AUTHOR: TOM NASH
Hey, this is Tom, and I'm going to assume here, even though I was told never to assume because it makes an ass out of you and me. A long time ago, I'm going to assume that if I say that investing is very, very hard, most of you would agree, and rightfully so. Studies of the past 30 years show one clear thing: most individual retail investors get hammered in the stock market every single year. Now, that doesn't add up because the S&P 500, over the past 30 years, averaged a 10 percent increase per year. So, if the stock market keeps going up every year on average 10 percent, how come most retail investors lose? Well, it mainly has to do with human psychology. One of the worst things that screws investors every year for decades is the frequency of trading. People can't let their app go; they have to get on it and trade and trade and trade. Now, the frequency of trading for a long-term investor is one of the worst things you can do, and it's not me saying that, it's Fidelity. Fidelity had a study in which they took a look at all of their portfolios, and they found out that their best portfolios belong to either people who have died or people who forgot they had an account—literally, people who haven't touched their app in years. They beat everybody else by a country mile. Now, the other thing is obviously trying to time the market, which is nothing more than gambling. You know, I can go to a casino and play the roulette table and occasionally win, but can I systematically beat the house? No, and you're playing against the house because you're playing against institutional investors with better resources, better information, and more money than you. So, you're coming with a toothpick to a machine gun fight. So, frequency trading, trying to time the market, those are things that are destroying people, not to mention chasing hype. What's going on right now with AI hype, everybody is chasing the hype. Chasing the hype may work short-term, but long-term it will destroy a lot of people. Some will make money, but a lot of them will be left bag holding. So now that we know that these three things destroy portfolios… "How do we take them out? Now, in this video, I'm going to give you a complete guide, not only on how to take these things out but also on how to structure your portfolio, how to invest in it, how to manage it, how to pick the best stocks—everything you need to know as an investor. And I know this video isn't for everybody. I get it, no problem. I'm good with it. But this is kind of an overall tutorial on how to become a better investor, A to Z. By the time you leave this video, you'll know everything you need to know about being a long-term investor. So, how do we eliminate these three things? Well, it starts by being methodical, and the best way to do it is understanding the structure of your portfolio. Now, believe me when I say this, it's not complicated. People on TV and on some YouTube channels want you to think that this is some sort of rocket science, and only they can teach you the wisdom. It's actually very simple. I'm going to show you right now. Every single portfolio can be broken down into three main elements: bonds, value stocks, and growth stocks. That's it. Now, if you know that your portfolio is comprised of these three elements, or at least it should be (and by the end of this video, it will be), how do you determine what's the right allocation for each group? How much in bonds, how much in stocks, and within each stock, how much in value and how much in growth?
The flowchart for eliminating these three things and understanding the structure of your portfolio is as follows:
By following this , you can effectively eliminate the identified issues and create a well-structured portfolio with the right allocation. |
Now, obviously, each of you is a unique individual with your own risk aversion, with your own preferences, and you have to make that decision with yourself or with a professional. But in this video, I'm going to use a generic, general kind of category just to show you the principles, because I think it can be grouped by age. Now, if you're 30 years old or younger, basically the majority of your portfolio will be in stocks. So, 90% of your portfolio will be in stocks, 10% will be in bonds, and most of you under 30 don't have bonds at all, and that's a mistake. Put 10% in bonds. Now, from that 90% in stocks, I would just use a generic 50/50 split: 45% in growth, 45% in value, and 10% in bonds. Now, if we go up another decade and you're 30 to 40 years old, there's very little change. All you have to do here is add ten percent, another 10%, to bonds. So now, you have a 20% bond allocation, and we have an even Steven forty-forty-forty percent growth stocks, forty percent value stocks. Now, if you're 40 to 50 years old, it gets interesting because at this point, you're going heavy on value stocks. That means you stay with 20% bonds, you go down to 20% growth stocks, and sixty percent of your portfolio goes to value stocks. Now, as you're getting older, we're getting down to that 50 range, 50 to 60, there's a slight change. Now, you're going in the opposite direction. Now, you're going 50% bonds, and then 25% growth stocks, 25% value stocks. And if you're 60 or over, 60% of your portfolio will be in bonds, thirty percent will be in value stocks, and 10% will be in growth because at this point, your risk appetite is almost non-existent. Now, obviously, this is a very general way to put this, and I'm assuming that all of you will have your own allocations. But I just wanted to give you the guiding principle of how I would look at this. But I would say it's not a bad way to allocate your portfolio, even if you don't do anything else but put the age bracket in it. Now, let's move on. Now that we know that each individual component has to get a certain percentage, what do we put in it? We have the title, we have the category, but what stocks do we choose for value, and what stocks do we choose for growth? That's very important. This next part is called research. You have to research potential candidates for your portfolio, and you have to do it like there's no tomorrow. Spend as much time on it as you need. This has to be the most time-consuming category in your entire process. You cannot invest in companies you have not researched, that you do not understand. Don't buy it, simple. Warren Buffett once said, 'I'm sure that if you try to invest in a company you don't understand, it's like trying to drive a car lying on your back, naked, from the trunk.' Yikes! Hahahahaha….Now, obviously, Warren Buffett didn't say that. I just made it up. But I mean, might as well. So many quotes that he has not made are listed and credited to his name. Absolutely incredible. Now, going back to serious mode. How do you research a stock? Well, you research a business first of all, not a stock. Change your terminology, change your language right now, you're buying a piece of the business. You're not buying a stock. It's not some sort of paper, it's not a virtual, digital thing. You're buying a piece of a business. Right now, I know I just said it like "piss," but I mean "piece." I don't know what my Russian action does hahahahahah….. do not buy "piss" business, Do not buy. Buy good business. The way to do it is by three stages. Stage number one would be looking at the business. Look at the time, look at their business model, look at their brand recognition, look at everything that has to do with the way they conduct their business. Is it viable? Is it sustainable? Will it be around in 10 years? What's their position in the market? All the things that you will not find in the balance sheet and you would not find anywhere else but researching the actual company. Now, once you've done that and you understood what the company does?, what its business model?, what is the total addressable market?, what's the projection of the complaint?, then you move to stage two. Stage two is opening the books. All public companies have to give you their financials, which means you have access to the balance sheet, the cash flow, the income statement. All of it is right in front of you. Make sure you understand everything in the balance sheet. Look at how much cash they have, what's the change in cash?, how much debt they have compared to cash?, what's the change in debt?. Look at assets, look at liabilities, look at the composition of assets, how much good assets, how much bad assets. If they have goodwill, for example, that's polony, but there's a lot in it that you have to analyze. Most of it we cover on our Patreon page at patreon.com/TomNash. More on that later, but let's keep moving with the company. Now, look at the cash flow. Look at how much the company is burning? or how much it's making?. You have to understand if it actually will need more capital in the future because if the company is burning money and they have cash for two years, you know that there's a dilution coming or there's more debt coming. Neither are good for long-term investors. You have to understand the financials of the company by heart. When they wake you up at 1am and you can tell Exactly "what's their net debt?" That's the point where you get to. Now, the third stage, after you understood their business and after you understood their financials, is looking at the ratios. And specifically, I look at two ratios, which are pretty much all I need to know. PE, which is price to earnings, and PS, which is not what you think, not the letter "one," but price to sales. Price to earnings compares the share price with the earnings per share. Price to sales compares how much revenue they got with the actual price of the stock. Now, when you look at the company from the perspective of these two ratios, what you need to understand is these are not absolute numbers. Now, you have to understand what a PE means. If I look at a company and they got a 10pe in their bank, well, that's great. That's pretty much where it should be. But if I'm looking at a high-growth company with terrific fundamentals, amazing profit margins, and sort of a oldesh trajectory, and it's a 10pe might be an opportunity.A PE is an industry-based metric. So, you have to understand which industry you're looking at here. So, that's part of the deal here, understanding each industry's standard of PE and then comparing it to your company because it's a relative thing. You have to understand if your company is expensive or cheap compared to the industry. PE on a standalone basis, as well as price to sales, are absolutely meaningless. And obviously, as an investor, you want to see lower PE than usual and lower price to sales as usual. It's not hard to buy a company that everybody knows about. Nvidia is one example with a PE of whatever gazillion, right? It's a great company, but the PE is so high that you see that is overhyped and pretty much overbought. It doesn't mean that Nvidia is a bad investment. It just means that you have to figure out what are the hidden gems here. you cannot go all in 100 percent Nvidia, you need other stocks as well, same thing for Tesla. You have to have a diversified portfolio and you can find five or six or even 10 companies that are great, but what about the rest? Now, here's the important part. Once you're done with these three processes, you have to understand that the PE or PS, it doesn't matter. The balance sheet, it doesn't matter. And the business model, it doesn't matter. On a standalone basis; These three categories of examining a company are meaningless. You have to take a look at this from a holistic point of view. All of these have to combine into one analysis that tells you if this company is for you or not. If you see a company with a great ratio but a bad business model, and the one thing I want to explain here is that you have to balance this out every quarter. Every quarter, you go in and you compare your analysis, your thesis about the company to the previous quarter. Because you have to make sure that the companies that are in your stable, nothing has changed from a fundamental perspective, that your thesis has not been shattered. And that has to be done every quarter or every time something happens that justifies you taking a look again at the company. Because all of a sudden, if major issues have changed with the company and the fundamentals are not as good, you have to adjust. And if that happens, if your thesis is no longer there, that company has to go. It cannot stay in your portfolio. But about how to buy, how to sell, how much to buy, how much to sell, that's the next stage. Now, I don't know how many of you actually do a budget right now, I suggest all of you start it today. Now, comment below if you currently have a budget or don't have a budget for your household or yourself. I want to know! I'm guessing 50 percent of you do not currently manage a budget, and that's horrible. When I was working for Deloitte for 10 years as a senior manager, the things that I saw, that even millionaires, company owners, CEOs, people who were insanely rich, one thing in common for all of them, they all had a budget for every single dollar they spent. The most successful people I met always knew exactly how much money they got in the pocket, how much money they're spending, to the dollar, in fact, to the cent. And here's a quick tip on how to build your budget in five seconds. Basically, you make a table. In that table, you add in all your income, after-tax dollars. So, after you pay tax on these dollars, how much you have from your salary, from whatever, right? You subtract your expenses. You have fixed expenses like a mortgage or rent, and you have variable expenses, such as food, entertainment, travel, whatever. And then, at the end of the day, you have an amount that's the remainder amount. That amount you use, number one, hopefully to repay debt. Number one, you repay all your debts except a mortgage. A mortgage, I'm willing to accept and Ben Ramsey, right over here right? But accept the mortgage, everything has to be repaid. I don't want you to invest money in the stock market before you've paid your expensive credit card debt.
Simply,
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So, once you've zeroed out your credit card debt and it's gone, then you allocate it to three things. Number one, savings. You have to have savings, especially now with high-yield savings accounts. Make sure that they're FDIC insured. You can get 4% in savings accounts right now. Number two, emergency fund. Six months' worth of living. So, these two things get filled up before investing. After you've done those, then you start putting money in the stock market. And that remaining amount, whatever it is, goes into your portfolio based on your allocation. But how much of it? Here's the tricky part. So, the way we do it and what we teach on our Patreon page at patreon.com/TomNash, more on that at the end of the video for those who are interested to learn, this is our system. Our system is very simple. Whatever the amount is left, let's say the amount we have left right now is $3,000, right? Cool. How do we invest this $3,000? Now, I already told you what your allocation should be based on your age, right? so I know that, 20 percent is in bonds 40 percent in growth 40 percent in value just for the example right, But wait. We're going to use a DCA method, a DCA meaning dollar-cost averaging, meaning we're going to buy the same amount every single month, regardless of the price of the share, regardless of the market, regardless of everything. Fixed amount buying every single month into good companies. Remember stage one, we selected our good companies, and now we're buying a fixed amount. We're allocating $3,000. The only thing is, you're allocating $1,500, unless what happens unless we go below the threshold line. Now, here's the thing. You want to keep half of the money as powder on the side. So, when you're dollar-cost averaging, you're dollar-cost averaging with half your money. Half your money, half your money, and half your money stays on the side. Why? Because when a stock from your stable goes below the threshold line, that is where you actually start to double; take money from your powder. And then you go and you double. For example, we have $3,000, and now we're going to put $1,500 to the side. And $1,500 every month, we're going to invest. So, that $1,500 over ten stocks, right? We know the number is a hundred dollars!, sorry!!, $150 per stock right $150 per stock, and now we buy, and we buy. And all of a sudden, one stock booms, it hits the threshold. What is that threshold? That threshold is 10 percent below the 52-week high. For example Tesla has a 52 week high of $317, the moment Tesla goes below $280 it is within that threshold, so now we take money from our dry powder, which we saved on the side, and now Tesla is getting bought at $300 a month not $150 and we keep buying $300 per month on Tesla, and any other company that's within the threshold as long as it stays there. The moment it goes above the threshold, inside that range of 10 percent from the 52-week high which means in the case of Tesla $280 and above we go back, we put the money to the side and we keep buying at $150. That system of buying more when the company is below and buying less when it rises creates a weighted average for your cost basis in the company. And that ensures that in three years, when you take a look at your cost basis in this company, your cost basis is going to be way closer to the bottom of the stock in that time period than to the top.
To Simplify:
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You're cheating the system. You're creating a cost basis that's almost very, very close to the bottom without timing the market, without emotions, without anxiety, without panic, without FOMO, without nothing. It works every time, and that's what we teach. But the problem is that it only works, "it only works" if you selected the right companies. If you screwed up stage one and you've selected bad companies, this whole system is meaningless. This whole system only works if you actually selected the good companies. And this is what I want to finish the video with. If you want to learn how to select good companies, by learning how to become a better company evaluator, how to do a proper due diligence on a company, financial due diligence, business due diligence, how to put an objective value on the company and not screw it up, and have an idea of how to accumulate good companies inside your portfolio, join our Patreon page at patreon.com/TomNash. We just launched Tom's Academy. This is what we teach you. We teach you how to run your own DCF, how to use multiples, how to create a better process, a discipline, a system, a methodical thing which you can repeat time and time and time again without emotions, without fear, without panic, and duplicate it so that most of your stocks, not every stock, but most of your stocks in the portfolio will be good choices. So that your DCA actually means something at the end of the day. Now, if, again, patreon.com/TomNash, 30 days you get to try for 30 days. If you're not happy with my stuff, get a refund. No questions asked. That's how I'm confident in my content, and that's how I'm confident in my Patreon page. And I hope this video helped you, even if you don't join my Patreon. That's fine. Comment below, let me answer some questions. Comment below with what you want to hear about more, what you didn't understand, what you want me to expand on. I'm going to engage with questions on this video more than ever. So, comment below anything you want to know about this process, about the system, and I'm going to answer it right away in the next couple of days. Thank you so much for your attention. I love you all. I love my patreons. I love my viewers, even my haters. See you on next video.
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