Investing in Stocks: How to Get Started?

I'm not a financial advisor, but here's what I tell people when they ask me how to get started investing.

1) Get your finances in shape otherwise. Low debt (except mortgages), no credit card debt, build an emergency savings account of a few thousand dollars (in case of short-term, unexpected money needs like your car dies or you get laid off).

2) Open an on-line, discount brokerage account with anywhere from $1k-$5k that you could afford to lose in the short run. Stocks don't always go on a straight upward line like interest on a bank account. Even great companies go up and down in the short term, though over 5-7 year spans, good companies go up overall.

If you can afford to put this money away for decades without withdrawing it, you can open your brokerage account as an IRA account (Roth or Traditional), giving you decades of tax-free growth until you reach retirement.

3) Buy stocks in dollar quantities. $500 per stock is a good starter amount where a $5 trade commission is only 1% of your total investment. Don't worry about the number of shares. If $500 buys you 3 shares of ABC, that's fine. If $500 buys you 20 shares of XYZ, that's fine too. Lots of people believe you have to buy 100 shares at a time or you have to be rich to have a brokerage account, and that's not true anymore (it was true 30 years ago, but the idea persists).

4) Strive to add money to your portfolio account over time, buying new companies or adding to the ones you already own, in those same moderate-sized increments. 10-15 stocks in a diverse range of industries is a good goal for a new investor to reach after the first few years of investing. Don't put all your eggs in one basket (or all your money in one stock).

5) If you're still unsure of what you're doing, a good way to start investing is with a low-cost index fund, like an S&P 500 index fund.

Want More Details?

Nerdwallet has a good guide to getting started. The Motley Fool also has a good guide to the basics. Both sites are credible sources for new investors.

Should You "Buy in Thirds"?

Let's say you want to invest in a company. Should you buy now? Should you wait for a correction? Will that correction ever come? What if the stock goes way up tomorrow and never comes back to today's price, even with a correction? I don't know the answers.

Buying in Thirds is a way to shift some risk around. If you want to invest $1500 in a company, buy $500 worth of shares today, $500 more a few months from now, and $500 a few more months after that.

Risk is not created or destroyed, but spread around differently. You avoid some of the risk of buying now, only to see the price go down. But you gain some risk of not buying it all now, only to see the price go up later. If the price does go down, you can buy your next batch at the lower price. If the price does go up, well at least you got your foot in the door at the lower price.

You are adding "time diversification" to your portfolio by buying the same company at different prices over time, sort of (but not exactly) like dollar cost averaging.

If you are wavering over whether to buy or not, buying in thirds also helps you ease into your ownership position instead of having to make an all-or-none decision today. In the long run, repeated over many stocks over many years and through full market cycles, the risk and luck should even out.

Arguably, things also even out at the big-picture portfolio level if you buy every stock all at once, and there's debate among investors about whether "time diversification" is a fallacy. Buying in thirds can still be useful, even if you view it as mostly an effort to control your emotions and manage cognitive biases.

Secondly and equally importantly, depending on how much cash you have on hand and whether you're regularly adding cash to your portfolio, buying in thirds is a good way to slowly establish larger positions in stocks when you don't have all the cash up front. It's useful as a way to get stock diversification in your portfolio earlier in the process of portfolio building. Keep your "third" purchases big enough that your commissions don't end up as a significant part of the cost of the stocks though. If your brokerage charges $4.95 commissions now, you could buy my hypothetical $500 worth of a stock and the commission would only be 1%, which is reasonable to me (many people say 2% is fine too).

Here's another longer discussion about "buying in thirds" from Stock Market School.

Berkshire Hathaway vs. Markel vs. the S&P 500

Someone asked me today whether I thought investing in Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B) or the oft-compared "Baby Berkshire" Markel (NYSE: MKL) was a better investment than the S&P 500.

How do Berkshire Hathaway and Markel Differ?

Everyone calls Markel the "Baby Berkshire", but the two companies are quite different as investments today. Both are great companies to own, but for different reasons.

Berkshire Hathaway is a huge conglomerate, where the operating profits from the subsidiary companies (railroad, energy, trucking, chemicals, etc.) are now more important than the income from Berkshire's insurance companies' underwriting and stock investments. Berkshire wields the power to finance and profit from huge deals like they did with Kraft-Heinz.

Markel is in a much earlier stage. They have a few small subsidiary businesses, but Markel is still almost entirely dependent on insurance underwriting profits and portfolio investment profits. One hopes that they can grow to be as Berkshire over the next few decades, but it is not a sure thing. Markel, as a smaller company, has the advantage of the ability to buy meaningful stakes in a diverse assortment of companies without the complications of owning 10% or more of those company.

The Companies vs. the Index

Berkshire Hathaway and Markel are both one-part "active mutual fund". Berkshire's "fund" is managed by Warren Buffett (and to some extent these days, Ted Weschler and Todd Combs); Markel's "fund" is managed by the highly respected (though less well-known) Thomas Gayner. The investment portfolio is a more important part of Markel and a less important part of Berkshire, but because we're also talking about the business results/prospects of the insurance industry (for both) and the industrial and financial economy (for Berkshire), neither one is really comparable to a mutual fund or ETF.

So which one is "better" depends on what "better" means. If you want to try to beat the S&P and will still live a comfortable life if either Markel or Berkshire Hathaway strikes out, then the stocks are better. If you want to play it safer with that part of your portfolio and take risks elsewhere, the S&P 500 index might be better. Nobody but you can really say what's "best" for you.

What did I do?

I own both Berkshire Hathaway and Markel in my standard brokerage account. Neither one is more than 5% of that account. I pay a lot more attention to Berkshire Hathaway (I write a blog about it), so I personally feel comfortable owning a larger position in Berkshire Hathaway. I know less about Markel, but I know a lot of other very smart investors who have larger positions in Markel.

My much larger 401k account is 100% index funds (large cap, small cap, international, bonds). I automatically invest there with every paycheck and never think about it except when I get end-of-year reports. I love investing in stocks and talking about stocks, but in my total financial existence, index funds dwarf any single stock position that I might own. I am never buying any stock instead of index funds, always in addition to.

So Back to the Original Question...

Looking backwards, people have indeed gotten rich by putting huge portions of their fortunes in Buffett's hands. Maybe giving your money to Gayner today will play out the same way, maybe not. Can Weschler and Combs replace Buffett and continue his performance over the next few decades? Luck plays a bigger role than we like to admit in any investor's fortunes, and survivorship bias plays a big role in which investors we lionize.

Will Berkshire Hathaway in the future continue on its positive trajectory after Buffett leaves? Will Markel match or beat that trajectory or follow the path of a more average insurance company?

I don't know. I personally think Markel might have a higher potential upside, but also a higher potential downside. I think both have an above-average chance to do better than the S&P 500, but I can't say which will do better, so I hedge my bets and own them all.

Disclosure: I own positions in BRK.B, MKL, and an S&P 500 index fund. This post is my opinion and an explanation of how I invest. Your financial situation and investing goals may be different, so don't buy or sell any company mentioned here without further research or advice from an investment professional.

Michael Steele Lets His Kids Watch Netflix

Parents like Michael Steele have long fought the same battle with their children: how much (if any) TV to watch. At the center of the fight is the amount of commercials young children are exposed to. But now, companies like Netflix ($NFLX), Amazon.com ($AMZN), and Hulu have created a compromise solution for parents and their offspring: advertising-free streaming.

The battle for the hearts and minds of parents between the competitors has heated up this year, as I explained in this freelance story I wrote for The Motley Fool recently: Video Streaming Companies Fight to Win the Battle for Parents. Who will win in the end? Netflix, with its exclusive content deal with Disney? Amazon with its Viacom license? Or the newcomer to the fight, Hulu, with Jim Henson shows? The monetary size of these deals shows that parents are a lucrative market to win over in new age of streaming television.

Michael Steele Helps You Bet on "House Hunters"

Crown molding. Granite. Stainless steel. 

Around a year or two ago, we used to watch "House Hunters" and "House Hunters International" on HGTV a lot. Back when we were watching 2-3 episodes a week, we could pick the winning house 80% of the time with this simple formula:

Pick the house that's the most impractical for the couple involved. 

Oh, you're a young couple with a 6-month-old infant and two 16-year-old dogs? Odds are you'll pick the smallest house that's furthest from your jobs and is the most expensive, ignoring the toddler death-trap spiral staircase with no railings, because it has a fenced yard for your dogs. Besides, the house that was already child-proofed had that ugly paint color in the rec room and the house that was a half-mile from work didn't have stainless steel appliances or crown molding.

Corollary guide points to picking a winning house:

1. If a buyer bemoans the lack of granite counter-tops or stainless steel appliances in a particular house, they will not buy the house.  They will not factor in the cost of just replacing the counter-tops or appliances.
2. If a buyer has dogs, they will always favor any house with a fenced yard, regardless of all other factors.  They will not factor in the cost of putting up their own fence.
3. If a buyer initially says they want to be near their work, the beach, a nightlife district, etc., they will end up in the house furthest away.
4. On the International edition of the show, the house that is the least habitable and needs the most work has the best chance at being picked.  The buyers will see it as a blank slate for their remodeling dreams. Bonus points if it's so run-down that wild animals have taken up residence.