Cartoons are way smarter than you probably think they are. You can learn from about almost any topic by watching them, if you pay attention. And investing through an online broker is not the exception. In fact, here are 10 lessons about investing you can take away from watching cartoons:
1. Investing for the long term pays off
For those of you who are not familiar with Futurama, it's a cartoon about a pizza delivery boy who is frozen for 1000 years. The show is also teaching one of the most powerful phenomenon when it comes to investing : compound interest (or compound return when we talk about the stock market). In one episode, Fry is surprised to learn he is a billionaire, as he left 93 cents in his bank account a thousand years ago. Had he left the same amount in a S&P 500 ETF, assuming a yearly return of 9,8% (the average annual return of the index since 1928), Fry would have been much much much more than a billionaire. He would actually be worth an amount I can't even qualify : $37,224,001,980,093,649,409,108,848,752,883,904,020,480
2. Don’t trust investment advice from people who are trying to sell you something
When a financial advisor is telling you about an investment opportunity, he should tell you specifically why the fund or the stock he's recommending will provide you with a hefty return. If he's telling you how smart the portfolio manager behind the fund is, how the CEO of the company has been successful in the past or how his other clients are getting richer thanks to his advice, beware! When investing, always keep in mind that past returns are not indicative of future performance.
3. Investing is all about calculating risk and reward
As you can see in the video below, Homer Simpson does not understand the risks of stock ownership. And that's very bad. The ability to evaluate risk is the single most important skill every self-directed investor must master. Everyone can pick winning stocks. And everyone will be wrong sometimes. Successful investors are not better than you, Homer or me at picking good companies. They're better at managing risk and they have the discipline of passing on great companies, over and over again, when the risk is too high. In other words, they're good at evaluating how much money they could lose if everything goes wrong. As a result, they pick investments with great potential… but limited downside. Homer, on the other hand, is obnubilated by the upside of Animotion, putting his life-savings in one stock that, he hopes, will be his ticket out of the”hellhole” he's currently living in.
4. Invest in companies you would buy from
You might not be an expert in finance, but chances are that you have some expertise that does not have most analysts on Wall Street and Bay Street. If you're a runner, you might understand something about Nike that would be hard to grasp for most analysts following the company. If you're a truck driver, you might understand something about Couche-Tard's business model that isn't obvious to the financial professionals that use the subway to get to work. It does not mean you should buy any company whose product you use, but it's a good place to start looking for investment opportunities.
5. Don’t be influenced by investment commercials
Ever wondered why investment commercials are never about risk adjusted returns, investment strategies or value added? They're never talking about their specific value proposition, because what they are doing is branding. They're trying to make their brand so recognizable that you would pay more to invest with them than with their competitor. At the end of the day, when making a decision about a fund or a wealth manager, you should look at what they are doing specifically, what is their track record, and most importantly, how much fees they're charging. Strangely, you often find few different ETFs tracking the exact same index, and their management fees varies a lot, which means that some ETFs providers get away with selling a commodity at higher price than their competitor, which should not happen in a market economy where all players are rational… But they know most people are not rational, and they invest in advertising accordingly…
6. Don’t invest in what you don’t understand
You're better off putting your money in a high-interest savings account than in a money market mutual fund, because the management fee will usually eat away its meager return… But that's not the point of this hilarious clip from South Park. The point is : DO NOT INVEST IN WHAT YOU DO NOT UNDERSTAND, even if the guy at the bank seems to know what he is doing. He might actually know what he is doing. Or he might not. In any case, no one care as much about your money than you do.
7. Don’t try to time the market
Homer is just like a lot of investors who are bullish on marijuana stocks, bitcoin or anything else they buy because it's going up fast and not because they're getting a good deal on an asset they're confident is valuable now, and will be even more valuable in the future. Like Homer, they think they're smart enough to time the market. They think: “Sure, it will probably go down at some point, but by that time, I'll already have sold at a profit, and those who bought it from me will be dealing with the burst of the bubble.” And a lot of people think this way, and buy in for those reasons, and it keeps going up and up an up, and then at some point, people that sold to cash in their profit, buy in again, because they're starting to think pumpkins value can only go up and up and up… And, of course, at some point, the Halloween is over, the music stops, and everyone who tried to time the market wake up with a hangover.
8. What goes up must come down and vice-versa
Even in 1000 years, this tragedy is likely to keep happening. Whenever there is a stock market crisis, the less fortunate investors tend to sell at the bottom of the curve. Those who are patient, and keep their shares and funds have generally been able to compensate for their losses after a few years. Those who have sold everything during the crisis have often never been able to compensate for the losses they have suffered. This is the case for a large number of retail investors who started investing in bullish periods, and who were not mentally prepared for the burst of dot-com bubble in 2000 or the subprime mortgage crisis in 200 … This will also be the case for those who started investing after 2008. And what would you do if your portfolio lost 30% of its value and if, every day, your portfolio would shrink more and more? Would you have nerves to keep your portfolio intact, and wait patiently for the recovery? One way not to be betrayed by your emotions is to better understand your portfolio, which you can do by downloading Hardbacon : https://itunes.apple.com/ca/app/hardbacon-invest-like-a-pro/id1313964435?mt=8
9. Invest in sectors that are growing
There are two ways to invest as a value investor. You can look for companies currently undervalued by the market. Or you can look for entire sectors or niche that are undervalued by the market. When hard facts such as demographics or a technological shift back up your hypothesis, you've probably got an investment opportunity among the companies in this niche or sector. We actually have a several lists of stocks and ETFs built around certain thesis in the “Explore” screen of the Hardbacon app.
10. Investing, unlike speculating, creates value for everyone
A lot of people have trouble understanding that investing money in the stock market is actually making the world a better place. In fact, many people, just like Sylvester in this clip, would rather spend the money they suddenly inherit from a family member than invest it. While the consumer society we live in might be to blame, there is also this misconception that it’s greedy to invest. Quite the contrary. Spending all your money or keeping it in a bank account is much more greedy, as such a choice will contribute to slower economic growth and unemployment. Investing provide capital to businesses who needs it to fuel their growth, and it creates value for everyone involved: for the business, for society and for the investors. On the other hand, pure speculation, like buying a commodity like oil, or a currency, is a zero sum game, which means that if you win, another speculator, or a business that actually need oil or a specific currency, will lose. So, if you want to make the world a better place, but don’t want investing to give you a headache, download Hardbacon.