The 2 Financial Concepts You Need to Understand Before You Start Investing

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Now that I’m getting a little older, I hear my friends talking all the time about their investments. “What are you investing in? You’ve gotta get into dogecoin. No, this other coin! What about Gamestop? Blackberry’s looking good these days.”

One can never know, of course, but when people tell me about whatever individual speculative investment they think is hot these days, I’m almost convinced they don’t have a clue how money works. One of the things people who know about money know is that individual speculative investment rarely ever beats the market; unless you’re Warren Buffet (and you’re not), you’re better off buying lottery tickets.

If you like reading about which crypto is doing well these days but don’t even max out your company’s matched 401(k) plan, you’re one of the suckers.

The good news is, you don’t have to be a sucker forever. It’s easy to turn your financial situation around. Put reading about speculative investments like various stocks and crypto coins on hold and master these financial basics first.

How to Save Your Money

“Too many people spend money they earned… to buy things they don’t want… to impress people they don’t like.”
— Will Rogers

The all-time number one best way to make money is to not spend the money you already have. The number of people who speak to me about speculative investing who I know don’t have a firm grip on this would shock you.

Don’t even think about thinking about investing until you…

1. Have an expense-tracking system that you review once every week or two. Any profits you probably won’t make on speculative investments will be pointless if you piss away most of your paycheck on random shit. There are a zillion expense-tracking services in the world, but I prefer Mint because it’s free and automated.
2. Are maximizing your company’s matched 401(k) plan. Nearly every full-time employer offers what’s called a company-matched 401(k). For every dollar you invest in your company’s matched 401(k), they will invest a dollar as well. That’s an automatic 50% return on investment, even before the market itself produces a return! It’s the best free money you’re ever going to get. If you work full-time, getting on your employer’s company-matched investment plan should be your number one top priority.
3. Have paid off all your credit cards and high-interest loans. Credit cards charge interest, and it is absolutely stupid to use your money to chase a possible 3% profit on a speculative investment when your credit card is charging you 24% on interest month-over-month. It will be much easier to do this once you are using an expense-tracking system to create room in your budget.
4. Have an automated monthly to some kind of savings account (preferably the company-matched 401(k) above). Ever heard the phrase “pay yourself first”? Every investment strategy in existence relies on you making regular contributions to savings. If you haven’t cleared out the room in your monthly budget to make regular contributions to savings, you don’t have room in your budget for risky speculative investments. Do this after paying off your credit cards and high-interest loans.

I’ve listed these off as short to-do’s, but every one of these tasks is quite a challenge in itself. If you want more, you can read Your Money or Your Life by Vicki Robin and Joe Dominguez or start with some short articles I’ve written:

How Building Wealth Works

“An investment in knowledge pays the best interest.”
— Benjamin Franklin

People who talk about speculative investments treat building wealth like it’s a get-rich-quick game. Who can make the most money the fastest? “Hey, did you hear about that guy who made a million on GME?”

There are people who become millionaires overnight. But they don’t become millionaires overnight because they were “smart enough” to pick the right stock any more than lottery winners get rich because they picked the right lottery ticket. It’s well-known that no human (or even computer) can pick “the right” stock with any reliability. Even billionaire investors like Warren Buffet don’t claim to know which stock is “the right” stock — so when I hear someone claiming to know that some unknown crypto coin is a “sure bet,” I know that person doesn’t know the mathematics behind speculative investments.

The only reliable way to get rich is very simple and very, very boring. It’s to buy stock market index funds and hold them for thirty years. (Preferably by taking advantage of your employer’s company-matched 401(k) plan).

The stock market as a whole reliably gains money over long periods of time. Even recessions that feel severe to us are completely regained over a period of several years. We bounced back from even The Great Depression in around twenty years. So even if you buy a stock market index fund literally the day before a major recession, you still have a guarantee that you will be richer than you started in thirty years.

Compare that to short-term investing and the selection of individual stocks. The stock market reliably gains money over time, but its aggregate one-month return is actually a loss of 0.63%. That means if you buy one share of an index fund and sell it one month later, you’re probably going to lose money. If you buy a share of a single stock on the market, you’re even worse off, as most stocks don’t even survive over a seven-year period. Of those that do, only the top 4% account for the entire wealth creation of the stock market.

As was said earlier, no human or computer is as of yet competent enough to know which stocks are in the 4% beforehand, so when you buy individual stocks, you’re basically blindly guessing and hoping your stock will be among the 4%. No wonder most people lose money.

If Speculative Investing Sucks This Much, Why Do People Do It?

A few reasons.

One, most people don’t know what you’ve just learned! They don’t know the stock market is a loss in the short term and they don’t know most stocks fail. Neither do they know the stock market is a guaranteed gain over the long term. They assume individual stocks and short-term investments do better than they really do and that the stock market, in general, does worse than it does. It’s easy to assume this when people are always gossiping about their latest short-term speculative investment and not about the great wealth they’re building in their company-matched 401(k) plan.¹

Two, speculative investing shares all the same psychological characteristics as gambling. Many people who are in treatment for gambling addiction are actually addicted to speculative investment, not craps or the slot machine. People who are addicted to gambling tell themselves things like “It’s been a high number the last few times, we’re due for a low number” when in their head they know that, mathematically speaking, the odds of them rolling a low number are precisely the same as every other roll. It’s a form of superstition. Speculative investors often engage in the same superstitions. They tell themselves stories like “This stock has underperformed the last 3 quarters, it’s going to break through any moment now,” even though they intellectually know most stocks are losses and disappear within seven years. So even people who know better easily get sucked into speculative investing.

Third — and this is a totally unsubstantiated theory on my part, so take with a grain of salt — I suspect the establishment encourages people to speculatively invest despite it being a general loss because they want to save the real gains for themselves. When investment firms make enormous gains well above the performance of the general market, where does that money come from? Not from the legitimate gains of the market, because the market didn’t gain 20%. It comes from all the average people who thought they were smart enough to choose the winners. The investment firms have much better chances of winning because they’re picking literally thousands of stocks all at once, giving them thousands of chances to win. I also suspect they’re getting away with a lot of market manipulation.²

How to Make Money Investing

Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time. 
— Johann Wolfgang von Goethe

I’ve already given away the punchline. Get on your company’s matched investment plan and allocate all the funds so they’re in low-fee stock market index funds. Deposit the money and don’t touch it for thirty years.

That’s not to say you can’t enjoy speculative investment the same way my father enjoys buying lottery tickets every now and then. It’s a cheap thrill. But my father doesn’t use his retirement savings to buy lottery tickets, and you shouldn’t use your life savings to buy speculative stocks and cryptocurrency.³

More importantly, don’t spend your money on lottery tickets if you’re not already…

1. Tracking your expenses.
2. Paying off loans and credit cards as fast as humanly possible.
3. Making contributions to company-matched investment plans.
4. Automating regular contributions to your savings or index fund investment plans.

Investing in anything speculative without taking care of these things first is a sure way to lose out.

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1: Something I’ve observed is that people who are really building wealth this way are usually reluctant to talk about it because it’s working. Who wants to be the asshole bragging about how they have $50,000 in their savings while their friends are struggling to make rent?

2: There’s been a lot of suspicious stuff in the markets since 2008 (market freezes, bailouts, that sort of thing) that the authorities say was to protect the average investor but that, in practice, left the rich richer and the poor poorer…

3: There’s an argument to be made that bitcoin is becoming a more stable investment in an alternative currency. But the vast majority of cryptocurrency still bears all the hallmarks of ridiculously high-risk plays, so keep that in mind.