The best way to understand investing is by studying the great investors such as Warren Buffet, Benjamin Graham, Peter Lynch, George Soros, John Bogle and others. But, most importantly, Bill Ackman.
If you are a college student like I am, you may be broke. You may be taking student loans and working part time to pay for rent, food, school, gas and other things. You may be taking unpaid internships, where you put away hours of work for the sake of experience and building your resume. And if you are a liberal arts student, things may get even worse. Today’s system works better if you major in (or already work in) STEM, and it seems like this state of affairs will continue in the future.
Nevertheless, there is still hope. You must work very hard to get ahead. But there is a problem with this mindset: The people in control want to tell you your dreams are possible if you work hard, but this just makes you the horse in Orwell’s “Animal Farm” — a hard, but unthinking, obedient worker who is ultimately a little too satisfied with his station in life. The truth is that you must work smart. There is no other way; otherwise you’re being taken advantage of. You must be able to dominate the system, not the other way around.
Thus, the best way to go about this is to understand how money works and how it can work for you. Investing, in other words, is what can get you ahead. But it is smart investing, not gambling. And we can talk about investing in terms of money, but there is also the notion of opportunity cost. This is the idea of how you invest your time, which is very valuable. For example, if you’re passionate about dogs, you could invest in a dog franchise that doesn’t require a large amount of time or a high-dollar investment. For another example, do you want to spend the next two hours watching shows on Netflix or working out? What is it that you are losing when you commit to do something? Is the other thing better? More productive? You are the CEO of your life and you must make those decisions.
Who is Bill Ackman?
Bill Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund company. He is notorious for being a contrarian investor because he buys and sells against the crowd’s overall sentiment.
For context, general pessimism about a stock exaggerates the company’s risks and undermines the return potential. Similarly, widespread optimism about a stock results in people overvaluing without concrete evidence, thus leading to a big drop when expectations are not met.
Ackman did this during COVID-19. Just before the market crashed, he predicted the potential widespread pessimism that will come because of the virus. And so, he moved his fund accordingly and that resulted in $2.6 billion of profit in less than a month. Nevertheless, this explanation is only the surface of what he is doing. Ackman has an army of highly trained quants, computer algorithms, analysts and experienced people on his side to do the calculations: That is how the hedge fund business works. But we don’t have the time or the infrastructure to do this, so what can we do? Well, we invest on a smaller scale and in ourselves, following Ackman’s advice.
Bill Ackman’s Advice on Investing
First, Ackman believes the best way to understand investing is by understanding a business; thus, one of the most important skills that you can cultivate as an investor is the ability to distinguish between a great business, a good business and a bad business. And one way to get a sense of this is to go work for one. He claims that today (maybe after the pandemic) is the best time in history to go work for a startup business. This is because if you are one of the first employees, you learn a lot about how the business works such as how to market your product, how to design and how to manage. And even if the business fails, you still learn a lot from it (this is where opportunity cost comes in).
Second, Ackman assumes that once you get into your profession, you will get some money that you will save over time. Now, once you have this extra money, avoid investing it in startup businesses or businesses you do not understand. The reason for this is high risk. You don’t need an outrageous return; instead, you need a conservative 10% to 15% return over a long period of time. Here are a few good ways to invest:
— Invest in public companies: These are companies that trade publicly in the stock market (S&P 500, NASDAQ, etc.). The reason for this is because those businesses are more established and stocks are liquid (there’s high volume of shares traded and you can change your mind if you want to sell or not.)
— Understand how the company makes money: Again, do not invest because the crowd thinks it is a good product. You need to dive into the roots of their money-making process. Just like working for the startup.
— Invest at a reasonable price: If you pay too much for it, you are not going to earn big returns.
— Invest in a company that could last forever: The reason for this is because you want to own a business that can compound your investment over a long period of time. For example, Ackman believes Coca-Cola is the perfect model for long term investing.
Third, Ackman emphasizes the notion of not following the herd. He believes that there is a natural human tendency to follow the crowd. For example, if the stock market is going down every day, your natural tendency is to sell. And if the stock market is going up every day, your natural tendency is to want to buy. But you need to have the courage to understand the volatility of the stock market. This is what makes you stand out from the herd and ultimately a better investor.
Lastly, Ackman believes that making mistakes is one of the most valuable things you can do, assuming, of course, that you learn from them. He thinks that a college student’s biggest risk is that they probably have not screwed up a lot. The importance of this is that if you come across information and you haven’t failed enough, you are more likely to ignore that information. And that information could be critical in investing.
The importance of understanding investing goes beyond the money-making aspect. Investing teaches you how to think in a society filled with people that want to take your value. It teaches you how to navigate the herd and to think for yourself. And of course, this applies for life as well. So, be smart with your choices. I wish you luck.