It’s easier than you think

“When you first start to study a field, it seems like you have to memorise a zillion things. You don't. What you need is to identify the core principles that govern the field. The million things you thought you had to memorise are simply various combinations of the core principles.” -

John Reed

In last week's article, I started a new series on why you need to invest. I'm not flogging any financial products here; I'm not selling you anything; I simply believe that if you can grasp the basic principles of investing, it can make a dramatic difference to your wealth over the course of your life.

In fact, in investing, sticking to the basics has been a far more rewarding endeavour over the long term.

To put this into context, after fees, only about 11% of actively managed funds outperform the S&P 500 over a significant period of time.

That is to say, professional investors, who repeatedly try to overcomplicate it, eventually get it wrong and underperform anyone who has just passively invested

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Morgan Housel provides the perfect comparison to highlight this in his book 'The Psychology of Money'.

Housel gives the example of Ronald Read, an American janitor who gained a fortune of almost $8 million by investing patiently and living frugally. His investing strategy was simple. Invest for the longterm, and do not invest in companies you know nothing about.

Then, there is the story of Richard Fuscone, former vice-chairman of Merrill Lynch, who declared personal bankruptcy after the 2008 global financial crisis. Fuscone borrowed massively to expand his mansion, with "two swimming pools, two elevators, six fireplaces, 11 bathrooms and a seven-car garage".

These stories where an 'ordinary person' can outperform others with much better education, background or connections show up in the investing world all the time because how we behave around money is much more important than what we studied about money.

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You wouldn't let a surgeon step up to the operating table after they had 'covered the basics' and expect them to be a statistically better surgeon?

Nor would you expect an architect who had just 'grasped the main ideas' to build you the home of the year.

But somehow, this is seen time and time again in investing.

Of course, it doesn't always seem like this, which is why I have decided to take a step back to highlight it.

'Investing gurus' love to make it sound way more complicated than it is.

To be honest, I was part of that cohort for a long time, and it's easy to see why this happens.

How else will the investment industry continue to function as a multi-trillion-dollar machine if they can't convince you to pay them thousands to manage your money each year?

To keep the wheel spinning, they need you to believe that the nuances and complexities of the industry could only possibly be handled by 'the experts.'

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But the numbers don't lie. Statistically speaking, those who simply focus on the basics can generate huge returns over time.

I’m not talking about a few outliers here, this is the norm.

I have spent the last few weeks writing a book covering all the basics. This step-by-step guide includes how to set up your brokerage account, how to pick your first investments and how to value a company.

To receive a free copy, sign up for my newsletter by scanning the QR code above or go to www.theislandinvestor. com.

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