This guide distills a year’s worth of research into the latest strategies for mastering investment techniques.
This guide is crafted or both novice and experienced investors. While it’s particularly valuable for beginners, intermediates will also find a wealth of science-backed insights.
I put this guide together because much of the common investment advice is either superficial or misleading. I understand why this happens — many of the facts I’m sharing haven’t been widely published outside of the financial literature.
In this guide, you’ll find that it challenges several popular investment myths. For example, it addresses the misconception that high-risk stocks are the only path to high returns, the belief that you should frequently adjust your portfolio to chase short-term gains, and the idea that market timing is the key to success.
What makes this guide stand out is its foundation in cutting-edge, research-driven strategies. I’ll walk you through how to assess your investments critically and measure your progress to ensure you’re making informed decisions.
We’ll learn what the research says about:
1. Investment Bubble History
2. Industry Lifecycles
3. P/E Ratio Myths
4.Value vs. Growth Investing
5. Combining Analyses
6. Expert Strategies
7. Risk vs. Reward
8.Market Sentiment
These points promise fresh, actionable insights that will keep you engaged and informed.If you’re starting from scratch or looking to refine your approach, you can make substantial improvements in your investment strategy by diligently following the research-based methods outlined here. While returns will vary, the principles you’ll learn can set you on a path to smarter investing.
Inspired? Good.
Oh, and I have nothing to sell you. This GUIDE is free. There’s no promotion.
let’s begin.
Part 1:
ChatGPT hit 100 million users in less than three months. That’s a blink of an eye in the tech world. TikTok, the app that keeps you up at night, took almost nine months. Instagram, the app that doesn’t let you live, took 30 months.
Then suddenly, the world turned around and said,
“Wow, what is this? This artificial intelligence thing seems real! It seems like the future! Get in now, invest, invest! Throw your money into it and watch it double! It’s clear AI is about to create an information revolution, just like the Internet did!”
Investors jumped at the chance. Microsoft dropped a staggering $10 billion into OpenAI, the company behind ChatGPT. Now, OpenAI is valued at $30 billion!
And right there, the frenzy began in the world of investments and companies.
BuzzFeed announced in January 2023 that it would start using AI to generate a significant chunk of its content, causing its stock to surge by 150%. Suddenly, every company was claiming to be an AI company or, at the very least, using AI in everything they did.
The spike is dramatic, reflecting a surge of investment. Nvidia’s stock has soared over 400% with a single day’s increase in market value of $184 billion.
talking about billions and 400% returns has got me thinking about investing. Ben , I’m going to put my money into AI companies and ride this wave. I’ll make 400% just like Nvidia did from the AI revolution, or 13,000%, just like Tesla did from the electric car revolution, or 204,000%, just like Amazon did from the Internet revolution. I want to be rich, Ben, and make some serious money!”
this idea you have, my friend, it’s one of the biggest misconceptions in investing. It’s a common mistake, and let me tell you why.
In a famous speech by Warren Buffett. He spoke about how the car industry was a revolutionary and incredibly important industry, one that changed the world back then, and still today. Cities, my friend, they’re designed around cars. The size and shape of streets, all of it is based on the size of cars, not on your size.
Warren Buffett says that if you were in America in the 1920s, during this industrial boom, there were more than 2,000 car companies in America. If you were as excited as you are now, and invested in this great industry, which indeed, my friend, did change the world, you would have gone broke.
My friend, this is a well-known phenomenon in the world of investing, not just in cars.
We saw it in the 18th century, when the English were obsessed with digging canals for boats to pass through. They invested, poured their attention, and it all went into that industry.
Then, there was a bubble, and then a collapse.
We saw it again, when the English were obsessed with railways in the 19th century. They invested, poured their attention,
then, there was a bubble, and then a collapse.
We saw it in America in the late nineties, when the whole world was obsessed with small internet companies that were going to change the shape of the world. They invested, poured their attention,
and then, we saw a bubble, and then a collapse.
This, my friend, by the way, is the collapse that Warren Buffett was predicting in 1999. The collapse we know as the “dot-com bubble.” When we look at companies like Pets.com, its market value dropped from $300 million to zero.
At that time, there was a large, well-known, influential, and important company in the world today, its name is Amazon, and back then, it lost 95% of its market value. 95%, my friend! Today, Amazon is worth more than a trillion dollars.
Even the Nasdaq index, which includes the most important technology companies, it lost more than 70% of its value.
Here we are again, my friend, talking about very important industries.
The building of canals, where boats move, it’s an important industry. The building of trains that connect cities and create trade, it’s an important industry. The Internet, which connects the world together, making knowledge accessible and widespread, it’s an important industry.
These aren’t false bubbles,
“Don’t be lured by important industries that everyone knows are important now.”
In the words of Jeremy Siegel, a professor of finance at the Wharton School, University of Pennsylvania, one of the most important business schools in the world, competing with Harvard.
This man says in his book, “Stocks for The Long Run,” that actually, if you invest in a dying industry, you can make more money.
- “Seriously, Ben ?”
- According to what he said, yes. Let me explain with an example, my friend.
Railroad companies were once the giants of the S&P 500 index, the index that includes the biggest and best 500 companies in America. They made up 63% of it. 63% of the 500 largest companies in America were tied to railroads.
That number kept dropping, my friend, until it reached just 1% in 2019.
By all definitions, my friend, this is a vanishing industry.
From 63% early last century, to 1%.
If you, my friend, had invested in the railroad industry, you would have made more money than if you had invested in air travel, which was a breakthrough, my friend. Imagine getting on a plane, closing your eyes, and within hours, you’re on the other side of the Earth. This is a breakthrough your ancestors never dreamed of. Not only that, if you had invested in these railroad companies, you would have made more money than if you had invested in the entire S&P 500.
“Ben , it feels like you’re just trying to stir up controversy with opinions that go against the grain.”
Let me, my friend, give you another example, because I feel you don’t believe me.
Let me ask you a question, my friend. If we went back to 1971, and I asked you, would you put your money in software companies, or would you put your money in oil companies? What would you choose?
“Of course, Ben , I’d choose the software industry, because it’s an advanced industry that will truly change the world, and electric vehicles will replace the need for oil.”
Let me surprise you, my friend, and tell you that if you had put a dollar… into software companies in 1971, you’d have gotten back $74 in 2019.
“I was right, Ben !” — It’s profitable, !
- Hold on, my friend. If you, my friend, had put that same dollar into oil companies, that America and China don’t love, nor does the world, or the environment you would have gotten back $92.
This is by pure math, my friend, not by my opinion. If you had invested in oil companies, you would have made more money than if you had invested in software companies.
Why is that, my friend?
Why, despite all the enthusiasm about technological revolutions, does investing in outdated industries sometimes yield more money?
The reason is, my friend, that the competition is fewer.
When an industry is on the decline, the number of companies decreases, the competition becomes less fierce, and it becomes easier for the remaining companies to make a profit.
On the contrary, in emerging and booming industries, the competition is intense, and only a few companies survive, while most companies end up failing. The ones that do succeed, like Amazon, do so after going through very difficult phases,and even then, it takes a long time for them to become profitable.
That’s why, my friend, the common belief that investing in emerging industries is a guaranteed way to make money is a misconception. It’s not about the industry itself,
but about the specific companies you choose to invest in. And this, my friend, is the most important lesson in investing:
it’s not about following the hype, but about doing your research and making informed decisions.
This way, you’ll avoid the traps that many fall into and increase your chances of success.
So, my friend, before you rush to invest in AI or any other emerging industry, take a step back, do your homework,
and remember that sometimes, the less glamorous industries can offer better returns. People were investing left and right to find renewable energy sources. If you had invested in this miserable, late-stage industry, your dollar would have turned into $134 by 2019.
That’s almost double the return you would have gotten from software.
What I’m telling you, my friend, conveys a very, very important lesson. Successful investment does not necessarily mean choosing the highest value option.If you buy at a price higher than its value, you will lose. And if you buy at a price lower than its value, you will gain.
So yes, the software industry is important, beautiful, and revolutionary. But its price will likely be high,
because everyone knows it’s important, beautiful, and revolutionary. Therefore, its price is higher than its true value. On the other hand, industries like petroleum,
which people dislike and often ignore, usually have prices lower than their real value.
If you buy in, you’ll likely earn from it.
Part 2:
Now Let me explain how you can invest to grow your money.
The first scenario is to you buy an index. The S&P 500 index,
In this type of investment, you buy an ETF — a fund that contains many companies. This is called passive investing. You don’t need to sit and choose companies or manage anything.
Just buy an ETF, let it grow over time, and it’s done without much effort. Most experts recommend this: invest in an index, put your money in, and check it after 20 years.
The second scenario, my friend, is to give your money to someone knowledgeable who has the ability to manage it well. Someone like Warren Buffett, who is very smart in finding companies that are worth more than their price. He buys these companies and lets them grow at their own pace.
This man has increased his money by an average of 20% every year for over 60 years.
If you want to invest with Warren Buffett, you can buy Berkshire Hathaway stock. By doing so, you’ll share in his profits,
In scenarios like Warren Buffett’s, you rely on giving your money to someone who knows what they’re doing. This person or institution might be so skilled that they continue making money even when the market is down. The stock could be declining, but their numbers remain solid and unaffected because they likely bought companies at their lowest prices, preventing further decline.
A smart investor would understand this and make the right decisions, allowing them to be less impacted by market downturns.
Take, for example, Stanley Druckenmiller,
a famous investor who, for almost 30 years, has grown his capital by an average of 30% per year. His wealth has never decreased in any given year, always ending on a positive note.
This is a scenario where you give your money to someone knowledgeable. However, there’s a third scenario:
you could invest your money yourself, hoping to earn more than the S&P 500.
While most people agree that passive investing is the right approach, there are some respectable opinions suggesting otherwise.
One of these people is Dr. Mohamed El-Erian, the Head of Queens’ College at the University of Cambridge and an economic advisor to Allianz.
Dr. Mohamed El-Erian believes it’s not the best time to buy the index and earn well in the coming period. He sees the next era as one of “smart money,” where intelligent investors move money to places that deserve investment.
Another person with the same opinion is Seth Klarman.
one of the world’s most important investors, managing over $29 billion. He wrote a very important book called “Margin of Safety.” Let me tell you that the most important thing to know about Klarman is that Warren Buffett — the greatest investor in history — says that if he ever retires, Seth Klarman is one of three people in the world he’d trust to manage his money.
What I want to say is that Klarman’s opinions are worth paying attention to. He has expressed opposition to the idea of passive investing many times.
Additionally, we’ve seen reports from companies like JP Morgan, Vanguard, and UPS suggesting that the S&P 500 may not deliver the 10% returns it historically has.
“Why do they say that, Ben? Do they have any inside information, or is this just personal judgment?”
As I mentioned, there’s a lot of controversy surrounding this topic. Some people believe in continuing with passive investing, while others say, “No, it’s time to stop.”
One reason some argue against continuing with passive investing is that companies in the U.S. market are very expensive.
“How expensive, Ben?
It’s not that simple. The easiest way to determine if a company is expensive is by looking at a specific ratio called the P/E Ratio. This stands for Price to Earnings ratio. It’s the company’s price divided by its profits.
Example:
- Suppose a company has a market price of $100 per share.
- The company’s EPS is $5.
- P/E Ratio = $100 (Market Price per Share) / $5 (EPS) = 20
This means the company’s stock is trading at 20 times its earnings.
If we took all the companies in the S&P 500 and divided their values by their profits to find the overall P/E ratio of the S&P 500, it would be 28.
“Is that expensive or cheap, ben ? So I know how to react.”
This is considered very expensive by some. If you compare this number with the rest of the world, you’ll see how high it is.
For example, in China, the P/E ratio of companies is about 8. In Qatar, it’s 11, and in Egypt, it’s 10.
Not only that, if we compare the current P/E ratio of the U.S. market to its historical average, we find that it has been around 15. Over the last 15 years, it’s been roughly 19. Now that it’s reached 28, it means the market is extremely expensive.
A P/E ratio of 28 means it would take 28 years of pooling all corporate profits to return the value of your investment. That’s a very long time.
Today, when you buy an apartment for a million and rent it out for 10,000 pounds, it returns the value of your investment in about 8 years.
According to some analysts, this makes the U.S. market very high-priced. Yes, the American market is growing with AI developments, but it also means the risk is higher.
The same goes for the Indian market, which has a P/E ratio of around 24 or 25.
this is oversimplified explanation when dealing with tons of money.
The P/E ratio, though, can give us a basic idea of whether the companies we look at or invest in are expensive or not.
“Ben , I have a genius idea.”
“What is it, my friend?”
“We should sniff around for companies with low P/E ratios. For example, if a company has a P/E of 1, it means the company’s profits will match its price in one year, so I’d double my money. Who’s Mohamed El-Erian now?”
That’s a good thought. But honestly, investing your money yourself can be a bit reckless, and choosing companies solely based on a very low P/E ratio is even more so. Again, I repeat my advice: the best thing to do is put your money in an index or a portfolio, as we discussed , or give your money to someone who knows what they’re doing. If you want to take on more risk to potentially maximize your profit — remember, there are risks involved, of course.
part 3:
Now let me take you on a simple little tour into the world of Valuation Science.
This is the science of evaluating companies to determine whether their price is higher or lower than their actual value.
It’s like understanding what they discuss on Shark Tank.
One important thing to understand, my friend, is that shares represent your right to a company’s future profits. When you buy a stock, you’re essentially buying future money. The trick here is to buy this future money at a price lower than its real value. In other words, buy a pound for 50 cents. If you buy a pound for a pound, what’s the point?
“Ben , don’t worry about me. When I invest in companies, I’ll choose large, well-known companies like Apple, Microsoft, and so on.”
Of course, my friend, that’s a good choice. But to make money, you must be right when others are wrong. For you to buy a stock, someone else must be willing to sell. If you profit from the stock you bought, then the person who sold it must lose. Your profits, in one way or another, are someone else’s losses.
That’s why Warren Buffett has a famous saying: “Be greedy when others are fearful, and fearful when others are greedy.”
If everyone agrees that a company is good and profitable, everyone will buy it, raising its price. So when you go to buy it, it’ll be expensive. As we said before, if what you buy is more expensive than its value, you can never profit from it.
Professor Aswath Damodaran, who teaches Valuation at NYU,
says that any business in the world can earn you money as long as you buy it at a price lower than its value.
“Any business, Ben ?”
Yes, any business, according to him.
“Okay, Ben, I know what I’ll do. I’ll look for companies with a low P/E ratio because they are cheap, and all investors are trying to sell them. So I’ll be right while everyone else is wrong. I’ll be the greedy one when everyone else is afraid!”
Well, my friend, you might be right. The idea you’re suggesting has some merit for several historical and philosophical reasons.
For example, if we look at the period from 1966 to 1982, the Dow Jones Index remained almost unchanged. The price of this index reflects the prices of the companies it represents, so it gives a snapshot of the economy.
This index was stable for about 16 years. So, if you had invested 1,000 pounds at the beginning of this period, after 16 years, you’d still have 1,000 pounds.
But, according to Sven Karlin, if you had invested 1,000 pounds in companies with a low P/E ratio during those 16 years, you could have multiplied your money by 10.
Imagine that! The market was stagnant, but because you invested in cheap companies based on the P/E ratio, your money could have grown tenfold.
The P/E ratio reflects investors’ perceptions. A low P/E ratio means investors believe that this company will not be able to increase its profits significantly.
The philosophical advantage here is that in life, the lower your expectations, the better your opportunities. Excessive pessimism is often necessary for optimism.
If I take you to a restaurant and say, “You will eat the best fish of your life,” and the meal doesn’t meet that expectation, you’ll be disappointed. But if I tell you that we’re going to meet someone annoying, not funny, and pessimistic, and you find them to be a normal person, you’ll be pleasantly surprised.
Similarly, companies with a low P/E ratio are those with low expectations. When they exceed these expectations, it can be a pleasant surprise, and their value remains low because they’re undervalued.
This method of investing is known as Value Investing. Value Investors buy companies that are undervalued and invest in them, believing they’ll eventually be worth more.
Value Investors are always concerned with risk.
Ray Dalio, who heads one of the largest investment institutions in the world, says the most important thing for an investor to think about is risk.
If you lose 50% of your investment, you need a 100% gain just to get back to where you started.
That’s why Warren Buffett’s first rule is to avoid losing money.
This Value Investing school tries to minimize risk by buying undervalued assets.
There are, of course, critics of this method. Some argue that if a company’s P/E ratio is low, it might indicate that the company is struggling and won’t be able to grow its profits to justify its price in the future. So why invest in a company that might go bankrupt or only preserve your money without growing it?
In the last 10 to 15 years, we’ve seen a shift. Companies known as Growth Stocks, which grow rapidly, often have very high P/E ratios. But they can increase their capital more quickly than Value companies. In recent years, Growth investors have made more money than Value investors.
Companies like NVIDIA, Tesla, and others have increased their capital by more than 20% per year, while the stable companies that Value Investors love have only increased their capital by about 9% per year.
The debate between the two philosophies is fierce. But historically, Value Stocks — companies with lower P/E ratios — have outperformed companies with high P/E ratios. This is a historical fact. Whether it will stand the test of time, we don’t know. The world is ever-changing.
“Okay, Ben, I’m confused. Should I go with Value or Growth? What should I do?”
Honestly, my friend, these are just labels. If you want to invest yourself, you need to study your companies well and put in the required effort.
Of course, it’s important to look at things like the P/E ratio.
Aswath Damodaran, the NYU professor, says that Valuation is not just a number. It’s never enough to look at numbers like the P/E ratio or anything else and just buy.
To be a smart investor, you need to do what’s called Fundamental Analysis. This means studying the foundations of a company:
how much it spends, how much it earns, how much it invests, and how it distributes profits. What are its assets, and what are its debts?
This is quantitative analysis — analyzing the company’s numbers.
Then there’s qualitative analysis, where you learn about the company’s competitors, what distinguishes it from them, who owns the company, and whether they still hold shares or have sold them.
For instance, if someone within the company starts selling a lot of shares, it could be a warning sign.
Qualitative analysis is crucial because a company might have a high P/E ratio, but this could be justified if it’s a small company with the potential to grow its profits exponentially every year.
For example, if a company has a valuation of 100 million and a profit of 1 million, the P/E ratio is 100. The question is whether this company is expensive or not.
“Of course it’s expensive.”
However, sometimes this information isn’t enough. If the company is small, does something unique, and is expected to grow its profits by 500% annually, then it’s actually a cheap company. Buy it! Next year, it might make 5 million in profit, and the following year, 25 million. After two years, if the price remains the same, the P/E ratio will be 4. Next year’s P/E ratio, if the price remains unchanged, will be 20. The following year, it will be 5.
At that point, it’s a cheap company. Buy!
That’s why it’s essential to understand the story behind a business and do qualitative analysis.
my friend, there are some important websites like Yahoo Finance, Seeking Alpha, and Morningstar. Through these sites, you can find news and analyses about companies. You can understand a specific industry, see how companies operate within it, and figure out who is profiting from whom.
Remember, my friend, companies are not antiques. They are productive assets — shares that give you ownership in future profits. You need to have a good understanding of how your investment will generate profits and allow you to recoup your investment and more in the future.
Keep in mind the immortal words of Warren Buffett: “It is very important that the price you pay is less than the value you will receive, or at the very least, equal to it.”
Investment is vital not just for individuals but also for the economy. If you save money in gold, dollars, or Bitcoin, you are not helping production. But if you invest in the stock market and buy shares in companies, your money finances industries — industries that employ local workers and possibly export goods abroad.
So, my friend, investment is important for you on both an individual level and an economic level. To make a sound investment,
you need to understand the company you’re investing in.
You need to understand the business that you are literally becoming a partner in.
And that is it , my friend
