3028: The Art of Investing by Chris Reining on How to Invest with A Long-Term Mindset and Build Wealth

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[00:00:51] [SPEAKER_00] This is Optimal Finance Daily. The Art of Investing by Chris Reining of chrisreining.com Maybe the biggest mistake investors make is buying shares of Apple or Zoom or whatever and then hoping the price goes right up. It's why you sometimes hear that the stock market is just a big casino. Because some investors are just buying prices and then hoping to sell their prices at some higher price to someone else who's then hoping for the exact same thing.

[00:01:19] [SPEAKER_00] Which is gambling. A more reliable way to make money investing is to invest like you're buying a business. After all, that's what a share of stock is. It's a tiny piece of the business. And when you buy shares like you're buying tiny pieces of real businesses, it just might change how you invest. For instance, pretend you and I each put up $50,000 to buy a McDonald's restaurant together.

[00:01:43] [SPEAKER_00] Would I call you every day offering to sell you my 50% stake just sitting there shouting random prices through the phone? I'll sell it for $43,947. $54,924. How about $48,586 or $57,097? That's what happens in the stock market though. You can buy and sell pieces of businesses almost nonstop and at seemingly random prices.

[00:02:11] [SPEAKER_00] This little quirk creates opportunities though. You see, the market does an okay job figuring out how much a business like Apple or Zoom is worth. The price of the stock is usually right. But sometimes prices are wrong. They swing too optimistic or too pessimistic. Too high or too low. Think about it like this. Say I wake up this morning and feel super bullish about the future.

[00:02:37] [SPEAKER_00] I call you first thing and offer to sell you my McDonald's steak for a whopping $100,000. You know it's worth about $50,000. Do you buy? No. But then the very next morning, I wake up and feel super depressed. So I call again and offer to sell my steak for just $25,000. Now you know that nothing with the restaurant changed overnight. That the steak is worth twice that. Do you buy?

[00:03:03] [SPEAKER_00] Like the saying goes, the stock market is there to serve you. When it offers a good business at a bad price, you do nothing. When it offers a good business at a good price, you buy. It's as simple as that. Yeah, but how do you know a good price? What's a share of Apple or Zoom worth exactly? You'll hear professional investors say that a business is worth all future cash flows discounted back to today at an appropriate interest rate.

[00:03:30] [SPEAKER_00] Translation, money invested today should give you more money in the future. I wanted to learn what the professionals do. And so I took the corporate finance and valuation class in the MBA program at New York University Stern School of Business. Maybe the biggest takeaway was realizing that these very bright, capable people learning how to value businesses in order to work on Wall Street aren't really learning how to invest.

[00:03:54] [SPEAKER_00] Because look, if all it took to be a successful investor was plugging numbers into equations full of Greek letters, then wouldn't anyone with a calculator be rich? It almost seems like the more numerical gymnastics you perform, the worse the result. Go read about that hedge fund run by a bunch of famous PhDs and Nobel Prize winners that blew up. I'm not saying the science of investing isn't important. You need math skills. What I'm saying is that there's also an art of investing.

[00:04:23] [SPEAKER_00] Like when I'm thinking about investing in a stock, I'll go listen to the company's past earnings calls and read past quarterly reports and play with past numbers. But then you need to make a guess about the future. What might Apple or Zoom look like in 5 to 10 years? What's my view of their management team? How might their growth strategy evolve? Is their moat getting deeper and wider? The answers are totally subjective.

[00:04:48] [SPEAKER_00] And I've noticed the investors who really excel at assessing and judging the intangibles just use lots of common sense. They see things so clearly, think so clearly. They also easily change their mind, but don't change their mind easily. Which reminds me of the story about Picasso. Have you heard it? It goes like this. Picasso was sitting in a Paris cafe when an admirer approached and asked if he would do a quick sketch on a paper napkin.

[00:05:17] [SPEAKER_00] Picasso politely agreed, swiftly executed the work and handed back the napkin, but not before asking for a rather significant amount of money. The admirer was shocked. How could you ask for so much? It took you a minute to draw this. No, Picasso replied. It took me 40 years. The longer you invest, the more you realize that being good at investing has little to do with combing through mountains of data or spending hours crunching numbers.

[00:05:44] [SPEAKER_00] To be good is blending science and art. It's hard data and soft data. Left brain, right brain. Any artist will tell you that art is not knowing what comes next. Not knowing how the future unfolds. You can never entirely know. So the artist, like the investor, makes guesses. They might be wrong, but they keep at it. You just listened to the post titled The Art of Investing by Chris Reining of chrisreining.com.

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[00:08:34] [SPEAKER_00] I often hear a lot of confusion about what to actually buy when you're investing. And this article highlights some considerations for stock picking if you're an active investor. If you've been listening for a while, you know that I'm a huge fan of passive investing in low-fee total market index funds. And if you're interested in learning more about this style of investing, I recommend you read The Simple Path to Wealth by J.L. Collins because that book is what helped me figure it out.

[00:09:03] [SPEAKER_00] While it's true that active investors are more likely to beat the market in the short term, almost no one beats the market over the long term unless you're Warren Buffett. That's a big reason why I'm such a fan of passive investing. I just don't see the need to work harder when the results likely won't be better. And because I'm investing for the long term, I simply don't need to beat the market. I'm happy with matching the market to meet my financial goals.

[00:09:29] [SPEAKER_00] I like to focus more on asset allocation versus deciding which stocks to keep in my portfolio. This is because all reasonably well-diversified 100% stock portfolios are going to perform at least 90% the same. Likewise, all reasonably well-diversified 80-20 or 60-40 stock-to-bond portfolios are going to perform at least 90% the same.

[00:09:54] [SPEAKER_00] I had a listener write in not too long ago and questioned why I was investing my HSA in Fidelity Zero Fee Total Market Index Fund when there was another fund with a 0.015% expense ratio that performed better over the last year by 0.04. The way I look at it, these two funds over time are going to perform about 90% the same. So I'd rather just stick with one versus constantly monitoring them.

[00:10:21] [SPEAKER_00] Plus, even though this other fund's performance seemed to justify the fee in one year, it's not likely to justify it over 30 years. That's a wrap for another edition of Optimal Finance Daily. Have a great rest of your day and start to your week, and I'll be back here tomorrow where your optimal life awaits.