The truth about how young investors can succeed. In addition, the Canadian banks that short sellers target the most
Dear young investor:
There is something I must say, and I hope you will take it in the spirit of caring for which it is intended.
You have no idea what you are doing.
Please don’t be offended. When I was your age, I didn’t know what I was doing either. But that was a different time, before the internet, crypto and WallStreetBets and enablers like Elon Musk turned the investment market into a get-rich-quick carnival of noise.
Expect. Don’t go back to TikTok scrolling yet. I’m not finished.
You need to understand what you are up against here. There have always been – and always will be – unscrupulous people who try to profit by selling you the dream of getting rich. The difference now is that entire industries, backed by multi-million dollar advertising and marketing budgets, are trying to manipulate you into making the wrong decisions with your money.
Your own government buys airtime to convince you to waste money on its lotteries. Online sportsbooks offer “deposit bonuses” and “risk-free bets” to get you hooked on the dopamine rush of the game.
Lotteries and online bookmakers are just the beginning. Mobile trading platforms make it easy to buy and sell shares of memes like GameStop and cryptocurrencies like bitcoin and ethereum. Don’t be fooled; trading in stocks of losing companies and crypto assets with no intrinsic value is just another form of gambling, but with potentially more serious financial consequences.
Have you seen the Coinbase Global Inc. COIN-Q stock price lately? The crypto-trading platform closed Friday at $62.71 on the Nasdaq stock market, down about 83% from its opening price of $381 on its first day of trading in April 2021. This was back when people still thought crypto was going to change everything, and before bitcoin fell almost 70% from its peak in November.
Something in humans’ DNA makes them susceptible to schemes that promise easy wealth. It’s been going on for centuries, from the Dutch “tulip mania” of the 1630s to the American “bucket shops” that emerged in the 1870s to modern trading apps such as Robinhood that are popular with the WallStreetBets crowd on Reddit.
But none of this is a real investment. None of this will help you build lasting wealth or retire comfortably. There are only bright lights and loud music – the financial equivalent of an amusement park ride that will probably make you want to vomit when it’s over.
Now that you are beginning your investment journey, you need to understand this first and foremost: there are no shortcuts to building wealth. It’s a slow, methodical process that rewards patience. It may even seem boring at times, but the long-term rewards will be very exciting. If you start early and follow a few simple rules, you’ll be amazed at how successful you can become.
What are these rules, you ask?
First, to earn money consistently, you need to invest in profitable businesses, especially ones that have been growing their revenue, profits, and dividends for a long time. Many banks, utilities, power producers, telecommunications companies, infrastructure companies and real estate investment trusts meet these criteria. (See my Yield Hog Dividend Growth Portfolio template for specific examples.) Remember that a stock isn’t just a piece of paper or pixels on a computer screen; it represents an equity stake in a business, giving you the right to share in the growing cash flow and growing market value of the business.
Not comfortable with individual stocks? No problem. You can invest in a few exchange-traded funds that give you instant exposure to all stocks in major indices such as the S&P/TSX Composite Index and the S&P 500, eliminating the need to monitor individual companies.
Second, whether you buy stocks or ETFs, you need to regularly reinvest your dividends to harness the power of compounding. You can do this automatically by enrolling in a dividend reinvestment plan, or manually by acquiring additional shares when you have enough cash to deploy. Capitalization – also known as exponential growth – is one of the most powerful forces in investing. Its impact will be small at first, but over time it will generate bigger and bigger dollar returns.
Finally, you have to trust the process. Buying and owning big companies or index ETFs may seem easy, but many investors struggle to do so. Focusing on the growing dividends your companies or ETFs are producing — instead of worrying about short-term swings in stock prices — is an effective way to deal with market volatility. You also have to learn not to get distracted by shiny objects, whether it’s go-go growth stocks with unsustainable valuations or the latest non-fungible fashion.
The world has changed. But the principles of successful investing haven’t been – no matter what crypto fans and Reddit gamers tell you.
— John Heinzl, Globe Investor columnist
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actions to ponder
Revlon inc. (REV-N) Retail investors who bought Hertz shares after it filed for bankruptcy in May 2020 found themselves with handsome profits when a group of investment firms offered US$6 billion a year later for take over the car rental company. Today, retail investor fascination with Revlon has driven its shares up more than 300% since filing for bankruptcy 11 days ago. It is unusual for the shares of a bankrupt company to trade in this way, as investors generally fear that its assets will not be sufficient to settle the claims of creditors and suppliers to leave shareholders with any value. But retail investors, who often brainstorm and organize on the social media platform Reddit, grew bolder when those who invested in Hertz got lucky.
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Compiled by Globe Investor staff