One of the first reactions people have when I told them I am an investor and I teach the basics somebody needs to have before become one, I hear very often this:

"It sounds very cool, but investing is not for me. I know a guy who tried it and lost all of his money."

When I hear such a sentence, I instantly know that this person's friend was not investing.

He was speculating.

And, although it looks like semantic, there is a huge difference between investing and speculating, and not knowing it is a surefire way to lose money on the financial market.

In this article, we will analyze the difference between investing and speculating and see how it can be useful for you.

Let's start!

Investing or Speculation?

What is a good definition of investing for you?

Take a few minutes to think about it.

(Please, really take a few minutes. That is the time where if this were a video, I would say “pause the video and think about it”.)

Ok, now let’s see what the Oxford Dictionary is saying about it:

How is that, close enough to what you thought was a good definition?
Well, now I have bad news for you: this definition of investing is wrong.

This definition puts on the same level a guy who is buying a lotto ticket and the one who is carefully analyzing a company before buying some of its shares.

To put it simply, it considers investing and speculation the same thing.

Look what happens when, on the same dictionary, I look at the meaning of speculation:

So, for the Oxford dictionary, investing and speculating are almost synonyms.

In the case of speculation, it puts an emphasis on the losses, while when investing on the gains, but that’s it.

This is the first reason because people lose so much money on the financial markets.

They think they are investing in some products where the risks are visible and under control, only to find out that they were speculating and putting too much of their capital at risk for no good reason.

That's why it's important to upgrade the definition of investing and differentiate it clearly from speculation.

Here is one definition I like:

Investing is a process that protects and grows your net worth over time so that you can reach your financial goals and sleep well at night.

As you can see, the definition got a bit more complex than it was before.

I added a few keys concepts:

  • Investing is a process: it’s not about getting lucky once, it’s consistently doing the right thing (or at least trying);
  • Investing is about protecting your net worth in the first place. First, you play defense, then you can focus on offense;
  • Investing is about finding the right level of risk for you, and avoid to be ruined at all costs;
  • Investing is about having a long term perspective, and not trying to make a quick buck out of it.

If you are not sure if you have been investing or speculating so far in your life, I prepared a table which shows the main differences between the two of them.

And the best part?

If you have the right investing process in place, the chances of losing money are going down, almost to zero.

I said "almost" because there will always be timeframes when some of your investments will be down in value.

But with the right investing strategy you will be able to endure (or even take advantage) of these situation while sleeping well at night.

And, at the end, you will have more money that you started with.

Want to know more about it?

Have a look at my free workshops for individual clients and, if you are interested, get in touch!

Have you ever wondered who an investor really is?

The simplest definition I found is "somebody who invests his/her money".

However, this definition doesn't take into consideration many important traits that can define an investor.

Based on my experience, there are 5 psychological traits that you need to develop and nurture if you want to be a successful investor.

The most successful investors in the world possess them and they can also be developed by a non-professional investor.

These 5 traits are:

  • Curiosity
  • Flexibility
  • Probabilistic thinking
  • Self-control
  • Risk management

Let's see them in more detail.

1. Curiosity

In the last years, I listened to a lot of financial podcasts where great investors were interviewed.

I read financial papers and financial books which were studying in detail the best investors of the last 50 years and I noticed that all these people are (or were) curious.

I couldn't find one that wasn't always looking for more information to absorb.

For example, Charlie Munger, Warren Buffett's legendary partner, has been described by his own sons as a living book.

Warren Buffett himself is no exception.

He gave a well-known piece of advice for those who want to become like him.

Read 500 pages a day of financial reports and trade journals, and do that for many years.

Ray Dalio, another investing legend, often talks about curiosity as one of the weapons that allowed him to succeed.

The (few) investors who managed to get great results in the financial markets are people who love to read, study, and absorb knowledge, not only investing-related.

They talk to people in different fields and try to understand new things.

Having a good knowledge of the investment world will give you everything you need to invest profitably.

However, if you want to take your understanding to the next level, you need to become curious about everything related to the business world.

Every time you buy a product as a consumer, ask yourself, "How is this company making money?

You'll discover that it's not always so obvious and you'll learn a lot of interesting things along the way.

For example, did you know that cinemas make a lot more money on popcorn than on the tickets?

There is also another way to feed your curiosity: read a lot.

As Charlie Munger says:

I've never met a wise person who didn't read a lot. None.

Reading provides you with a pair of glasses that allow you to see the world from different perspectives.

It is also magic, because it can become a microscope or a telescope according to what you need in a given moment.

Reading a bit of everything will help you develop a broad, yet unique knowledge, that will allow you to see investment opportunities invisible to the rest of us.

If you want to start from investing, here is a list of books I personally curated on this topic.

And to feed your curiosity even more, do not stop only to a subject that interests you.

The biggest investors have borrowed ideas from other disciplines (such as physics and psychology) to apply them to their investment strategies and obtain extraordinary results.

That's what I keep doing in Simplinvest during my workshops.

I mix psychology, statistics, economy, and sociology to help you gather the necessary knowledge to invest your money with confidence (and in the right products, too).

2. Flexibility

When I was a child, I read a story about a bamboo and an oak.

The bamboo bent at every wind blow, while the oak stood solid and well-planted.

One day a strong storm came and destroyed the oak, but it couldn't do the same with the bamboo.

It saved itself by bending over and avoiding the worst part of the storm.

This story is a perfect example of flexibility, one of the most important qualities for an investor.

If you've already read some of my posts on my free Facebook Group, probably a question popped out in your head.

"But why? You keep saying not to change your investment strategy, even during the most critical conditions, and now you change your mind?"

Actually, you can be flexible and have a strategy to follow continuously.

Let me explain it better.

Imagine having an investment plan on a well-diversified ETF that invests in stocks.

If this fund should lose value (due to a global recession) your investment strategy shouldn't be changed.

A general market downturn can happen.
It is an event that was considered during the preparation of the strategy.

But if in a dystopian future shares become outlawed, there would no longer be any point in buying ETFs, unless you want to become a criminal.

I made an extreme example, I know, but it is to highlight an important concept.

When the conditions change, the final outcome of the decision you made can also change.

As the legendary investor Charlie Munger says:

When the facts change, I change my mind. What do you do?

You should apply this reasoning to your investing strategy.

Every time you make predictions, especially those which try to look into a very distant future, at some point you will have to make adjustments.

It is unavoidable.

Sometimes an external event could change your mind on how much you are willing to risk (like the Coronavirus), but very often there are less dramatic events that happen to you personally that force you to reconsider your choices.

Maybe an inheritance, or a career change.
Something very personal that impacts a lot your life.

If you have a well-defined investment plan and tomorrow morning you will receive a large sum of money from a relative that you don't even remember, the strategy you had until the day before is obsolete.

Now you have to look at it again and decide how to manage your new money.

Keeping a flexible mind allows you to take advantage of one of the basic principles of investing.

Earn even when you are wrong.

The reason why you decide to risk your money in the financial world is not to rub in your friends' faces how smart you were when you bought Netflix 10 years ago.

What you should want is to grow your capital and make the compound interest working for you.

That's why one of the questions you need to constantly ask yourself is:

"What would happen if I was wrong?"

Let me give you a practical example.

Over the past 200 years, stocks have been the engine of wealth in every financial portfolio.

They were the best performing asset class.

However, there have been times (even long stretches that lasted several years) when stocks have done worse than bonds or gold.

And nobody knows when there will be another similar situation.

That is why investing 100% of your capital only in stocks (or at least in a specific asset) is very risky, especially from an emotional point of view.

When the stock market collapses and you own only stocks, it will be very difficult to continue to be optimistic and keep the necessary coolness.

Especially if many of your friends don't invest in stocks and right now are not losing even 1 cent.

That's why it's so important to build a well-diversified investment portfolio that can deliver results even when our beliefs like "equities are the engine of a portfolio" are tested.

Making money (or losing very little of it) even when you are wrong: this is the real advantage of flexibility.

To be as flexible as possible, however, you will have to do something very uncomfortable.

Look for new ideas and facts that go against what you think.

Let's be clear: "Go against what you think" does not necessarily mean something negative.

Imagine one of your goal is to buy a house that costs 300,000 € but you decide to wait.

After a couple of years you find another property, identical, that costs only 200,000 €, and you decide to buy it.

You have shown flexibility and you have also saved 100,000 € on such a big decision.

To exercise even more your flexibility muscle even more, try being a devil's advocate.

Take an idea of which you really believe it is true and defend…its opposite.

In this way you will be able to see nuances that at first glance you missed and understand the risks that you may have underestimated at first.

By using these tricks you will be able to develop more and more your flexibility, adapting your investment strategy to every possibility.

Let's move to item number 3, probabilistic thinking.

3. Probabilistic thinking

What does it really mean to invest?

Some might say that it is putting money into something today and expect to sell it tomorrow, at a higher price.

But this definition also includes speculation, so it is not the best one.

A better definition of what is an investment is the one given by Ben Graham, the master of Warren Buffett:

An investment is an operation that, after being carefully analyzed, offers a guarantee of the capital invested and an adequate return.

This definition may seem strange to you.

How is it possible to look for a capital guarantee, when one of the first condition to accept is that there is no guaranteed capital?

To solve this paradox I will bring in the third element of the successful investor: probabilistic thinking.

Probabilistic thinking is a kind of superpower that allows you to quantify the uncertainty, always present when you invest, and to find a way to deploy your money where the chances of success are greater.

Let's see a practical example.

Look at these two tables below:


In these two tables, you can see how many times the returns of the MSCI World and MSCI Europe index (two of the most used indexes for the stock markets) have been positive and how many times they have been negative.

As you can see, when the time horizon is limited (a few months and a year), the chances that the return is negative are quite high.

From 5 years onwards the chances of having a positive return increase dramatically, until you have a situation where, after 20 years, you have never lost money (at least according to the data of the last 50 years)

This is a very practical example of how to calculate the odds before making an investment.

Knowing this table, you can easily guess why investments in well-diversified ETFs must last at least 5 years.

This way, your odds of losing money are significantly lowered.

However, doing this kind of work is not enough.

To make the best use of probabilistic thinking you need to add another dimension: the magnitude of an event.

Let's see it in a practical example.

Imagine receiving this proposal: there is an investment that has a 99% chance of having a positive outcome and putting 2000 euros in your pocket and a 1% chance of losing 200,000.

Do you think this is a good deal?

Although it is very unlikely to go wrong, you are actually exposing yourself to a huge risk for no reason.

And you can see how dangerous this investment is by calculating its expected value.

The formula to use is very simple.

Just multiply the end result of the investment by the possibility that it will occur.

In this case:

2,000*0.99 - 200,000 *0.01 = 1,980 - 2,000 = - 20 euros

This value is negative because the small probability of it going wrong has a huge impact on your financial situation, compared to the positive probability.

Unfortunately, in the real world the odds are never so clear.

If you want to determine how risky is an investment, you have to make an estimation of the probability.

Here is a practical example, with an estimation of the probabilities that I made personally.

Imagine that an ETF that invests in the well-diversified MSCI World index seen above, has a 95% chance of having a return of 4% per year or more and a 5% chance of having a return of -2%/year (a very pessimistic scenario, since it has never occurred so far).

All of this assuming a time horizon of 10 years.

In this case, the expected return is 4*0.95- 2*0.05 = 3.8-0.1 = 3.7%.

Even if I used very pessimistic numbers (a 4% return per year, when the historical average was 7%) and a 5% chance of final negative returns, (which never happened before) the final result is still very positive.

Especially in an era of low rates like the one we live in nowadays.

(Note: These are data that I used for educational purposes, do not focus too much on the final number.
The main purpose of this exercise is to make you realize that even in a situation more negative than those that happened so far, the risk of losing by investing in stocks with the right time horizon is very low).

So, how can you apply the same reasoning to any future investment?

Follow this process:

  1. Look for as much historical data as possible on the investment you want to make;
  2. Using historical data, assign a % of success and failure to your investment (do not be afraid to be conservative);
  3. Calculate the expected return and decide if it is worth it, considering also the worst possible case

This process is not infallible but using it continuously you will avoid the biggest mistakes.

4. Composure and control

Why you want to invest?

I'm not talking about generic stuff like "having more money", but the deeper reasons why you want to do it.

For example:

  • A better future for you or your children.
  • Investing to get the money for the business plan that's been buzzing in your head during the last year
  • Buy you the house of your dreams

Knowing the real reasons why you invest is the first step that will allow you to acquire one of the most important superpowers to become a successful investor: self-control.

Many of the people I know invest without a specific reason.

They just want to make some extra money in the financial markets.

As soon as things get bad, they panic and sell, lose money, and swear they will never invest again.

Without a clear goal, they have given in to the first difficulty.

Those who invest by objectives (like all Simplinvest clients) know very well that each objective requires different financial instruments, depending on when and what needs to be achieved.

Using this approach, called Goal-Based Investing, you will have the self-control you need to manage your declines and know what to do in every situation.

5. Risk Management

Try to think back to the most beautiful and memorable moment in your life.

Maybe it was when you met your soul mate.

Maybe it was when a chain of events led you to your dream job.

Whatever you have in mind now, I'm sure you had to risk something to get it at some point.

And this brings us to the fifth point: risk in financial investments.

Risk is an unavoidable element in our lives, we can't eliminate it.

Even in the smallest and most harmless activities, there is a risk that something will go wrong… or it will be much better than expected.

For this reason, asking for 100% guaranteed capital and seeking total security makes no sense.

It does not exist.

In the financial world, by convention, the rate of return on government bonds is called "Risk-Free".

Yet if the state fails (like Argentina or Greece) it turns out that government bonds are also risky.

And the states that are more financially solid offer very low or negative returns.

Data from from 10/09/2020

Today more than ever, risk cannot be avoided when investing.

And it is even more important to understand how much risk you can take and how to do it in the best possible way.

All great investors have a risk control system in place.

Warren Buffett, for example, uses a margin of safety.

Before making an investment he makes an estimate of how much it might be worth in the future and then uses mathematical formulas to calculate the current value of the investment (also called intrinsic value).

If this value is much higher than the current price of the product in which he wants to invest, he buys it, otherwise he does nothing and waits for a better opportunity.

This is drastically reducing the chance of losing money.

Even if Buffett should have made some mistakes during the evaluation phase, for example been too optimistic, he will still have the possibility to earn something, even if he was wrong.

Other investors with more speculative styles, instead, use the stop-loss mechanism.

When certain conditions change, or the price falls below a pre-determined level, they decide to close their investment and preserve their capital.

These are just two examples of risk management, but they are not the best for a non-professional investor, especially if he is only buying ETFs.

In this case, it is much more important to determine what type of risk you want to take.

First, you must decide if you are willing to accept a total loss of the capital you are investing or not.

Understanding this is essential to understand how much money you are willing to invest in the most speculative way possible (it should never be a lot, anyway).

Once you have done this, you need to understand how much you are willing to see your investments' value fluctuate.

In this case, it is much better to think about absolute values rather than %.

Having a temporary loss of 50% of your invested capital may seem enormous.

But if you have invested 5,000 euros and your net worth is 300,000 euros, it shouldn't worry you very much.

When you have found the value of the temporary loss that you are willing to accept…test it!

A lot of people say they are very tolerant of risk when the financial markets go up and then sell out of fear when they go down.

The longest you invest, the more accurate you will be in predicting the level of fluctuation you are willing to tolerate.

And it will be easier for you to stay the course and continue to follow your investment plan, even when the situation looks critical.

How can you better manage the risks of investing?
Here are 2 ideas:

1.Have a designated amount of money dedicated to paying your bills for at least 6 months, including emergencies, and scheduled purchases.

It will help you stay calm when you see your investments swing dangerously.

  1. Rebalance your investments every year.

Rebalancing is a concept a bit more advanced and it could be scary for a non-professional investor.

In a nutshell, rebalancing means to divide your investment portfolio in % according to the different financial products you bought, and make sure that after a period of time (usually one year), the % are still the same.

If they are not the same (it's usually the case) you buy and sell accordingly, to go back to the same %.

In this way, you make sure that you are taking only the risk level that you are willing to tolerate.

And with this one, we finished for today.

It was a long article but you can use it as a reference to become a successful investor.

If you liked this article, remember to subscribe to my free newsletter (see below), where every Sunday I send some extra content about investing, including some very interesting links taken from carefully selected blogs and other sources.

If you look for a book that can teach you how to invest, you will quickly discover that there are gazillions of possibilities.

The biggest problem is that "investing" is a word that incorporates a lot of different disciplines.

Under this label you can find purely motivational texts, based on some general "believe in yourself" sauce.

Or the most exotic forms of trading with complicated financial products.

All these books are paired together with books written by Nobel Prize winners, or by extremely successful investors with a proven track record.

So, if somebody wants to start out, he (or she, of course) needs to figure out what is good from the bullshit.

If this is not complicated enough, there is another problem for somebody who wants to invest and lives in Europe.

The best books about investing are from the US, the most influential country when it comes to investing and finance.

This means that people living in the US have, on average, better financial products available for them (which usually are not available in Europe).

Fortunately, we made some progress, but as Europeans, we still live in the Investing Stone Age

So, reading books that are specifically written for the US audience will not give you a lot of practical information when it comes to financial products available in Europe.

Apart from this "tiny detail" there are some fantastic books that you can use to learn the basics of investing.

At least, they will give you the minimum amount of information you need if you want to make your own investment decisions or delegate them to a professional.

I selected for you the best 10 books available.

They are written in English, of course, but you can always check if there is a version available in your native language if that is easier for you.

The books are divided into two sections.

The first one is for those who have just started investing (or want to start investing), while the second is for those who already have some experience in this field.

Let's get started!

Books for those who want to start or have just started

1. Money, master the game - Tony Robbins

Investing your money is not just about knowing the technical stuff.

It doesn't matter if you know all the financial products available or all the mathematical rules behind the investment world.

It will not be enough if you lack the knowledge of the psychological mechanisms that govern the world of investment.

Money, Master the Game, written by Anthony Robbins, is an excellent introduction to this subject.

The book's main focus is on how to define (and improve) your relationship with money, but there are also more technical parts that discuss different investment products and how the stock market works.

In the book, you will also find interviews with the most famous investors of all time.

And some suggestions on how to create a portfolio that can do well during all economic seasons.

(spoiler alert for financial nerds: they are based on Ray Dalio's All-Weather portfolio).

This book is quite long (688 pages), but there are whole chapters that you can easily skip if you live in Europe.

For example, the description of the American pension system and some financial products that do not exist in Europe.

This book is not overly technical and it's a great introduction to the investment world.

2. Unshakable (Tony Robbins and Peter Mallouk)

If you don't have the patience to read "Money, master the game" and are not interested in interviews with the greatest investors of all time, Unshakeable is a great alternative.

Apart from Tony Robbins, the other author of the book is Peter Mallouk, an independent American financial advisor who manages millions for his clients and helps them achieve their goals through proper financial planning.

This book is very practical.

A handbook that will give you invaluable insight on how to build your investment plan.

It is my personal favorite for somebody who is at the beginning of his journey (unless you prefer to have a more tailored-made approach to your learning, so let's talk LINK)

As usual, there are specific situations that are typical of the American system.

Anyway, all the principles you can find in this book can be applied immediately by investors from all over the world, including Europeans.

3. Fooled by Randomness, Nassim Taleb

Nassim Taleb is one of my favorite authors of all time.

He has a very direct and aggressive style, especially when he talks about economists who are sure they know everything.

In this book, he makes some very interesting reflections on human nature and how we react to the role of chance in our lives and uncertainty.

Fooled by Randomness was the first book he wrote for a wider audience and revolves around a fundamental theme: how difficult it is for anyone not to be fooled by chance.

It is a basic Statistics course, but not the one studied at university with balls and urns, or anything in a predictable environment.

It is Statistics applied to real life, the one where you do not know the initial probabilities.

And learn to use statistical (or even better, probabilistic) thinking is one of the traits you will need if you want to become a successful investor.

Moreover, if you have not read anything about behavioral economics, this text is an excellent introduction to some of the most famous bias that can cost you money, such as survivorship bias and overconfidence.

By reading this book, you will find a guide to better understand and manage your emotions when you invest, especially during moments of euphoria and panic.

4. The Little Book of Common Sense Investing

The author of this book is John "Jack" Bogle, an absolute legend. 

He is the inventor of the Index Funds.

If you don't know what they are, here is a (simplified) definition.

An index fund is a fund that copies specific indexes (for example, the S&P or the Nasdaq) instead of trying to do better than them.

It doesn't sound so great until you do some research and realize how tough is to do better than the index (more on that in the book).

Bogle was the first providing a low cost- high effective solution for non-professional investors looking for the best way to invest their money. 

One of the greatest investor of all times, Warren Buffett, said about him:

"Jack has done more for American investors than any other individual I have ever known."

And American investors (and not only them) repaid his hard work.

The investment company he started, Vanguard, is the number one in the world for the number of assets (money) under management.

Despite this, it continues to charge very low fees to allow investors to earn the highest possible returns from their investments.

In The Little Book of Common Sense Investing, Bogle explains in detail his investment philosophy and why funds that copy indices are the best choice for a non-professional investor.

It is not a book suitable for those who are completely zero experience in the investment world.

If you already have a little bit of experience, but the concept of an "automatic" fund that simply copies an index (an ETF) feels a bit scary to you, or you just want to better understand why it is so effective, this is the book for you.

5. "A Random Walk Down Wall Street" 

"A Random Walk down Wall Street" is one of the most classic investment books.

Written in 1973 by Burton Gordon Malkiel, it has survived the test of time and is now in its twelfth (!) edition, which also has a small chapter dedicated to the 2017 cryptocurrency bubble.

This book is fantastic for those who already have a basic knowledge of the investment world and want to learn more about some basic concepts.

While reading it, you will find many hints on how to build an investment portfolio (unfortunately, always and only with American products) and a "small guide for speculators", which will talk about the two most common types of analysis when you want to buy single stocks.

Technical analysis and fundamental analysis.

The technical analysis is based on price movements and exchanged volumes, and it tries to understand the psychology of the market.

The fundamental analysis, instead, works differently.

Through the analysis of the balance sheet, the sector, and the management in charge, it tries to understand the intrinsic value of a company and then see if the current valuation of the share is more or less high than its intrinsic value.

As a final gem, the last chapters of the book are dedicated to a mini-guide with the key principles to build an investment plan.

For example, how to invest according to your goals and make sure and rebalance your portfolio regularly.

The same principles that we have deepened and adapted for the European markets in Simplinvest.

These 5 books will help you build a solid foundation.

If instead you want something more advanced, keep reading.

Books for those who are more experienced (and want to learn more)

6. The 4 Pillars of Investing - William Bernstein

The name William Bernstein is unknown to most people, even in the United States.

Bernstein is a neurologist who decided to change his career and now is a financial scientist (or at least, I like to call him this way) and an independent financial advisor.

His innate drive to share his financial knowledge has led him to write many books, and "The 4 Pillars of Investing" is the most popular.

This book is a very U.S.-oriented guide that lays down the foundation you need to have in order to invest successfully.

It explores the theoretical foundations (take more risk, get more return), the history of markets, the psychology of investors, and the institutions you need to deal with while investing.

This book combines elements that are easier to understand with more advanced elements.

For this reason, it is not a good first book to begin to enter the investment world.

But if you already have some experience and you want to understand better the more technical part of building a portfolio, then it is a good choice.

Inside you will find also some already made portfolios, but they are based on the American reality, and so they are not very useful for a European investor.

7.Principles - Ray Dalio

Ray Dalio is one of the best investors of all time.

He is the founder of Bridgewater Associates, an investment firm that manages $150 billion and accepts only clients with at least $5 billion in assets.

Not only that: Ray Dalio seems to be one of the very few managers able to really beat the market and therefore this is definitely a book worth reading.

Before rushing to buy it, however, you need to know something very important.

This book does not give practical indications on how to invest.

In the book you can find 3 parts:

  • An autobiographical part, interesting if you are curious to know more about the life of a successful investor;
  • "Principles for Success in Life" in which Dalio explains the principles to use to make the best decisions in your personal life, based mainly on radical honesty;
  • "Principles for Success at Work", extremely useful if you are an entrepreneur who wants to build a successful business.

If you are looking for information on where Ray Dalio invests his money or you simply want the answer to the question "Where can I put my money?" you will be disappointed.

But there are still some gems that can be linked to investments, especially the behavioral part, which are worth reading to improve your understanding of your own psychology.

8. Nudge - Richard Thaler

Richard Thaler is one of the most influential figures in Behavioral economics and he won the Nobel Prize for Economics in 2017.

Before becoming worldwide famous, Thaler wrote several books analyzing the key points of behavioral economics, and "Nudge" is one of the first.

This book introduces the concept of choice architecture or the systems that govern the way we think and we act.

The systems we use to make all the decisions, more or less important, or the ones that other people use for us.

We often don't realize how silently we are guided to an alternative, not always the best one for us.

Nudge is an antidote against unconscious decisions.

After reading it you will feel like you are in a post-Matrix world and you will look with different eyes both at your own decisions and those of others.

More than on investments, this book focuses on "decision making", the science of making the best possible decisions and ranges in various fields.

But you will also find insights from the world of behavioral economics and investment to make your investment process even better.

9.Irrational Exuberance - Robert Shiller

"Irrational Exuberance" is an expression first used in 1996 by Alan Greenspan, the former president of the FED (the American equivalent of the ECB).

The context?

"Irrational Exuberance" was used to describe the mood of the market participants of the American stock market in those years.

If you weren't there, the end of the Nineties saw the formation of a technological bubble in the stock market, and a lot of people had left their jobs to become a full-time trader.

Robert Shiller, winner of the Nobel Prize for Economics in 2013, shortly before 2000 decided to write a book that warned of the technology bubble that had blown out of all proportion.

This bubble became an opportunity to do a scientific study on what are the components that contribute to the formation of an economic bubble, in order to recognize and avoid financial bubbles in the future.

The result of this analysis was Irrational Euphoria, a manual that explains in detail how bubble works.

Inside you will find a description of the cultural, economic, and psychological elements that form a financial bubble, and what to do to avoid losing your money if you are investing during such times.

The book has had 3 editions and the last one (2016) contains interesting elements about the real estate bubble in the USA in 2006 and some elements to better assess the current situation, in particular a new chapter about a possible bubble within the bond market.

10.Antifragile - Nassim Taleb

We all know what fragile means.

Something that breaks easily and does not withstand any external shock.

But what is the opposite of fragile?

The English language doesn't really help us in this case. 

The most common answers are "robust", "resistant" or "resilient" (if someone wants to be cool).

These answers do not describe exactly the opposite of fragile, but only an intermediate stage, in which something remains indifferent to an event. It does not get better or worse.

The true opposite of fragile, Antifragile, is a word invented by Nassim Taleb.

Antifragile is not a detailed manual on how to invest your money.

On the contrary, there are more parts related to the medical world, nutrition, and politics that don't have much to do with it, apparently.

Although they seem disconnected, they actually allow you to better understand the theoretical concepts of this book and put them into practice in the world of investment (and not only).

Two examples above all, the Via Negativa (the negative way) and the barbell strategy.

A great book if you want to refine your investment philosophy and make your investment plan bulletproof.

That's it for today!

If you have any other book that you feel it should be included in the list, leave your suggestion in the comment section below.

One of the most common beliefs about investing is that you need a lot of money to start.

Don't have at least 10.000 Euro to chip in? Come back another time.

This discourages many young people who usually have very little money when they are starting out.

So, if you are young and don't have a lot of money, should you just dismiss investing as something that is not for you?

Absolutely not.

It is possible to start investing from a young age, as long as you use the right strategy.

And yes, even if you have a small amount of money.

Let's see how.

What you need to do BEFORE you start investing

If you found this article and you are a person in your twenties, or under 25, congratulations!

Very few people of your age are interested in the investing world.

But if you are here, it is also extremely likely that you have some misconceptions about what it means to invest.

So let's see some important things you need to know BEFORE you start investing.

1. Learn the difference between investing and speculating

The first fundamental distinction to make is between investment and speculation.

From the outside, they seem to be two similar activities.

They both take place in the same field, the financial markets, but the rules that regulate them are very different.

Invest your money does not mean multiplying your capital quickly.

This is what you try to do with speculation.

It is not a bad thing if done properly (even if most people are getting it wrong, will talk about that in another article)

Investing means protecting your capital first, and then growing it, using a repeatable process that works with both 100 Euros and 100,000 Euros.

2. Invest in your human capital

I don't want to lie to you.

Investing for "regular" young people (not tech millionaires) has a big problem.

The expected returns do not have a big impact on your life.

For example, imagine getting an average return of 20% per year from your money. 

An incredible result, which only legendary investors such as Warren Buffett have consistently achieved during many years.

Now imagine that your starting capital was 100 euro.

After one year, you would earn a whopping 20 euros.

In the second year, reinvesting and earning the same exceptional return, you would have an extra 24 euros (20% of 120 euros) for a total of 144 euros.

It's clear that 44 euros in two years don't change anyone's life.

You can save this much money by avoiding going for a pizza 2 times.

Conversely, if the starting capital is 100.000 euros, 20.000 euros and 44.000 euros are much more meaningful numbers, which give you more choices and can help you live the life you want.

Therefore, the very first advice I can give you if you want to start investing and you are young is to invest in your human capital first.

The ability to generate income over time.

It's a more elegant way to say: "Get to work!"

I'm not a business coach so I don't feel like giving you specific advice in this area, but any money invested in a skill that will give you a good income in the future is an investment in your human capital.

In the beginning, you will have to prioritize investing in your human capital instead of spending too much time trying to figure out how to invest what you have.

If you really have no clue about what could be the strategic areas where you can get a job, as of today (August 2020) programmers and salespeople are in great demand, and the best ones can command very high salaries.

But I would like to point out that these are just a couple of ideas.

Today there are a lot of interesting sectors that are looking for skilled workers.

If you are in this group of people, you can earn a good income over time and you will put yourself in the best possible conditions to invest and get tangible results at the same time.

The most important thing is that you choose something you really like or you will never put enough effort and determination into it to succeed.

Buy books, courses, go to events, and meet other passionate people in your chosen field.

(Note: "So good they can't ignore you" is one of the best books I have found that explains these concepts).

The money you invest in your human capital will give you an incredibly higher return.

Higher than any financial investment you can make, at least in the beginning.

So before you invest in financial products, don't have any trouble investing in improving your human capital and increasing your future ability to generate income.

Once you've done that, is it time to start investing?

Not yet.

3. Protect yourself

Before moving on to the world of "pure" investments, I suggest you use your money in another way.

Get the right insurance. 

If you are following the first advice I gave you, you are working to grow your human capital and your ability to generate income. 

If something bad should happen to you (wood knocking), this capital would go up in smoke and you would have nothing left.

By protecting yourself against negative events such as accidents and very serious diseases, you will be sure that your human capital will be ensured at a very low price.

And, as the last thing before you start investing, remember to have a liquid "emergency fund" able to cover unplanned expenditures or possible drops in your income.

This fund is essential to avoid situations when you need the money and you have to sell your investments (or anything else).

But it's also true that if you're young, you might take a few more risks in this regard.

Let me explain better.

If your family is not dependent on you and they can help you with some unforeseen expenses, you may have a smaller emergency fund than would be appropriate.

This is not a solution that drives me crazy, as being independent is very important to me, but it can still be a possibility if you know you can get support from your family.

And now, finally, let's get into the more practical part of investing.

How to invest if you are young

Now that you made some investments to improve your human capital, you got insurance and saved some money for emergencies, you are ready to invest what you have left.

The first thing you need to do, very important, is to connect your investment to a goal you want to achieve over time.

It can be retirement, buying a car, a house, whatever you want.

Based on this goal and when you want to achieve it, you will need to select the financial products that are best suited to you.

During my workshops, I explained this process in detail, however, the complete program lasts 2 days, so it's definitely not possible to cram it into an article.

What I can tell you to give you a starting point is that the best products available to an investor who wants to invest in the long term, are well-diversified ETFs (you can find a document I prepared in my free group which explains what they are in detail).

Is it enough to invest in ETFs to become a successful investor? Absolutely not.

There are several other aspects to consider, such as choosing the right asset classes to build a robust portfolio that will perform well during all economic cycles.

However, compared to more traditional financial products (especially actively managed mutual funds, the ones people are trying to sell you in the bank), ETFs are more transparent, cost less, offer excellent opportunities to provide a higher return, and are faster to buy and sell.

Once you have chosen the products that are right for you, there is one last strategy that you need to know, and that allows you to invest even if you have little initial capital available.

Enter the Dollar Cost Averaging, or DCA for friends.

The DCA is an investing strategy that allows you to enter the financial markets a little at a time.

The main advantage of this strategy is to avoid being unlucky and entering at the wrong time.

Instead of entering all at once, you divide your capital into small parts over a predefined period of time.

Usually it is one or two years (could be more in special circumstances) and then you can start investing.

One of the most interesting aspects of DCA is that you can start investing even if you can save only 2-300 euros.

Today there are secure platforms that allow you to invest even these small amounts without worrying too much about costs.

Obviously, the returns you can expect from the first few years will not be stellar.

As you have seen above, even an incredible 20% on low figures would not make a difference in your life.

If you then take into account that the average return on the stock markets is around 7% per year, we are talking about even smaller numbers.

But starting to invest gradually (and from a young age) has two huge advantages.

What are the advantages of starting to invest gradually and at a young age

1. It helps you get used to volatility

When I started investing in the stock markets years ago, even just investing 1,000 euros made me nervous.

I knew I could afford to lose that money.

But at the same time, the idea of losing it (and being wrong) bothered me a lot.

I spent my days monitoring the performance of my stocks, almost compulsively.

Even if it was a small amount of money, when their value was going down I was upset.

It was similar to the discomfort I felt when I lost 20 euros on the street.

On the contrary, when there were good days, I was excited and euphoric.

This kind of reaction is common to many investors, especially beginners.

What is very important is to not pay too much attention to the volatility.

Instead, focus only on the things you can control.

Today I invest more money than I started out with, but it doesn't affect my emotions that much.

By now I am used to these fluctuations and I know that they are part of the game.

And this is only possible because years ago I started investing tiny amounts, gradually getting used to the volatility of the stock markets.

2. It allows you to make your capital work for much longer  

One of the most powerful forces in the investment world is compound interest.

A fancy expression which means having the money working for you.

In the example above with 20% returns, after the first year, you will have 20,000 euros.

In the second year, they will generate an "extra" return of 4,000 euros (20% of 20,000 euros).

These 4,000 euros is the result of compound interest.

How powerful is compound interest?

Here is an example that can show you.

Imagine you have two investors who are the same age.

Let's call them Warren and Gann, respectively, to honor the greatest investor of all time and a trader who was using astrology.

Warren, at the age of 25, decides to start investing in a well-diversified ETF that invests in stocks.

He decides to put in what he can, 100 euros per month and does that for 10 years.

After, he gets tired of adding money and decides not to add anything,

But he does leave invested what he has already invested, for the next 60 years.

At the same time Gann, who until then had tried to make money looking into the stars, decides to invest in the same product as Warren.

He invests 100 euros per month, as Warren, from the age of 35 to 60.

When they both become sixty, who has more money?

Drum roll and...

... the answer is Warren, who at 60 years of age will have 70 thousand euros, against 68 thousand of Gann.

(Operational note: for this simulation, I assumed an average return of 6% per year, slightly below the historical average)

This result seems incredible.

Not only did Warren invest less money in total and for a shorter amount of time.

At the end, he also earned more money 35 years later.

That is the power of compound interest.

And that is the main reason why it is so important to start investing as soon as possible.

Starting to invest when you're young gives you a chance to make a few mistakes along the way. 

Investing as soon as possible gives you the chance to be lazy tomorrow, if that is your wish.

The longer you wait to put your money to work (even a small part), the more you will have to work to achieve your financial goals.

And often you may be forced to make unpleasant choices, which you could have avoided with a good investment strategy.

The name Alain Greenspan may not ring a bell to you, but I can assure you that the guy was pretty powerful.

He was the president of the Federal Reserve, the central banking system of the United States of America.

As you can imagine, this is not the kind of job that you can randomly land.

You need to be a great tactician, politician and have a strong understanding of economics and the investment world.

Theoretically, this person should have a “Master of the universe” understanding of investing and economics.

And still, this person managed to lose a lot of money with a wrong investment.

“C'mon! Everybody can lose money with the wrong investment, sometimes it’s just bad luck.”

Sure thing.

But that investment was the pyramid scheme of Bernie Madoff, the most famous financial fraud of our time.

The funny thing was that Madoff didn’t promise stellar returns.

He promised the same returns of the US stock market (around 10%) but with much less risk.

You can see in the image how smooth the graph looks, and how easy seemed to make money, until it wasn't (Madoff returns are represented by the red line)

At the beginning of the Great Financial Crisis of 2007, all the gains evaporated, the scam was discovered and the value of the fund went straight to zero.

How did that happen?

A lot of people were suspicious about Madoff's smooth returns, so how comes that one of the best financial minds of our times didn’t realize that it was a scam and lost a lot of money in the process?

Here is what Greenspan said about it:

In my own case, the decision to invest in the Rye fund (a feeder fund invested with Madoff) reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance.

To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations.

This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case.

Apart from the false modesty (you can’t be that ignorant in finance and be the head of the FED), the real problem of Greenspan was his laziness.

He blindly delegated his financial decision to an advisor, which turned out not to be trustworthy enough.

Do you have any way to avoid this fate and become a better investor than a FED previous chairman?

Yes, you do.

You need to take control over your investment decisions and make an investment strategy that will help you get what you want when you want.

Making a plan that clearly defines your life goals, and when you want to achieve them, figuring out how much money do you need for it and how to get the amount you don’t have yet.

This is an example of goal-based investing, the main principle we use in Simplinvest to help people creating their own financial plans.

"Why investing is so important?

Can't I just leave my money on my bank account and enjoy them when I am going on holiday?"

Although this is an option, it doesn't consider that the money left in your bank account is losing value every year, because of inflation.

Inflation is a concept that is not familiar for a lot of people, especially the ones who don't have a background in Economics.

Here is a definition which we can use to start.

Inflation is the rate at which the general level of prices for goods and services is rising

(kudos to Investopedia for being the best investing definition platform ever).

So, if you buy some bread for 2 Euros, and the yearly inflation is 2%, in one year you can expect the bread to cost 2 Euros +2*0.02 = 2.04 Euro

(Side note: I am well aware that inflation is not so simple and not every product's price is raising as much as the inflation, but let's keep this easy definition for now)

So, because of the inflation you will actually end up 2% poorer every year if you don't invest your money.

Not investing your money is an investing choice, usually a losing one.

Let me put it into a better perspective.

Because of the inflation the prices will go up, while your money will stay the same.

So 100.000 Euro today will have a purchase power of 98.000 Euro one year from now.

Now it doesn't look like a small amount anymore, right?

Inflation sucks! Wouldn't it be nice if prices are dropping every year?”

This situation can happen as well, and it's called deflation.

The central banks from all over the world are trying to avoid this situation, because It's very bad for entrepreneurs and companies.

If a product can be less expensive tomorrow than today, people will wait until the last moment before buying it.

And the companies will have to pay a lot of costs in inventory and to get rid of unsold products.

They will get less profits and they will need to lay off people.

Which means less customers in the future and a negative spiral that is hard to stop.

Inflation is a necessary evil we need to cope with to keep our economy going.

If you want to be protected against it, you need to invest in financial products that gives you a higher return than the inflation rate.

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