Basics of Investing

Bryce: [00:00:45] Welcome to another episode of Get Started Investing by Equity Mates, a series of podcasts where we help you on your investing journey. This is for anyone that wants to start investing but really doesn't know where to start. Our aim is to break down the markets and make them accessible to you. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going, bro? It's very good, Bryce. Excited for this episode. Now we get stuck into the meat of investing. Absolutely. Always exciting to chat stocks and markets with you, Ren. And as you said this episode, we really start to dig a bit deeper and really break down some of the bigger barriers that a lot of us face when we start to invest. And so it's all about understanding the basics today, Ren. [00:01:30][44.3]

Alec: [00:01:30] So today we want to talk about three main things we want to talk you about. What is the share market and how does it work? We want to understand what a stock is. What are you actually buying when you're investing? And then finally, we're going to talk about some of the different styles of investing. There's a number of ways to make money in the market. There's a number of different ways to think about investing. And what is really important is choosing the style that fits your temperament, that fits your lifestyle. And that is something that you can stick to because consistency is is key when it comes to investing. And picking the right style for yourself is a key driver of that consistency. [00:02:06][36.1]

Bryce: [00:02:07] Now, we understand that at this point, Ren a lot of people probably feeling a bit panicked and really still have no idea what we might be talking about or, you know, what's going on in the big, bad world of investing. So there's a lot of upsides to go. There are a lot to go. But I think the main message is do not panic, because Ren and I have been in this situation before and we hope by the end of this episode that we will have helped lay some solid foundations to understanding the very basics there is to the market. You know, these are some concepts that will really help you on your way. So don't panic. Investing is a lifelong journey. Ren and I are still very much on it. Ren had to repeat a year of his investing. Yeah. So let's get stuck in Ren. The share market, otherwise known as the market, the stock market, the S&P 500 is some people may have heard it, ASX 200, all these sort of things. What is the share market? What are we talking about here? What it what are we investing in? [00:02:58][50.6]

Alec: [00:02:58] So the share market is where companies are traded. So you have a normal company, you have equity mates, the company. Yes. And we we do our thing. We make make podcast and YouTube videos and people pay us. [00:03:15][17.0]

Bryce: [00:03:15] And we're a company that is a good company. [00:03:19][3.1]

Alec: [00:03:22] Stay tuned. I got a lot more of that. [00:03:23][1.1]

Alec: [00:03:25] So at some point a company may decide to go public and that is essentially it offers part of itself to the general public generally to raise money so way and equity makes companies say we want to start doing TV production as well. We do our half our nightly finance show and we need ten million dollars to do it. So rather than going to the bank and saying we want 10 million bucks and then giving it to us, we can go to the share market, we can go the public and say, hey, public, if you if you believe that this TV show is going to be a hit, we'll offer you part of our company and you can be a part owner in this venture. And what happens is the public give us ten million dollars and then we get put made public on the share market and then the public can then buy and sell those sections of the company. And so where that buying and selling takes place is the share market. Yeah. Now, in Australia, the main one is the Australian Securities Exchange. Yeah. Yeah. Not Stock Exchange. [00:04:26][61.1]

Bryce: [00:04:27] It was the stock exchange up until a few years ago. I think maybe you'd be more than a few years ago. But yeah, it used to be the Australian Stock Exchange. [00:04:34][6.9]

Alec: [00:04:34] Now the Australian Securities Exchange, the main market in Australia main, but not only as we I don't think I knew this before we started our podcast, but there was well, there is at least one more. There's probably more that we just aren't familiar with. But the other one is the NSX, which was the Newcastle Stock Exchange. Yeah. And is now the National Stock Exchange. Yes. Yeah. Probably not one that we need to worry about too much. I would say so. Do you have any holdings in it? [00:05:02][27.6]

Bryce: [00:05:03] Absolutely not. I don't think I holdings for many reasons. But anyway, we can touch on that a bit later on. [00:05:08][5.9]

Alec: [00:05:09] And so you might hear some other ones. You might hear about the New York Stock Exchange or the Nasdaq in America. And so really, all you need to know is that they're just the place where these stocks are bought and sold. It's nothing more than a market, as the name suggests. [00:05:25][15.6]

Bryce: [00:05:25] Absolutely. So we know what the stock market is now and the share market. And you mentioned there that it's a place where companies go to raise capital and they ask the public for ten million dollars and in return, the public gets stocks. That's what he said. But what am I? Getting as a public investor, retail investor, what is a stock, what is a share and what am I getting in return for, I guess, giving the company my money? [00:05:53][27.4]

Alec: [00:05:53] So you are literally becoming a part owner in that company to use our equity mate's company work to example? Yeah. Yeah. So right now, equity makes company, let's say we own 50/50. And if equity makes makes a million bucks. Yeah. Which will be in our future next week. Yeah. Then we split that 50/50. You get half a million dollars. I get a half a million dollars. If we go to the market and say we want to raise that 10 million dollars and we're willing to give you half of our shares each to raise that 10 million dollars, what that means is that your 50 percent becomes 25 percent. My 50 percent becomes 25 percent. And then what? We've given up that 25 percent age. So 50 percent of the company is then in the public. And so then the money that we're making as a company, we get our share. But the public also gets their share. And depending on how much money we're making, the public will decide what those shares are worth. So if we're killing it, then the public are willing to pay more for the share of our company at that share price increases. Similarly, if our TV show flops, if we find out that no one wants to watch half our show about finance, why wouldn't we make less money? Then the public will say, well, we don't want to own those shares. And they'll try and sell them. And people may buy them for less. And so the share price will go down. And so people often think about shares as these isolated tokens that relate to a company in some abstract way. That's not how we think about them. They are they are literally part ownership of a company. And you are then entitled to what an owner is entitled to as a company. And, you know, companies have millions or billions of shares. So you're a very part owner, a very small fraction, and they're probably not going to get you on the board. But that's what you are. And so if their company has a billion shares, you're entitled to one billionth of that profit. [00:07:51][117.5]

Bryce: [00:07:51] As a shareholder, yeah, absolutely. And as we said in the very first episode, Ren shares or stocks are the way that you become that owner, part owner of a company and reap the rewards of them doing their absolute best to reward the shareholder in terms of increased value over a longer period of time. So you don't really receive anything physical Ren you're not going to get anything in the mail. You might get something from the exchange or from your broker saying how you bought this stock, but you don't get anything to put on your shelf or anything like that. You purely you can make. You can make something, you know. Yeah. I guess you could go into the parking lot so you can throw it on the shelf or whatever it may be. [00:08:26][35.1]

Alec: [00:08:26] But yeah, I'm very creative. But let it be known. [00:08:30][3.6]

Bryce: [00:08:31] Ren has I think. What do you use. Coins. [00:08:32][1.9]

Bryce: [00:08:33] Don't you hang them on the ceiling shares. Yeah. Very tokenistic to look at them every night. Yeah. Yeah. You polish them, rub them and pray to them. [00:08:44][11.2]

Alec: [00:08:45] That's a bit coin isn't it. What do you reckon. That's Bitcoin. No coins. So that's a stock. That's the share market. There are a number of different ways that you can choose to then invest in those stocks. I guess a number of different styles or strategies you could say. So let's let's talk personal and then get general. So let's get deeper. [00:09:04][19.5]

Bryce: [00:09:06] Let's start. Very clear. [00:09:08][1.9]

Alec: [00:09:08] What style of investor are you? So I will be frank and say that I know your price first. [00:09:15][6.8]

Bryce: [00:09:16] So I will be Brice. And to be honest, Ren, I don't think I am hard and fast set in my ways in terms of a style of investing, if that makes sense. I'm very much at a stage of incorporating a number of elements of strategies that I've learned along the way. [00:09:33][16.6]

Alec: [00:09:33] So that makes a lot of sense, but it does nothing to answer the question. [00:09:36][2.9]

Bryce: [00:09:37] I think the short answer is I am. I can't sit down and look you in the eyes. I say I'm a value investor. I have no more aware of the different styles of investing. Let's go. Yeah. [00:09:49][11.4]

Bryce: [00:09:50] Okay. So in terms of the broader styles of investing, you've got value and momentum and we'll get into these in a sale and the growth in those sorts of things. [00:09:57][7.1]

Bryce: [00:09:57] I can't conclusively say I won't conclusively say it won't look you in the eye and say I am a value investor. [00:10:04][7.1]

Bryce: [00:10:05] And that is because there are particular characteristics and methodologies that are out of all of these styles of investing that I just don't do and still learning to do. But I am aware of face value in, you know, growth, momentum, cetera, and I'm trying to incorporate elements that I think work for me. [00:10:22][17.3]

Alec: [00:10:22] Well, given that you're being so evasive, let's start General and then get personal. So you've labeled a fair few there. Yeah. So let's explain some of them. Dealer's choice. Okay. What do you want to 21 to kick off? [00:10:34][11.9]

Bryce: [00:10:35] Well, let's start with value. I think value investing is one that I'm sure many people have heard of just by virtue of the fact that some of the great. Investors in the world follow this methodology or this strategy, a value based strategy. Buffett started out his journey following a value based approach. So value investing in its simplest form, Ren, I guess, is finding companies that are trading below their intrinsic value or that the total value of the company. And I guess paying less than what it is worth. [00:11:08][33.5]

Alec: [00:11:08] Yes. So I guess in a nutshell, you're buying these companies the price at which you can buy them changes. Changes all the time. When markets are open and value, investors try and buy a dollar's worth of value for 50 cents. And so the most obvious example, if we use our equity markets company example. If we're spitting out a million dollars a year and someone can buy our whole company for 700 grand, that's that's great value. You would buy that any day of the week. And so value investors take that same philosophy to the share market and they say, where can I find a company where I am getting my money's worth, where it is earning more than I'm paying for it? Or maybe the equity makes company. We might have a hundred million dollars worth of gold in our safe. Very awesome. Don't tell anyone. So we've got 100 million dollars worth of gold in our site. Let's say that person bought our whole company for seven hundred thousand dollars. They bought it for less than a million dollars. And we've got 100 million dollars worth of assets in our safe when they buy us as a company. They buy they own those assets. So value investors are trying to find companies that are cheaper than they should be. [00:12:19][70.3]

Bryce: [00:12:20] And they're trying to buy them in the hope that at some point the market will then, I guess, price accordingly. And the stock will rise closer to it. What would be classed as its true value? I guess now that is not always the case. But that's I guess the whole idea of investing is you want to try and find the ones that are more likely to do that than others. And so, as I said, Ren, you know, this is a very old school style of investing that's been around for years and that there are many iterations of it. But at its heart, it's about, as you said, finding companies that are trading less or buying companies for less than they're actually worth. Yes. Easier said than done. Absolutely. [00:13:01][41.0]

Alec: [00:13:02] Yes. The flip side of that is finding companies that will become worth a lot more in the future. Yeah. And that brings us to the second style of investing, which is growth. Yes. And so if value is all about looking at companies today and trying to find where they're cheaper than they should be, growth is all about projecting the future of the company and saying, I'm willing to buy this today because I'm confident that it will grow into the future and the share price will grow with it. And so, again, if we use our equity mate's company example, if we make a million dollars in profit today. But someone who is an investor thinks we're going to make 100 million dollars worth of profit in the next 10 years. Then you'd be willing to pay. You'd be willing to pay for that because it's going to grow so fast and so much that in the future investors are going to pay more. Yeah, it's a pretty obvious strategy. It's a pretty clear I clearly understand strategy. You're backing the horse that's going to grow. Yeah. [00:14:03][61.1]

Bryce: [00:14:03] You're looking for companies that are displaying above average signs, essentially. So you want to be looking for above average revenue growth, above average profit growth, above average growth in a number of key metrics and those sort of companies that you would then classify in your growth strategy. Now, I think it's important Ren you mentioned their price value is all about the price at which you pay for an investment growth strategy. Generally, you would not really necessarily consider the price you pay for it because, as you said, you're thinking further on down the track. So you might be paying for a company that is more expensive than it's actually worth, but you're anticipating that over time you're going to get reward for paying that price. [00:14:44][40.4]

Alec: [00:14:44] Yeah, that's it. So I guess if you think about the big companies that are around today, growth, investors have done very well. Yeah, if you think of Apple, Amazon, Google, Facebook, they've all just grown incredibly over the last two decades. And so as an investor, didn't really matter what price you paid for them 20 years ago and you just should have bought them. [00:15:07][22.5]

Bryce: [00:15:08] You often find that growth companies are early on in their lifecycle as well. You know, there they might be a new disruptive to the market or they might be early on in their phase of new development in technology or whatever it may be, whereas a value approach, you might be looking at companies that are much more established and for some reason or another, they've gone through a change in the markets, penalize them in some way. [00:15:32][23.9]

Bryce: [00:15:32] So I like growth Ren I think I'm a bit better at than value because for me, growth, you can use a bit more macro sense in the sense of thinking about somatics and what's going on in the. And sort of picking industries rather than trying to pick direct stocks and then making decisions based on that. I don't know how you feel about it. [00:15:50][18.0]

Alec: [00:15:50] I mean, growth. Everyone loves growth. When you pick it right. And it has an amazing run. I understand both. And I probably fall somewhere in between both of them. We'll talk about the other strategies in a sec. But these are the two that I think make the most sense for me as an investor. [00:16:05][15.0]

Bryce: [00:16:06] So question then, what do you think you have been more successful from in terms of value or growth? And can you give an example of perhaps some stocks that you said, you know, I genuinely believe I'm paying less for this or maybe a stock that you thought I'm buying this because I see a trend that is going to really benefit this company in significant growth will come as a result. [00:16:28][22.2]

Alec: [00:16:29] So I guess the big company in my portfolio was A2 Milk. Yes. So A2 milk creates milk that doesn't have A1 protein, probably buy it in the supermarket. It also makes a lot of infant formula and it has had an incredible growth story as it grows its market in China especially. Yeah. But it's also growing in the states and stuff like that. And the share price has just been on a great run because of that China growth story, because it's growing its revenue and its profit, because it's just selling heaps more dairy products in what is the biggest market in the world. [00:17:04][35.1]

Bryce: [00:17:05] And from memory, that was like one of your second or third investments, wasn't it? [00:17:09][3.2]

Alec: [00:17:09] Yeah, that was my so after my first of Slater and Gordon, it was my second. And what did you buy it for? 60 cents. What is it now? I think like 14 dollars return. [00:17:18][9.3]

Bryce: [00:17:19] That's a classic indication of a growth company. Is there anything that you can pinpoint as being sort of value based? [00:17:24][5.0]

Alec: [00:17:25] So the flip side, a company that has better value characteristics, I guess, would maybe be a company like Berkshire Hathaway. Now there Warren Buffet's company. So you also would expect a bit of growth out of the greatest investor of yesterday. Yes, but the company is worth about five hundred billion. John bit maybe less than that. But that's a fair bit of money. The company also has 120 billion dollars worth of cash sitting on its balance sheet. And so if you say of the 500 billion that the market says the company is worth, if you take that 120 billion dollars of cash out, then it's worth 380 billion. And then it is it is a relatively cheap company for what Berkshire Hathaway actually holds. Yeah, right. So when you take into account the assets that it has in all that cash and you take that out of what you're buying and you just buying it for the companies, it's relatively cheap. [00:18:17][52.0]

Bryce: [00:18:18] Yeah. So those are probably the two major investing strategies. There's a few technical investing probably would have of day trading and sort of shorter term stuff. Now, we don't really play in that game, but by all means, jump online and have a look around. There's a third one, Ren, that is quite popular at the moment. And that is momentum investing. Yes. Now, what is momentum investing? Is it something that you use? [00:18:42][24.3]

Alec: [00:18:43] So I think that momentum investing slashed. Day trading is really what most people think about in the stock market. They think about this frantic buying and selling, you know. Oh, no. The stock's gone down two percent. It's gone up one percent. Cent world's ending like that. [00:19:01][18.2]

Alec: [00:19:02] That's the perception I had about the stock market went to Starless and you get it because like that's what you see in movie, like financial news and financial media is like this is what happened today. This is what happened today. You this hour. And the whole industry creates this feeling of urgency and needing to act. And like there's there's a reason that the industry creates that because third, from a financial media perspective that keeps eyeballs on your TV or your radio or your newspaper. And from a market's perspective, there's all these companies out there, all these investment banks that make money when you're trading and they make money on activity regardless of if you're making money or not. They want to save the cash registers, ching. They want to see companies being bought and sold. And so there's an incentive to create like this frantic pace in the market that you need to try and keep up with. I think it's the wrong strategy, especially for beginners. And if I was trying to do that strategy, I would lose my shirt, so which wouldn't be too bad. I think the biggest learning point for me in my early days as an investor is you can block out that noise and whilst people will make money on momentum and I think you are going to come in and give a different point of view in a second. I think the important thing to realize is that you don't need to. You don't need to run at the pace at which the market wants you to run. You can run at your own pace and you can make a lot of money doing it. Yeah. [00:20:27][85.7]

Bryce: [00:20:28] So I tend to disagree with your definition of momentum there if you're relating it to day trading, because I completely agree. [00:20:36][8.1]

Alec: [00:20:36] Day traders try and trade on momentum. [00:20:38][1.7]

Bryce: [00:20:39] Yeah, they do. But the broader strategy for me for momentum in my books. He's looking at stocks that are generally performing well and have a lot of, I guess, demand coming into them over, say, three to six month period. Momentum investing is a strategy that you can overlay with, say, value investing or growth investing to almost help you. And I don't want to say time the market, but to help you time your entry into a position. That's exactly what you're saying. You say on the market it's it's helping your time, your entry into the stock, because at the end of the day, you don't want to be buying into a stock necessarily depending on your strategy. That is in a downward trend because you could be losing money so you can use momentum as a way of identifying when the stock is in favor. [00:21:22][43.1]

Alec: [00:21:23] So let's split it out a little bit. So value investing is all about the price that you pay for the company? Yeah, yeah. Growth investing is all about the company's future prospects and how the company is growing in the years ahead. Momentum investing is a lot more around market psychology. Yeah, and you're looking less at the company itself that you're investing in and you're more looking at the activity around the company. Yeah. And so how momentum build is that there's more and more buyers looking to buy into that company and they're willing to buy it at a higher and higher price. Yeah. And as demand continues to flow into the company, other market participants are trying to buy that company that builds price momentum, the price increases as these people are trying to fill their orders and get their hands on this company. And so when you're talking about momentum, you're not talking about the momentum of the company itself in terms of equity mate's company selling more stuff and growing our revenue. You're talking about the momentum in terms of investors buy shares in equity mate's company and driving the price of equity mate's company's shares are absolutely. [00:22:36][73.2]

Bryce: [00:22:36] Yeah, great summary there, Ren. And I think that's probably a good place to move on to the final two aspects of this basics and understanding, and that is to quickly touch on two terms, passive versus active. Now, we've probably heard a lot of stuff in, you know, over the last 10 years about the growth of passive investing. And it's certainly a way in which a lot of people are now entering the market. [00:22:57][20.8]

Bryce: [00:22:58] I think it's probably worth touching on what both mean and maybe the differences and and what it means as a beginner investor. [00:23:04][6.5]

Alec: [00:23:05] I would say that the three styles we've just spoken about are active. Yes. So does that actually mean that active is buy and sell decisions as you go? Yes. Actively selecting the stocks that you're choosing to hold and actively making decisions about how long you're gonna hold them for. [00:23:22][16.9]

Bryce: [00:23:22] Yeah. So it's a hands on approach. You've got to be across what you're buying. You've got to know when you want to sell. You're going to know what your goals are. And so that's why I passive investing is becoming increasingly popular at the moment, Ren. And that's because passive investing is investing in a broad index where you don't really have to control what you're buying individual stocks. You don't control the weight of the stocks, the make up of the index. You just buy into an index which will touch on in a few episodes time, and then you get access to a whole range of stocks. So you take away that, I guess need to keep track of individual stocks in your portfolio. [00:23:56][33.6]

Alec: [00:23:57] Yeah, it is the easiest way to make money over the long term because you literally are saying I don't want to choose one company in Australia. I want to make a bet that every company in Australia as an average will grow. So like you're making a bet on the market or the economy as a whole. And so you buy these funds that, as I said, will touch on in future episodes. You literally buy a fund that gives you access to everything in a market, and then you just expect that that will grow over time. Because historically, most share markets over the long term. Now, this is really important because, you know, there are periods in which markets don't perform well. The GFC was one the end of the tech boom in the early 2000s was another. There are times when markets don't perform well. But over the long term, if you're talking in decades rather than in days. Markets generally average about eight to 10 per cent a year in growth. And so this passive style is about buying and holding for that decade long time horizon and just taking advantage of that steady, consistent growth. As companies get better at doing whatever they're doing, economies get more productive. There's more humans to add labor to the workforce. There's more capital to invest. You're just making a bet that over time economies will get more efficient and more productive, which has been a winning bet throughout throughout human history. But, you know, throughout the last century as well. [00:25:30][93.6]

Bryce: [00:25:31] Absolutely Ren. So that brings us to the end of the episode. We've discussed what is a share market? What is a stock and how they relate to each other. We've also discussed the three main investing styles that we've sort of come across in. Investing styles, I guess, more broadly speaking, and then also we just touched on passive versus active as an approach to investing. So I really hope that helps break down some barriers even further. Ren we were starting to get into the nitty gritty of it now. Always good to chat stocks and markets with you unless you've got anything else to add. [00:26:02][30.5]

Alec: [00:26:03] You can make money through any of those strategies. That's the important thing. It's not it's not like here are the options. There's only one right answer. There are all right answers in their own right. [00:26:11][8.2]

Bryce: [00:26:11] And I think we've made it pretty clear that Ren and I both aren't hard and fast and stuck to one. [00:26:16][4.8]

Alec: [00:26:17] I think it's I'm not a fan of momentum. That's fair enough. Yet I just. I understand the logic. Yeah. Yeah. [00:26:23][6.7]

Bryce: [00:26:24] I think it's clear that don't feel like you need to know which one to start with. You will find that as you start investing, you come to realize what works for you. And that's more important. You know, you might find that the day trading is your thing. I think the main message is just get started, get stuck in. As Ren said, time is on our side. And it's probably one of the biggest advantages we have at the moment. So don't feel like you need to choose. Value versus growth before you even make an investment. So get stuck in where you will leave it there for now and chat next episode. Looking forward to it. [00:26:58][34.1]

[00:26:59] Thanks for listening to get started investing. A production of acclimates media. Please remember that everything you hear and get started investing is general advice. [00:27:07][7.5]

[00:27:07] Only the content has been prepared without knowing your personal objectives, specific financial circumstances or goals. The host of Get Started Investing may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licensed financial professional. [00:27:07][0.0]

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