Musings of a Beginning Investor

Investing is more psychology than intelligence. When money is involved, emotions are heightened and rationality is suppressed. It’s easy to lose. 

So why play the investing game at all? It’s the most simple way to financial wealth. However, simple does not mean easy. Everyone knows the simple formula of weight loss (eat less and move more), but that doesn’t make weight loss easy. Similarly, “buy low and sell high” is simple to understand, but it’s not easy.

As I try to become a better investor, I’d like to revisit my past and learn from the many mistakes I’ve made.

A Chronology

In middle school, I heard about the magical stock market in which you could make more money without doing anything. Naturally, I wanted to get in on this action as soon as possible. I begged my mom to invest in the stock market, and she set up a Scottrade custodial brokerage account for me.

I had $485, the culmination of all my savings from birthday and holiday gifts. On October 8th, 2016, my eighth-grade self spent it all to buy Under Armour stock. I remember the $7 commission fee struck me as massively expensive. After all, $7 was 1.4% of all my money. By the next year, I had lost more than 50% of my investment. Eventually, I sold out.

Going into freshman year of high school, I downloaded the newly released Robinhood app to get zero-commission trading. Again, I traded under my mom’s account since I was under 18. Between classes, and even during classes, I made trades. Essentially, I was a speculative swing trader holding positions for a few days to a few weeks.

After several months of emotional highs and lows, I achieved a roughly 0% return. Freshman year had ended and it was now summer. I spent that summer in China, having the best summer of my life and forgetting about the stock market. 

In sophomore year, I was preoccupied with school and bodybuilding. It wasn’t until the summer after sophomore year that I got back into investing. I subscribed to the Motley Fool for $99 a year to get their stock picks, as they had a solid track record. Still, I had a swing trader mentality and treated the stock market like a casino. That summer, I lost $1K of my hard-earned restaurant wages.

In my junior and senior years of high school, I continued to swing trade, although less intensely. Then, when I started college at Berkeley, I stopped all my stock market activity as the first semester was quite overwhelming. 

During winter break, however, I got back into the stock market. I read Rich Dad Poor Dad by Robert Kiyosaki, which had a central message of learning to take risks to become rich. 

I misinterpreted the message to support speculation in the stock market and put all my money into speculative stocks and Bitcoin. In the next few months, I lost close to $3K, and even worse, this loss wasn’t tax-deductible as it was in my ROTH IRA.

During spring break, I spent a few days at a family friend’s house. The dad was a wise investor who was able to retire early due to his investing prowess, and he imparted a levelheaded investing approach to me. My key takeaways were to follow the best investors like Warren Buffett and to be careful about the price at which I bought the stock.

It should’ve been common sense, that to become a great investor, you should study the great investors. I sold all the speculative stocks and Bitcoin I had bought in winter break and studied Warren Buffett.

I discovered the 13F filing, a filing required from institutional managers who manage more than $100 million in assets. This quarterly filing lists all the US positions that managers held in the past quarter. 

Over the summer, I read more about Warren Buffett and bought stocks that he was buying according to the 13F filing. During sophomore year of college, I eagerly awaited each 13F filing and bought as Buffett bought. I didn’t do much investment reading outside of that as I was pretty busy. 

After my internship following sophomore year had ended, I had several days of free time and dug deep into investing. I found many lesser-known investors with outstanding historical returns. I read some of their books which were even more impactful than the books I read on Buffett.

The investments I made while copying Buffett had only generated 1% returns over the past year, so I pivoted towards copying another outstanding investor, Mohnish Pabrai. I sold almost all of my Buffett holdings and bought into the companies Pabrai was invested in. 

And that’s where I’m at. I estimate that I’m back at 0% overall returns for the past seven years. But that doesn’t account for inflation.

My Mistakes

I’ll cover my mistakes in the order I made them, starting from my Under Armour investment in 2016.

Lack of research (2016)

I went with my gut when buying Under Armour, without doing any research on the company’s fundamental financials. Granted, I was thirteen at the time and didn’t know any better. But even as I got older, I bought stocks simply because a stock recommendation service told me so or because I felt innately good about it.

It’s both sad and funny that most people spend more time analyzing what refrigerator they’ll buy than where they put their hard-earned life savings. 

Before buying a stock, you should evaluate both the qualitative and quantitative aspects of the company. Qualitative aspects are factors like past company history, long-term prospects, and company positioning. Quantitative aspects can be discerned from the company’s financial data.

You don’t need to get an MBA but a basic knowledge of terms like cash flow, P/E ratio, and net present value are crucial in determining the intrinsic value of a company. Only with this knowledge can you determine if you are overpaying for a stock or getting a bargain deal.

That said, if you detest company research, you can get away with it. You could invest in an index fund tracking the market or buy the top investors’ stock picks.

There’s a catch though: you’ll be less confident in your purchase. Will you be able to hold the stock through thick and thin? Or will you balk at the first dip? The investor who knows what they own and why they own it is far more likely to remain rational.

A love for action (2017 to 2021)

Throughout high school, I traded at least once a week on average. The emotional highs and lows were fun in a way, but it wasn’t fun seeing negative returns after all my efforts.

Oftentimes, the investor who is the least active achieves the most. Fidelity released a study on the performance breakdown of their accounts. The clients that did the best were the ones who were dead. The second best-performing set of clients were the ones who forgot they had Fidelity accounts.

Buffett recommends the punch card approach, where investors invest as if they had a punch card with 20 punches, each punch representing an investment decision they get to make in their entire life.

If you want to gamble and speculate in the stock market, you can, but don’t expect returns from it. Approach it as you would with a casino: you’re going in to have fun and you don’t hope to make money. Don’t look for both fun and money like my naive adolescent self did.

If you need to get your gambling fix (which I don’t recommend), set aside a tiny percentage of your portfolio as play money. You could also open a paper trading account and trade with fake money. But never get close to your actual portfolio of long-term holdings.

Using substandard resources (2017 to 2022)

For the longest time, I had used all sorts of subpar stock recommendation services and sketchy articles for my investing knowledge. These resources were better than nothing, but I could’ve gotten so much more value for my time by studying the best resources from the best investors.

Why pay for investing courses and stock recommendations when the world’s greatest investors are giving away their knowledge and stock picks for free? I’ll repeat what I said again: to become a great investor, you should study great investors.

Common Investing Biases

Throughout my investment journey, I have repeatedly fallen prey to cognitive biases. After improving my investing knowledge, I discovered these misjudgments had names and were universal human experiences. Countless biases that rear their ugly head in the world of investing, but I’ll cover just the ones I’ve experienced most frequently.

Loss aversion bias

The pain of a loss weighs more severely in our minds than the pleasure of a gain. Discovering a $10 bill in your pocket is a nice treat but subsequently losing that $10 bill causes greater misery. It’s estimated that the pain of losing is psychologically twice as powerful as the pleasure of gaining. So, we prioritize avoiding losses rather than making gains.

For some people, this bias may prevent them from entering the stock market as a whole. If they stayed out for the past decade, they would’ve missed out on the 220.437% return of the S&P 500.

For others, the bias may prevent them from selling their loss-making investments. Even if their reason to purchase is no longer there and the company fundamentals have changed, they continue with the investment to avoid realizing the loss. As Buffett said, “You don’t have to make it up the way you lost it.” If there’s a better opportunity, sell your losing position and put the proceeds into that opportunity.

Sometimes, the pain of a loss motivates people to take risky bets to make up for their losses. Other times, people may sell a falling stock to prevent further loss, only to miss the stock rebound.

Loss aversion bias happens to everyone, even Charlie Munger. During the 2001 Berkshire Annual Meeting, Munger talked about his biggest investment mistake. 

“I was offered 300 shares of Belridge Oil. Any idiot could’ve told there was no possibility of losing money and a large possibility of making money. I bought it. The guy called me back three days later and offered me 1,500 more shares. But this time, I had to sell something to buy the damn Belridge Oil. That mistake, if you traced it through, has cost me $200 million. And I — it was all because I had to go to a slight inconvenience and sell something.”

Anchoring bias

We latch on the first piece of information that we see, whether that information is relevant or not. When new information comes, we interpret it from the reference point of the anchor instead of seeing it objectively.

Let’s say you first saw a stock trading at $100 and wanted to buy it. You had done your due diligence and concluded this was a solid company at an undervalued price. But then, the stock moved to $105. Even though the company fundamentals hadn’t changed and the stock was still undervalued, you decided to halt your purchase.

If you believe that the stock is trading at a substantial discount to its intrinsic value, paying an extra 5% is not going to derail your investment thesis.

This bias caused Buffett to forgo a $10 billion opportunity. In his 2004 annual meeting to shareholders, he said “I set out to buy 100 million shares of Walmart, pre-split, at about $23… We bought a little and then it moved up a little bit. And I thought, ‘Well, you know, maybe it will come back’... And that thumb sucking, reluctance to pay a little more — the current cost is in the area of $10 billion."

On the flip side, let’s say you first see a stock trading at $100, and now it’s trading at $50. Without doing any further research, you’re tempted to buy it simply because of the discount. You think, “It’s gone down this much already; it can’t go any lower.” In his 1997 speech, Peter Lynch gave an example of just how dangerous this mentality could be.

“Polaroid went from $140 to $107… people said if it gets under $100, buy Polaroid… within nine months, the stock was $18.” Polaroid was eventually acquired privately for $12.08 a share.

Recency bias

People over-emphasize recent information because it’s more readily available. As a result, we give more weight to recent events when they shouldn’t be considered any more important than events of the distant past.

When the market is falling, we feel as if it’s going to fall forever and sell at the lows. When the market is rising, we feel as if it will never stop and buy at the highs. We do the exact opposite of “buy low and sell high.”

Because of recency bias, recent market headlines and short-term trends can generate irrationality and market extremes. If you understand recency bias and ignore the momentary fluctuations, focusing instead on company fundamentals, you will be well-positioned to benefit from the bias. My investing mentor illustrated a memorable example of him doing just that.

On December 23, 2003, the USDA announced the first case of Mad Cow Disease. Only 4 people in the entire history of the US have gotten Mad Cow Disease, but regardless, people avoided beef like the plague. Then, on April 19, 2004, the CEO of McDonald’s died of a heart attack. Understanding that neither of the events impacted the company’s long-term profitability, my mentor proceeded to load up on McDonald’s stock. 

It’s common for investors to flock to the recent high-performing stocks and funds, inevitably overpaying at high prices. Yet stocks that have had the best performance in the past year are rarely the stocks with the best performance this year. 

It’s also common for investors to flee the low-performing stocks and funds, selling their positions at low prices. Yet it’s often the most beaten-down stocks (with their fundamentals intact) that grow the most. 

For example, the ARK Innovation ETF (a basket of stocks) was one of the best-performing ETFs of 2021, generating a total return of 152.5% that year on $6.8 billion of assets. Seeing such performance, numerous investors bought into the ETF in 2022, bringing the total assets to $21.5 billion. That year, the ETF lost 23.4%. The next year, with investors leaving and assets at $9.1 billion, the ETF lost 67%. Investors continued to flee, and now with assets of $7.4 billion, the ETF gained 29.6% in 2023 as of 5/31. 

Though the ETF “has outpaced that of the average mid-cap growth fund by about 1.6 percentage points per year,” investor returns were far worse because they entered and exited at the wrong times due to recency bias.

Herding bias

Following the crowd and doing as others do saves both time and mental energy. But in the stock market, the crowd is not always correct. The Dotcom Bubble and the Great Recession are perfect examples of this.

Buffett says you should “be fearful when others are greedy and be greedy when others are fearful.” When everyone is greedy and driving the stock prices to lofty extremes, you should stay away and avoid overpaying. Conversely, when others are fearful and selling the stock, driving down the price, you should consider buying at the bargain prices.

Ignore the short-term noise and the sensationalized headlines. Instead, do your own research, remain objective, and stand your ground. Don’t be afraid to go against the crowd.

Confirmation bias

We tend to seek out and give more weight to information that confirms our beliefs. Even if the new information doesn’t inherently support our opinion, we selectively remember the bits and pieces that confirm our stance.

In the world of investing, this bias causes people to look only at content that affirms their beliefs. So, when researching a stock, it’s better to ask yourself what could go wrong than what could go right. Actively seek out contrary viewpoints to make a better decision.

Action bias

People tend to favor action over inaction, even when nothing indicates that action would create a better result. 

In investing, action often leads to a worse result. But because financial firms profit off increased investment activity through fees like trade commissions, they’ll encourage more activity at the expense of investors. Even with zero-commission trading, each trade still generates money for the financial institution through payment for order flow, bid-ask spreads, and more.

Short-Term Regrets and Solutions

To me, four categories of short-term regrets cover almost all the short-term regrets that are to be had when investing. You either buy or sell a stock and the stock either goes up or down.

For the rest of this section, I’m assuming you bought into an outstanding company at a bargain price. If this is not the case, the guidance below is not as applicable.

Buy and it goes up

Huh? Why would you regret buying a stock and having it go up? Say you spent only 5% of your cash on that stock. You think to yourself, if I had gone all in on that stock, I would’ve generated twenty times those returns. Still, you made money!

It seems so obvious now that you should’ve put more money into the stock, but don’t be so harsh on yourself. Given the information and research you had at the time, your past self did the best they could. Your past self felt that putting in any more money would be too risky and cause emotional angst. 

Plus, it may not be too late to buy more of the stock. If the stock is still priced cheaply and your investment thesis hasn’t changed, don’t fall prey to anchoring bias and instead consider buying more.

What if the stock has appreciated to such a degree that you can’t definitively say it’s trading at a discount? It’s okay. Hold on to your money and wait for the next opportunity. There will always be more opportunities. Below is an example showing just that.

Peter Lynch managed the Magellan Fund for 13 years, achieving a massive annualized return of 29.2%. He listed 200 stocks that went up tenfold or more during his time at Magellan that he didn’t own. Furthermore, he only went through stocks A through L listed on the New York Stock Exchange (NYSE). Imagine how many stocks he would’ve found had he considered stocks A through Z on every single stock exchange in the world.

To size your position more wisely in the future, consider using the Kelly criterion, a mathematical formula for sizing a bet. Based on the probability of winning and losing and the expected returns, it tells you what percentage of your money you should allocate toward an investment.

Mohnish Pabrai says the “formula suggests the maximum bet we ought to make…The formula optimizes just one variable — the maximization of wealth in the least amount of time. It is agnostic on volatility.” Many investors opt to use fractional-Kelly or half-Kelly instead to tame volatility.

Buy and it goes down

You may think to yourself, “If only I had waited a bit, I could’ve bought in at a cheaper price.” To counter this, recognize that it is impossible to time the market. Even Buffett regards trying to time the market as pointless. “We haven't the faintest idea what the stock market is gonna do when it opens on Monday — we never have.”

Look at the glass half full. The stock you bought at a bargain price became even more of a bargain. Consider buying more at this cheap price. 

Do your best to ignore short-term price movements and focus on the big picture. Even if the stock price drops, the company fundamentals haven’t changed. Your reasons for investing in the stock still stand.

Sell and it goes up

When it comes to outstanding companies with outstanding management, Buffett’s “favorite holding period is forever.” The top investors rarely sell their great businesses.

They only sell when the company characteristics and fundamentals have changed, the stock is seriously overpriced, or when something much better comes along. If you’ve sold along those lines, there’s nothing to worry about.

What if you look back and realize your reasons for selling were based on false conclusions? Think of your selling as freeing up cash for the next best opportunity, which could still be the company you just sold. Even if it’s not, there are always more opportunities.

Sell and it goes down

Much like buying and having it go up, selling and having it go down seems that it wouldn’t cause any regrets. But what if you sold only a portion of your stake and not the entire thing?

“If only I had sold everything, I would be X amount richer.” Again, don’t be so harsh on yourself. Given your evaluation of the business at the time, your past self felt a partial selloff would be better. The company characteristics may have worsened slightly but the change didn’t warrant a total selloff.

Upon reanalysis, if the company fundamentals have taken a turn for the worse or the stock is steeply overvalued, you may want to sell the entire position. Be wary of anchoring bias, which may dictate you sell only when the price of stock gets back to the initial price you saw. Sometimes it never gets back, especially if the company has deteriorated.

Remember, hindsight is 20/20. There’s no use thinking “If only I had done X.” First off, you wouldn’t have done X, given your knowledge at the time. Second, you can’t change the past. Third, wallowing in your mistakes only drains energy from the present, which can be changed to your benefit.

Why the Long-Term Investor Wins

Watching the price of a stock go up and down is an emotional rollercoaster. 

You’re in the stock market to make money, not to ride a rollercoaster. If you must feel emotional frenzies from time to time, there are better ways to do so than risking your life savings.

Take the long-term mindset. As Buffett said, “If you're making a good investment in a security, it shouldn't bother you if they closed down the stock market for five years." 

Remember the Fidelity study? The investors with the best returns were those who were dead or those who forgot they had an investment account. While taking action is helpful in most areas of life, action in investing is often counterproductive.

Approaches

After reading significant amounts of investing literature, there seem to be two main approaches for generating substantial wealth in the stock market.

Index funds and dollar-cost averaging

For the large majority of people, this is the approach that works best. It requires very little effort and no investing knowledge.

Buffett was asked, if he was a 30-year-old with a full-time job, how would he invest his money? He responded, “I’d have it all in a low-cost index fund… You will not get that advice from anybody because nobody gets paid to give you that advice.”

In his 1993 shareholder letter, Buffett states that “By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when dumb money acknowledges its limitations, it ceases to be dumb.”

Buffett stated this opinion again in the 2020 Berkshire Annual Meeting. “In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do.”

When you don’t understand businesses, diversification among hundreds of businesses (using the index fund) is your protection against ignorance. In Buffett’s words, investing in an index fund “is a perfectly sound approach for somebody who does not feel they know how to analyze businesses.”

It’s smart to combine index funds with dollar-cost averaging, the practice of investing the same amount of money at regular intervals of time regardless of the price. Dollar-cost averaging has two main benefits.

First, it takes the emotion out of investing. It compels you to continue investing regardless of short-term fluctuations and curbs the urge to time the market.

Second, it tends to decrease your average purchase price. Since you invest a fixed sum, when the price is low, you end up buying more shares. When the price is high, you buy less shares.

Dollar-cost averaging into index funds will beat 90% of professional US fund managers in the long run.

Concentrated stock picks

For those who are willing to spend time and effort to understand companies, making significant investments in a few stocks can yield superior returns.

A further benefit is that it’s less risky, much to the contrary of conventional wisdom. There’s less risk in holding a few companies that you deeply understand than 50 companies you don’t know.

Peter Lynch, the manager of the aforementioned Magellan Fund, said “I don’t believe in diversification at all. I would own one stock if I could find one great stock… If I find ten good stories, and they’re all equally attractive, I buy all ten.”

Buffett said, “Putting money in number 30 or 35 on your list of attractiveness and forgoing putting more money into number 1 just strikes Charlie and me as madness.” Why would you put money into your 30th best idea when you could put it in your best idea?

Understanding your investments in depth necessarily means that you can’t hold a large number of stocks. You have limited brainpower and time and cannot keep up with numerous companies.

Dollar-cost averaging could also be used in this approach. However, some prefer to invest in lump sums due to factors like transaction costs or the belief that a company is severely undervalued at its current price.

My approach

I take the concentrated stock picks approach, opting to spend more time for potentially better returns. 

Looking back, I should’ve taken the index fund approach while I had little investing knowledge. Only once I could evaluate companies and determine intrinsic value should I have taken the stock-picking approach. But again, hindsight is 20/20.

How do I pick just a few stocks from the world of 65,000 publicly traded companies? I’ll explain.

Please note my approach is by no means the correct approach, and it may change in the future. I just hope you gain a few key takeaways that improve your own investing methodology.

Screening

As I mentioned, I use the quarterly 13F filing that lists all the US positions held by managers with over $100 million under management. I only consider the positions held by my favorite investors.

Which investors do I look at? Warren Buffett, Charlie Munger, Mohnish Pabrai, Li Lu, Joel Greenblatt, Seth Klarman, Guy Spier, Chuck Akre, Clifford Sosin, Norbert Lou, David Tepper, Bill Ackman, Bill Miller, David Abrams, and Tom Gayner.

You can look at the raw 13F filings on the US Securities and Exchange (SEC) website, or you can use websites that display the 13F data in a more readable format. I use hedgefollow.com, dataroma.com, whalewisdom.com, and gurufocus.com.

The 13F is required to be filed within 45 days after each quarter, meaning an investor could’ve bought in and sold out of positions within that quarter and the following 45-day period. As a result, the 13F can be an out-of-date snapshot. That said, for long-term buy-and-hold investors who don’t make many trades, the 13F is quite accurate.

Note that the 13F only shows US positions. To find international positions, you can use tikr.com for a subscription fee. We learn about investors’ international positions only when a regulatory filing is triggered in that country, such as when an investor owns more than 5% of a company. For this reason, it’s hard to know all of their international positions.

Some YouTube channels cover the renowned investors’ moves every quarter, along with their known international holdings. My favorite channel for this is Investing with Tom. For more hidden gems, listen to interviews with these top investors.

Because international markets are picked over less than the US market, there are often better opportunities and favorable mispricings abroad. I pay special attention to international positions when I find them.

I also focus on lesser-known investors like Mohnish Pabrai as opposed to Warren Buffett. The sheer size of Buffett’s portfolio drastically narrows the investment opportunities, while the smaller size of Pabrai’s portfolio keeps options open. How so?

Let's say Buffett found a company worth $50 million that was guaranteed to double in value. Even if he bought the entire company and made $50 million, that would be a 0.01% increase in his portfolio. It’s not worth his time to analyze smaller companies, even though they could generate far greater returns proportionally than big companies. 

Here’s what Buffett has to say on the subject. “Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s… But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Nowadays, Buffett is managing hundreds of billions of dollars and can only consider billion-dollar companies. Whereas, Pabrai is working with “only” hundreds of millions of dollars and can consider many more companies. 

Wait, wouldn’t Pabrai’s portfolio of millions also preclude investment possibilities? Yes, it would. But at least it's less limiting. If you wanted to have the greatest chance to maximize your returns, you could do as Buffett did: “I went through 20,000 pages in the Moody’s industrial, transportation, banks, and financial manuals — twice.” For me, I’m happy to stick with lesser-known investors as sort of a middle ground.

Overall, to screen the massive universe of stocks, I consider only the holdings of renowned long-term investors, with an emphasis on lesser-known investors and international positions.

Analysis

After screening, I conduct my analysis on the stocks that remain. My analysis has two parts: financial analysis and business analysis. 

For financial analysis, I look at the company’s financial statements (their income statement, balance sheet, and cash flow statement). Using certain key metrics from the financial statements, I calculate the company’s intrinsic value with a script I’ve programmed. Based on the stock’s current price, I determine how undervalued or overvalued the stock is. The stock should be decently undervalued for me to consider it further.

Along similar lines, magicformulainvesting.com is a great website for finding solid companies trading at low prices. It was created by Joel Greenblatt and uses his mathematical formula to select potential winners.

For business analysis, I try to understand the business on a deeper level. I look at the company’s long-term prospects, its operating history, the management, insider transactions (required to be filed to the SEC), insider ownership, and more.

Buying

I follow the Kelly criterion as a general guideline for how much money to place in a stock. Because the Kelly criterion requires you to know the exact probability of winning and how much you win if you win, it’s more of a loose estimate than a rule. I never allocate more than the Kelly criterion says since the Kelly criterion is an upper bound.

When buying stocks, I would ideally set it and forget it. Yet I constantly check the price for the days and even weeks after. But eventually, I stop checking so often.

Selling

I sell in three cases. First, the company fundamentals have changed and my reason for investing is no longer there. Second, I can say with a high degree of certainty that the stock is seriously overpriced. Third, something much better comes along.

If you have bought into a great company at a bargain price, give it at least a year or two for the share price to converge to the (higher) intrinsic price. Real business change takes time. If the convergence still hasn’t happened after three years, don’t hesitate to sell.

Long holding periods are preferred when it comes to taxes. Gains from stocks held for less than a year will incur a short-term capital gains tax ranging from 10% to 37%. Gains from stocks held for more than a year will incur long-term capital gains tax ranging from 0% to 20%. 

Of course, you aren’t taxed on short-term or long-term capital losses. Instead, these losses can be used to offset the gains from their respective category. Tax loss harvesting comes from this concept, where you sell a stock you lost money on and apply that loss to your gains. 

If the losses in a category outweigh the gains, the IRS allows you to deduct up to $3,000 of net capital losses against other ordinary income (like wages) per year. Net capital losses exceeding $3,000 can be carried forward indefinitely until the amount is exhausted.

A short-term capital loss carryover first offsets short-term capital gains incurred in the carryover year, then long-term capital gains, then ordinary income, and then it’s carried to the next year.

A long-term capital loss carryover first reduces long-term capital gains in the carryover year, then short-term capital gains, then ordinary income,  and then it’s carried over.

Take note of the wash-sale rule: if an investment is sold at a loss and then the same or “substantially identical” investment is repurchased within 30 days, the initial loss cannot be claimed for tax purposes.

Furthermore, there are ordinary dividends and qualified dividends. A dividend is qualified if you have held the stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. The ex-dividend date is the cutoff date that determines whether a shareholder will receive the dividend payment for the stock they own. Those who buy after the ex-dividend date are not entitled to that period’s dividend.

If the dividend doesn’t meet the qualified dividend requirement, it is an ordinary dividend that will be taxed at 10% to 37%. Qualified dividends are taxed at 0% to 20%.

In the US, you can open an IRA (individual retirement account) that grows tax-free. Most employers also sponsor a 401(k) tax-free account, and you can have both. Any capital gains in these accounts are untaxed. Capital losses in these accounts cannot be deducted unless you dissolve your account and the balance is less than what you contributed.

Both IRAs and 401(k)s are offered in two options: traditional and ROTH. This gives us four types of retirement accounts: traditional IRA, ROTH IRA, traditional 401(k), and ROTH 401(k). Traditional accounts are funded with pretax money, while ROTH accounts are funded with after-tax money. When you start taking money out of the retirement accounts, traditional withdrawals are taxed as ordinary income while ROTH withdrawals are tax-free.

To decide between traditional and ROTH, consider your current and future tax rates. If you think your tax rate when you start withdrawing will be less than it is now, a traditional account may make more sense. If your future tax rate will be higher than it is now, a ROTH account may be better. 

What if you just want to save as much as possible? Go for ROTH as it enables you to save more in a tax-advantaged manner.

Getting Started

In investing, time is money. Don’t regret that you didn’t start earlier. “The best time to plant a tree was 20 years ago. The second best time is now.”

Don’t let the fear of mistakes prevent you from getting started. Buffett has said “I make plenty of mistakes and I’ll make plenty more mistakes, too. That’s part of the game. You’ve just got to make sure that the right things overcome the wrong ones.”

If the stock market bores you to death, go with the index fund approach. Embrace your ignorance. There are other things you can spend your time on. But if you’re hoping to achieve greater returns by picking stocks, you’ll need to build your investing knowledge. Here are some of my favorite resources.

Investors:

• Warren Buffett
• Charlie Munger
• Mohnish Pabrai
• Li Lu
• Joel Greenblatt
• Seth Klarman
• Guy Spier
• Chuck Akre
• Clifford Sosin
• Norbert Lou
• David Tepper
• Bill Ackman
• Bill Miller
• David Abrams
• Tom Gayner
• Peter Lynch

Just search up their names on Google or Youtube and you’ll find dozens of interviews. Listen to them as you would an audiobook or podcast.

My favorite investing books:

• The Dhandho Investor by Mohnish Pabrai
• The Little Book That Beats the Market by Joel Greenblatt
• The Warren Buffett Way by Robert G. Hagstrom
• Poor Charlie's Almanack by Charlie Munger
• The Intelligent Investor by Benjamin Graham

I wish you wealth and prosperity.