Everything You Need to Know About Finance and Investing in 45 Minutes...

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Mar 07, 2016
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Behavioral Finance, Investing, Mutual Funds, Stocks, Video Resource, Compound Interest

This investing video featuring hedge fund investor Bill Ackman had 1.2 million views so I thought I would give it a try:

Here are my notes:

For the first 21 1/2 minutes, Bill uses a lemonade stand example to provide an overview of the financial aspects of a business (revenue, profits, valuation, growth, pricing, balance sheet, income statements).

From 21:30 – 25:00, Bill concentrates on investing, including the following key points:

  • With some compound interest examples, he highlights the importance of starting early so your money can grow early over time)
  • He tweaks return assumptions to show how long-term outcomes are impacted by changes in how much your investments return
    • Save $10,000 and earn 10% each year, you would have $602,000 after 43 years
    • Earn 15% per year, you would have over $4 million after 43 years
    • Importance of not losing money as drawdowns can have significant negative effects on returns

 

25:00 – 27:10: What are keys to successful investing?

  • Invest in companies that are listed on the stock market (liquid, well-known)
    • Avoid investing in start-up businesses where prospects are not well known
  • Invest in businesses that you understand
  • Invest at a reasonable price
  • Invest in company that could last forever

27:10 – 33:30: What kind of businesses last forever? (Examples: Coca-Cola, McDonalds, candy business)

  • Sell a product that people need
  • Sell a unique product (not a commodity)
  • Elicit brand loyalty that consumers are willing to
  • Find a company with limited debt
  • High barriers to entry
  • Immune to extrinsic factors
  • Has low reinvestment costs
  • Generate high amounts of cash flow
  • Avoid businesses with controlling shareholders (one shareholder holds majority of company stock)

Editor’s note: The business characteristics described above would be a useful construct for students to use when selecting stocks for the stock market game or other stock simulation that you use in the classroom.

33:30 – 34:40: When are you ready to start investing?

  • When you have money you won’t need for 5-10 years
  • After paying off credit card debt and student loan debt
  • Have 6-12 months of emergency funds set aside

34:40 – 36:40: Psychology of investing

  • How to withstand volatility
    • Be financially secure
    • Don’t get spooked by short-term fluctuations
    • Do your own research
    • Invest at a reasonable price

36:40 – 40:25: Other ways to invest

  • Mutual fund companies
    • Pros
      • Portfolio diversity, even for small investment amounts
      • Managed by professional investor
    • Cons
      • Choice: Over 10,000 to choose from
      • Research is required to pick a good manager
        • My note: Hard to tell based on past experience who is going to be successful in the future!

How to find a good money manager (Editor’s Note: Be sure students understand that until they get significant assets, they will be picking mutual fund managers vs. having a financial advisor)

  • Reputation for integrity
  • Easily explain investment strategy (“the two minute test”)
  • Has a value approach
  • Long-term track record
  • Consistent approach
  • Invests own money in the fund

Recommends The Intelligent Investor (Ben Graham); the Bible for value investors

Editor notes: As a hedge fund investor who gets paid to beat the market, it is not surprising that no mention is made of index funds, which historically have outperformed an extremely high percentage of active managers. I did find his description of characteristics of “businesses that last forever” to be useful as a construct for students to use when evaluating investment opportunities.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.