5. investing 101
Eric: So I just want to say before I get started that all the content coming after this message is my own opinion for your informational purpose. I am not a financial advisor by any means, and you should use your own opinion and judgment to make investment decisions. Without further ado, let's get to the episode.
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Eric: Hey there everybody. It's Eric Mueller. Thank you for tuning back into The Eric Mueller Show.
Lately, I have been thinking of how I could best discuss the subject of investing with you all. If you've been following the news or social media recently, you have potentially heard about crazy swings in the stock market with companies such as GameStop and AMC.
You might have also heard the term short squeeze thrown around a bit.
In this [00:01:01] episode of the show, I want to explain some of the components of the stock market in the way that I understand them, and I also want to share with you some tips and strategies that I've learned along the way from my personal experience investing in stocks.
So really the first lesson that I learned from the very beginning was to not be afraid to start with a small initial investment. I realized that you don't need to have a thousand dollars to start investing. In fact, you really don't even need $100 to get going with this. With the multitude of trading apps and investment platforms out there, you can begin building your portfolio with just a few bucks.
Now a portfolio simply stands for an assortment of investments that an organization has ownership of so your portfolio could consist of two stocks, it could consist of 15 stocks, it really varies, but just owning, you know, a conglomerate of stocks becomes your portfolio.
Another brokerage company that I primarily use [00:02:01] for stock Investments is Charles Schwab or just Schwab. I really like their mobile app, and the customer service has been superb any time that I've needed their assistance. In my opinion, Schwab is one of the more traditional brokerage platforms that you could use for investments.
Other traditional options in my opinion include TD Ameritrade, ETrade, Fidelity, Merrill Edge just to name a few that come to mind. On the other hand,there are some more modern options that you could explore for your investing.
Some of these would be like Acorns, Robinhood, WeBull and Stash just to name a few of those as well. So clearly there are plenty of options to get you going. So, how do you pick the right one? Well, I could probably do a whole additional episode exploring the pros and cons of each of those platforms, but for the purpose of this episode, I want you to simply pick a brokerage platform and try it out.
Now I'd recommend that you play [00:03:01] around with each of these options as you grow as an investor to find out which one suits you best long-term, but to start you really just need to pick one of them and make a deposit. A lot of them will offer deposit bonuses as well. Sometimes like Robinhood, there's a free stock when you know, use an invite code from a friend. The more traditional ones like Schwab and Ameritrade, like there's probably not as much of that going on, but some of those more modern mobile based apps will have those things.
For me, I'm satisfied with Schwab. But I've also recently begun to use Robinhood. Now some of this was probably driven by Robinhood being in the news for some of the controversial moves they made in regard to GameStop at AMC stocks just to name a few of those stocks that were in that short squeeze type of situation, but I started using it, and the main reason I wanted to use Robinhood was to invest in cryptocurrency. Now, I'll focus on that in a completely different episode. I think that that would be confusing to start with that.
So, for the purpose of this episode, just remember I use Schwab and Robinhood, [00:04:01] but I'm also experimenting with Acorns. So I was introduced to Acorns by some buddies in pharmacy school. Actually, they were enjoying it and using it. So the one thing I want to mention with Acorns is that it has a really unique feature where it will invest your spare change from your purchases for you. So for instance, if you go to Starbucks and buy a coffee for $5.35, Acorns is going to round that purchase amount up to $6 for instance and invest that $0.65 change for you.
So it allows you to pick an investment strategy as well in regard to the risk. So acorns is pretty unique. I think for a really beginner investor I think it's pretty I think it's pretty useful, and I think it'd be fun for an early investor to start playing around with it and really using that start small strategy to get involved with investing and figure out, you know, the pieces of the stock market that you want to learn about.
The major drawback that I see with acorns is the recurrent fee that it has.
[00:05:01] I really can't remember exactly what that fee is, but I think that it for me at least I got out of it because of that fee, and it was because I wasn't really investing a lot. So if you're not investing a lot of dollars, that fee, I don't even know how much was a couple dollars or something per month, but that can add up if you're only investing like 20 bucks or something. So mainly anyways just do a little bit of research on the various options the various brokerage platforms that I mentioned and just pick one of the platforms you think sounds fun and get after it. Just started investing started exploring the stock market with that platform you pick.
So we're going to pretend that you have selected Schwab for this example. So hey, I commend that choice. I think Schwab's great. You know, it's maybe not as attractive as some of those more modern versions such as you know, the Acorns, Robinhood from that, you know bonus standpoint or just maybe ease of use for an early investor, but for the purposes of this we’ll just say you selected Schwab.
So now you got your brokerage platform, and let's say you got $5 queued up in that bank account. [00:06:01] You're ready to get going crafting your own portfolio, and you're ready to become the next Wolf of Wall Street.
I'm just kidding on that part. So with five dollars, I wouldn't say that it's super reasonable to expect to change that in the five hundred dollars overnight or even in a week, but I think that $5 is a great start because you're getting going. I mean you're starting to begin that process of exploring the market and learning how investment can benefit you, and you're also going to be, you know learning how maybe that risk can not pan out sometimes, which I think is also a good lesson.
So overarching advice to you as you begin. I have one simple piece of advice to start with here and that is to stay consistent with investing a little bit of money every week or every two weeks or every month.
Get in the habit of consistently putting money into that brokerage account to invest with.
Now picking stocks is a whole completely different animal because to be totally honest with you, [00:07:01] there is not one person in the world that knows which direction a stock is going to go. Even if they claim to be an expert.
Now, when you get into investing you might hear like, you know of companies such as the Motley Fool or you might know of different programs on CNBC, you know watching Power Lunch or something like that, but these people are analysts that are predicting what they think the market is going to do or what they think a particular company is going to do, but you know, their word is not accurate 100% of the time. That should be fairly obvious. It's just like anything with predicting the weather, anything like that.
You're not going to be right 100% of the time, and this always reminds me of a quote from one of my favorite movies, The Wolf of Wall Street.
So early on in the film, Matthew McConaughey who is one of the lead brokers at a firm that Leonardo DiCaprio is entering into. Matthew’s his boss. Leo’s, I think on day one or something on Wall Street. He's ready to make a fortune. He's hungry.
But [00:08:01] Matthew takes him out to lunch at this penthouse looking restaurant, it looks crazy cool, and he drops this line on him. He says number one rule of Wall Street, “Nobody and I don't care if you're Warren Buffett or if you're Jimmy Buffett, nobody knows if a stock is going to go up, down, sideways or in circles.”
Now, I know that you're probably a little bit sad I didn't do the accent there, and I also censored myself a little bit.
But the piece I want you to take away from that is to just take solace in the idea that you may invest some of your money into stocks that WILL decrease in value.
And that's perfectly normal.
As long as you're making consistent contributions to invest with, I think you're doing it in the right way in my mind.
I think that's the main piece that that you really need to keep your mind focused on is that that consistent effort over time is going to pan out for you. You're going to win some and you're going to lose some on your Investments.
Another tip [00:09:01] that I have for you is to think of your investments as mostly long-term plays. Meaning that the money you're putting into the market or into a particular stock should stay there for a while.
Now you can define a while however you see fit, but I would recommend that you keep your money parked in whichever stock or stocks you choose to invest in for at least a full 30 days.
The reason I recommend this is because 30 days might, and I do say might give you a chance to experience swings within the market.
Now, let's say you buy a stock at $12 per share on day one, and by day six the stock is now sitting at $10.50 a share. So it's gone $1.50 per share.
Now in the short term, you have decreased your invested money.
But now I want you to think and pretend that on day 15 of this example, the stock has fallen even more to $9 a share. Now you feel even more defeated because you've lost more [00:10:01] money.
Now play it forward to day 28, where you see the stock is now rebounded back to $11.87 a share. Oh, man. Thank goodness. You got most of you invested value back.
Now this is obviously a hypothetical example and any stock you have is likely to perform very differently during any given 30-day period of time, but by experiencing the short-term market swing, you can begin to see why you should think of your Investments as longer-term plays most of the time. That is the best methodology in my opinion when you're investing in the stock market.
Now I should mention that we're talking about established companies here when we're talking about investing for the long-term. So we're talking about if you invest in, you know, something like an Amazon or Google or Apple, Chipotle. You know, things like that where you if you invest in them, and those type of established companies, generally speaking your investment will increase over time.
Now the rate at which it'll, [00:11:01] you know increase is pretty variable, but let's just say that, you know, the stock market has an average return over the span of a decade of maybe around 10% or so.
So, you know you invest $100, you're going to make $10 on that. Invest $1,000, you going to make $100 on that. So when you think about the stock market in that way, that is the average return and that average is I mean, you could have years that are much higher and much lower than that, but historically speaking, you're going to make money over time if you play the long game with the stock market
Now that's not to say you can't make money in the short-term. You absolutely can. You can make a lot of money in the short-term. It's generally more risky, but you may have heard of, you know, the term day trader. People that trade stocks within a matter of seconds or minutes. They're in and out of the market like that.
So when you think of those people, I want you to know this thing. I mean, they generally have very very very deep pockets, [00:12:01] and they're able to ride those swings. They’re able to invest $25,000 in one position, immediately see it go down to $15,000, and then the next minute go up to $25,000.
So I also want to tell you that a lot of those brokerage platforms that I mentioned, so Schwab and things like that. Those companies require that you have a certain amount of money in your account to even be able to day trade, and that amount on the ones I've researched is $25,000.
So if you want to be a day trader, you need to have $25,000 in your account, but also your account can never go below that value, and that doesn't mean that you can invest $25,000 and say hey, I've got $25,000 there. That means if you invest $5,000, you better have $25,000 still cash in your account. So they have really strict requirements, but that also you know prevents people from doing it who really shouldn't be doing in my opinion, which is good because it's really risky.
But you know, let's say you are really efficient at short-term trading [00:13:01] stocks. So you're not day trading, but you're buying in at a stock on you know, Monday and then the next week Wednesday, you're selling it and profiting off that then. You know pretty short-term, about a week and a half or so. I've done that and made some money doing that. I've also done that and lost some money doing that.
So the whole point really is I mean, if you invest for the long-term most generally speaking, you'll see a positive return. You'll see some profit.
But it's probably not going to be the money, you know on the side that's going to buy you your next Lamborghini tomorrow if you invest for the long-term.
Short term investing can be really fun. Sometimes it can be a little bit like gambling, you know, any stock market investment is somewhat of a gamble, but if you’re investing in those companies long-term, you're probably going to win.
So my advice to you would be to do that. Invest for the long-term plays, and see how you do over the course of you know, 2-5 years with consistently putting money away. It's going to profit you in a way that's better than [00:14:01] just putting it in a savings account, and I think it's a little more fun than just throwing it in some type of mutual fund. Where you just own a conglomerate of stocks that someone else is picked, and it doesn't really allow you to analyze the market or really learn really anything about how stocks work and that.
So we've talked about consistent investing, we've talked about investing in, you know, more longer-term plays in the market.
So the last point that I really want to focus on with you is to ride the wave. So you're likely to see many roller coaster type graphs and swings within the performance of your stocks over periods of time. Both in the short term and sometimes in the long term, but hold the faith that most likely your Investments are going to go up as time goes on.
And that's not to say that every stock you have is going to have a positive return. That's why you want to have a diversified portfolio. You want to have investments in many different companies and many different Industries even.
So you know the list that I [00:15:01] gave earlier, you know, you got Amazon and Google and Apple. Okay, well Google and Apple are both technology companies and Amazon is you know, I really like to think of it as an all-inclusive company of every type of really industry, but they’re a tech-based company as well.
So you don't want to just throw all your money into those, you want to also have money in different types of industries such as agriculture and oil and gas for example, like you just want to diversify your portfolio.
Even if you were to lose 50% of your investment in 3 month’s time. So let's say you put in $200, you bought a couple stocks. 3 months later, you're sitting at $100.
It's obviously not the most ideal situation to be in, but 6 months later, you know, so you're 9 months from your investment time then. Your portfolio might be 12% up. You never know. You're not going to be able to buy low and sell high every time, but you can try to come close.
So, you know while you're riding the wave [00:16:01] you, if you owned stocks like I did when it was March 2020, you saw those things plummet. So when the COVID-19 situation really broke loose, you saw the market tank so to speak.
But historically speaking, the market has always rebounded and that's not to say every company rebounds, but the market itself, you know, if you follow indexes such as the NASDAQ or you know, the Dow Jones. Those will show you that that the market is typically going to rebound.
So really I mean personally, if I had some money sitting to the side to invest and double down on all the stocks that I held in March of 2020, I for sure would've done that. And I would have seen that you know, those stocks are actually now at dollars per share higher than they were even before COVID happened.
So you know, it just really should be a lesson to not only you as an investor, but [00:17:01] just anyone who has interest in the stock market performance for their 401K, you know for different types of retirement investments to just hold the faith and know that historically speaking, the market’s going to come back.
And not that you should have everything in your stocks. Not that you should have everything in one particular company, but you should remain faithful that it's likely going to come back, and you know, you really shouldn't be scared to throw a little more in there if you think you want to take a flyer on it.
So I wanted to just quickly touch on some of the current news in regard to the market, especially in terms of the short squeeze and those companies such as GameStop and AMC. You know, the Reddit page r/WallStreetBets, just a few things like that. Just wanted to quickly explain in my own, you know words and thought process what a short squeeze is and just kind of talk about some of those pieces and how they played together.
So basically what you have with a with a short is that you have investors that are betting [00:18:01] against a particular stock. So it's the opposite of a traditional investment. So if you were a true investor in GameStop, you would hope that the price goes up because that's how you're going to make money. So if GameStop was $50 per share and you bought one share, and it now went to $100 a share, like you just made $50.
But shorting a stock is betting on the opposite happening. So you want to buy it at $50 a share and hope it goes down to $25 and then profit off that difference.
Now, you know, you might be thinking how is that possible? How do I buy the opposite of a stock?
Well, and that's where that's where the term short-selling comes into play.
So basically you have someone who wants to short a stock, so they will essentially get the money lent to them from a broker. They will buy the stock. You know, view it as you're buying it with credit. You're buying it with money that's not really yours. And then they will sell that stock back to the broker [00:19:01] in the hopes of buying it later.
You know, sounds a little confusing but just keep thinking of it in terms of your basically investing in a stock in the reverse way. You're buying it to hope it goes down.
But the thing with this is think of it this way.
If you buy a stock at $50, and it goes to $0, you just lost 50 bucks. That's the most you could lose because that's the most you invested.
But if you short a stock at $50 and it goes, you know, the sky's the limit there if it goes up.
If it goes to $300, now that $250, you know spread. You just lost that. So you lost five times the amount that you know put in basically.
But essentially what happened in the short selling and the short squeeze that occurred with GameStop is that there were big hedge funds that were betting on GameStop stock to decrease. So they shorted, in fact they actually [00:20:01] shorted even more than the shares that were available. So they were above a 100% percent, and they ended up losing because people pumped that stock up.
So there was the Wall Street bets page on Reddit, you know, and that was part of it, but there were some other deep pocket individuals involved I believe that that pushed that stock up.
But as people buy a stock that's shorted, the price goes up because the demand for that stock is increasing, but then in order to cover their losses, those people that short sold the stock. They have to also buy shares of that stock to cover, you know, to mitigate some of their losses that they're incurring and that further causes the price to increase.
So that you know, it's being squeezed so that the more that those short sellers have to buy shares, the more the price is going up and the more that people, you know traditional as you might have heard retail investors such as the Reddit r/WallStreetBets people, the more money they pump [00:21:01] in further increases that stock.
So you got two things coming at it increasing that price, and that's why we saw GameStop go to, you know, nearly $500 over the course of a week because of that phenomena.
Now I didn't get in on that before it happened. I wish I would have. You probably have seen if you've been following it, you know, there is one Redditor that he was up to like $17,500,000 or even more than that in terms of the GameStop he owned.
Now, I don't know for sure if he did, but I hope he sold and when he was leading it. I hope that he didn't wait for it to plummet back down. I think you know; it's settled down back around like $60 a share or something like that.
But that's just a little bit as far as how I understand what happened with the short squeeze, and it really is kind of confusing when you try to discuss what a short is. But I want you to just think about it as betting on the reverse of a stock.
So you buy a stock traditionally. you hope it goes up. You short a stock, you're going to buy it with borrowed [00:22:01] money, which is the benefit of that. That's called a margin, buying it on the margin, and we'll talk about that in some future episode. But you're hoping that once you short that stock that you buy it, you know, quote but it at $50, you hope it goes down to $25 and pocket the difference.
So that's a little bit of a lesson on this short squeeze as far as I understand it. If you have anything to add to it. If you think that you know, something was explained in a way that you don't necessarily think that you see it in that way, please let me know.
Reach out to me on social media. My Instagram and Twitter is @ericmuellershow. I'm on LinkedIn as The Eric Mueller Show, and I also have a Facebook page @ericmuellershow.
And if you like the show, if you enjoy the episodes that I'm producing you know, please give me a five-star review on iTunes. Please subscribe on iTunes or follow me on Spotify.
Go to my website, ericrmueller.com/ericmuellershow, and subscribe to the show so you get notified when new episodes come out, and I would really really appreciate that.
I thoroughly enjoy producing these episodes. It's [00:23:01] so much fun. This one was particularly fun for me because I love stock market investing. It's really a side hustle passion of mine, so I really am happy to share those insights with you as far as I understand them, and I'm looking forward to future episodes.
I actually got another interview coming up soon, so I'm excited to share that with you all.
And thank you everybody for tuning in, really appreciate it. Really appreciate the support.
Until next time, Mueller out.
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Voice audio: Written, produced and edited by Eric R. Mueller
EDM music: Produced and edited by Eric R. Mueller