#18 – Finance #2 – Investing, easier than you think?

Summary

Are you someone who considers yourself to be an expert and therefor choosing your investments yourself? Or are you maybe somewhere in between, ending up not doing anything at all? Regardless, we have been in all these positions and now we think that we have a way that will make our lives easier

Transcript

[00:00:00] All right. This is becoming great podcast where me and my buddy Eric explore topics like life and business.

[00:00:11] And in the meantime, we are building Greg Dalton Common and shared a project that would give away 100 percent of its profits to charity. And I’m here with my good buddy, Eric Berman, the founder of Great. How are you?

[00:00:30] Very good. Thank you. I’m here today with e-mail. Likewhat? My my good friend. Then, you know, this this annoying guy, if you if you play sports and he get the ball and and he’s in your team, then it’s a good thing. And then he’s in the other team and then he scores all the time that you and that’s that’s you. And I’m still haven’t forgiven you for when we played football and your team won every single game all night. So thank you for being annoying. And thank you for being in my team today.

[00:01:04] You’re welcome. And two months ago, we did an episode about finance and a recent that we did. That episode is because both me and Eric, we had lost quite a bit of money doing investing and we realized that we had taken too much risk. So we have now spent the last two months researching on how can we make intelligent investment decisions as individuals. And you may notice that we are wearing shirts today, which makes us totally qualified to talk about these subjects. Not really. We are we are not experts, but we are two very engaged nerds. And what we have tried to find is a strategy that is not too complicated to work for regular people, something that can be useful. If you’re not an expert, because I guess there might be people listening to this that think that investing only should be done by experts and that you can’t do it yourself as a regular person. Or there might be people that think they are experts and that they should make all the decisions. Or you might be someone that feel like I don’t know anything. So I’m just going to keep my money in the bank. And I suspect that regardless of which of these character you might be, there is going to be value in this episode for you, because we believe and we believe at least that we have found a strategy that would work really well for all of those people. You have anything to add to that dramaturg.

[00:02:52] And it was a good run. Yeah. God, right. I’d just like to say that I can relate to all of those different situations. Yeah, I’m in the situation where I feel like, OK.

[00:03:01] I don’t know anything. Let someone else deal with all of this. Things get headache out of my way.

[00:03:07] I’ve definitely been in a situation that I’m the king of the world. I know everything.

[00:03:12] And then I made some shitty decisions. And I think the thing that I can relate to the most is actually the one in between. The overwhelming feeling of I don’t know what to do or where to do with this, and I don’t really want to engage myself in it. So I’m not doing anything. Which person I believe is the most common scenario that we don’t engage ourselves at all. And that’s how I felt when we when we started doing this. The reason why we did the other episode was a big part of it was that I hadn’t been doing anything. So I had put my money in places. But then I kind of got overwhelmed and not interacted with it and not anything else. I got that paralyzing, overwhelming feeling from that. So I think that’s the one I can relate to the most myself.

[00:04:04] You can totally relate to that. And if you’re curious about the emotional aspect and the history of this, there’s an Episode 10 of the Become a great podcast that is called 40 million euro loss or something like that, where we talk about our experiences of losing money and how that affected us. But for now, Eric, investing. Do you have any experience in this area? When did you begin thinking about this?

[00:04:33] Ok, I took my first stumbling steps in to invest it into investing in shares. When I was I think I was 16 or 17, so somewhere around there and I took some of my savings that I got him from my parents and I put it into this stock portfolio website. And the first share I bought was Ericsson, the Swedish huge company that absolutely can’t fail and never can do anything wrong.

[00:05:02] We’ll start because it had the name Eragon. Of course it does. You’re just jealous because no company is called a bill. I’m going to start.

[00:05:18] Yes, it was because that Erica, honestly, I don’t know why it was because it was a big Swedish corporation that’s been around since like forever. And the first day they had the biggest drop that they’ve had since the Internet crash. I think they lost 10 percent. There’s something and it completely killed my entire spirit of investing in shares. So I didn’t touch that account for probably seven years or something after that. And well, once again, got into that paralyzed. I don’t know what to do here. Kind of feeling. Mm hmm. That’s that was my first stumbling steps into two investments. And how did you how did you say you were? I think I was 17. Six, sixteen. Seventeen. Somewhere around there. How did you get started?

[00:06:09] I started reading books on investing. When I was not actually I started when I was soon, I was 10 years old. I think I’ve got some savings from my grandmother. And then I put that into stocks. So seriously reading their stocks newspaper every morning, looking how my stocks did. And I started reading books when I was twelve.

[00:06:30] I just picture this. Did you got to be the nerdiest 10 year old ever? I can see you sitting in one of these guys. I actually wanted to wear a suit when you were 10, sitting by the dinner table, drinking coffee, even though you’re 10 years old, just because you’re supposed to do it. And it’s paper and you had glasses. You definitely have glasses.

[00:06:50] I should have glasses. That would have fit my fit my image. Yeah. Maybe most excitement. There was a part of me that would become a professional poker player player later on. But kind of like the variance. Variance, believe it. No.

[00:07:06] But I really picture in my head how you look. Somehow you have a lot less hair as well. Look, we had a glorious haircut. I had the one where it’s equal long on all sides would make Nick for nicking Backstreet Boys. My idols add me kind of thing.

[00:07:23] None of my thoughts about where it’s just equal along on all sides like this.

[00:07:29] Never mind talking about haircuts later. OK. Sidetrack a little bit. So back to the investment in 10 year old emigrating business magazine.

[00:07:36] Yes, I read books about from Warren Buffett, the one of the richest people in the world. And his investment strategy was that. All right. It was pretty much like this. Not even experts knows what they’re doing. They’re not good enough to beat the market, which is just the average results of every company. So people are not good enough to be able to predict the future. Well, a very few number of people are capable of that. Then if you’re not one of them, you shouldn’t even try. So. All right. I shouldn’t try. Just put it in some in an index fund that just mirrors the market. So I pretty much stopped looking after reading about four books since most of them said pretty jewelry or books on investment when you were 10 years old.

[00:08:25] Years old. Oh, that’s the way they were.

[00:08:28] Books like If I finished four new magazines of Donald Duck.

[00:08:35] Well, here’s the hole that read a lot of don’t book.

[00:08:41] Ok. So basically we’re trying to say that we’re not experts here.

[00:08:45] And Emma was a 12 year expert, but then he didn’t keep track.

[00:08:50] I could overcome it anyway. It’s safe to say you’re a nerd. Let’s put it that way. Oh, yeah. Oh, yeah.

[00:08:58] So whatever we’ve been up to the last two months.

[00:09:01] Ok, so two months ago, we felt we really needed to dig into this and get a better understanding, mainly after me losing 40 million euros on the stock exchange last year, which we talk about in the previous episode that’s even mentioned. And I started this with an overwhelming feeling like I don’t really want to deal with this. And at the same time, I thought, OK, Eric, you have to wake up. You have to get an understanding about this. There is too much at stake. And we decided to OK, let’s focus on this together for three months and learn together and see where can we take this. And the first thing the both of us did was to read a thick book. I think it was like 700 pages or something. Money Monster, the game where Tony Robbins had interviewed Warren Buffett, as you mentioned, and a ton of the other richest people in the world of of their advice and how to interact with money, what to do and what what not to do. And for me, I felt like, OK, this is a great way to start. And it’s raised a lot of questions and. The book kind of became the the of tree, and it added a lot of questions in the different branches going out and then Google became my leap’s, so I just sat down and read on these things and I started MindUP this these questions and prepare that you have you over here. And we did a 10 day get together with the intention of studying finance all the time, but we had too much fun.

[00:10:40] Other stuff.

[00:10:43] But either way, the main what was fascinated about that for me was I came into this thinking that it would be super complex and super complicated. And yet pretty much all the experts that Tony interviewed were agreeing on on the same thing, that there was one way of investments that was superior to pretty much everything else. But in that particular way, the banks didn’t make any money, so they didn’t advertise it. So. That became interesting for me. How what did you pick up from these things?

[00:11:27] Pretty much the same thing, and I think the book did a good job of highlighting the biggest mistake that a regular investor will do. And I think that is kind of the value we can bring in this episode to talk about common mistakes and make sure that it’s not something you do if you’re listening and you have money that you want to invest, but you had you don’t know what to do. So I’d say let’s dive into some of those mistakes. We now know that we should at least be wary of.

[00:12:04] All right. OK. So.

[00:12:08] We thought in the beginning I talked about. I did trusting experts are trying to be your own expert. So let’s start with being your own expert. What is the mistake that can be made if you are trying to be an expert and pick the right stocks, trying to hit the right trend, trying to buy something that is hot?

[00:12:33] Well, I think that the first challenge with being the expert is that it’s far more likely that you think you are the expert than you actually are the expert. I mean, this this goes back to to both me and Emily.

[00:12:46] We used to be professional poker players, and it was a very common thing there that some people won a lot, even though they might not be super skilled and thinking they were super skilled just because it was luck. So in poker, roughly one person out of ten wins money and is a good player.

[00:13:07] And if you ask people, I would say nine out of ten would consider themselves good people.

[00:13:12] I think players and experts and would be beating most of the people. So if you were to look in poker players, I believe that a lot more than one in ten would claim to be an expert and would see themselves as an expert. And I think the same thing goes on with with investing that it’s very easy to think of yourself as an expert. Where I’ve definitely thought of myself as an expert and not being it at all. So I take decisions based on a false sense of knowledge that that I don’t have.

[00:13:43] And I think in poker, I think one in ten people might be winning. But in the end, it’s a lot less than that. It might be 1 percent of the players that are big winners because the one in 10 that is winning then end up playing against a bigger fish on a higher level. And then they’re not one the one in 10 anymore. So it’s almost like if you look in the ocean, you have tiny fish been eating by medium, fish being eaten by sharks being eaten by, you know. There’s a few people at the top of the food chain that eats a lot of fishermen. And investing seems to be similar where a lot of the fishes things they are winning. But then there’s a couple of big fishes that eats a lot of the food.

[00:14:30] I know is sidetracking a little bit right now. But I can and cannot help myself from saying that this is obviously what all the experts were saying in this book. All the world’s richest are that you should invest all your money in playing poker.

[00:14:41] Yes. OK, do not invest all your money and play poker. I was kidding.

[00:14:47] Disclaimer If you could take the time machine in 2002, you should play poker. Otherwise, do not do it. It’s impossible these days. And who?

[00:14:58] Ok. So the thinking. You’re the expert, ain’t you? Probably not.

[00:15:02] Yeah. And what poker does is a game is that it’s creates an illusion of competence because of the luck is so big that even a bad player can have luck in the short term and have really good results. And then they think they’re much better than they are. Same thing goes for investing. A really bad investor can make just a random investment. Be lucky. And then they think they are the Michael Jordan of investing.

[00:15:29] And that makes sense. This brings me to this this analogy you told the other day about guerrilla’s.

[00:15:35] It’s a similar situation. Yeah, let’s let’s save that one for where we talk. I like the metaphor. Oh, Jesus. Yeah, like that. Or I’ll say that, but I like it there. There would be a gorilla metaphor at some blue cliff hanger. OK. So what are the other downsides of thinking you’re the expert.

[00:15:53] Have a really good second gorilla story. Have you seen this before? I have to tell a sidetrack gorilla story. Have you seen this video where there is it’s a basketball game. And there is hundreds of people in the audience. And then in the middle of the game, a gorilla, a man in a gorilla suits run across the game. And people don’t see the gorilla because they don’t expect the gorilla.

[00:16:19] I think we really need to link this one in the description. I hope we’ll be seeing it sometime. Yeah. It’s easy to find it. It’s really cool. Here. You’re supposed to look at the ball. Yeah. And they’re throwing around the ball. And then a gorilla dances through the screen and no one sees the gorilla because everyone’s looking at the ball.

[00:16:38] I’m not expecting a big sidetrack, big satellite or any value. But we appreciate your time. It brought that picture into my head and it got me smiling. So I’m projecting more energy into the world.

[00:16:50] Yeah. I mean, if you think you’re an expert giving that a few expert makes almost all of the money. What makes if you’re a regular investor just going on gut feeling or read one or two books. What makes you think that you are better than the people who dedicated their entire life to perfecting the skill of investing? Me, for example, I played poker for over 10 years as a professional. I played 5 million homes. I started one hour a day. And still some people that just started playing think, wow, maybe I can outsmart him. You can’t have luck in a short time. But you’re not going to outsmart me. You can’t. You didn’t have glasses done many base march. Yeah, but that’s the problem with being an expert, I think. And also, it’s very difficult.

[00:17:40] And I think what was said before, like you think you’re an expert, but yes, I definitely thought of myself as someone who knows more than the markets. And yeah, I did not.

[00:17:50] Yes. And it’s not strange because you have been very successful in other areas of your life. Maybe you are good at sports, you’re good at business. Then it makes sense that you would be good at investing, too. And I said when I’m out on the tour playing live poker tournament’s all the time. I see businessmen out there successful in business and relationships. And of course, they’re going to be good at poker as well. I do, too. It doesn’t do being good quality.

[00:18:16] And I faced some sum this up. Yeah. It’s easy to think that we are experts and we’re probably not. So if we’re in the first category seeing ourselves as experts. It might be a good idea to reconsider.

[00:18:30] And I think the most crucial time to do that is if you are tried to be an expert and you’ve been successful, is do not assume that means that you know what you’re doing.

[00:18:40] Yeah, yeah. Can you repeat that? I didn’t quite get it. Okay, cool. So.

[00:18:48] You have tried to be an expert picking stocks or let’s say you tried playing poker and you have been doing really good for a while. That doesn’t mean that you beat the game and that you should move out, up and stake and quit your day job, right? Oh, it most likely mean that you’ll be lucky.

[00:19:06] Ok. So be aware that it was more likely luck than anything else. Yeah. And we’ll tie this back to the gorillas.

[00:19:13] Another cliffhanger further into the episode.

[00:19:19] All right. So let’s let’s look at the other side. The complete opposite of thinking. You are the expert doing your own investing. Imagine you think I’m. I don’t know anything about investing. I’m as far from an expert as I could possibly be. I have to leave this into the hands of professionals. Can you relate to this? And what is the potential mistake here?

[00:19:45] Yes, second, definitely relate to this. So.

[00:19:49] The challenge about trusting someone else is that they might not have your best interests at heart. So two situations come to mind for me and when I started. So I made a lot of money when I took my previous company to the stock exchange and I wanted to invest millions of euros in something.

[00:20:13] And I remember the first investor banker I spoke to gave me advice and turned out. And I follow those advice. I bought this and that share that they recommended. And they were horrible. I’ve been the worst investments I’ve done. And when I read on it later on, I realized, OK, these are not the best companies, but there are companies that that bank had helped take to the stock exchange. So it was in that bank’s best interest that these shares were doing well. Not necessarily me as a client’s best interest. So they gave me advice where they were clearly biased, saying that these shares are good because they want the company to do good because they have recommended that before and they helped them with a lot of services. So there was clients of the bank rather than me. So I ended up losing hundreds of thousands of euros because I followed the first advice that I got there and I realized afterwards, like I felt.

[00:21:13] Felt the deep mistrust and I felt stupid because I hadn’t done the research on this. This my on my own. So I thought that they would have my best interest because I was a client and it turned out they did not. And then I didn’t follow any bankers advice for a while. I did my own thing. I considered myself an expert, but I still met with the banks regularly. And when you have a lot of money, the banks want to be your best friend. So they flew me to Barcelona to watch Formula One with a lot of superstars and stuff like that. So I got to do these cool things. But I also then got tied back into talking to these these bankers and getting advice. And one thing they kept telling me was, OK, Eric, you are having to high risk. You should lower your risk, which was solid advice. And me considering myself to be an expert. Didn’t want to listen. And after a while and a bunch of meetings when they realized that they could not get me to lower the risk and following their advice, they instead flip everything around and tried to get me to double my risk because they wanted to sell me products they could make money from.

[00:22:28] So they lost all their credibility for me when their first advice had been always lower your risk, lower your as Gloria risk. And then suddenly they started telling me double my risk, double my risk and my feeling with that. And I’m not sure if that’s true. My feeling was that, OK, they just want to make money from me. The first advice was that it wasn’t advice. It was. They wanted to sell me something that lowered my risk. And when they realized that they couldn’t sell me something that lowered my risk, they flipped it around and tried to sell me something that doubled my risk. So this is them in the challenge with with trusting experts that they work on commission. A lot of the time they they are usually they have titles that advice or anything else. But in my experience, there are sales people going for bonuses and their best interest is not the same as your best interests. A lot of time because what what brings them the most money is likely. What brings you the least money? Because they need to take the money somewhere. Yeah. Did was this easy to follow?

[00:23:35] Yeah. I made a lot of experts. Not always, I guess, but I think a lot of the time their job is to make money for the bank and not for you. And to do that, they offer investment opportunities that are good for banks. And I guess they also charge you fees. Right.

[00:24:03] And how are those fees affecting your business is another thing that I’ve been really focused on the last two months. Understanding bank fees and where is the money going and how much is being charged everywhere because it’s a mess. And I’ve realized that I pay tons and tons of not hidden fees, but fees. You need to kind of read the terms and conditions to see. And it adds up a lot. There’s. So I pay some money just to have my bank account on a yearly basis. I pay some money every time I buy something and sell something and does something. I pay for some advice. I pay for some tax planning thing. I don’t use. I pay for all of these different things that’s involved with it. And it’s not like you go to the store, you buy a can of coke and you know, it’s one euro. It’s like, yeah, it’s zero point two, three percent. Here’s 0.1 percent here, 2 percent here. And it’s a lot of teeny tiny things that altogether look like nothing. But when you squeeze all those fees together and start looking at it, I realize that that’s taking out a big portion of my investments without me even being aware of it.

[00:25:20] But if it’s like 0.25 percent here, 2 percent here, it doesn’t sound like it’s that much. But I guess you or I know that you have calculated how much how much that actually adds up to.

[00:25:34] Yes. Well, it’s quite complex to get to a specific number, but that’s the core of it is it doesn’t sound like much, but it is a lot. So if you think of it, let’s say you have a thousand euros in the bank and you have 5 percent return on investment, that basically you make 5 percent extra every year on being on the stock exchange, for example. And if we just take the smallest and simplest example of this, you end up paying 1 percent in fees, then it sounds like you’re just paying 1 percent, but you’re paying 1 percent out of the 5 percent remaining profit, which means that you’re actually paying 20 percent of everything that you’re getting in fees. So for not really anything you can see in anything you understand 20 percent of what you made is is gone to the bank for whatever they did. And this can easily be lowered a lot by just being aware of these costs and knowing what bank to use or what investment method to use.

[00:26:42] And to be clear, that is 20 percent in one year, but an investment stocks. Could you explain how that how compound interests works?

[00:26:54] Not in a good way, but I can give it a try. Yeah. So if you think of a snowball and it’s on the top of the hill at first it’s very, very small. And then you just roll it down and it just get bigger and bigger and bigger and bigger from time. Not adding any force, not adding anything. So this is the idea of of investing. If you start with a thousand euros and then over time it will just increase with interest and the interest with compound over time. So at first let’s say you have let’s say 10 percent of return on investments every year. Then you start with a thousand euros. The second year is 1100 euro and then you get 10 percent of that, which takes you to one thousand two hundred and ten euros. And in only seven years, you will have doubled your money. So in seven years you’re up to two thousand euros. In 14 years, you’re up to four thousand euros. You double every seven years if you have 10 percent profit. But the same thing happens with the fees, then that the fees will increase all the time because of the amount of money will increase and it will take a big part of it. So it’s basically like if you see that snowball rolling down. If it would stay solid, it will just get bigger and bigger and bigger and bigger because everything kind of adds more snow to it. But if there would be a stick in there, it wouldn’t be able to roll as well or it wouldn’t be able to collect the snow everywhere. So it would be a lot, lot smaller. Even though it’s a small thing, not sure if that allergy really flies, but the snowball effect.

[00:28:33] So we made a lot of sense and ideas. Even though it’s 20 percent in the beginning, it could become more than 20 percent over time because the snowball control that well. And so think this is the good thing that.

[00:28:45] Yeah, yeah. You are listening to this and it’s interesting.

[00:28:50] I think it’s Google for a compound interest and examples. They will be able to explain it a lot better with numbers and with some pictures then. Yeah. Then I can do here.

[00:29:01] Yeah. It’s easier when you see it. And you took an example of one percent fees, but some funds have much more fixed on that. And if you’re up to 2 percent, 3 percent, then you can really limit how big your snowball can become.

[00:29:18] Yeah. And especially over time. And the main thing that’s important to take from this is it looks like small fees. But at the end of the day, there you. So if that’s the only thing that that someone takes from this, then that’s a win. Just that undestanding think if you can see this snowball and knowing that it will be half the size. If there are fees, that means that basically the snow has been melting and he’s not going to be able to be a big snowball. So just being aware of that has been a big thing for me.

[00:29:50] All right. So someone might be listening and say, okay, of course, I don’t want to pay fees. Right. But I don’t know how to invest myself. So I kind of have to pay some fees to let an expert do it.

[00:30:08] That kind of makes sense, right?

[00:30:12] Yeah. It’s easy to think of it that way. And that’s what what’s been the main gist of what we’ve been studying now that I’ve been going into this with the intention of, OK, I need to understand this. Probably I need an expert to tell me and what I’ve briefly touched upon before is this one way of investing that might solve this riddle, that it might be easy. And that’s all these experts recommended in the book or almost all of them. And that’s called index funds. And what’s cool with an index fund is that you’re buying a little part of lots of different companies, but there’s not one expert choosing them. They’re actually choosing all of them. So the main one is an American one called S&P 500, which is the 500 biggest companies in the US. And instead of someone then picking the five best ones or the 10 best ones and charging a lot for doing so, you’re basically investing a little bit in all of those. And no one makes a decision, which means that it’s a lot cheaper. There’s almost no fees at all. And you’re still investing in all the companies. So if if some of them goes badly and some of them goes good, you’ll get whatever it takes out. And what’s interesting with this is that, well, the 500 biggest companies in the US are likely over time, the 500 companies that have been the best at making money. That’s how they became the 500 big biggest ones. They’re the five on the ones that we’re best at growth best innovation best at these things, at least they’ve been over the past decades. So by just investing in those, you’re following the average and the average is is really good. Where has this historically been? Really good. And because there is no fees, barely no fees, you’re not paying any experts. And even if some expert might be slightly better than this, you’re coming out on top because no one is charging you that 20 percent of your profit.

[00:32:22] So instead of buying just a couple of stocks or just one investing in one thing, you’re investing in everything. You’re investing in all of the big components in the entire world, almost. So would you explain why it’s important to diversify?

[00:32:44] Yes.

[00:32:44] So basically what you’re doing here is spreading your risks. So we’re talking about our savings and the money that we care for. And if you have them in one company and maybe that company goes bankrupt for whatever reason, they lose their biggest client. They do whatever it is, something happened. Then you’re screwed. But if you’re in a thousand companies and one goes bankrupt, some other one wins the lottery. And it doesn’t really matter. So if you’re in one company, you can make a lot more money quicker, but you can also lose a lot more money quicker. And if you’re investing in, let’s say, the S&P 500, you’re investing the 500 biggest companies, you’re basically investing in capitalism, you’re investing in that. You think the world will progress, that you think we will come up with new innovations, that everything will be better tomorrow than it was yesterday. And that’s kind of the only idea you need to believe in. You need to believe in companies as an idea, because all companies have as they’re pretty much all companies have their main task to grow and make more money. So it’s enough that you’re investing in that idea rather than the one company. Yeah, that explain diversification or did I not?

[00:34:03] I think that makes a lot of sense, especially like the batture you’re investing in. You’re investing in the future. What did you say you put a draw to? Yeah.

[00:34:17] Yeah, I stole this. So this is something that I’m not sure if Warren Buffett or Jack Bogle or some of this brilliant geniuses said. So I can’t take credit for it, but I’m going to. So this was all my idea.

[00:34:32] And basically, you’re investing in in capital, investing in the idea that of companies.

[00:34:42] So if you’re buying all the companies, then you will go as well as the companies are going. So if you believe that tomorrow will be better than today, that technology will improve, that all of these things will happen and that we will be more efficient than smarter tomorrow than we were just today. Then it’s a good idea to invest in companies. And if you’re investing in an index fund or you can cheaply invest in tons of companies without doing the effort.

[00:35:09] All right. And how much money can you make in an index fund?

[00:35:15] I mean, that depends on how much money you put into it. It’s tricky to say if you’re looking at the S&P 500, this index fund of the US. It’s been going up with roughly 10 percent per year, which is a lot. And there is no way of saying that’s going to happen in the future. But in the past 10 years, it’s been 10 years. And yeah, so per year in 10 years, which means that if you put your money in 10 years ago, there would be more than double today. And it’s been going very well for a long time. But there is no you can’t know for sure that nothing’s gonna happen. We can have another financial crisis tomorrow or maybe artificial intelligence takes over the world and blows up all over the American companies. I don’t know. It could happen. Unlikely, but it’s one way of investing. That is surprisingly simple. It’s surprisingly cheap. Spreads the risks very well. And I think what’s been most interesting for me in this, because I know genius e-mail 10 to 12 years old, read about index funds, genius. Eric did not when he was twelve and not when he will save 17, 19 or for that matter, 28. But what’s been interesting with this for me is that the part about the banks barely make any money from it. And that also means that if the banks if we say that the banks are salespeople, which is my experience, then why would they sell you something that they barely make any money from? They want to sell you something with a high fee. They don’t want. So they don’t want to sell something that costs zero point 0 4 percent. They want to sell something that costs to present and.

[00:36:58] Yeah. Yeah. I mean, that makes sense. But then you said the index fund makes 10 percent profit a year on average. But then the bank might say, OK, we have a fund that is making 20 percent per year. And sure, we have a 2 percent fee, but that would still out up to 18 percent, right?

[00:37:20] Yeah, if if that was true and it very rarely is. So once again. Okay, now we’re going into complicated land and I’m going to try to explain this in a way that my my best understanding can. And it’s going to be interesting to see if it makes sense. So one of the things that I took from the book, which was very interesting, watch how these funds work. So they are index funds as we touched upon. And there are mutual funds which are in hedge funds. There are different kinds of funds. Let’s call them hedge funds. And these are funds where someone sits and selects the best different shares. And then they look very closely which companies are the best and they try to outperform the index. They want to beat the market because beat the market. And for this, they charge a lot of fees. And what they do is if you think of a bank starting 10 different funds today, then just based on sheer luck, they will choose 20 shares in each fund, for example, based on sheer luck, some of them will get better than index and some of them will be worse than index. And what it’s common to do then is that they take the ones out of the of their portfolio that got worse. So they stopped selling those because no one wants to buy the funds that were worse than index. And they keep selling the ones that were better than index and then they start new ones. So it looks like the funds have been beating index because they’re really, really good. But it’s much more likely that they’ve been beating index because they’ve been really lucky.

[00:38:59] And yeah, this is where you think it’s gorilla time comes into picture. I think you’re pegging out here this year. Give me the gorilla. I did. You did a gorilla? I did. I think the last gorilla. You did a grow.

[00:39:11] Ok. So guerrilla type.

[00:39:14] Let’s paint the picture for you. Imagine that you’re walking in in the old gym of your school when you’re twelve years old, reading a worm.

[00:39:27] And all around, all around.

[00:39:30] There are gorillas there. One thousand and twenty four gorillas.

[00:39:38] Think of the snap one thousand words. Think about the noise.

[00:39:44] Oh, and then you see that all of them are standing opposite each other one on one and they’re all holding a coin.

[00:39:56] And then they start flipping.

[00:39:59] And everyone should get heads if they get tails, they’re out. So 1024 flips can hear that sound, 1024 coins spinning around at the same time and their land and out of this, it’s very likely that five hundred and twelve will get heads. So five hundred twelve of the guerrillas will be out and then they do it again and we’ll be down to two hundred and fifty six. And then they do it again and again and again and again and again. And after ten times there will be one gorilla left mathematically who have done ten flips in a row and got in ten heads. Now, you could argue that this gorilla is very skilled at flipping coins. Or it could possibly be that he’s very lucky or she let’s say it’s she it has to be a female skilled grill. And this is basically what happens with the hedge funds, not the gorilla suit. Right. Yeah, the gorilla had a suit. Obviously the lucky as well. And they charge high fees for flipping cookies. That this is basically what happens in the fun market. So you can imagine that you start with 1000. And well, yes, it 1000 funds to make it easy.

[00:41:17] And after one year, half of them would not be as profitable. So they take them off and there’s only 500 left. And they might start 500 new ones. And after 10 years, they will have one fund that’s been immensely lucky. That made a lot of money that’s been so much better than anyone else. And because it’s investment, people would say they’re experts and they’ve done really good things. But if they were a gorilla, no one would argue that, or at least very few. Maybe someone would say it was a very good coinflip the gorilla. So it’s easy to look the bank and say, hey, but look at this gorilla. He has flipped heads 10 times in a row. Of course, the 11th time is gonna be heads as well. And the 12th. And so because of that, we’re gonna charge you more for betting on the gorilla. And it’s the same thing with the funds. I’m hoping this made sense. And people not just stuck with the idea. A thousand gorillas invite a lot of sense, but in a lot of sense.

[00:42:09] And.

[00:42:12] I mean, it makes sense, right? You can market a really good gorilla and at the same time. Have you seen any ads for the smell that it’s it’s oxygen. They just see the ads. Did you see the ad for oxygen lately on the news? Yeah, I’ve been buying a lie a lot. I love those ads, but no one is making ads for for oxygen because no one can make money out of out of air. Right. But no. And that is the ad and would be the index fund. It’s very tricky for banks to make money of it. So no one would market it.

[00:42:50] And it might be the best and most important thing. So is obviously the best thing for us as humans. Without that, we would not survive. Many minutes and we can definitely survive without index funds. So it goes a little bit over the top. But I like how you put it like no company makes money from it’s a no on advertising and no one really tells us how important that is. And it’s the same thing here. So that’s why I’ve been investing or considering myself an expert in many ways. And I didn’t even know of this or how it worked.

[00:43:23] It’s funny how these three months have progressed. I kind of feel like Frodo from Lord of the Rings. And, you know, I’m heading out with Gandalf on this big adventure leaving shire, do all this cool stuff to the ring in the fire. And then I come back to shire and everything is the same, but I am different. And I kind of feel left out in this financial journey that I started off 12 years old. Warren Buffett saying don’t pay a lot of fees. Experts don’t know what they’re doing by an index fund. And I’m here later having started done the work by an index fund. But at the same time. So it’s the same. It’s still shier.

[00:44:01] But I am different in China. I have a higher understanding of the analogy.

[00:44:09] Ok.

[00:44:09] So basically what we’re saying is index funds are the secret sauce to investing, at least that’s what we consider with our nerdiness and not ex-partner’s. Should we then put all our money in index funds or what’s the downsides of of index funds?

[00:44:27] I mean, it sounds like you’re putting all of your money in one thing, but at the same time you’re putting all of your money and all things, so you have a lot of diversity. Then like if you want to be read and heard about it, you can have it’s kind of different index funds. You can have index funds in different markets. But what do you say?

[00:44:49] So I think it’s important to know that when you put all your money in an index funds, you’re putting all your money in, shares in. In reality. So the fund is just a lot of different shares and the stock market can still fluctuate a lot. So I think on the financial crisis, I think the stock market crashed about 35 percent. So it’s still if you put all your savings in to index funds, it’s not unlikely. But it’s not very unlikely that you will lose 50 percent of it.

[00:45:23] If if it’s a really crappy slide today, you really did 50 percent at some point.

[00:45:29] If you have them for 20 years at some point, very likely. Very likely. So this this is an important thing to keep in mind. So I I wouldn’t suggest anyone to put all their money into this unless they have a very long time horizon and especially not putting all the money if they needed to buy an apartment a year from now, because you can actually lose a lot of money in a short time. So even if you’re investing in 500 biggest companies in the US, they’re not going to go bankrupt in a year. That’s definitely not going to happen. But the stock market can plummet and the financial crisis can happen and there can be a depression or whatever. There could be a war and then it might happen. So depending on your your risk tolerance and your timespan, there might be the right idea to put 10 percent of your money into index funds or 90 percent of your money to index on depending on how dependent you are.

[00:46:25] So if you want to take lower risk, wish you did put the rest of your money.

[00:46:31] The lowest risk is to just have your money in a bank account. You’re not going to have any interest, really, you’re not going to make barely any money from it at all. But you know that if you put a thousand euros in the bank account and given that it’s not a really crappy bank, you will have a thousand euros there in a year from now as well. And then there are all kinds of other tools where you can get some interest. There are bonds and a lot of different value papers that I don’t know much about and definitely not good enough to explain it very well, but it’s good to be aware of that. There is there is a significant risk in index funds, even though if it’s a lot less than buying a couple of things. Right.

[00:47:13] So bond so some bonds give you a lower, low interest, but it’s much lower risk. So. So, yeah. So what is the risk then? Would having money in the bank? Because what you say you have a tosser, you are now.

[00:47:27] But how does that look like in the future?

[00:47:32] Well, so the main risk is inflation. Basically money becoming worth less a year from now. The reason why you 50 years ago could get a lot of stuff for a penny and now you can’t use it for anything. So that’s inflation. And that happens all the time and roughly about 2 percent per year. So if you have a thousand euros and you put them in a bank account now with no interest in reality, you will still have a thousand euros a year from now. But those thousand euros will only be worth. Well, 98 percent of what it used to be. So you’re down to nine hundred and then nine hundred and fifty euros to your. So that’s what happened. That’s the biggest risk. I would say not looking at bank might go bankrupt, which happens, but that’s going to happen for sure. So you’re always taking a risk in a sense by not being in the market as well. It’s easy to think that it’s safe to not do something, but it’s not necessarily the case.

[00:48:41] Yeah, that’s that’s well worth putting under that. Yeah. For sure.

[00:48:47] Right. So I think it’s time to start wrapping this up. So what are your biggest insights during these two months?

[00:48:59] Well, there is one thing we didn’t touch upon. Well, we kind of touched upon it. So we we mentioned in the beginning that you could either think you’re the expert and maybe you’re not. You can think you’re definitely not the expert. And then before it’s trust experts, which might not be the best case because they might be expensive and biased.

[00:49:17] And there is the third category, which is you might think that this is overwhelming and you’re not doing anything, which either then could lead you having the money in the bank account but not doing anything else. And this is the one I resonate the most with myself. I felt overwhelmed. I haven’t done anything. And one way around that would be to just buy index funds. But I haven’t done that in the past. And I can see that’s been holding me back. And they can then see the problem with this, like the thought of how overwhelming it is. Makes me not want to do it. And just going into this for a couple of months, reading a lot, discussing it with you, discussing it with other people that I know and trust and feeling that. Index funds sounds too good to be true. It sounds too too easy. And still, it seemed to actually be that good of an option.

[00:50:13] Sure. It’s not Nirvana. It’s not gonna solve all your problems, but it’s very likely that it’s a good option to do. And well-worth are there looking at some YouTube video just explaining this or trying to get whatever we tried to explain here? Even if we’re far from experts or resort rhetorical genius in these kind of aspects.

[00:50:34] Just being aware of standing still might be the worst option for you. It might be better. It might be even better to trust the experts then to not do anything and be paralyzed.

[00:50:46] That’s one thing I just wanted to highlight.

[00:50:52] But jealous. Let’s wrap it up. What? What did you take with you from these weeks of study? Months.

[00:50:57] I think the biggest thing that I haven’t thought about this before, but. One thing I got out of it.

[00:51:07] It’s definition of what it means to be financially independent, that works for me. Right. So before when I was 12, I learned about index funds by when I thought of someone that is financially independent. I would think that’s at least 10 million euros, at least if I have at least that they would not maybe not even then I would be financially independent because I couldn’t do whatever I want. I couldn’t like have two airplanes and whatever.

[00:51:38] But all 10 year old only wanted to airplanes, humble guy.

[00:51:43] Yeah, but I mean, to me, financially independent, independent would be. Being able to do whatever.

[00:51:50] Right. Yeah. And.

[00:51:52] Tony Robbins defined financially independent as having a passive income, which means the interest from your investments, that is higher than your expenses. So one way to do that is to have a lot of money or you can lower your expenses and being able to have all of your needs covered with a lot less money.

[00:52:14] Right. So.

[00:52:18] Basically owning your own time. Yeah. So if you have if you have passive if you have interests that covers your costs of living like your rent and your food and whatever you do on a regular basis, then you don’t need to work. You don’t have to.

[00:52:33] You don’t need to. You probably are going to want to because you probably want to do something that feels meaningful where you can contribute and grow and learn. And at the same time, you don’t want to sit. They would come from pure lust and passion. Right. And what I realized is that the money needed to do that is actually a lot less than what I thought.

[00:52:54] So imagine you have. 5 percent return of investment on your money. That means that.

[00:53:05] If you have this math might be a little bit complicated, so you. If you could clarify this afterwards, if you have 20 times what you spend in a year with 5 percent interest, then you are financially independent.

[00:53:21] Ok, so let’s let’s take that into the example, let’s say we have costs of two thousand euros a month rent and then and we need two thousand. That’s twenty four thousand euros. Yeah, yeah. That that we need. So we would need 20 times more than that, which is roughly then five hundred thousand euros to be able to do whatever we want and not have to go. So with five hundred thousand euros in the bank and five percent interest or return on investment from the stock exchange would be enough. Not having. Yeah. If you if you just have two thousand euros a month. Yeah. Expenses which is. Yeah. OK.

[00:54:08] Yeah. And that is kind of that’s kind of cool. Christos. Five hundred thousand euros to be financially independent. And I would have never guessed when I wish some I would have done this math in school actually because for my whole youth I thought all right. To be feel really secure financially. I made ten millions, but I think the biggest thing I realised that the best number is a lot smaller than I thought. And that makes it seems a lot more doable.

[00:54:35] I think it’s much easier to reach her. I don’t have to take super high risks. And yeah, it seems much more doable.

[00:54:46] And yeah, you can take it down to a hundred thousand euros done as well. For example, if it have 5 percent return on investment of that. That’s five thousand euros a month, which is roughly 400 euros extra five thousand years of a year, which is roughly four hundred euros extra a month, which would make a big impacting in anyone’s earnings. And it would also help saving if you want to do that, so that once again, if you have those hundred thousand, let’s say, which is still a lot of money, but that means the snowball has started early. So you would get four hundred euros extra month that would just go into your savings from having that.

[00:55:26] And imagine you had those five hundred thousand that would cover your expenses of 2000 euros. But then imagine that instead of spending that money, you kept working because you wanted to, you could cover your expenses. Then that money instead would just keep compiling and that snowball would just roll. And after a couple of years, that money’s doubled.

[00:55:47] Now your passive income is twice as much and that the passive income keeps increasing as well.

[00:55:56] That’s the biggest thing I’ve. What is the biggest thing you learned?

[00:56:02] It will simply that I went into this feeling overwhelmed, feeling that this will be so complex. I’m gonna need to to put so many hours in your ears and wherever I looked, whatever expert I saw or whoever I spoke to. It’s like, hey, index. And it seems so much simpler than I am.

[00:56:22] That is an expert that don’t have an interest in selling you something seems to be very, very valuable insights.

[00:56:29] So every every expert that can’t make money from me or is not in this to make money for me has been recommended. This and it makes it’s so easy. And I haven’t found any big downside with it other than yet. You’re still betting on the stock market. So there’s is a.

[00:56:43] I think it really could benefit of index funds as well. Is start. You’re never going to buy or sell something. So if you have stocks, you are always, like I say this a good or. Is this a good time to actually own that tech stock or that Ericksen or that whatever. But here you could literally just buy your index fund and never look at it again. You could buy it and not look for it for on it for ten years, because regardless what the market is doing, you’re just gonna keep owning that index.

[00:57:15] Yeah, and he’s gonna save you from a lot of nightmares and bad sleep and bad decisions because it’s very easy that you sell because the market crashes or you buy because B going up for a long time. And that means that you’re selling when it’s actually the low price and buy on it’s a high price.

[00:57:31] And that’s another and I mean, if you’re gonna owe something, if let’s say I’m buying an index fund and I know this is money that I put aside for me being older. Right. I might not touch it for 30 years then. I know that during that time there will be a couple of drops as big as 50 percent probably. And I know that beforehand. So when it happens, I don’t have to like sleepless at night worrying about it.

[00:57:56] I’m prepared for it. Yeah. Cool. I think that was pretty much it.

[00:58:04] All right. I’m I’m happy to learn. All right.

[00:58:07] And as always, if you have any comments, ideas, suggestions for improvement that you like this dad hated. Would you like some more should’t financial advice from two happy nerds wearing shirts looking like they know what they’re doing? Send us an e-mail to podcast. Great.

[00:58:25] Thanks. All right.