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I've observed a lot of interest yet confusion about investing overall on this forum so wrote this. Obviously there is much that can be written on this subject matter which is why I'll be updating it weekly based on responses/interest. This thread is intended to be a starting point for serious investors. What you invest in is your call in the end and obviously I encourage you to do your own due diligence. This is intended for people that have at least $100K to start (elaboration: I rec this as a starting point, you can start with as much or as little as you please). I rec this simply because this is a forum for creating your own wealth through a Fastlane business, so you should be re-investing into your own business unless you intend to be the next Timothy Sykes (Context: Guy turns ~$13K into $1.65MM, started hedge fund called Cilantro Fund Partners, blew said hedge fund up, now turned guru selling penny stock advice). This is more geared toward the preservation of wealth once you make it. Below is an index of talking points. Read some or all. Let's get started.
1. Investing Platforms
Beginner: This is where you start if you cannot build or understand a three-statement financial model and HERE is where you go if you want to learn. This is where you start if you don't know of or never looked at a 10k. This is where you start if you trade based on what Marketwatch or Motley Fool tells you. Below are recommended trading platforms in lieu of a traditional trading account (Edge, Ameritrade, E-Trade, etc):
Motif Investing: A community-based investing platform. You invest alongside peers in an online community that creates industry-segregated themes known as "motifs". For example, say you want to purchase in Chinese Internet companies, by buying into one motif, you can have exposure to up to 30 companies (30 stocks) per motif at $9.95 per as of writing. Love the platform/concept.
https://www.motifinvesting.com/
Wealthfront: Well-known and gaining a lot of traction. Low-cost and optimized for tax-efficiency. They use ETFs that track indexes for all major asset classes in their portfolios. New and noteworthy.
https://www.wealthfront.com/
Betterment: They're similar to Wealthfront. Low cost like Wealthfront. Both worth a look if you want your portfolios on auto-pilot. If you want to learn to trade, keep reading or start with Motif.
https://www.betterment.com/
Advanced: This is where you start if you already know it all yet don't know the below brokers (best IMO) or are learning or want to learn to trade on your own in either stocks, bonds, or FX and want more sophisticated options to trade on. These accounts generally start at $10K just to fund them.
Lightspeed Trading: One of the best damn brokers/platforms out there. These guys are on top of their game and always improving their platform. Charting, multi-threading, customizeable w/ APIs, etc.
https://www.lightspeed.com
Interactive Brokers: As competitive as Lightspeed. Tons of fancy awards I see on their website. Low-cost. Like Lightspeed, great for smaller volume (less than 1m shares a month), taking liquidity and using smart orders.
https://www.interactivebrokers.com/en/home.php
MTS Markets: Where you trade bonds. Relatively new trading bonds over an e-Platform but Basel-III cap requirements gave rise to it recently.
http://www.mtsmarkets.com/MTS-US
FXCM: Where you trade Forex. FXCM is regarded as one of the most reliable dealers in Forex with a solid and tested platform selection. Solid trade execution. Commissions are measured in "pips" and can be as low 0.2 pips in liquid trading pairs such as USD/CHEF, EUR/USD, and USD/JPY. 50:1 leverage.
https://www.fxcm.com/
Instaforex: The Asian broker I made $70K with then lost $40K with. Instaforex can trade on 1:1 to 1000:1 where investing a mere $1000 on the latter amplifies your position to $1,000,000. I liked the platform when I did use it years ago. US citizens can't use this broker.
https://www.instaforex.com/
2. Stock Selection & Valuation
Here's how you value a stock in a nutshell. I'm going to assume nobody here has access to Bloomberg, FactSet, or Capital IQ. Fret not, there are other ways. Stocks tell a story. And nothing archives these stories better than the form of SEC filings. We want to start with the history of the company and get access to the IPO. Type in a ticker and find the 424 (also known as a prospectus)
These are long. Very long. But you'll get a snapshot of the company though. Go over this as the takeaways you want are key metrics used to measure success within the company. Let's think of a Tech company like Twitter. What kind of metrics do they use to measure themselves? Perhaps things like the growth of users, measuring the activity of those users (daily/monthly), likes, comments, and mobile vs. desktop views, etc.You'll get a good foundation here and condense most of this to the basics. You want to know user growth, the activity of users, and how they're being monetized. There are obviously exceptions, scrutinizing any company there's likely to be more than these three examples.
How does Twitter deliver value to its advertisers (relevance, reach, engagement and social context)? As you get to the end of the section they give you a sample of risks. Potential negatives being anything from being unable to monetize for advertisers, dwindling user engagement or user growth, etc. It might also highlight the interests of founders, especially a controlling interest.
Now that we know the basics, what's driving revenue? Search for measurements of these main themes in the filing. You're looking for user activity and user growth numbers which should be included in the filing (page 59) under management's discussion and analysis where you can further analyze. Now you can export this information into Excel to track such as Monthly Active Users, Daily Active Users, and Tweets Per Day. Note, this isn't the same for all companies. If we were discussing Apple for instance you'd be breaking out line items by revenue (Mac Air, iPhone, etc). Once we get our metrics, we can also track performance by geography as well which is extremely relevant to promoted tweets. Looking at revenue in F-46, we can quickly surmise that the US is clearly the most saturated market.
So now that we know what is driving revenues, is it actually profitable? Not all stocks that go public are actually profitable. Uber is reportedly losing a lot of money, is valued higher than GM and Ford, and most of the S&P 500 (Lol), yet is being courted as a potential IPO candidate. Guys like Salesforce's Benioff are clearly sick of it. Anyways, back on topic. Now that we understand Twitter's business model, how it grows, and how it generates revenue we want to see how we make cash from it. Tech companies are generally valued off EBITDA (Earnings Before Interest Tax Deprecation Amortization), this varies per sector, some companies are simply valued off sales numbers/rev growth if they aren't profitable.
Now let's turn to Page 78 and look at the quarterly results of operations. We want to know profit margins and seasonality (operating income or EBIT). Twitter is losing money. Uh oh? Should we be concerned? Apparently 68% of tech companies that went public in 2013 were losing money. Adjusted EBITDA for 2012 reads $21MM. We can also observe that revenue is growing faster than operating expenses (promising).
Keep tabs on analyst estimates routinely on sites like Yahoo Finance (Twitters). They give you a free glance at consensus estimates for EPS and Sales so you can easily calculate the Sales and P/E multiples on both LTM and Next Fiscal Year basis. Remember, this isn't true for all companies and values by industry. Always check if your industry is valued on other metrics such as P/BV, FCF, etc. At this point we should have a basic understanding of the company and be able to espouse an elevator pitch. Would it perhaps be reasonable to say: Twitter is a $24BN company that is looking to grow its revenue by increased advertising fees through growing their user base and engagement. If the company suffers in user activity levels or is unable to continue growing its user base the stock could drop.
This is a simple example of where to start to wrap your head around the basics of how stocks are selected by investment professionals. If you want to continue with this example, we could continue with this story building out a financial model using the latest 8-K to see what we're dealing with on a quarterly basis. As Twitter is a tech stock, we're provided both GAAP and non-GAAP numbers. The rule of thumb for a tech stock is using non-GAAP numbers because of stock comp expenses. To learn about building a financial model out, continue here.
To clarify things, let this also help serve as a reference point. For a thorough lesson in corporate finance, a link to Investopedia is posted in the end in rec'd reading.
3. ETFs and REITs
ETFs: Exchange Traded Funds are essentially the same concept as "motifs" are to Motif Investing, a bundle of securities that investment professionals select taking the guesswork out. If I had a mutual fund I'd take them out and put them into this. As I said in another post, Vanguard is considered to be the holy church of asset management and have more conservative ETFs based on industry and macro scenarios; their full offerings can be seen here. In addition to lower fees than mutual funds, there are certain tax advantages, as well as how ETFs differ from mutual funds, all of which is explained well here. ETFs obviously differ as well by risk tolerance and its volatility can be measured. Still, there are examples here where low volatility can still generate high payoffs. An easy tool to measure volatility up to 5 ETF tickers at a time can be found here. As I discussed in another thread, these are great investment vehicles as well to capitalize on trends such as the rise of oil, or other industries. If you're bullish on oil for example, here is a list of ETFs to invest in. Learn NAV, more here. Play around and you'll find plenty of good funds to add to your portfolio, some of my favorites happen to be here.
REITs: Let's all agree, that many billionaires/multimillionaires holds/speculates on some real estate. Fortunes are made and sustained on this as well. Yet this isn't always necessary or practical to all situations. Introduce, the REIT. A REIT (in the traditional sense, a property REIT) is simply a company that holds a portfolio of properties. By buying shares in one you essentially 'indirectly' own cash flowing real estate assets. Small fees assessed at a mere 1% are paid for management expenses. REITs are well diversified and invest in assets that require high upfront capital like commercial office space and shopping malls. Most property REITs are general, but some invest specifically in areas of residential, retail, and industrial. Below is a simple diagram illustrating how a property/equity REIT works.
Without getting too confusing, there are three kinds of REITs, our above example being a property/equity REIT. There are also mortgage REITs and Hybrid REITs. The IRS specifically requires ALL REITs to pay out 90% of their income to their shareholders. Some equity/property REITs to consider.
Mortgage REITs are much different yet commonly associated with property REITs. It helps to be apprehensive when it comes to these as they're known for paying higher dividends but at the expense of higher risk. These REITS operate similar to banks, they borrow money on the cheap, lend it out for more. The difference between what they borrow at and lend out at is called the "spread". To peak the interest of investors, they often use leverage to amplify returns, so watch closely their debt-to-equity ratios rather than simply the dividends that are advertised. Fluctuations in interest rates dig into their bottom line. More on this here with specific REITs.
4. Bonds
Almost everyone thinks to trade stocks first. However, the bond market, namely US Treasury bonds have the most impact on the economy and are used virtually in all financial calculations as a "risk-free rate". Bonds are loans, interest rates are coupons, issuers repay the amount borrowed known as "face value" on a set date (known as the maturity date). Bond markets are generally quite liquid and treasury futures are one of the most liquid markets in the world. Bonds fluctuate in pricing largely in response to interest rates. If the Fed raises rates, bond prices become lower. More on understanding this here. Indexing (S&P 500/DOW) is seen as more "secure" yet from 2000-2010 the total annualized return of the S&P 500 was just under 1.5%. High quality bonds (A grade+) tracked by the Barclays U.S Aggregate index saw bonds grow at just under 6% during this same timeframe (govvie bonds are approx 75% of this index. More on analysis here, here, and a tutorial here. Additionally, you can simply add fixed income ETFs here to gain exposure. Lately, people have been suggesting talk of P2P investments. There's a lot less to go by, simply a brief credit profile of the loan applicant (higher risk, higher interest rate). Here's some good on this and some very interesting reading on the industry here.
5. Forex
Simply put, currency speculation. You're longing/shorting positions in the Forex market against currencies. For example, EUR/USD, you're speculating on the Euro against the USD. People make and lose a lot of money on Forex. I walked away relatively unscathed (short story above). For Forex you are looking at country announcements for metrics. Here are some recent trade ideas as an example that discuss certain events that could influence a significant change in currency fluctuations. Almost all seasoned FX traders are tuned into Bloomberg Economic Calendar which tracks reports that can affect currencies. Just for Friday I see PPI and Retail Sales to be announced. PPI is a metric that observes changes in price 'producers' receive for their products (also considered an inflation indicator). Traders care about Retail Sales because it observes how consumers spend. Almost all countries have central banks and they all peddle fiscal and monetary policy. These are examples of fundamental analysis and you can more in-depth here. "Candlestick charting" and other technical analysis can be viewed here. When you hear of China "devaluing" it's currency it's because they've been able to sell it's holdings back to the market effectively increasing supply. Note here recent events of a weakening dollar in response to further devaluation from China and we may well be on the verge of one of the largest USD margin calls in history.
- Investing Platforms (based on experience).
- Stock Selection & Valuation (a tutorial)
- ETFs and REITs (learn to love these)
- Bonds Overview (are awesome, kept brief)
- Forex/Currencies Overview (brief)
- My thoughts on Oil, Deposit Rates, and Geopolitical Risk
- Recommended Reading & Resources
1. Investing Platforms
Beginner: This is where you start if you cannot build or understand a three-statement financial model and HERE is where you go if you want to learn. This is where you start if you don't know of or never looked at a 10k. This is where you start if you trade based on what Marketwatch or Motley Fool tells you. Below are recommended trading platforms in lieu of a traditional trading account (Edge, Ameritrade, E-Trade, etc):
Motif Investing: A community-based investing platform. You invest alongside peers in an online community that creates industry-segregated themes known as "motifs". For example, say you want to purchase in Chinese Internet companies, by buying into one motif, you can have exposure to up to 30 companies (30 stocks) per motif at $9.95 per as of writing. Love the platform/concept.
https://www.motifinvesting.com/
Wealthfront: Well-known and gaining a lot of traction. Low-cost and optimized for tax-efficiency. They use ETFs that track indexes for all major asset classes in their portfolios. New and noteworthy.
https://www.wealthfront.com/
Betterment: They're similar to Wealthfront. Low cost like Wealthfront. Both worth a look if you want your portfolios on auto-pilot. If you want to learn to trade, keep reading or start with Motif.
https://www.betterment.com/
Advanced: This is where you start if you already know it all yet don't know the below brokers (best IMO) or are learning or want to learn to trade on your own in either stocks, bonds, or FX and want more sophisticated options to trade on. These accounts generally start at $10K just to fund them.
Lightspeed Trading: One of the best damn brokers/platforms out there. These guys are on top of their game and always improving their platform. Charting, multi-threading, customizeable w/ APIs, etc.
https://www.lightspeed.com
Interactive Brokers: As competitive as Lightspeed. Tons of fancy awards I see on their website. Low-cost. Like Lightspeed, great for smaller volume (less than 1m shares a month), taking liquidity and using smart orders.
https://www.interactivebrokers.com/en/home.php
MTS Markets: Where you trade bonds. Relatively new trading bonds over an e-Platform but Basel-III cap requirements gave rise to it recently.
http://www.mtsmarkets.com/MTS-US
FXCM: Where you trade Forex. FXCM is regarded as one of the most reliable dealers in Forex with a solid and tested platform selection. Solid trade execution. Commissions are measured in "pips" and can be as low 0.2 pips in liquid trading pairs such as USD/CHEF, EUR/USD, and USD/JPY. 50:1 leverage.
https://www.fxcm.com/
Instaforex: The Asian broker I made $70K with then lost $40K with. Instaforex can trade on 1:1 to 1000:1 where investing a mere $1000 on the latter amplifies your position to $1,000,000. I liked the platform when I did use it years ago. US citizens can't use this broker.
https://www.instaforex.com/
2. Stock Selection & Valuation
Here's how you value a stock in a nutshell. I'm going to assume nobody here has access to Bloomberg, FactSet, or Capital IQ. Fret not, there are other ways. Stocks tell a story. And nothing archives these stories better than the form of SEC filings. We want to start with the history of the company and get access to the IPO. Type in a ticker and find the 424 (also known as a prospectus)
These are long. Very long. But you'll get a snapshot of the company though. Go over this as the takeaways you want are key metrics used to measure success within the company. Let's think of a Tech company like Twitter. What kind of metrics do they use to measure themselves? Perhaps things like the growth of users, measuring the activity of those users (daily/monthly), likes, comments, and mobile vs. desktop views, etc.You'll get a good foundation here and condense most of this to the basics. You want to know user growth, the activity of users, and how they're being monetized. There are obviously exceptions, scrutinizing any company there's likely to be more than these three examples.
How does Twitter deliver value to its advertisers (relevance, reach, engagement and social context)? As you get to the end of the section they give you a sample of risks. Potential negatives being anything from being unable to monetize for advertisers, dwindling user engagement or user growth, etc. It might also highlight the interests of founders, especially a controlling interest.
Now that we know the basics, what's driving revenue? Search for measurements of these main themes in the filing. You're looking for user activity and user growth numbers which should be included in the filing (page 59) under management's discussion and analysis where you can further analyze. Now you can export this information into Excel to track such as Monthly Active Users, Daily Active Users, and Tweets Per Day. Note, this isn't the same for all companies. If we were discussing Apple for instance you'd be breaking out line items by revenue (Mac Air, iPhone, etc). Once we get our metrics, we can also track performance by geography as well which is extremely relevant to promoted tweets. Looking at revenue in F-46, we can quickly surmise that the US is clearly the most saturated market.
So now that we know what is driving revenues, is it actually profitable? Not all stocks that go public are actually profitable. Uber is reportedly losing a lot of money, is valued higher than GM and Ford, and most of the S&P 500 (Lol), yet is being courted as a potential IPO candidate. Guys like Salesforce's Benioff are clearly sick of it. Anyways, back on topic. Now that we understand Twitter's business model, how it grows, and how it generates revenue we want to see how we make cash from it. Tech companies are generally valued off EBITDA (Earnings Before Interest Tax Deprecation Amortization), this varies per sector, some companies are simply valued off sales numbers/rev growth if they aren't profitable.
Now let's turn to Page 78 and look at the quarterly results of operations. We want to know profit margins and seasonality (operating income or EBIT). Twitter is losing money. Uh oh? Should we be concerned? Apparently 68% of tech companies that went public in 2013 were losing money. Adjusted EBITDA for 2012 reads $21MM. We can also observe that revenue is growing faster than operating expenses (promising).
Keep tabs on analyst estimates routinely on sites like Yahoo Finance (Twitters). They give you a free glance at consensus estimates for EPS and Sales so you can easily calculate the Sales and P/E multiples on both LTM and Next Fiscal Year basis. Remember, this isn't true for all companies and values by industry. Always check if your industry is valued on other metrics such as P/BV, FCF, etc. At this point we should have a basic understanding of the company and be able to espouse an elevator pitch. Would it perhaps be reasonable to say: Twitter is a $24BN company that is looking to grow its revenue by increased advertising fees through growing their user base and engagement. If the company suffers in user activity levels or is unable to continue growing its user base the stock could drop.
This is a simple example of where to start to wrap your head around the basics of how stocks are selected by investment professionals. If you want to continue with this example, we could continue with this story building out a financial model using the latest 8-K to see what we're dealing with on a quarterly basis. As Twitter is a tech stock, we're provided both GAAP and non-GAAP numbers. The rule of thumb for a tech stock is using non-GAAP numbers because of stock comp expenses. To learn about building a financial model out, continue here.
To clarify things, let this also help serve as a reference point. For a thorough lesson in corporate finance, a link to Investopedia is posted in the end in rec'd reading.
3. ETFs and REITs
ETFs: Exchange Traded Funds are essentially the same concept as "motifs" are to Motif Investing, a bundle of securities that investment professionals select taking the guesswork out. If I had a mutual fund I'd take them out and put them into this. As I said in another post, Vanguard is considered to be the holy church of asset management and have more conservative ETFs based on industry and macro scenarios; their full offerings can be seen here. In addition to lower fees than mutual funds, there are certain tax advantages, as well as how ETFs differ from mutual funds, all of which is explained well here. ETFs obviously differ as well by risk tolerance and its volatility can be measured. Still, there are examples here where low volatility can still generate high payoffs. An easy tool to measure volatility up to 5 ETF tickers at a time can be found here. As I discussed in another thread, these are great investment vehicles as well to capitalize on trends such as the rise of oil, or other industries. If you're bullish on oil for example, here is a list of ETFs to invest in. Learn NAV, more here. Play around and you'll find plenty of good funds to add to your portfolio, some of my favorites happen to be here.
REITs: Let's all agree, that many billionaires/multimillionaires holds/speculates on some real estate. Fortunes are made and sustained on this as well. Yet this isn't always necessary or practical to all situations. Introduce, the REIT. A REIT (in the traditional sense, a property REIT) is simply a company that holds a portfolio of properties. By buying shares in one you essentially 'indirectly' own cash flowing real estate assets. Small fees assessed at a mere 1% are paid for management expenses. REITs are well diversified and invest in assets that require high upfront capital like commercial office space and shopping malls. Most property REITs are general, but some invest specifically in areas of residential, retail, and industrial. Below is a simple diagram illustrating how a property/equity REIT works.
Without getting too confusing, there are three kinds of REITs, our above example being a property/equity REIT. There are also mortgage REITs and Hybrid REITs. The IRS specifically requires ALL REITs to pay out 90% of their income to their shareholders. Some equity/property REITs to consider.
Mortgage REITs are much different yet commonly associated with property REITs. It helps to be apprehensive when it comes to these as they're known for paying higher dividends but at the expense of higher risk. These REITS operate similar to banks, they borrow money on the cheap, lend it out for more. The difference between what they borrow at and lend out at is called the "spread". To peak the interest of investors, they often use leverage to amplify returns, so watch closely their debt-to-equity ratios rather than simply the dividends that are advertised. Fluctuations in interest rates dig into their bottom line. More on this here with specific REITs.
4. Bonds
Almost everyone thinks to trade stocks first. However, the bond market, namely US Treasury bonds have the most impact on the economy and are used virtually in all financial calculations as a "risk-free rate". Bonds are loans, interest rates are coupons, issuers repay the amount borrowed known as "face value" on a set date (known as the maturity date). Bond markets are generally quite liquid and treasury futures are one of the most liquid markets in the world. Bonds fluctuate in pricing largely in response to interest rates. If the Fed raises rates, bond prices become lower. More on understanding this here. Indexing (S&P 500/DOW) is seen as more "secure" yet from 2000-2010 the total annualized return of the S&P 500 was just under 1.5%. High quality bonds (A grade+) tracked by the Barclays U.S Aggregate index saw bonds grow at just under 6% during this same timeframe (govvie bonds are approx 75% of this index. More on analysis here, here, and a tutorial here. Additionally, you can simply add fixed income ETFs here to gain exposure. Lately, people have been suggesting talk of P2P investments. There's a lot less to go by, simply a brief credit profile of the loan applicant (higher risk, higher interest rate). Here's some good on this and some very interesting reading on the industry here.
5. Forex
Simply put, currency speculation. You're longing/shorting positions in the Forex market against currencies. For example, EUR/USD, you're speculating on the Euro against the USD. People make and lose a lot of money on Forex. I walked away relatively unscathed (short story above). For Forex you are looking at country announcements for metrics. Here are some recent trade ideas as an example that discuss certain events that could influence a significant change in currency fluctuations. Almost all seasoned FX traders are tuned into Bloomberg Economic Calendar which tracks reports that can affect currencies. Just for Friday I see PPI and Retail Sales to be announced. PPI is a metric that observes changes in price 'producers' receive for their products (also considered an inflation indicator). Traders care about Retail Sales because it observes how consumers spend. Almost all countries have central banks and they all peddle fiscal and monetary policy. These are examples of fundamental analysis and you can more in-depth here. "Candlestick charting" and other technical analysis can be viewed here. When you hear of China "devaluing" it's currency it's because they've been able to sell it's holdings back to the market effectively increasing supply. Note here recent events of a weakening dollar in response to further devaluation from China and we may well be on the verge of one of the largest USD margin calls in history.
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