects the opinions of only the authors who are associated persons of Finstead Inc. The Gist is meant to be used for informational purposes only. Past performance is no guarantee of future results, and any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in some loss. Finny does not provide personal financial planning services to individual investors.

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