Stock market fundamentals: fees, orders and asset allocation

0:01Winston and I are super excited to have slaved away for about 3 and a half months to record this, endless hours of editing it, and 3 years studying economics, working on a bank and everything else, and actually giving you a free course that delivers real value. Basically in the next 6 hours you will get the financial education that you should have had at school, and it's a freaking scandal the government doesn't give it to you. Follow the money trail if you want to figure out why.

0:37But by watching this video, and maybe you'll watch it in parts and maybe you'll rewatch some parts of it, I think you're going to get tremendous knowledge, tremendous skill. And making money from your money is a skill, it's a skill you can learn. It's no more difficult than learning to drive a car or repairing an engine or something, which is something I have absolutely no idea about, but I know I could learn it. You can learn to become an amazing money manager, but first you need to understand the foundation. How does it work, what are the asset classes, how are companies valued, all that stuff is in the following 6 hours.

1:19So I couldn't think of a better way to celebrate 150,000 subscribers, which is insane, than giving you the most value that I could possibly think of in this video. I hope you enjoy it, I hope you get a tan out of it. There is also a handbook that you can download, there's a first link in the description down below, and it'll give you additional resources and links to all the things that I use and so on. And if you enjoy this video, if you get some value out of it, share it with people. That's really what this is all about, right. We want to make a million people financially free here, me and Winston and all of you I hope.

1:58And to do that we need to reach more people, more people need to get the financial education they deserve. So spread the word, enjoy the video, get studying.

2:09What actually is a stock market? I think it's a question many of us haven't actually asked ourselves for some time. Well what is it really? Well it's a market much like a real physical market that sells groceries or vegetables or something, where basically you can buy or sell and issue shares of publicly traded companies. And also it isn't just actually stocks that are traded, it's also ETFs, other funds, bonds and various other financial instruments. The leading stock markets in the world are probably the New York Stock Exchange and the NASDAQ and perhaps the Chicago Board of Options Exchange. There are of course many others around the world, but fundamentally I think the US model is what has been copied around the world, and that Anglo-Saxon US model of market regulation is in most exchanges around the world.

3:04So how does it really work, what is it really all about? Well it basically gives you, or us rather, a secure and managed environment in which we can trade financial instruments. So say it's a stock market, you have thousands, hundreds of thousands of people who want to buy a stock and want to sell a stock at certain prices, and their system figures out exactly the most efficient way of doing it. What else do they do? Well they give us the opportunity to do that very trading at very low prices typically speaking. They charge pretty low nominal fees. They provide us with data, real life data, sometimes slightly delayed by 15 minutes or so, but near life data. Also certainly they charge you for access to real life data and historic data of companies.

3:57They are two markets really within each stock market, the primary market and the secondary market. The primary market is basically for IPOs, initial public offerings. So when a company first goes public, i.e. they want to list their stocks on the exchange, they need a stock exchange to essentially tell them how to do it, an efficient method of pricing those stocks and providing a regulatory framework whereby they have to provide, the company has to provide, certain information, certain updates. When they do certain deals or trades, insiders sell stocks, buy stocks, they lose some money, something unexpected happens, they have to file their quarterly earnings, all these kind of things. It's all regulated essentially by the stock market or their regulator, in the US that will be the SEC.

4:44And that's a very very good service they provide, I think we have to really admit that. Most trading of course nowadays is done electronically, there's very very little left that is done in paper, and that makes things more efficient and allows us to basically get the best price when we buy or sell. The secondary market is essentially whereby companies that are already listed, you can then buy the shares from the guys who bought it at the initial public offering. And then from there on after we are all in the secondary market. The secondary market also gives companies that are already listed the opportunity to issue additional shares. They can issue also debt, bonds, they can even buy back shares or they can even delist the whole company.

5:34So there's a whole range of services if you will that the stock exchange actually provides that we just take for granted, but it works rather marvellously and that's quite important. Often stock exchanges then also create indices like the S&P 500 or the NASDAQ 100 index, and again those give us an easy snapshot of an industry, of a market, or of a country's even economy. And then people can create ETFs so we can buy the whole industry basically very very easily. So there's quite a lot of fantastic services they really provide for us, and generally speaking they make the market fairer than if they weren't around. If there wasn't a regulator it would be like a bazaar where you pay what the vendor thinks you're willing to pay, and that isn't really happening here.

6:26Now the whole liquidity is also a big big issue. Stock exchanges ensure that there is sufficient liquidity in a stock, if not they will actually suspend trading or delist them eventually. And basically protect investors as far as they can by setting uniform standards for companies and investors big and small.

6:51Who is in the market? Well there are investors, then there are speculators I would say, who you might call short term traders. There are of course stock brokers in there, who are typically licensed professionals, in the US they certainly are, and they are buying and selling securities on behalf of their investors who are doing something else, playing golf or something like that, and prefer to let a stock broker do it for them. There are portfolio managers again who invest on behalf of their clients, and they might make decisions or they might make recommendations rather. And then you have investment banks of course, they typically handle the IPOs, the initial public offerings, and mergers and other major items such as issuing convertible bonds for example and all those kind of things. And then you have custodians also who basically hold securities for safekeeping, so they are just there to hold things.

7:54How does the stock exchange actually work as a business? Well they charge a small fee for each trade, that's in addition to stamp duties that most governments collect. Or they also make money from data, so if you want to get access to live data for the NASDAQ for example you have to pay something like $2 or something a month as an individual, obviously more if you're a large corporate. If you want to get access to back data again they charge you for that, and various other bits of filing and subscription services that they have, because they get a lot of information obviously every second of the day. They also give access to certain traders who are allowed to do high frequency trading, again that's an additional paid for service.

8:44Is any of this ever going to change? Possibly with blockchain. There is I think an opportunity to do stock trading more cheaply, more efficiently, at lower transaction costs than we have right now. So we might see competing exchanges being set up, or perhaps the existing exchanges acquiring some of that blockchain data or paying for licence fees to somebody who has it. So that's a quick roundup here on stock markets overall, part of our introduction series to really understand the terminology of all these very very important parts of the financial world that we live in.

9:22We're going to discuss the kind of market orders, the kind of orders you can place when buying and selling stocks. You might have noticed on your brokerages, whether it's on your phone or on your computer or wherever, there are lots of options and a lot of people find them quite confusing, and I totally understand why. So we're going to go through that. Guys as always remember this is not financial advice, this is just for educational purposes I suppose in this instance, but also for entertainment. As always I try to make it as entertaining as I can, but I might write a few notes here and you can see my horrible handwriting.

9:54So what are the kind of order types we have? Well the first one is basically the market order. You will see that I was a lawyer at one point and that ruins your handwriting, so I blame that on it. So what's the market order? Well you're basically saying I'm going to buy this at market price, and it guarantees you that you are going to get this order.

10:20Executed, but it doesn't guarantee you any kind of particular price. I'm not a huge fan of them. I suppose sometimes it doesn't really matter with certain stocks if you just think, well, it doesn't really matter if I buy this a few cents or dollars higher or lower, I just want to get my hands on it. It is a popular choice in the sense that it does it like that without any delay, and that can be advantageous, but you just simply don't know the exact price you're buying it at. So I prefer personally to set limits, and that's really the next type.

10:54Limit orders. So what's the difference here? It's quite simple really. You are basically saying I'm going to buy this order but I'm only going to buy this at say $10. If the stock price before your order gets executed goes to $15, it simply won't get filled. So your order will just sit there pending whatever, and it might expire at some point depending on what brokerage you use.

11:27So the other thing to understand with that is it doesn't mean that you're going to buy it necessarily at $10. You might buy it at $9.95 if it's your lucky day. So it's a maximum, it's a max limit typically. So there are a couple of variations of this. There are buy limits, and that's basically you purchasing it below a specified price. This is the one you see most frequently, buy limit, probably the standard option on most brokerages.

12:02Now there are also sell limits of course, which say you're going to sell this only above a certain price, and that can be a nice way to exit. You can have a sell limit too, or you can have a buy stop or a sell stop, and I might have lost some of you now, apologies for that.

12:36So a buy stop is basically an order to buy a stock or a security at a price above the current market bid. So it basically only buys you in above a certain level. You might wonder why you want to do that. We're going to get into the details of that a bit later, but it can make sense in certain situations, for example if you sold short.

13:02Then the 4th option here is a sell stop. A sell stop is an order to sell a security at a price below the current asking price. So basically it only becomes active after a specified price level has been reached below that, that's when it sells. Again that makes sense in some situations, but really the main ones you are likely to encounter are buy limits and sell limits, and they kind of matter the most.

13:30Now what is one thing to bear in mind with this? As always with trading, the big thing is cost. Always check out the cost. Some brokerages, especially the more traditional older ones, have higher fees for limit orders than for market orders. So if you say I only want to pay $10 for this, not $10.02 or $10.03 or $10.05, some brokerages just charge you higher fees for that. So check with your brokerages.

13:57One of the most important things in trading or investing I think is keeping an eye on fees, and a lot of people don't. And 0.5% here, 1% there, 2% here and there, it really adds up and it massively erodes your long-term performance of your investments. I'm going to cover quite a bit of that really here, because that in some of the next lessons, that is a super super important thing to look out for.

14:21Now you might also have heard of some other ones. There are quite a few other ones as well, and we're going to just run through a couple here. So these are the little bit more exotic ones. You have a stop loss, you have stop limit. We also have all or none, sometimes also abbreviated to AON. You also have something called IOC. It's not the International Olympic Committee. You also have FOK orders, and that is not an abbreviation for a swear word. There are a few others I suppose which we could also run through. There is GTC, there is day, and also take profit.

15:37So stop loss orders are fairly simple. They are basically telling you if your price drops below a certain level, so say you bought a stock at $10 but you can't sleep at night if your stocks drop more than 10%, you just can't handle it, you can't afford it, that's the maximum risk you're willing to take, which can be a very sensible decision depending on your investment horizon. You are basically saying I'm going to do nothing with this, but when it hits $9, so 10% less, it automatically sells it. That can be a really sensible way of just setting downside limits, especially if you're trading in volatile stocks.

16:19Some growth stocks we look at, things sometimes they go down 30% in a day or something. You might not want to go down 30% in a day. You might only want to do 5% or 10% or whatever it is. For that I would always look back at the volatility though of the charts, and we are going to get into charts a bit later, how you can see and read volatility quite easily. Because if you have a stock that goes up and down 10% each day, if you set a 5% stop loss order, a fairly good chance, 50/50, that you are out on day 2, in which case you've just spent money on 2 trades and you haven't really achieved very much. But it's a really sensible thing to do.

16:57What are stop limit orders then, the 2nd one here? They're quite similar to stop loss orders, but there is a limit on the price at which they'll execute. So there are 2 prices specified in a stop limit order. There is firstly the stop price which converts the order to a sell order, and the limit price. Instead of the order becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price or better. So again this can mitigate the problem with stop loss orders which can be triggered during a flash crash when prices plummet but subsequently recover. So it's a little bit more of a sophisticated way of looking at it. Again we can look at some of those things a little bit more in detail down the road.

17:40I also wrote down all or none, AON. Now you might never have encountered this and you might never encounter this in your life, in which case go and get yourself a cup of coffee. But if you trade penny stocks, and this has become a popular thing again of late, the revival of the 80s, looking at pink sheets. And why are we excited in penny stocks? Well, there is potentially an opportunity to make a lot more money or lose a lot more money, as somehow people seem to be particularly attracted to stocks with very low nominal share prices. That doesn't mean by the way that the stock is cheap. It just means that basically there are too many shares outstanding or the company really isn't worth very much.

18:28So you get an AON order for penny stocks, and that basically means say I want to buy 1,000 shares of some penny stock. If there aren't 1,000 stocks available at that time, and that's the problem with penny stocks or OTC stocks, sometimes the volume simply isn't there, then you can put an AON, all or none. So if you tick that, it means the trade will only be executed if you can get 1,000 stocks at the same time. If there are 500 available but not 1,000, the order won't execute. Whereas if you don't set this, you'll get 500 at this price and then you get the next 500 at a higher price possibly.

19:09And that of course happens. You also see that a lot when you're trading crypto. You often say you want to buy one Bitcoin, you might get it in 3 little bits at 3 different prices. So that's an interesting one, especially if you're looking at penny stocks.

19:22What is the IOC, the Olympic International Organising Committee? It's an immediate or cancel order. So it basically sets a very very short time limit, often just literally a few seconds. So either this gets filled right here right now or it's cancelled completely. And that can be again very sensible if you're trading highly volatile stocks and you have had a kind of flash crash situation. You're saying I want to buy in right now this second, I'm not interested in one minute. Then again that's an interesting one, perhaps less interesting for some but certainly for others.

19:59What is the FOK order? It is fill or kill. So this combines the AON with an IOC. I've probably lost you here on the acronyms. So in other words, basically it says that the entire order size has

20:16To be traded in a very, very short time period, so a few seconds. So basically, say I want to buy 1,000 shares, I want to buy it on a fill or kill. I'm combining my all or none with my IOC, which means either I get the 1,000 shares right here, right now, this very second, or I'm going to have a tantrum and I'm not going to want it anymore. So that's your FOK order there.

20:42Then there are 3 more, which is the good till cancelled. So this basically remains active until you decide to cancel it. It typically, most brokerages set a 90-day limit on that. So you can say I want to buy the Neo stock but I want to buy it below $20. I hope it never gets to that, but then you could set that order and you could have it valid for 90 days or however long your brokerage allows you. Again you need to check with them on that, it varies, but 90 days is typically the limit.

21:15So that can be quite a nice way of, I've decided to buy this but I've only decided to buy this once it falls below a certain support line, and we are of course going to look at that when we get to charts later down the road. Then that's a sensible way of picking up a bargain if you are a bargain hunter.

21:34Now what about day? I wrote here at the beginning, what does that mean? Well it's simply the span validity of your order. Again quite typical, but a lot of brokerages I use, they actually have that set as standard, so it means it's only valid for today. Why is that? Well I think some of it has to do with the fact that brokerages just don't want to have all these pending half-baked orders on their books, but yeah perhaps also it is just sensible. You either want to buy it or you know these sort of prices, but if say the price runs away from you, say you want to buy it at $10 today but the price went to $10.50, $11, $12, no real point in keeping that order open if you don't think you're going to get back down to those levels.

22:19The last one here, you can't really see because I've written it below the screen, just going to keep it interesting. Take profit or a profit target basically tells you to close the trade. So that could be to sell it or to buy it depending on whether you're long or short, but if you are long it basically says execute a sell once we reached a certain profit amount. So for that you need to have an open position first, so you need to already have the shares, say, or you could have short sold, but let's keep it on the long story.

22:54Say I have 100 shares at $10, I want to make a $100 profit, and therefore when they go up $1 this will automatically sell. And where does that make sense? Well especially when we look at the event-driven trading. I like to do that sometimes when some sort of catastrophe happens. Often good stocks, good companies get hit say 25, 30%, in which case I'm the kind of scavenger that then buys them and I might set a take profit order at 10% above perhaps, and it simply gets me out. So I'm sitting there, I'm doing nothing, I don't have to monitor it every single day and I get my 10%. I'm very, very happy.

23:30When is it a good time or a bad time or the right time to sell a stock? And it's a difficult question because actually selling is often much, much harder than buying. It's hard to sell things when they've gone up and it's even harder to sell things when they've gone down. And we see that red number, we see that loss, we don't want to realise because we don't want it to be true. So psychology is a hugely important part here.

23:54Now generally speaking there are 3 reasons to sell a stock. One, it was a mistake to buy it. That's pretty hard to admit to ourselves, but we're going to look into that. When the price has gone up not just a bit but tremendously. Or thirdly, when there's actually a fundamental change to the business, and again it's important to spot those as soon as they happen.

24:22What makes selling stocks so hard? Greed. It really is just greed and emotion and fear. That is our biggest enemy when we are investing in stocks. So say you bought a stock at $10, it's gone to $12, gone to $13, gone to $14, and you thought, well that's fantastic, it's gone up 30, 40%, but I'm going to hold on, I think I'm feeling greedy, feeling really, really, really greedy. Then you think it's going to go to $15, it doesn't, it goes back down to $12. You think well it'll recover, it doesn't, it goes to $11, to $9, to $9.50. What do you do, do you sell or hold?

25:04It's a tough question. At that point it of course depends on what you actually bought. So really the fundamental reasons to sell a stock. The first one is, let's assume here, and that's a big assumption, that you've done some real research on this stock. You really done some analysis, you read their financial statements, you read some analyst reviews on it, you understand the business, you know how they're making money, you know what their margins are, you know what their free cash flow is, and you know why they are better than their competitor. You know why they are keeping their customers, you know that there is some sort of moat, something special, exclusive they have. That could be dominant market share, it could be extremely loyal customers because it's expensive to replace the product or service, or it could be that they have an invention, a technology, a brand that is so powerful that people will stick to it.

26:00But if you don't know the answer to any of those things, I would say to start with, stop buying stocks. Because unless you know that, you are just following the whim of the market and whatever headline you see. And often when it hits the headlines it's perhaps too late to get in on it, not always, but it can be. So blindly buying stocks I wouldn't recommend. If you want to blindly buy stocks, buy an index, buy an index fund, and again we're going to look at that in one of the lessons coming up. That can be a fantastic way of doing it and I'm going to show you also the kind of returns you can get with that, which can also be tremendous.

26:34And you might simply not have the time or inclination or interest to dig deep into all the stocks that you own. If you do have more inclination, then if you buy a stock you should certainly do some research, or at least join a research community where other people have done research and you can read that research, and you think that they didn't just put on their rose-tinted glasses and only look at the sunny side of the stock or the company. That's a real danger. So that's why I particularly love our Patreon community, guys, because people are actually critically thinking over there. So that's fantastic, thank you for that.

27:09Now if you bought a stock and it turns out your analysis was flawed somewhere, and we make mistakes, I make mistakes every day, everybody does, then the important thing to do is to realise it, say to yourself it's fine, you made a mistake, you didn't lose much money. But if you're going to hold on to this mistake you potentially are going to lose a lot of money. So just sell the thing, if it's a dud get rid of it as quickly as you can.

27:35If the reason for you buying it has changed, and I'm going to put out down below a sort of document where you can write down for each stock you buy the reasons you bought them and what you aim to achieve with it, and at what point you are exiting. And that I recommend to print it out and stick it on a wall, stick it on your fridge, or wherever your desk or study is, and look at it when you look at the stock. And then if it goes up above that level that you targeted, don't be too greedy.

28:09Now the second one here, I said when the price goes up and up dramatically. So some stocks have just these massive rallies in a short term, couple of days, couple of weeks, and they go up 30%, 100%, 500%, whatever it is that you're investing in. You could therefore think, hang on, I'm incredibly wise and clever and I picked the one thing that went up 300%, I now believe this is going to go up another 300%. It's mostly a mistake. Very, very rarely do stocks keep going up like that. If they go up like that they typically come down again at least halfway or so.

28:49Yes they might continue to go up, but I think there is a very, very good reason to get out at the tips of those, or near the tip of those, or perhaps when it starts to come down again a little bit, just sell it. At that point you can always get back into it when it drops again, and for that we are going to look at technical analysis down the road. I think that might assist you guys, certainly does assist me in making those decisions.

29:14The third thing here is fundamental change. What is the fundamental change? I'm pointing in the wrong direction and I hear this, my screen seems to do the.

29:23Opposite, it's basically valuation. Say the company you bought in at had a PE multiple of 15, the stock performs very nicely, it goes up, now the PE multiple is 20 or 25. The competitors have a PE multiple still of 15 or 16 or 17, yours is 25 or even 30, say it's doubled. At that point a rational value investor would look at that and go, well, it's gone up very nicely, I made a lot of money, valuation now is at a level where it's substantially above the competitors. Yes it's perhaps a slightly better company than the competitors, but it isn't doubly as good as much as I love it.

30:06I think that is the hard decision to make because you hear a lot of this talk of conviction stocks, and that doesn't mean you can't change your conviction. Your conviction says I believe this is going to increase for whatever reason. Once it's reached what you were expecting, get out, provided some of those indicators say your PE ratio has gone up that much compared to the market or compared to competitors. If the whole market has gone up like that and the competitors have also and you believe this is going to continue as a trend, fine, keep it, stick with it. But if it has dramatically outperformed competitors and the market, typically things revert back to where the average lies.

30:55Another indicator from fundamentals to look at would be revenue declining. That's generally speaking a big no no. If you have a company that's been growing, even if it's growing slowly, 2%, 5%, 10%, and then suddenly they have a revenue declining, that's typically a big red flag indicator that something is seriously wrong there. That is one where I would sell.

31:18Cost cutting is another one. When you get companies, and that of course happens with cyclical stocks like banks for example, in downturns they always start to cut costs, lay off people. That tends to give the stock price a temporary boost, but in the long run it does tell you something about that business that isn't quite right. Now banks are perhaps not the greatest example because there are certain banks that simply do perform in the long run because they have incredible businesses. But there are a lot of other examples. If you look at a manufacturer say and they start cutting costs, why are they doing that? Well they obviously have some issues with margins and profitability and perhaps customer retention. So I think those are sensible things to look at.

32:02So essentially I would look here at earnings, cash flow, also I would look at PE ratio, revenue declining, and then cost cutting. For me those are all not on itself red flags but certainly something where you need to really look at it and think, hey, maybe I have ridden this one as far as I can and maybe I get out of it. I'll keep watching it and I can perhaps get back into it. And a lot of the time you sell those things and they go up an extra 10%. Do you beat yourself up over it? No, you made some money or you made less of a loss perhaps and you're happy with that.

32:40You just have to accept that every trade you can't optimise each trade. It is just simply not possible and it isn't actually desirable either, it just causes a lot of stress. All you got to do is set your targets for the profits you want to achieve and stick to that. And now there is a last one I really wanted to put on here I suppose, and that would be financial need. That's yours, not the company's.

33:07That is of course a hugely valid reason to sell stocks, and that is really the first thing just to start with. We are going to look at some portfolio planning down the line here. When you invest your money you need to realise, will I need that money back at some point and how soon is that some point? Is it 3 months, 6 months, 6 years, 10 years? The longer that horizon the lower your risk, the shorter that horizon the higher your risk. That's really something to bear in mind, that sometimes holding cash, even though it isn't a great investment by any stretch of the imagination, it can be a good thing to do.

33:42So when to sell. Either it's your mistake, which is the best thing is to admit it to yourself. The price has gone up dramatically. Or there's a fundamental change in the business which you can see through revenue changes, you can see it through growth changes, PE rate multiples changing. Cost cutting are always a bit of an alarm bell to me. Or of course your financial situation requires that cash for whatever reason, that is always a good reason to get out. That might not be the optimal time to do it but that is just the reality, so we have to start our planning with that in mind.

34:16Guys, so the most important and the most overlooked area of investment, it's fees. Costs, transaction fees, whatever you want to call them, that is probably about 40 to 50% of your investment success. It's all about costs and fees and how to minimise them. So what kind of fees are we looking at here? By now you are probably used to my horrific scribbles.

34:42We have a couple of different fees depending on what you're buying. Starting at the bottom, bank transfer fees. When you send money from your bank to your brokerage account, is there any kind of fee from either party? That's the first thing to look at and write it down. Secondly you have brokerage fees. Most brokerages have fees depending on how big a trade you make. Look at that table.

35:08Quite often they're fixed fees. So I use one brokerage for example, they charge me say $20 when I buy from zero to $5,000 per trade. When I buy from $5,000 to $10,000 they charge me $15. So does it make sense for me to execute a $1,000 or $100 trade? No it doesn't. So you have to find the sweet spot within the fee structure you're in and really do compare the brokerages because it makes a huge difference.

35:40The expense ratio, transaction costs and sales fees here that I've also got on the screen here are more relevant if you are buying ETFs and funds, and I know a lot of people are, I certainly am. And here is a little example I wanted to show you. This is, I don't actually know where this came from, some website. So they are here basically doing this typical mutual funds are bad kind of comparison. To me that isn't actually the point. Nowadays there are good mutual funds, there are bad mutual funds, same with ETFs.

36:15But what most funds will tell you is their expense ratio and how much they charge you when you buy it. So here they call it sales charges, some people call it whatever, over the counter fees or whatever that might be. So you look at this and you think, okay, I'm going to pay half a per cent to buy this and then I'm going to pay 1.3% a year. That's usually all they show you. What they don't normally show you is the transaction costs. They are hidden fees, they typically don't disclose them.

36:42And what are they? Every single time they trade they incur brokerage fees. Now they might well be pocketing that profit through another subsidiary or parent company, but they are fees that they're charging you and they're not telling you about. So what does a good fund look like? A good fund fact sheet, that's a typical word, actually tells you what they are. So they tell you here at the top the fee to buy into it, in this case 1.05% to 95 cents depending on the size of your investment.

37:13And then you scroll down and it's in the key facts, it's on the front page, very very clear. 2020 transaction costs 0.03%, which is incredibly low, and it basically means these guys did very very very few trades. And that's another way of looking at it, is to look at their turnover. But really you want to be able to see the transaction costs from their fund fact sheet. If they don't tell you that I would just run because they obviously have something to hide and they don't like the number that they have there. And there is also something in just trading too much quite frankly.

37:50So for this fund here therefore, what is my cost? Say I'm paying the 1.05% to buy it, that's my in, and then every year it is 0.03% on transaction costs. So that's pretty clear, right? That's rather very very obvious. Why does it matter?

38:06Okay, say here you're paying 3.2% in total now in actual expense ratios fees. If you bought a fund or an index fund, because nowadays there are also mutual funds with very low fees, that had a half a per cent fee structure versus 3.2%, we put that into a compound calculator. Say you start with $1,000 and say you are getting 8.5% market average or so. So now you're getting 8% because you've paid half a per cent to this fund in fees.

38:49And we're going to do that over 10 years, so 120 months. Monthly I'm going to deposit every month $1,000. Now that might seem high, that might seem low to you, but just as an example here. So what does that leave us with? It means that that is now worth $185,000 after 10 years. Let's do this same exercise again. We have $1,000 to start with but now we don't have 8%, we spent 3.2%. So what is 8.5 minus 3.2, so 8.5 was our average.

39:25Now that is 5.3% net interest that you're getting. Again we do that over 120 months and we are still depositing $1,000. We're not changing that at all, we're keeping that the same. So what does that mean? You got $159,000 and here you got $185,000. So 185 minus 159, that is $26,000 that you have essentially paid in fees, or rather that didn't enjoy as part of your compounding over time being able to reinvest it because you paid those fees.

40:05So you might think that's a small difference, picking a mutual fund with hidden fees versus a fund with low fees or an ETF. $26,000 over 10 years, and that's only investing $1,000 a month. That might be a lot for you, might be a little to you, but obviously the numbers will go up substantially if you put in more money into that. So fees are the single most important and the single most overlooked item in investing.

40:34So before you do your next trade, look at your last 10 trades. And it's painful because brokerages typically hide this stuff in PDFs they send somewhere where no one will look at them, and they are often pretty messy to look at. Make a list, write down your costs. Did it cost you money to send it to the brokerage? If yes, write down how much. How big was the trade you made, how much did you buy, what amount? Write down the fees you were charged. There'll be a brokerage fee, there might also be a little bit of stamp duty depending on where you're buying, in what markets, or stock exchange fees that might perhaps be split out. Sometimes they combine it, sometimes they split it out. And write that down and just keep that column and see what are my fees, and I think you'll typically notice that your fees are higher the smaller your trades are.

41:28Now of course there are newer apps that are virtually commission free or have very low commission, and again you can write down the platforms, do that comparison. It'll probably take you an hour or 2 of your life and it won't be the most enjoyable hour or 2, but just think if that hour can make you $25,000 or $26,000 I think it's worthwhile doing it. And then by all means do please share your findings with our Discord community because everybody else is in the same boat and it is super interesting to spot these little fees.

42:02I do it for my trades, I track all of the fees and it's tedious. But the longer you do it for the more you realise, okay I've got here $1,500, it doesn't make sense for me to buy this now. I'm going to have to wait till I get to $2,500 because otherwise I'm spending an extra $50 on fees which doesn't seem like a lot, but if I do this 10 times a year then yeah it does really add up over time.

42:25So the 3 types of fundamental stock strategies that are out there, or the types of investments you can make, people often talk about these. What are they? Well let me pull that up for you here. There is income, what's next there is value, and they are similar, some people say, or different, it depends on your perspective. I think they are actually quite different. And that's growth, and there we have it.

42:58So what does that mean really? Well income basically refers to dividends. So what would be a stock that gives you a high income level? Well let me pull one up for you here. AT&T for example, 6.94% dividend yield. You can see that simply by typing AT&T stock into Google and it shows you the dividend yield, you don't need any specific knowledge of that. Has the stock performed wonderfully? No, it has basically lost about 20 to 25% of its value since 2016. So if you'd held it throughout this whole time you would have burned quite a bit of cash.

43:43However, why do people buy something that has this kind of a chart when you think, well let's look at the maximum chart here, again not particularly wonderful, right? What's the reason a lot of people do it? A retirement plan. Now some people are also simply more conservative at doing this even when they're much much younger, and it's a reasonable thing to do. It basically is a little bit like a bond, it's a fixed income kind of type product almost.

44:11Now it doesn't guarantee you that dividend yield, whereas if you buy a bond it nearly guarantees it to you except if the company or the government that issued that bond goes out of business. But bonds, at the moment I don't hold any bonds, I used to. Why? Because what they pay you simply isn't very much and the ones that do pay you quite a lot are typically pretty risky. And that goes through cycles. There were times after the 2008 financial crash for example when financial bonds, bonds of banks, were incredibly cheap. They were trading at say 30 out of 100 and they then recovered all to 70, 80, 90 levels. That was a fantastic trade from that point of view, but that wasn't for the income, that was because they just got hit over their head and generally speaking governments were bailing out those banks at least until a certain point in time.

45:07But I digress here. So AT&T for example, if you buy that today and you don't give a hoot about what the stock price is going to do, you never ever look at that again, as long as you think that AT&T will have sufficient free cash flow to pay that dividend yield. And that's one thing we're going to get to of course, is how can you establish that. You buy it, you get 6.94% and you're basically done.

45:33One thing I would bear in mind though, depending on where you reside there are income tax consequences for that. There are dividend taxes in most jurisdictions, and so look at what those tax rates are, look at what the thresholds are. There is typically an optimum point of having it, or a point where you might say, well I've got enough income now because I'm just going to get taxed at a higher rate.

45:59There are also of course investment strategies that reinvest that dividend yield, then so you get that compounding going. And sometimes therefore using some sort of bond or ETF can make more sense because you avoid the dividend tax when it gets paid out. So accumulative funds can be kind of an interesting one, and often when you look at funds they are offered with an Inc at the end and an Acc. Inc means income, as in you get the dividends when they get paid out. Acc means they simply reinvest them, they accumulate them. That's really a tax strategy there more than anything else.

46:36Now second, value. What's value all about? Well a lot of people summarise it by using the name Warren Buffett, and that's helpful and not helpful because not everybody understands what that really means. So basically you're buying a stock because of its financial situation. And what do you look at there? Well it can be dividends but it doesn't actually have to pay dividends. I quite like value stocks that don't pay dividends because it means that their business is growing sufficiently that they can reinvest those profits and grow faster and get a higher return than if they just gave me 5 or 6%.

47:18So you look at some basics like price to book ratios, price earnings ratios, but that isn't quite enough. Really you want to look at free cash flow. You want lots of free cash flow because that is money that they can reinvest in that compounds. You want high gross margins, you want high net margins, and you want a high return on equity employed or a high return on capital employed. And if that all goes over your head that's completely fine, we are going to look at those details, we're going to look at some examples down the road here. So this lesson is a bit of an overview on the differentiator really in these.

47:57And I'm going to pull one value stock up for you here. McCormick and Company is a value stock that I own, and it isn't the most sexy company in the world. It is basically food spices and flavourings, both for retail, and you might have seen their spices on the spice rack, but also they supply a lot of food manufacturers and food service businesses. So caterers and those kind of people.

48:22And this is the share price and you can see it's gone up very very nicely. If you were to draw a line in on that, you can basically see here someone has drawn a line in on that, I guess that was me in a previous life. But you can essentially see that's basically what you want to see with a value stock. You want to see this, and that is compounding. Basically it just goes up steadily and slowly over time, and yes it does have some kinks and dips and mini rallies, but over time it simply performs.

48:53And why? Because it's highly profitable, they have a very good moat, very loyal customers, and people basically buy spices no matter what happens in the world. Good things, bad things, people will want to eat tasty food, therefore spices are always one of those things. So to me for example this is a pretty decent value stock.

49:13Thirdly, growth. And that is of course what we read most about. Why? Because that is what is most exciting. It's where it gives you those 100%, 500% returns, 1,000% returns, sometimes when you time it right. And that is therefore

49:29What hits the market and the headlines the most, because it simply is the most exciting, and that can be tech at the moment or green energy or biotech or space or whatever is the flavour of the month. And what's their business model? Basically, well, they're generally speaking fairly new companies that have a great concept, a great idea, perhaps a great invention, and they are disrupting a business or are creating a whole new industry. They can give you very, very good capital returns, but typically they are not profitable. Not always, but typically they're not profitable, and typically they are reinvesting all those profits back into, if they have any at the gross level, back into the business. So their aim is to grow. Their aim is not to generate dividends or a big cash pile.

50:26So what would be a good growth company, for example? Well, the one that gets talked about as I'm filming this a great deal is of course Tesla. And you can see why, here's the 5-year chart. So massive valuations that also comes with it quite often, 1,000 PE ratio, 1,100 PE ratio as we're talking about this. So here is a company that has disrupted the automobile space and possibly also other energy industries and simply has come up with essentially a new product, a new way of powering cars really, basically replacing the ICE.

51:03So it's a huge, huge growth story. It's also hugely more volatile of course. It's I think a very exciting part of one's portfolio. If it's the only part of your portfolio, you have to be willing to take very, very significant volatility. So that's really something to bear in mind here.

51:25So that's a quick take on here. Income is basically dividends. Value is not necessarily dividends. You can have great value stocks without dividends. It just means it's a product that people buy every single day and no matter what happens in the day they can't do without it. They typically have near dominant market positions or dominant market positions in their sector, and have very high returns on their capital employed and very, very big free cash flow. That's normally what people look for in value stocks, and they are things that value investors simply buy and more or less forget about. I mean, still keep an eye on it of course, on their performance, but it is a buy and what's your time horizon? Well, forever. That's the ideal value company there.

52:09And then growth of course is the exciting new technologies disrupting industries, creating something that is so fantastic that it'll possibly go up tenfold, 100-fold, and therefore give you those massive, massive capital returns in a potentially short period of time, but also gives you volatility of course at the same time.

52:28Asset allocation, yes, sexy subject indeed. Well, what are the assets that we actually could invest in? Well, let's start off with cash. There are stocks. There are bonds. And yes, crypto, I'm going to add that to the list here. Anything else you can think of? Well, there's real estate, right. Apologies for my scribbly handwriting as always. So there we have it, we've got basically 4 or less 5 asset classes. Yes, you could have sub-assets within that, different types of REITs and things like that, but I think for this purpose we don't really need that.

53:15So let's go through. The first one, is cash an asset? How do you define an asset? Well, I like my assets to go up in value or at the very least give me an income. Now cash does neither at present. Cash essentially deflates, and you might say, well, but inflation is really, really low, I'm not worried about it. True. So inflation is, say you have $10,000 in the bank here and say inflation is 1.5%, say it is. Then over 10 years, what is the amount of money that you have lost? Well, you've lost $1,393 there. So you think, okay, yeah, I get that, but it's not that bad, is it really?

54:07Well, that's true, but assets, real assets, stocks have gone up 8% plus on average over the last 10 years or so. And if you pick some good ones you will actually go up more than that, or you got some good funds. So say your inflation rate, your actual inflation rate which the government is hiding from us, is minus 8%. I have to do that negative here otherwise it doesn't compound. So then you've lost $5,500 after 10 years of your $10,000. So that's pretty bad, right?

54:43So quite frankly I would say to me, cash, yes, we need some of it. We need to have some as an emergency type thing, some backup fund, an amount that makes us feel secure. That should be I would say at the very least one month of your expenses, perhaps a little bit more than that. I would put 1 to 3 months of your expenses. And that obviously really depends on who you are as a person and whether you sleep well at night.

55:22And I'm going to show you the chart here as well and the notes I'm making so you can see them. Some people don't feel comfortable, some people don't sleep at night if they haven't got a certain amount of cash stuffed on the mattress, and if that's you, that's totally fine. Do that, don't worry about inflation, sleep is more important in the long run. But cash quite frankly isn't really a viable investment. Even if you are getting 1 or 2% or so, it simply isn't going to give you a great deal.

55:49Now stocks is obviously one of the main ones we're going to talk about. The question is therefore how much to put into it. Well, before we get to that, let's take off bonds, because bonds have traditionally had this theory that the amount of your portfolio that should be in stocks really was 120 minus your age. So when you are 30 years old, that means 90% of your portfolio is in stocks, right? So that is the old mentality, 120 minus age. And that means that when you are then 70 years old, your portfolio is now 50/50, right?

56:35Is that still a sensible thing to do? I very much doubt it. And that's of course at the time of me recording this. If you're watching this in the year 3000, things might look different. But at the moment, the way that governments are acting, it doesn't seem to me all that sensible to have that much in bonds, and I'm going to show you why.

56:57These are American bond prices at the moment. These are the yields here, this is the yield, this black column here. So even if you buy a 30-year US government bond, the yield is 2.35%. So compared to the stock market you're still losing at least 5.6% or thereabouts. So you are basically making yourself poorer in comparison to stocks as an asset class each year if you hold these.

57:27Now some people believe that the end of the world is coming and therefore believe that US long-term government yields are going to skyrocket, and okay, if that's your plan, that is a valid investment strategy in the short term, not in the long term. So for me, bonds at the moment, and this is of course my personal take on it, for me bonds are an absolute zero. And that's the world's worst zero there it is. Can I make that better? Still struggling with his pen, I'll get there in the end. So for me bonds are an absolute no no.

57:59I'm not saying you shouldn't have any, but corporate bonds that pay you a decent return tend to be from corporates that have a decent chance of going out of business and not paying you at all. And you might be thinking, well, maybe the government will bail us out. I don't know, they did that with the whole financial sector on the last crash, it's true. But towards the end of that cycle they stopped bailing out the bond holders, which was rather painful for the bondholders. At least they gave them a nice haircut, which is what I need. So for me bonds are not really a sensible place to go, and I'm going to show you what I would put the money in instead.

58:38Crypto. Crypto is something that a lot of people think is absolutely insane. A lot of people think it's absolutely wonderful and magical. At the moment it is a tiny fraction of the world's assets, it's something like $2.5 trillion or something like that. Of course that's going to keep going up I think. For me, I think having a portfolio that's all crypto is more volatility than I can handle. So for me, something like 1 to 5%, I would say, and that depends really on your risk appetite and again on how soon you need that money. That's what I would say because that's what I do. So for me that is my allocation here, whereas for bonds it's absolutely zero. And I'm not saying that my point of view is absolutely correct, I can only share with you though what my views are.

59:27Real estate I think is a sensible thing. Now there are of course two parts to real estate. There is investment real estate, and then there is the home, our 4 walls. Now a lot of people will argue that the home is not an investment at all because it doesn't provide you with any kind of income, it's not an asset you can access, you can't really sell it because you're in it, and it certainly doesn't pay you.

59:56You any kind of income, right? It doesn't pay you rent. In fact it's a cost because you have to keep paying for all the fees and the taxes and the repairs and the maintenance. Having said that, I'm rather a fan of owning one's home. It is an allocation of assets, so say you put $500,000 into your home. That $500,000 in stocks could get you I think 8% or maybe 10 or 11% or something like that, so that's your opportunity cost there.

1:00:26But at the same time, if everything in the world goes belly up, you're sitting in a home that is paid off, and that's the big assumption here, that you actually paying it off. I'm not really a fan of people sitting in homes that are highly mortgaged because I think then you're getting neither the safety long-term benefit nor are you really getting the returns. You have the worst of both worlds. I appreciate you might disagree with me on that point of view, but that's where I'm coming from.

1:00:54So I would say a home, and my caveat there is basically a low leverage or rather low mortgage. I'm going to write here, low mortgage. I think that is quite important to actually pay that off, not an interest only or anything like that, because the whole point here is to plan to reduce your risks. And one way of doing that is to remove one of the main expenditures in your life, and that is probably the home you live in. If you've paid it off fully, your costs are relatively moderate, so that's I think one thing there.

1:01:29Real estate as an investment is of course a different beast altogether. Typically it depends very much on how much money you can borrow there, whether that gives you a decent return or not, and then taxation comes in. This is not a real estate course so I'm just throwing this in on the side. I think it is a nice thing to have in the mix. I certainly own real estate and it balances out your risks a little bit because you know, okay, say if the stock market tumbles, yes real estate markets tend to go with it, but it is still an asset you have. You might have, hopefully have, somebody who's paying your rent there, so you're still getting an income flow from that which is separate from what your other investments are doing.

1:02:07So that leaves the question then, stocks, what are we going to do with stocks? The 120 minus age, for me that is an old thing. I'm going to cross that out here. I don't think that really applies anymore in the real world, so I'm therefore going to delete this whole thing. And I'm going to break this down because I think after you have allocated some money to perhaps real estate or to your home, or if you haven't done it yet, I think stocks are the sensible place to start.

1:02:37And I'm going to split the stocks here into several categories. I'm going to split it into dividend, I'm going to split it into value, and I'm going to split it into growth. And you think, hang on, we've done a class on this before. True, but this is a little bit different. I'm not going to explain what they are, I'm just going to explain how you might divide your investments between the 3.

1:03:06What I treat as the old bond is value stocks. And why? Because they are companies that have been around for 90 years, that have a huge return on capital, they have a huge moat, they're very profitable, they're highly unlikely to go out of business. Think Coca-Cola, think Procter & Gamble, think those kind of companies. And they are therefore paying you an almost bond-like increase on your capital. So really these 2 together up here, and I'm going to talk about dividend in a second, they are my basically new bond.

1:03:44Because at the moment I don't see the point in owning things that are paying me 1 or 2% income. I just don't see the purpose to it, it just in some vague hope that might somehow diversify me. So what about dividends and value then, how do you find them?

1:04:02Well, you could think, let me show you this here. So there are a lot of screening softwares. This one here is called macrotrends.net, you can see that at the top. It's not the world's best or the world's worst but it's a pretty decent one. So say you wanted to look for a value stock and somehow you thought, well why don't I just look at what some of the big value funds own? That's actually a good place to start. So look at what Buffett owns, look at what, if you want, Nick Train's, say Fundsmith owns, or look at some of the big value ETFs and go through some of those names, and that's a way to do it.

1:04:31But you can also just here look at a screen. So I'm putting in market cap here $10 billion. Why? I don't want the teeny tiny companies that might go out of business. PE ratio, I've put a cap here of 30. It's a little bit random but I'm just eliminating the really expensive companies, although having said that I am by doing that eliminating some of the best companies. So this perhaps not the wisest thing to do, so I'm going to take it out. My return on equity I put in here at least 50%.

1:05:03And that gives me then 64 stocks, and you might not want to go through 64 of them, but certainly some of the ones that are coming here at the top. And I've sorted them also by dividend yield. You can have value stocks that also pay you good dividend. So Altria, which is basically the US Philip Morris business, it's the parent company of Philip Morris, it pays a 6.6% dividend. That's pretty good. It has actually done reasonably well this year, but in the long run it hasn't done badly, but in the long run it's really only been the last year it's done well and it isn't a great performer, but it gives you 6.6%.

1:05:36So that's much better than most bonds and less likely to go out of business because people will still smoke until they've all dropped dead basically. You have a couple of other ones in here. Merck, Kimberly-Clark, PepsiCo, Lockheed Martin, Clorox, that you might be aware of. UPS, Colgate. These kind of things. Colgate sells basically pretty much all the toothpaste in the world and people are always going to buy toothpaste, right, pretty much no matter what happens. So that's the theory there behind picking some of these value stocks.

1:06:10Now if you wanted to purely look at dividends, you could of course do that and you could simply filter for, there must be a dividend tag here somewhere, dividend yield. You could simply get rid of the return on equity and just say I want at least 6%. Now the trouble with that is it'll give you a bunch of stocks that are possibly tinkering on the edge of being around. Often they're quite highly indebted. So one thing you would really need to look out for then here in dividends, yes great they're paying you lots of dividends, but you have to also look at their debt levels.

1:06:52You have to basically see how much debt do they have to equities. For example here, Cheniere Energy Partners has 32 times more debt than equity. That doesn't look great. Nomura does too, but that's a bank so that might make a lot more sense. So you have to look at those and you have to also look, and this does not show you that, this particular tracker here, have a look at their interest coverage and things like that.

1:07:17So for dividends, again I would be a little bit careful. I would dig into them in quite a lot of detail. You want to find the ones that pay you high dividends. Personally I'm not a huge dividend hunter. I totally get the attraction as a retirement play, and if you want to live off the income. I'm fortunate that I have an income and therefore I am looking to invest my income rather than in getting income from my stocks. I'm very happy for that to be reinvested all the time, so I'm not really looking for those. When I do, I reinvest them.

1:07:52So in short here, basically a combination of dividends and value stocks is what I would treat as a bond, and that therefore could be whatever percentage you feel comfortable with. You think, come on, answer the question for crying out loud. So people's theory is generally when you are younger you can go for more risk, right? Where does the risk live? Well the risk lives here in our growth stocks. And therefore you can afford to put more money into things like Tesla or whatever the growth stock is of the day.

1:08:24Which is of course true. Do I put 100% of my money into growth stocks? No. Why? Because I don't like the volatility. I don't like my entire portfolio being down 30, 40%. So if I put some of my money here into my new bonds up here, so I would say this would be something like 30 to 80%, and that really depends on your appetite for risk. If you don't like risk, you don't have a big appetite for it, you could make it 80%, you could make it 100%.

1:09:01If you are younger, you have a high personal income and you just want to invest it and you want to enjoy the fruits of that labour, of course putting more money into growth stocks would possibly give you a higher return. Another thing to do is if you are sitting on the fence, rather than picking individual growth stocks, you just buy the NASDAQ. You just put your money into a NASDAQ ETF and therefore you've got your growth without having to pick particular companies. The NASDAQ does tend to outperform, certainly the last 10 years or so, the S&P 500, so therefore you can throw some money at that fairly easily and fairly blindly. I'm going to show you also how you can do that when we get to the technical analysis, how you can do that at a more efficient way. In fact actually, as we are here, why don't we do it right here right now rather than waiting for it.

1:10:04So we're going to pull up any of these stocks and any of these charts here and I'm going to show you what I do with the NASDAQ as an entry point. Where's our NASDAQ friend here, yeah, NASDAQ. That's futures, sorry. Weeks and futures days, let me get rid of that.

1:10:38NDAQ, NASDAQ iShares Trust, NASDAQ 100. Now you can of course do this with any kind of ETF and there are plenty of them out there that you can use. And what's the easy way of doing this? You see this, okay, I've made the chart really simple. It's a blue line, the black line is the 50-day moving average line.

1:11:01Now as you can see the NASDAQ has performed reasonably well in recent years, right, it has just gone up rather tremendously for ages. What you can see if you look a bit closer is most of the time as it is going up, a lot of the time it is sitting above the black line, the black line being the 50-day moving average. Therefore when it is below that 50-day moving average you get a buy opportunity. You could also make this more extreme and you could set this as 100 days.

1:11:31You're wondering, well, where do I do that, what software do I do that? This is tradingview.com, it is absolutely free. You simply put in NASDAQ, whatever ticker you want from the NASDAQ, whatever your ETF of choice is for the NASDAQ. And if you want to compare them, go back to that ETF tool I showed you in an earlier video and you can compare the fees, that's what it's all about. And then you can type into the indicator moving average, and the moving average you then click on the little settings icon here and you change the length to 100 days. Be sure to be on the one day time frame up here so that each of these periods is one day.

1:12:15And then what does that show you? Well it shows you that ever so rarely in some ways do we drop to or below that 100-day line. So this here of course was the buying opportunity, or buying opportunities, and that was Covid, right, so that's the big C. Similarly here previously there was some opportunities here and there. We touched it here in November 2020, so you would have bought it here at 11,000, that would have been better than buying it at 12,000, I think you'll agree with that, right. And similarly we had that here more recently in March.

1:12:55But this theory quite frankly applies no matter how far back in time you go. Look, we can go back in time to whatever year you want, say 2016 or something. Again, buying it at 4,000 rather than 4,700 is a better place to jump in. So you can time these slightly, I would say, by looking at the average and therefore you're getting a little bit of a better entry point if you are so inclined. Or the other alternative is simply buy it every week or every month and don't worry about it.

1:13:26So that's how I would divvy this up. For me it varies a little bit since the beginning of the year because tech stocks are so very high. I work a little bit cyclically, I've been putting my fresh money into my value stocks and less money into growth stocks, only when there are individual real buying opportunities.

1:13:51So if we sum this up, we have bonds, I would say 0%, and that is of course just me guys, but that's what I would do. I would then go for value personally because I have an income, and therefore I would put value somewhere perhaps 50% plus. You might think that's a bit too conservative but it also depends of course on your age and your circumstance and what you're trying to achieve. My value portfolio does something like 11, 12% a year, sometimes 15, sometimes 18%, but pretty much always at least 10, 11%, so I'm pretty happy with that growth overall.

1:14:34And then the stocks that I'm particularly interested in, which is what I call growth, that would then be less than 50%. I would recommend, you might be thinking, okay, what about my dividends? Well, I take the dividends out of the value because to me that's the same thing.

1:15:11If you are of an age where you are either retiring or you're a young individual who simply wants to live off income from your investments because you are sick of drawing a salary, which I have huge appreciation for, then you could of course shift this a little bit and then you could add to it your dividends. Having said that, I think I can get a higher income capital appreciation from my value than the dividends, because dividends, I think really the good companies at present pay you about 6%, right. Above that you get to dodgy territory of companies that might go out of business. So here I get 6%, up here I get I would say 11% plus.

1:16:05So therefore for me the value actually gives me income. I could take some of that and spend it. Now that might sound alien to you but it's exactly the same thing whether you're getting dividends and spending them or whether you're selling a couple of shares every year or month, it is exactly the same thing. So for me I therefore prefer the value over the dividends, but I appreciate some people like the feeling that they're getting that, or they might simply want to, I don't know, they just feel more comfortable getting a little bit more of a diversification in there.

1:16:36Now if you have extra cash, I would say real estate income is a good place to be. Why? Because it is a genuine diversification away from stocks and it is likely to still pay you income when the stock market goes kaput in the short term. Your tenant will still be there, okay, they might ask for a discount at some point but they're still going to pay you some money.

1:17:04So for me that is the breakdown here, and as I say it really depends on a personal load. There isn't a right or wrong answer. I would just say if you are 100% in one of these 4 or 5 classes, I would think about it, because I think if you're 100% exposed to one thing, you're probably missing out on something. Okay, you could say if I'm 100% in dividends or 100% in value, they are the bonds, you're just a conservative person and I respect that, I totally get that. But if you're 100% in growth or 100% in real estate or 100% in dividends, I think there is perhaps a little bit of room there for smart diversification, not just diversification for the point of it, guys.

1:17:47So if you have any questions let me know. You can also of course send me messages with what your situation is and everything and we can discuss it, we can do it anonymously if you like. So thanks very much guys and see you on the next lesson.

1:18:01Make sure you do a little bit of homework. Have a look at what your assets are, make a list, make a list of what they're worth and make a list of what category they fall into at the moment and work out what return that actually gives you net. I'm talking net after expenses and after taxes, and particularly for real estate income that can be a little bit more tedious to work out because you have little bits of monthly and quarterly and annual expenses. But do work it out, it's really important to do it. You don't need a huge software programme, a piece of paper will pretty much do, you might need a few pieces of paper, but eventually you have it down.

1:18:38I think that's a good place to start, to really see where your assets are now and which ones are performing and which ones aren't. That might be an interesting place to start, thinking about are there some things I want to sell or things I want to get more of. Quite often we have the one gem already, we just don't realise it, and we can perhaps put more into it.

1:18:56More money into that one gem. Commonly used and most simple investment strategies there is really, it is called dollar cost averaging. Dollar cost averaging. What is it? It just means that you are going to invest a fixed amount of money, so you are spending a fixed amount of dollars in a fixed period.

1:19:30What do I mean by that? I basically mean you're going to invest $100 every Monday, or you're going to invest $1,000 every 30th of the month, or whatever amount it is. Some people do it quarterly. I would advise to do it at least monthly and I'm going to get you why just in a moment. If you have a 401k, if you're an American, you are probably already doing this. Well, you're definitely already doing this, you can't really go without it.

1:19:58And what's the idea, why do we bother doing this? Well it's basically timing the market is just not something that most people are very good at. Most people buy at the top of the market and they sell at the bottom of the market. That's just human psychology. You read about it in the news and therefore you think oh my God that's gone up this much, let's go and buy it, it's fantastic. That was the peak, then it falls 10 or 20% and you think oh my God that was dreadful, let's sell it. And that's what most investors do and that's sadly why most retail investors lose money over time.

1:20:30Much better therefore to simply follow a very simple model like this and to simply say no matter what happens I am buying. And that means through massive stock market crashes you keep buying, because actually it's more important to buy when it's down than when it's up. Why? Let me explain that. Say you have $100 and say your share price is $10. Now say your share price is $15, or say your share price is $7.

1:21:04How many shares do I get from this? From the $10 I get 10 shares. I'm writing like a child, I appreciate that, guys. 100 divided by 15, how many shares did I buy at that price? I bought 6 shares, assuming there is no fractional trading. And at $7, 100 divided by 7 is 14, I bought 14 shares.

1:21:29So what does that mean? It means that I bought more shares when the price was down. Can you see that here? So basically at $7 I bought more shares, whereas when the price was high at $15 I bought less shares. And that's the beauty of the concept. So it averages you out to a lower price than if you had timed it randomly, generally speaking.

1:22:00Now will it always give you the best outcome? No, not necessarily. If you are an investment genius and you always manage to time the bottom of the market you'll do better. But chance has it and probability is against you, you will sometimes buy at the top of the market rather than at the bottom of the market. And you might also simply not buy and you might sit on that cash for long periods of time. And then you wait for it to go up and then you buy too late, which is what most people do.

1:22:28So it's a particularly good method I think to slowly but surely build wealth through a fairly simple discipline. And you can do it with an amount of money that isn't a scary amount of money for you. So you don't have to wait till the end of the year and say, ah now I have $10,000, $100,000 or $10 million, whatever it is to you, and now I have to invest all of this today. Oh my God, what am I going to do, what if this is a terrible day to invest, what if the market falls down 10%, what if I'm buying at the top of the market. And this kind of thing that we do at the end of the year when we decide that we've saved some money.

1:23:02So the discipline of it is one of the things that appeals to me about it. Now as I say, it doesn't necessarily get you to the better result, but it massively reduces your risk of putting all your money in at the top of the market. And I'm going to show you some examples here and then we're going to talk about whether it's a good idea to do this with stocks or with funds.

1:23:25So this is Apple since 2010 and each little bar is a month, so I'm assuming here you're doing this monthly. If you therefore bought each month you would have averaged out. I'm not going to do the exact maths here, but you would have obviously bought at these price levels and your average price would be somewhere here. I would guess I'm making this a little bit random, but your average price would say be at $70, $65 or so, which would have been much better than perhaps waiting and buying when it was at $100.

1:24:06Now of course in an ideal world you would have timed the market and you would have bought down here and down there and down there. And we are going to get to that, guys, in some of the more advanced sessions. For example this little indicator here, 50-day moving average line, that's a fairly useful one, particularly for the NASDAQ and some of these growth stocks that can give you entry points. But for the moment we are going to look at this at a more simple method, and that is simply if you can't be bothered to dig into charts every other day and see is it a good time, is it not, I think dollar cost averaging is a particularly useful method.

1:24:47I do it, I do it every week. What do I do it with? I don't do it with stocks, I must say. Why? Because with particular stocks that I'm following I prefer to watch the chart. But I do it with either funds or with ETFs, because if I'm buying the NASDAQ or the S&P 500 or consumer staples or some sort of value fund or something like that, I think these are companies that are not that volatile. I don't think they go from a PE from 10 to 50 overnight. They are generally speaking slow movers, they're giving me my 11, 12, 13, 14, 15% annually. I'm very happy with that and it's a rock in my portfolio.

1:25:34So I am simply dumping money into them every single week no matter what happens. And I think it's a very useful discipline, and it's very hard to do when the market has crashed, but that's the most important time to do it. Now there are more advanced versions of this where you exaggerate the amount you put in in down times and you buy less in up times, but that's perhaps a model we can look at separately.

1:26:01But this model alone I think is the simplest thing to do. It does give you a somewhat average return, yes, but quite frankly nobody times the market right in the long run, otherwise you'd all be billionaires and few of us are at this point. So I think it is a very good thing to do, to just do that discipline and do it with an amount that you can definitely afford to invest. So if it's $100 a month, no worries, just do the $100 a month.

1:26:32And just make sure that what you are buying has low fees to buy it. And if you are buying a fund and it has a minimum fee of $50 to buy, don't buy that, find something else that has really low fees. And of course check with your brokerage what the fees are for buying at that level. And a lot of brokerages also have an automated system where you can set that up and you can just say every first of the month you are going to buy $100 of the S&P 500 or whatever it might be. And in the long run I think you will do very well with that.

1:27:05If you look at the S&P 500, this is basically it. And if you've done that over, let's make it percentages, we don't have to go back forever, let's go back to 2010 say, again you would have had a 271% performance, which is pretty good. I mean there really is nothing wrong with that performance whatsoever. At the moment it's 2021, so if we make it 10 years, that would have been 220% in 10 years. That's pretty good, right? I mean I really don't think that's something to be sniffed at.

1:27:36Without ever worrying or thinking or doing any kind of research of any kind whatsoever, simply just having that automated $100 going in a month, or whatever amount you're comfortable with. But just make sure it is an amount you can actually do, so there can't be any excuses. Oh no, this month I have to pay for the holiday or something. No, no, no, no, that's not how it works. It has to be an amount you can do absolutely every month. And if that means sometimes you leave a little bit of cash lying over so you can do it in periods where you have higher expenditures during the year, do that, but keep going with the discipline of it.

1:28:07I think it's a really good strategy. ETFs versus mutual funds, it's perhaps a question a lot of you think you know the answer to. And a lot of the press in recent years has been very favourable to ETFs and there are good reasons for that, but there's also still a place for the good old mutual fund. So let's look into really what the differences are. I will try to make some notes on our whiteboard.

1:28:29Here as we go along. So what are they both have in common? Basically they hold a large portfolio of different stocks or possibly bonds or sometimes other stuff like commodities, but they're generally speaking fairly similarly regulated. You can basically own a lot of stuff through one click, and both can also be leveraged. So far they are fairly similar. They can both track indices. Yes, there are mutual funds that track indices, not just ETFs.

1:28:58However, ETFs tend to be cheaper and we're going to get into why that is. Mutual funds have of course active management and that can be an advantage. Now I hear you saying there are some ETFs that are actively managed, and that is true. There are still very few and far in between, but ARK of course being one of the most famous ones. That is essentially a mutual fund but marketed like an ETF and has fees that are closer to an ETF than a traditional mutual fund.

1:29:29Now one of the main differences really is how you buy them. When you buy an ETF you are buying that ETF from a seller in the market on the exchange, whereas when you are buying a mutual fund you're buying it from the fund. So that's one of the main differences. With ETFs we have buyers and sellers. With the mutual fund we do not.

1:30:03Mutual fund, you are typically, it's once a day, you put in your order, it gets sent to the mutual fund, they typically charge you a fee for that, and they basically issue a share if you will in the fund. Whereas how do ETFs do this? Well, mutual funds obviously get your money and then with that money they buy more of the underlying shares, and that way the net asset value gets lifted up to the new mutual fund price. So they can kind of track that internally, but it is a little bit more work for them because you are buying it directly from them.

1:30:39Whereas with an ETF you are simply buying it like you would a share on the market, so the stock exchange does that business. Now the one thing the ETF does have to do is that when everybody buys that ETF, it means that there would be a discrepancy between the value of the ETF share if you can call it that and the underlying net assets. Therefore the ETF issues more shares. So that's kind of how they manage the difference between the net asset value and the ETF price. They simply create more supply to basically bring the price back down, and all of that is done by software. Basically there isn't a person there sitting like how many shares shall we issue today. That is not what Cathy is up to, one of these kind of managers. No, it is all done automatically so it is much more cheaper.

1:31:30Another advantage typically people cite for ETFs is tax. Why? Well, say you reside in the United States, and it is similar in many, many jurisdictions. Both are, if you hold an ETF or mutual fund, you're typically taxed on your gains and losses incurred. However, ETFs do a lot less internal trading, and those internal trades create less taxable events. So unless you are investing through a 401k or some sort of tax-free kind of mechanism, there is an advantage because basically your mutual funds will distribute taxable gains to you even if you did not sell your mutual fund.

1:32:21So that is a little bit of a mutual fund downside, whereas with ETF the tax is generally only an issue, and I'm not a tax adviser guys, but generally it's only an issue once you sell. Now somewhere down the road if you live in a jurisdiction that taxes you on your trading, you will still have to pay the tax, but you can defer it that way. So that's kind of an important one to understand.

1:32:46Now what about mutuals then, what is the actual advantage? Mutual funds, and I'm writing like a child I appreciate that, well the advantage is you have a jockey. What on earth am I talking about? I draw a horse here but this pen really doesn't allow me to do that, this little device here. Well basically you have a jockey on the horse. That is I think a good analogy an investment adviser gave me many years ago, and that is because there is someone who's actually actively monitoring that.

1:33:22That has a positive if they know what they're doing and they are intelligent and well researched and rational. Being it does of course also mean that they're going to spend more money on analysts and on research and company visits to the companies they're investing in. All these things, that is a little bit more expensive to run, but it can have an advantage and there are some very, very good mutual funds.

1:33:47I do actually buy some mutual funds, well actually mainly just the one, which is a UK fund which I've talked to you about in, we'll talk to you about again later on. It's called Fundsmith in case you're wondering. So why? Because they have relatively low fees and they are managed by somebody who I think is very intelligent and does a very good job in keeping an eye on things, and it means I don't have to. So I don't mind paying them a little bit of money. I wouldn't want to pay them 5% a year but I don't mind paying them a per cent or so.

1:34:16So what is therefore kind of our summary here? Well, if you are just trying to kill a sector in a lazy approach, and I like lazy investing, I think it's great to be lazy, it means you can enjoy your life and do other more interesting things, then an ETF is probably the way to go. And I wanted to show you again, let's go back to this tool here, fv.putnam.com. If you want to find some funds or ETFs I think that's quite an interesting one.

1:34:46So why don't we go back to our value example, not because that's all we should ever buy but that's what we were looking at earlier. So if we look at large cap value, that's the sector on here, it then shows us funds and ETFs. So now it shows us quite a lot of them, 279 of them here. So you're thinking oh my God how am I going to pick the good ones. Well I'll give you a couple of pointers. First of all expense ratio, that's really one of the main things that matters.

1:35:13So let's just take that down to say, well maybe a per cent, I think that would be a reasonable fee. That would be, I mean actually quite an expensive fee for a lot of them, and now we have 258. All right, so a lot of these will be ETFs. Let's take this down then to 0.66 let's say and see how many we've got left. Did it do that? No it didn't. There we go, apply, I need to click apply. Okay, now we have 78 left, that's starting to look a little bit better.

1:35:44So what we can then do here is performance is one thing. Alpha is another. What is alpha? It is basically the amount by which they outperformed this industry. So then we can look at alpha here, and why don't we then look at, we can also filter that, we can look at those who have, well you want positive alpha otherwise you're doing something really quite wrong. So why don't we take the ones that have more than alpha of 1. So now we're left with 14.

1:36:11Right, you're starting to see where I'm heading with this. You could of course filter a little bit more. Over here we could perhaps take the expense ratio down some more because I hate paying for things I don't need to pay for. So why don't we look at these. Now by doing this we have of course now excluded mutual funds because most mutual funds cannot live on those kind of fees. So now we've got 3, and we've got this one here and that one and that one, and they have done the best.

1:36:38So we can put that on here, that makes it then a reference. Okay, and then the other ones, tell me, you know how we can do that, but you basically get the idea that you can kind of create an overview there. Let's just do that again very quickly so I haven't lost you here. So you can do that. So let's just take our expense ratio back down to 0.5 or thereabouts, apply that, and we want an alpha that's say greater than 2, something like that. That leaves us with 4 left.

1:37:13So now all we can do, we just look at these basically. We just click our way around it. Add to comparison, can we do that? For some reason not, but anyway you can write them down and then you can write down these 4 tickers, and then you can simply go back to the homepage and you can click on compare. You can type the 4 in here and then you can get that nice overview again, and you can see everything about them, you can see what they hold et cetera on one screen. So I think that's always a nice place to start.

1:37:45So the only reason really I would buy mutual funds is, a, they have relatively low fees, and by that I mean below a per cent, and they have a very good fund manager. So that is something to think about, and there are not that many great fund managers quite frankly. Most of them are dreadful, but there are always a handful who are very good and who are.

1:38:04Worth paying a little bit of money for, and again if you then trust that individual, all you have to do, I would say, is read their quarterly statements, read their annual statements. A lot of these fund managers now put on YouTube the annual reports and things like that. Do watch those still because they are kind of your earnings call if you will. And again I would make a list of the at least top 5 holdings, pin it on your wall and pay attention to those 5 stocks as if you were invested in them directly, because you are essentially.

1:38:35So that's a quick roundup here on ETFs versus mutual funds. I wouldn't say mutual funds are over, there is a place for them, but for what most people are trying to achieve, that is to track a certain index or just dump money indiscriminant on the NASDAQ or the S&P, I think ETFs are the easier way to go. And in that case the main criteria quite frankly is fees, so look for fees and look for transaction costs, that's really the key.

1:38:59Stocks versus ETFs, it's a question I guess a lot especially from fresher investors, also some seasoned investors who are saying what should I do if I'm interested in this sector or this company. Should I pick this company or should I go for the whole sector through an ETF? What's really the advantages and the disadvantages to that, so we're going to look at that. I will try and run a few things on the whiteboard here with my horrific writing that you are used to by now.

1:39:28What's the whole point of the ETF? Well I think the first thing is really, I am lazy. And I don't mean that in a bad way, I just mean acknowledging the fact that I cannot be bothered to look into the inside of all of the, say, okay what are we going to look at, say battery manufacturers or something we've been looking at here as a community because it's a hot topic at the moment with green energy and with EVs etc. I cannot be bothered to dig through the financials and the analyst reports and the technology and the patents and the size of the companies, who their customers are, all that kind of stuff for say half a dozen or a dozen or so battery manufacturers and then pick the one that I think will be the best one.

1:40:16Because quite frankly I find it quite hard to understand the battery technology because I'm not an engineer and some of that chemistry goes over my head. So can I be bothered to look through them all? No, not really, I'm just too lazy to do it. And I think that's a very very very good thing to admit to ourselves and therefore just go, all right, therefore let me look at an ETF. So that's I think one of the main reasons, is if you don't want to do the research or if you haven't got the sector specific insight.

1:40:47Now on the flip side of that coin is say you are an engineer or a manager in, for example, an aircraft manufacturing company. Say you work for Boeing or Airbus or one of those guys, or perhaps one of their key suppliers. Therefore through your day-to-day knowledge, the meetings you have, the people you see, the news you get to your employer, you know a great deal about that space. You know the kind of projects that are in the offing, you know who your main competitors are, you probably know quite a lot about a supply chain that to most other people out there they don't even know it exists. So you have insight to a fairly complex industry, therefore you're probably a better stock picker in that sector than most.

1:41:30But then if you are going to go and buy, I don't know, software companies or something completely unrelated, say car manufacturers, you probably aren't. Now you might understand the principle of it, but until you've really dug into it you are as clueless as the rest of us. And that can apply to a lot of things, so a lot of the time I recommend to buy things that you know, that you are exposed to. I don't just buy them because you see them and they do great advertising, but it makes looking into that company a lot easier.

1:42:02And I've kicked myself quite a lot of times over the years when I've been using software for example for business and then I see that stock later 5 years later and I'm like, hmm, I think I should have picked that stock because I thought the product was fantastic. But again I didn't look into their financials. So that's I think for me the first part.

1:42:22The second part is, I want to write diversification but I don't really like the word so I'm going to write volatility instead. Why do I not like the word diversification? Because a lot of people diversify for the sake of diversifying. Say they find 5 good stocks but they think it's risky to hold 5 good stocks and I should diversify because that's what everybody tells us, right? All the financial advisers tell you to diversify.

1:42:51Why did they do that? Well the more things you have the more commissions they make, and the more often they can trade the more often they collect fees on those trades. That's my slightly cynical take on that industry. So diversification for the sake of diversification is worse than not diversifying. Now if you only own one growth stock I would say diversify, unless you really love that kind of risk and you're a bit of a gambler at heart, you get a kick out of that thrill.

1:43:23But really what is diversification about? It's about reducing volatility while at the same time maintaining what the industry strangely calls alpha. So why does the industry call this alpha? Alpha is basically the indicator that says it performs better than the average, it performs better than the rest of the stuff in that sector. So generally speaking people want to get high alpha because then you've outperformed the market, which is very nice, rather than just getting the average.

1:43:59So the advantage of an ETF is that it typically has less volatility than its sector. Why? Because you're not just picking one company in that sector but you're picking 10 or 20 of them. Therefore one or two of them will be massively volatile, the other ones will be less volatile, in most cases.

1:44:20There are perhaps exceptions to that rule. For example if you look at utilities or consumer staples, say let's take consumer staples. So we were looking at McCormick earlier, consumer staples, so stuff that basically you buy on every single day no matter what happens, whether it's sunny or whether it rains, so the economy is good or it's bad, you just buy that stuff, right? So if you look, we were looking at an example earlier of spices. People will always buy spices, people have to be incredibly impoverished before they stop buying spices. Therefore that's a pretty safe one to go for as a consumer staple, it's a good example.

1:45:02Now in consumer staples typically the whole sector moves more or less on a relatively low volatility basis. And therefore a lot of people buy into that sector using an ETF because the main advantage of picking a stock is that you can pick the one out of the 20 that's going to perform well, that's going to give you more alpha, it's going to give you performance above the average. If the whole sector moves all in tandem, well why not just buy an ETF? You get a little bit less volatility here and at the same time you don't really have to do all that much, right? You don't have to look into the individual companies as much.

1:45:45So that's I think a good reason to buy an ETF. If you look at the more growth stocks, at the more tech stocks, so say biotech or all that kind of stuff what's coming out at the moment, they have exceptionally high volatility. Because it all depends on whether your drug or your treatment gets approved by the FDA. When it does you get 1,000% plus, the ones that don't, they die.

1:46:12So it's fairly high risk to pick a winner unless you already know something about it. Say again you are some sort of medical professional, bio science, God knows what type, researcher, then you might have the inside track and you understand, you can look at the research and you know who's got more or less of a chance, and then yes you can stock pick. If you don't have that knowledge I wouldn't bother, I wouldn't follow the headlines. But if you still want exposure to that sector you can again buy an ETF, gives you less volatility but it still gives you fairly good upside.

1:46:47So really I also want to show you guys a really great place to search for ETFs, I'm going to show you that in just a second. But just as a summary, basically the advantage of ETFs over stocks is you can be lazy, you get less volatility, you can still outperform the market if you pick a subsection of the market with an ETF, it has pretty low fees, it is just easier. The advantage of stocks is if you know something about that stock and you've spent the time researching it, and that really is the key thing, or you have an inherent knowledge of that sector, then you can really find a winner and therefore you can get a lot of alpha. You become the alpha investor. So that's kind of an interesting one, now let me show you this.

1:47:35Here, this is a website called fv.putnam.com and it is intended only for financial advisors, of which I am not one, but you can register, it's free. Once you signed up you can compare ETFs and I think also funds, and it's actually super handy. For example, I was saying earlier consumer staples, so simply type in consumer staples and then it lists for you here 18 funds that are consumer staples. I think it uses the fund term rather loosely because ETFs are also included in this. For example you can compare the Vanguard one against the Fidelity one, and maybe you want to throw in a Bank of Mellon New York, maybe you want to throw in Invesco as well, and there you have it, you've got these four.

1:48:30Now you click create and then you have to have a little bit of patience and here we go, it gives you a nice comparison and I find this really super helpful. So what have we got here? Well we've got obviously what they are, we have Morningstar ratings. Personally I don't buy on the basis of that because I'm not entirely sure what they're rating it on. You get obviously performance overview here, they are fairly similar, you can see there's another one over here, there are small differences, 2-3% differences, so that's kind of interesting to see why.

1:49:05Then you can see return versus category, so that's basically our alpha, does it outperform the category yes or no. Versus the index, here is our alpha, is it positive, is it negative. Then you get some other ratios, we can get into some of those a little bit later, but again one of the key things I look at is expense ratio. So looking at these 3 or 4 here, the first one VDC has an expense ratio of 0.1, to me that is therefore almost automatically a winner compared to the other ones because they can convince me if they have something truly special in there, but quite frankly why would I pay 3 times or even 7 times the price for no real reason.

1:49:49Also turnover ratio, that basically is an indicator of internal transaction cost that typically funds don't disclose to you. But every single time they trade they are incurring brokerage fees themselves, and who pays for that? Well, you do, it's just that they don't tell you about it. So again, a huge turnover ratio here, over 119 versus 3, well for me therefore VDC seems to be kind of the winner.

1:50:16Then we can look through this here, VDC is the yellow one here so it isn't the best performer, PSL certainly outperformed, so we have to look at and find out why. You can also see that here on a bar scale, again it tells you which fund is which. So VDC is our cheapest fund but it hasn't performed well over 3 years, it's done rather well over 10 years, it's done pretty well. But actually this fund here PSL, the most expensive of the lot, does seem to be doing better, possibly they're leveraged or something like that, so you'd have to do a bit more digging into that.

1:50:54Then you can compare things like performance, standard deviations, alpha. For example you can see who's done better or worse. You can also see how correlated they are and that's again an interesting one for eliminating things. If you're looking at things that are the same, just look at the cheaper one because they're obviously the same. So VDC and FDX have a correlation of 97, so at that point what am I going to do? I am simply going to get rid of FDX because it has higher fees and it is essentially the same, it moves almost identically.

1:51:28So that then leaves me with just these 3. Asset allocation for these guys, pretty similar, it's all stock basically. What sector are they invested in? Very consumer defensive. So here we see a little bit of a difference, here PSL, they have some consumer cyclical stocks in there. Often actually you can click down here also on the link, it gives you a link to the prospectus, so that can be kind of an easy way.

1:51:56Here we go, we can see what they're invested in. So VDC and the fund, very similar, right? Philip Morris, Nestlé, Altria, Estée Lauder. I mean, again, to me almost the same thing, these two companies. So therefore what am I going to do? Well, I'm going to get rid of the Mellon fund because again it was more expensive in terms of fees and I'm getting the same thing. So now I've just got these two which are really quite different. There are some overlap here, things like Estée Lauder Company are in both, and there are perhaps a couple of others, but it's quite a different take on it.

1:52:30So you kind of narrow down, of course you can do this with more stocks kind of very quickly. The big differences here, so VDC is a more traditional value kind of fund or ETF rather, what I would probably shout out as names in terms of value stocks. Whereas PSL is a little bit more on the unusual side, although there are some good stocks in here like Mondelez for example, some of the pet stocks are good. So I can see why they are in here.

1:53:02I think at that point you'd have to go and look at the prospectuses and see really what's the difference between these companies. Is this perhaps a little bit more of a small cap play versus a large cap play? But I just wanted to throw this out as an illustration. If you're wanting to compare funds, I think fv.putnam.com is a pretty interesting one. I think that's a good resource.

1:53:30What is my final word on this? Well, whether you're buying stocks or ETFs, there is one rule. Do your homework. And that is regularly, because just because you bought the ETF it doesn't mean that the companies in it don't change. So still having a look at, just put a list on your wall, that's what I do. If I buy a fund or ETF I print out the top 10.

1:54:03This is 95%, well not quite, but it's the largest chunk of that holding. So I look at these top 10 companies. Rather, okay, this is the top 50, the top 10 has 62% of this fund, right? So that's really all you need to care about. Print out these 10 or print out their logos, it looks prettier on a wall, and then pay attention to those. Maybe have a Google alert or some sort of tracker for them and every once in a while look at their performance.

1:54:27I would recommend listening to the earnings calls, maybe not for all 10 but at least for the top 5. That'll take you, yeah, it'll take you 5 hours once a quarter, but if it is a substantial investment for you I think it is good to do it because you will see any concerns from the analyst questions there. Of why are things changing, or maybe just listen to the last 20 minutes of the earnings call, that's typically the analyst questions, and they will ask questions that will give you an indication of whether they are concerned or whether they're happy or whether they're bullish or bearish. So that's kind of a good early indicator there guys.

1:55:04So I think as a wrap really, I think both ETFs and stocks are a great way to invest. Just stocks require more knowledge on that specific stock. Don't buy things just because it's in the headline, look at the numbers, look at the maths, look at their performance. If it's a growth stock, well you're going to have to start and understand the tech behind it, or at least the business model behind it. How and when are they going to make money, and how do they stop others from copying them, and how hard is it to copy that?

1:55:39I think that's kind of what a lot of people don't do, especially in a bull market. Again, to give you another example, I bash Airbnb quite a lot. I think it's a brilliant idea, is fantastic service, I love using it, but I think it's a dreadful business because it's very easy to replicate. Because there are a lot of companies that have the same data and we all have search now, so every single property that is on Airbnb is probably also on expedia.com and a number of other local competing services.

1:56:09So therefore me as the consumer, where do I book it? Well, wherever it's cheaper. I really don't care whether it's Airbnb or any of the other sites because I'm getting the same apartment or house or whatever it is that I'm renting. So for me that's an example of a great business idea, but what's the moat? In theory it is acquiring the listings, but actually all Airbnb has done is they've knocked on the door of every property in the world and they've told them, hey, you can make money with this property on Airbnb.

1:56:39Then everybody thought, okay, let me do that, and then they did that for a few months and then they realised, hang on, I can also put it on other sites, I can put it on this one, I can put it on that one, and it doesn't really cost me any more, I don't really care, so why didn't I put it on everything. Therefore they've kind of created an industry without protecting themselves, without creating an asset, without creating some sort of loyalty. I think that would be perhaps a good idea for them, they should have consumer loyalty points, the sort of mileage programme what airlines have. And that's why airlines do it, because it's a fairly similar service, airlines, I appreciate.

1:57:12Some are better than others, but the reason we stick with one typically is because that's where we get our points from, our miles from. That's what they're missing, that Amazon Prime type thing. That's another reason why Amazon's doing that, because it makes it very hard for other people to steal those customers. Because once I'm paying for that subscription to get that discount and that free shipping, well I'm going to just buy it there, aren't I, unless Amazon was much much more expensive.

1:57:38But here I'm digressing, I'm ranting. That is not the intention. This is ETFs versus stocks. I think both have a place. If you want to take the, let's say, the I can't be bothered approach, buy ETFs. But if you're buying very sector specific ETFs you're still going to have to do some research on that sector, that's the bad news I'm afraid.

1:57:57If you are just buying the NASDAQ or the S&P 500, well you can just buy it and pretty much forget about it, although we will look at timing a little bit later here in this course. But if you are buying something very niche you still have to understand that niche, otherwise you can also fall on your face.

2:00:17We are going to look at actual income statements, start to learn to read them. A couple of things we're going to look at in particular here, we're going to look at operating margins, we're going to look at EBITDA, and we're going to see how those things really make an enormous difference when looking at financials. It's important to understand those I would say.

1:58:34So here we have Tesla's income statement for the last 3 financial years, the most recent one being the end of year 2020. So what do they actually include? Let's go through this, not entirely line by line but the important lines.

1:58:50Revenue, well that's simply all the money the company received, right, for whatever it was selling. All goods and services sold, that's the amount of money received. Now typically these statements are in millions, so people don't add all the extra zeros because it just makes it hard to read. But that's $31 billion.

1:59:11Revenue growth, that's a nice addition here, but you can see that otherwise you could have of course calculated that yourself. You then have cost of revenue. What is that really? Well it's costs directly associated with obtaining the revenue. Cost of sales is another word for that, stuff you had to spend to get that revenue. So in the case of Tesla that would for example be building the very car, that would be a direct cost of revenue there, buying all those components to build that.

1:59:44So that then gives you a gross profit. Gross profit is exactly that, it's gross, so it is before all the day-to-day expenses that the company incurs. So it's basically in a simplified way saying okay, we bought these 100 components for a Tesla, I know it's a lot more than that, and we've paid these 3 workers to assemble it in a simplified world, and that's what we spent on it.

2:00:07So we sold that Tesla for $31.5 billion and we spent $24.9 billion on the parts and these 5 workers and that left us with this gross profit number. That's basically what it is. What haven't we paid for? We haven't paid for the machinery, for the factory, for the insurance, for the electricity. We haven't paid for the admin staff, we haven't paid for the HR staff, we haven't paid for the sales staff, we haven't paid for delivery trucking, all sorts of things, lots and lots of stuff.

2:00:36We haven't paid any taxes, we haven't paid any interest, we haven't paid for any of our loans. All those kind of things that are part of the more day-to-day expenditure are not part of gross profit. So gross profit basically shows you how profitable the product or services are, that kind of headline number. And then you have to look further to see how much money the company actually made after they spent money on everything else, marketing, advertising, etc.

2:01:05And then we have the R&D expenses, general admin expenses, other, that could be some finance charges, operating expenses. That's a very broad brush for all sorts of other things, other costs of running a company on a day-to-day basis. And that then leaves us with an operating income.

2:01:22And what we could add in here, if we were so minded, we could add in here operating margin. I don't know why they didn't do that, but you could of course, and that would then simply be this number divided by the revenue. So that would be a 6% figure. Ignore the formatting, but there we go. So that would be an operating margin of 6% versus the gross margin of 21%.

2:01:56Why do we look at both of them? Because as you scale up a business like Tesla, if you make more cars your gross margin will improve, and hopefully your day-to-day expenses, your write-offs on the factory, your depreciation, your overheads will not go up as much as your revenue. So that's why it's interesting to look at the two separately.

2:02:16Then we have here net interest expenses, and that then gives us EBIT, so earnings before taxes. That's $1.1 billion. Then we have income tax expenses and that then gives us net income. A lot of people when they talk about profits they talk about net income, this level. So this is probably what most people would call profit.

2:02:45I forgot, you have to do these things, don't you. I have to put that in front of that one. There we go, now I can call it profit. So that's what most people would call profit, but I think you started to understand there are layers to profitability and it's useful to understand each one of them.

2:03:06You then have basic earnings per share. So that is related to net income. That earnings per share is basically profit, and maybe we should write all earnings, because that's the language most journalists will use.

2:03:26EBIT as we saw, $1.95 billion. So that's earnings before interest and taxes. And you can see that here is the income and here is the net interest expense. So together that is near a billion dollars, so hence EBIT being a bit more than a billion dollars above net income, right. You can see that differential here.

2:03:54So we can do the maths if you want to get the illustration. So we take EBIT minus net income, and what is that number? That number is taking net interest plus income tax, $1,046, $1,089. Okay, there will be a little bit more in here somewhere that I've missed, but you essentially get the point. There'll be a little bit more tax expense, that's income tax, maybe there are some other taxes that they have paid.

2:04:24So EBITDA then, what is that all about? Well I explained that I think in a previous video, you might have seen it yet or not. It basically strips out the cost of debt capital and its tax effects by adding back interest and taxes. It also removes all depreciation and amortisation, which are non-cash expenses.

2:04:51And you might be thinking depreciation, amortisation, what? Okay, depreciation, say I buy a factory, right. I am Elon Musk, I buy a factory, buy all the machines. Each year I can write off a percentage of that value as an expense under most tax codes in the world, because the machines only have a useful life for I don't know how many years. So each year I have an expense which reduces the value of that machinery on my balance sheet, and that isn't a cash expense, it doesn't cost me anything. In fact it saves me tax by creating the expense I wouldn't have otherwise had.

2:05:26Amortisation is the opposite, whereby I buy machinery and I can book the expense over the useful life of that machinery or plant or factory or whatever it might be. So for capital intensive industries like car companies for example, EBITDA gives you a lot more insight into the profitability if you strip out that one-off capital expenditure and the depreciation and the interest and the tax.

2:06:02So it gives you a number that is perhaps a bit more favourable to the company, but again it reveals quite a lot more information that some of the other headline figures don't show you. So I hope you're starting to get a feel for, a, this is not a scary sheet, you can break it down.

2:06:19So you just start with revenue, which is just all the money coming in. Then you look at the cost directly associated, cost of revenues, with manufacturing that product or service, the direct cost related to that provision of that service or product. And that gives you the gross profit. Gross profit margins are particularly useful to look at with growth companies because they tend to not be profitable on the net or the EBIT level because they're having to still hire a large number of staff, they have a lot of expenditures, and they're dividing that by relatively few products or services that they're actually selling.

2:06:56But if you can see that the gross profit margin is high on the actual products that they are making, you think, ah okay, but they are going to be profitable down the road. I can see that, they just need to sell more, and once they sell more units the overheads will be divided by more units and therefore it will eventually be profitable. And then you have operating margin, so that then throws in all the operating expenses. And then we have the net income, which is what most people would call profit.

2:07:23Most people look at it with earnings, but you're starting to see that the earnings per share measure here, which would be that earnings divided by the number of shares, isn't all that insightful. I like to see the whole thing, I like to see all of these numbers. Then down here you have EBITDA, which again strips out all those things I mentioned earlier. Tax, debt, capital, depreciation, amortisation, basically all the non-cash expenses and interest and tax expenses.

2:07:52Again, I think it's a useful way of looking at it. Of course it is also good to see how much they actually spend on taxes, how much they spend on interest. But if you really want to see the underlying business, how that's performing, that gets distorted by all the stuff that is recorded here in the net income or the profit or the earnings as people might call it. Therefore EBITDA is quite a useful measure to look at as well.

2:08:17Guys, two of the most useful, most talked about ratios or metrics or whatever you want to call them, price earnings versus EV over EBITDA. I'm going to explain what they are, what the upsides and downsides are. We're going to look actually at some real life examples of how they can both be useful and what they really mean.

2:08:42So the first one, PE, what does it mean? Price over earnings, that sounds fairly simple, right? But what is it actually? Well there's two ways of looking at this. One is share price over EPS, earnings per share, so that's therefore the price over the earnings per share. Another way of looking at this which basically gives you exactly the same result would be market cap divided by earnings.

2:09:21You can find those numbers either in any financial report or simply on Google. I mean just type it in and you'll basically get that. That's price earnings. Well what does it really mean, what is it actually? It's of course used very very commonly to compare companies and give a snapshot of their valuation. It's really only useful when looking at companies in the same industry and in the same sector of that industry, otherwise you're comparing apples to oranges and it is no longer particularly useful.

2:09:57What does it really mean? Well it doesn't mean all that much if you look at it globally, because you could say well if the PE ratio is low it's a bargain, it's a steal, the price is low compared to earnings, fantastic I'm going to buy it. Or is it an underperforming company where people have no expectations of future growth? So a lot of investors actually look for companies with fairly high PE levels because that means the market has confidence in their long-term ability to provide growth and earnings. So it's a snapshot but it doesn't tell us everything.

2:10:34Why doesn't it tell us everything and why do we therefore look at the next one? Well the next one is a little bit more complicated. It's called EV over EBITDA. What is that really? Well the EBITDA stands for earnings before interest, tax, depreciation and amortisation. So that's a mouthful and you're kind of thinking well what does that really mean.

2:11:07Well you're taking earnings and you're taking out things that distort the actual cash earnings. So companies that have a lot of assets, of machinery, buildings, things like that, are typically, depending on what tax code you're under, allowed to depreciate the value of those assets. That depreciation is recorded as an expense. Now they're not paying for that, the company isn't actually dishing out cash to pay for that, but it reduces earnings, it reduces profits. Under the earnings measure that will be used in PE, so by excluding essentially non-cash expenses here, we get a clearer picture of the actual profitability of that company rather than just looking at the earnings or the earnings per share number.

2:11:56So it's a useful alternative to what you might call net income or profit when looking at a company's profitability, especially in certain industries where you have a lot of capital expenditure and depreciation. Now the other part of that is EV. What does EV really mean? Well it's enterprise value. That doesn't make you any wiser, does it really. It's also used, and that also doesn't make you any wiser, when people do M&A. Typically people look at the EV, the enterprise value.

2:12:32It is calculated by, well, it's basically market cap plus cash minus debt. That's really what it is. So EV is market cap plus cash minus debt. So then we take EV, we divide it by the EBITDA, so the cash earnings if you will, the non-distorted earnings for that. What does that mean? Well I'm going to show you a real life example here in just a second of how they can both be useful.

2:13:17So the downside of this measure, EV over EBITDA, is that it doesn't include capital expenditures. I was just saying how good that was, wasn't I, a minute ago. But for some industries that can be very very significant also. It can make those companies look better than they really are, and I'm going to show you that example just in a second.

2:13:38So let's go over to that. Here I've pulled up 4 old car companies, Toyota, Honda, General Motors and Ford. We look at the PE, we sort them by the PE ratio. Here you can see that Ford has a minus 39x PE ratio. You're thinking wow, they're losing a lot of money, what a rubbish company. It might be a rubbish company but on this score it doesn't tell us everything. So that's the lowest one there. Toyota, it looks like it's the most expensive at 15.4x PE, and then General Motors and Honda are pretty close.

2:14:10Right, so now we know that the earnings that are under that E, they take into account write-offs of depreciation. If we look at the EV over EBITDA, they exclude those depreciation expenses, and suddenly Toyota is the cheapest out of the lot, which is very very different to what it is here. So it's almost turned upside down. Ford on the other hand is now by far the most expensive with a positive number here. So you can kind of tell that that loss here on the earnings is likely to do with depreciation. They're writing stuff off there, they're writing off losses, whereas Toyota is now looking rather good.

2:15:01Why is that? Well look over the depreciation. Toyota has the highest number there, $15 billion of essentially write-offs of capital, of their assets. Also they are spending $32 billion, more than everybody else, on capital expenditure. So that drags down their PE, or that drags up their PE number. It makes them appear more expensive, whereas as long as you think that the depreciation isn't something that's going to affect them in the long run, and that might just be because of the size of the company and these are just tax write-offs they're permitted to do each year, and as long as you believe that the capital expenditures will result in more profitability down the road because they are building new models, they're investing in R&D, whatever it is that they're doing, then actually Toyota is perhaps more fairly looked at on the EV over EBITDA number and it actually now looks like the most appealing out of these companies.

2:15:58General Motors has, well, Toyota has 50% more capex than General Motors, and General Motors also only has about a third of the depreciation. So therefore it looks fairly expensive on the score, right, on actually both numbers, but certainly on the EV over EBITDA number it looks a lot more expensive than Honda, which it was looking almost identical to before. A lot of that also again has to do with capital expenditure.

2:16:26So again you have to dig into what are they spending the money on, and you can look that up. They'll tell you that in the quarterly earnings calls, they tell you that in the financial statements, or you might just be able to find a Bloomberg article on it or something from some sort of reputable source. Whereas Ford is looking, well, they're not spending a lot of money. Yes they have written off quite a bit I suppose, but they're now looking very very expensive.

2:16:50So from this metric here you can see the cheapest company on the PE ratio would be Honda, whereas on the EV over EBITDA metric by far the cheapest is now Toyota. You can kind of see here I think how you can look at things in a different way. You have to, unfortunately, always, neither gives you a clear answer. It just provides you more information, and if you understand what EV over EBITDA means, you can then pull up the capital expenditures and the depreciation.

2:17:18So your homework for today, guys, is pull up for your top 1, 2, 3, 4 stocks, pull up their PE ratios, pull up their EV over EBITDA numbers, and you can simply do that by typing it into Google. Also pull up their depreciation for the last financial year and their capital expenditure for the last financial year. That might sound very complicated and like a lot of work, but honestly it isn't. It'll take you 10 minutes and a piece of paper. Just do that and then have a look at those numbers and see, is that interesting, is it not interesting, how much money are they spending, how much money are they writing off. Then if you have the time and are so inclined, you could of course then do the exercise against at least their number one competitor, and then you

2:18:02Have a much much deeper understanding of why you are holding that stock, or perhaps you didn't know why you are holding that stock. So I think that's a good exercise to do and I encourage you to do it. For quite a lot of the stocks we always talk about on the channel, you can simply refer to one of my benchmarks files on the Patreon. That'll save you quite a lot of time. But I think doing these benchmarks, I'm hoping you can see it can be quite useful to really get a deeper understanding in these companies rather than just looking at the headline PE number.

2:18:37There, what is a Warren Buffett portfolio? What is a Buffett investment strategy? What are the key things he looks for? And it isn't just him nowadays, of course there are a lot of value investors out there. So let's get into that.

2:18:48So Buffett, what is it all about? It is not about lots of food and queues. You basically looking for stocks with intrinsic value, and that I know is entirely a meaningless phrase, apologies for that. What are the metrics that we look for? And I'm going to show you some of the, and actually show you some actual stocks that he also owns and what those ratios are right here right now.

2:19:18So there are a couple of things we look at. We look at price to book, we look at price to earnings, we look at return on equity or perhaps capital, we look at free cash flow. Anything else we look at? What did I forget? I'm sure I forgotten something. Well yes, I forgotten the key thing. Moat.

2:19:47Moat is really one of the key things here, and what does that mean? It means that the company has the ability to keep others out of its business. And I don't mean that in a monopolistic manipulation kind of abusive way, but say Coca-Cola, right? What do you go when you order a Coca-Cola? Well you go and order Coca-Cola. I appreciate some places might serve Pepsi or some other drinks, but generally speaking they have an incredibly dominant position.

2:20:19How? Branding. They've just branded the hell out of the world. Wherever you go in the world, no matter how simple it is, you'll find a Coca-Cola sign somewhere and a vending machine or a bar or a sign or something. They've just managed to essentially outcompete everybody else on marketing and they've done that very very cleverly and they've done that for forever basically. So that's kind of their core moat. It can be brand, it can be as simple as that.

2:20:47So let's actually have a look at a couple of real life examples here. So these are companies that Buffett is actually invested in. I've put out only a couple of them here. Coca-Cola, Amex, Bank of America and Apple. And Apple is a little bit of the odd one out there you might think, but it'll make sense in just a moment.

2:21:09So what have we got here? Price book, you can see that I hope. I'll make that, yeah I think you can just about make that out, right? So price to book, generally speaking the lower the better. That isn't very helpful, I appreciate that. It isn't the be all end all because if you have a company that's growing a lot, you are happy to pay a higher price to book than when you are not.

2:21:29So say Bank of America has a price to book of only 1.39, it's incredibly cheap, but then they are also not giving us huge growth and we're going to look at that. But look at the PE ratio here, that's perhaps the more interesting one. They are basically all between 29 to, well, to 40 in the case of Amex here, but they're all in a fairly narrow range here.

2:21:52So let's just take that. So 29 to 40, let's write that down for PE, that's kind of where we are at the moment. So 10, 20 to 40 I'm broadly going to write down here. Now of course the lower the better, but those are acceptable numbers. Price to book, well I think Apple is a little bit the odd one out here because it is a company with very very high margins and also still tremendous growth ahead of it. But generally speaking I think you would look at price to book that are closer to the other ones here, 1 to 12 or so.

2:22:25So I'm going to write that down here as price to book about 1 to 12. And there are exceptions, I'm going to put a little star here as a reminder that when you have incredible growth, that is our exception to that rule. The higher the growth basically, the more you are going to be willing to pay for that and the more you're going to have to pay for that.

2:22:48Dividends, perhaps another one I should perhaps add dividends to this list. I don't think it's that important anymore, but it is still a factor. So dividends, there are a lot of businesses now that are moribund and they pay dividend. That doesn't necessarily make them great stocks, so it's not the sole indicator here. But for example I've highlighted Coca-Cola here because they pay 3% dividend and that is going to be important in a moment when we look at the chart.

2:23:20There are lots of other things you can look at in terms of indicators here, and of course feel free to look at this chart. I put the link below so you can play with it and also see it in a bigger range here. I also put on some of the risk items here. Generally speaking, less debt can be a good thing, but then if you're looking at financial companies, that again isn't really a firm rule, so let's not highlight that.

2:23:47Return on equity is a big one, and generally speaking of course the higher the better. So Coca-Cola has 40%, Apple 82% return on common equity, that's incredible. Now the banks will have less, but they are able to leverage that and you also paying less for them. So a little bit hard to come up with a hard and fast rule on that, but that's really one to look at, is return on equity.

2:24:17And then free cash flow. So you can see the numbers here, these are billions, right? So it's $8 billion Coca-Cola, $4 billion for Amex, $37 billion for Bank of America and $8 billion US dollars a year of free cash flow for Apple. So you can see why therefore you're willing to pay more for Apple, right? Because they're just a cash generator par excellence.

2:24:48Now growth is one thing you need to look at at the same time. So you basically want value companies but you also want to have growth in there at the same time, otherwise you are essentially doing more of a dividend play. So growth here for these, are still EPS growth, is 19 to 70%. So maybe we'll make that EPS growth rather than growth, that is perhaps an easier measure to look at here.

2:25:17So here what does Buffett have? He has 19 to 72%, that's kind of what those 4 stocks are. So that's pretty good growth, and given that you're paying relatively little for them, it matters. Now free cash flow, I would say basically depends on the size of the company of course, but you kind of want $5 billion plus or something like that, the more the merrier really.

2:25:47And return on equity is a little bit difficult here. I would say with that it depends. It depends, and that is not very helpful, but you just have to realise that a financial institution is going to have a lower margin than say Apple, right? So it kind of depends on that. You want it to be high compared to the peers and compared to that sector, and that's really I guess the important one there. Dividends are nice but they are not essential I would say, but they will come in when we look at the actual chart here.

2:26:25So where did my chart go? My chart is here. So I've charted these companies so you can see them, and you can of course see that Apple, this is randomly selected since 2010 essentially. So starting from 2010, Apple is up 1,800% and that rather puts the other 3 to shame, right? You would think, well why would I buy Coca-Cola then at the bottom there?

2:26:54So I'm going to hide Apple because I think that's more of a growth story. Let's look at the other 3 and I'll hide my Fibonacci lines here. So okay, look at Coca-Cola, right? You say 85% growth only over what, 10, 11, 12 years. That's not great, right? It's not bad but also it isn't great.

2:27:15But there is a big but. Do you remember the dividend? Pay 3.1% dividends, right? What does that mean? Where is my dividend calculator? Here it is. Okay, say you invested $10,000 in Coca-Cola and your portfolio on average gets you 8% per year and you've reinvested that money into your portfolio overall and you've done that for 20 years.

2:27:43Now every single year Coca-Cola paid you $300, right, in dividends. If you reinvested that $300 over 20 years, imagine how much money do you think that made you? Any guesses? I'm taking guesses. Well I've only hit calculate. So you started with $10,000, you got paid $6,000 over the period in dividends. By reinvesting that money together with your initial balance, you've earned $44,000 in interest. So you have to take account of the

2:28:20Dividends there, so you can say let's ignore the initial balance and let's just say you only got the dividends here. Then you can see just what those dividends did for you. So the $6,000 became $113,000, so therefore you actually got quite a bit of extra money. On your $10,000 initial, you got 1.3x on top. So you have to take that into account when you look at these charts because these charts don't price in accumulated interest.

2:28:57So when you have higher dividend stocks, your stock can actually underperform somewhat and you can still be doing rather well. So if you compare that then to BAC, we've actually probably done better than BAC. Now BAC has also paid a little bit of a dividend but nowhere near as much, which was I think 1.2%, 1.8%, so that still matters in the long run.

2:29:26So that's I think one thing to really bear in mind. But to summarise this then, you basically want to look at a low price to book value, 1 to 12. You can pay more if there is substantial growth, and what's the kind of growth I'd be looking for? I'd look at probably EPS growth because that is earnings per share, so that actually tells you something about how much that matters for your share price. PE, price over earnings, 20 to 40 I think would generally be a fair number.

2:30:01The rate of return on equity, it depends a little bit. It's a little bit harder to put a real number on that. What we're seeing here generally speaking for real world companies, 40%, 80%, but then when you're looking at financial institutions you're going to be happy to take less, especially if they pay you dividends. For free cash flow it really is a question of the more the merrier. $4 billion, $8 billion, $37 billion, $80 billion, of course it also depends on the size of the company, but generally speaking the more the better.

2:30:34And really I think what it's all about, it's all about moat here, that's really what it's about, because these are companies that have been around forever. So really one of the nice things to look for with moat is look for companies that have been around for more than 100 years. And that might seem like a silly thing to say, but if they've been around for 100 years and they still give you these kind of return numbers, then it's probably a pretty good company with probably a pretty good moat. Always look for it, but there we have it.

2:31:05And then EPS growth, we're looking here at 19% to 72%. If it's higher it doesn't hurt, but if it's lower I would perhaps avoid those ones. So that's a little bit of a Buffett takeaway here guys.

2:31:17Investing together, and that could be your spouse, girlfriend, boyfriend, or any other family member for that matter really. And why is it important? Well it's only important if you do have somebody else in your life. If not it will become important at some point in the future unless you are a hermit. And the reason it's important is that the wealth of a family or couple depends not just on the one person, it is very very much a thing you do together.

2:31:58And I want to look at a couple of things they have written on here. We're investing together, what does it really mean, what do we really need to do? Well the first thing we need to do is we need to set some goals, and those are goals for both parties. We need to talk about debt, and we need to talk about compounding and education. And what you are doing here is very admirable because you are taking time to raise your own financial IQ to another level, and your spouse or girlfriend, boyfriend may or may not have done that, and therefore sharing information is going to be very very crucial.

2:32:44And for goals I would say for each, because we want to do things together but we also want to do things separately. And the fourth part, which is what people sometimes are afraid of, is a budget, or not so much a budget but a record. And I think that's where you start with a budget. So forget about, most people look at budgeting as some sort of penal servitude where they can no longer enjoy the things that they enjoy doing, and that's not the purpose here at all. So we're going to go through this together in the spirit of investing together.

2:33:30And let me pull this up for you. So the first thing is a very quick compound reminder exercise. If you invest periodically, say every month, and I'd encourage you to set goals every month, don't set them for the quarter, definitely don't set them for the year. If you set them for the year you will fail, I guarantee it.

2:33:53Say every month you invest $200, and I mean it might seem like an absurdly small amount or an absurdly large amount to you. And then I put in here the numbers of periods to save, so we're doing this monthly because it's monthly, so say a 10 year period. Now interest rates, this is a confusing one for most people, but you might have seen some of my how I invest, so you might understand a little bit how I got to come up to 11%.

2:34:19But if you look at the S&P 500 since 1929, it has delivered something like 9.6% or something annualised. There were of course years when it was terrible but there were years when it was fantastic, and on average since 1929 something like 9.6%. The NASDAQ over the last 20 years or so has done slightly better, 10.6% or so. So even if you are not picking good stocks, you were just picking the broad market, looking back historically, of course past performance is no guarantee for future performance.

2:34:58But let's just assume the world isn't going to freeze over and everything will end. Say you want to be more conservative, say you make it 9%, and you then hit the calculator button and then you see that you have, and again I show you a little chart because some people prefer the visuals, you will see that over 10 years you have deposited $24,000 and you got $114,000 for free on top.

2:35:29Now that's a 10 year example. The beauty of this is to make it a 20 year time period, and you look at the calculator and you look at the amount you've invested here, $48,000. The interest, so the free money you got, was $85,000, and the final amount therefore is $133,000, and you only saved $48,000. It's very very nice, right?

2:35:52Now sometimes when people look at these interest rates, or what I call an interest rate here, or performance of the market, you have to take into account things like dividends for example, which is why the numbers in reality are the numbers I just gave you and perhaps not the lower numbers you sometimes read about. And this depends entirely on you keeping up with your $200 a month. Now if you make that number bigger or smaller you will see of course that number go up a great deal.

2:36:23Now this calculator is on my website, you can see the link here at the top, felixfinance.org, so you can play with that. And bear in mind that the number of periods, I would take monthly because you must invest and save monthly, and you must invest that money monthly, not just sit on it, not just put it under a mattress, because if you do that it doesn't earn interest, it doesn't compound.

2:36:43And I use the word interest very liberally because to me capital gains and dividends received or interest from bonds, it's all the same, it's all money I didn't earn. And I love money I didn't earn even more than the money I have earned. So I use that term interest quite liberally. Essentially it is a return on your investment.

2:37:08So the first thing I would do is sit down with your other half and say, look, I'm doing this course, I've been talking about it, I've been reading about it, I've been studying this. I figured out if I save a relatively modest amount of money each month I will become financially independent. I'll be able to pay for this or that or the other, whatever my goal is down the road. I'll be able to retire at this age, or I'll be able to buy that house, buy that boat, pay for the college education, buy that house, whatever it is, or buy you a pony.

2:37:47And it is actually relatively simple. All I've got to do is I've got to stick to it. And the other person you're talking to might say that's wonderful, fantastic, that's great for you, well done, or maybe I'll do it too. Or they might be like, really, how does that work? I thought the market always goes up and down, how do you know you're going to make money?

2:38:07Okay, so show them the compound calculator. And if they don't trust me, they don't trust Felix, show them the US government's calculator. And again I put the link below guys, investor.gov has a calculator and it's exactly the same. So if you have an initial investment of zero, you put a monthly contribution in of $200, and you do this for 20 years, and you do it with 9%, you have a monthly period, you hit calculate and you come up with $133,000, which is exactly the same number that we got here. It also gives

2:38:42You a lovely chart which tells you you've put in $48,000 and you got $133,000 for your money. Pretty good return I would say. And this is really the key thing people need to absorb, and what I would do is I would print it out, I'd stick it on your wall, I'd pin it on the door, put it where you see it because it takes some time to sink in. I've literally read books on this and it still took some years for this to properly sink in.

2:39:15And once you've done that you will say to your other half, look, I'm going to do this, I'd love it if you also did this. And that of course depends a little bit on whether both of you have an income. If both of you have an income I would set a separate target for both of you, and everybody has to pick their own target. You can't tell somebody else what to do, it's not a road to happy coexistence.

2:39:44And I would then take this spreadsheet I've made, which I call my investment targets, and I put that in here. So you can put in your monthly investment amount here, $200. Now the initial investment amount, you can leave that blank or you might have a lump sum. You might have a couple of thousand dollars lying around somewhere in a jar, under a bed, under a rock, or in a bank account. I don't know which of those is worse. And you could stick that in there too if you wanted to.

2:40:09And then you have your annual interest rate here and you might just say, okay, I hear what you're saying about the 9% but I just don't believe it, or I believe I'm going to do a little bit better than that. For me, for myself, I calculate with 11%, very confident that I'm actually going to exceed that. But totally fair enough, everybody has another level here.

2:40:28And then you only need to fill in these two orange levels really, but you can of course change the 9% here, so maybe I'll also make that orange for you. And you can leave this number here, this just makes it monthly. And then you can see it calculates this here from the beginning of time all the way down, and you can see how much money you would have. And you keep doing this and look, it goes into the millions. Isn't it lovely, absolutely lovely. By 2040 you'll be $4.4 million saving $200 a month. Pretty insane, isn't it. And I get very excited by this.

2:41:03Now you might think, well, I'm not starting this on the 1st of January 2021, so there will be a little bit of spreadsheet advice in here. How do you change that? Well the simple thing to do is you could select the month it is. So say as you're doing this it is June 2021, so you click on the first of that month and then for the next month you click on the first of the subsequent month, the month thereafter. So then you can see here 1st of June, 1st of July.

2:41:36Now those numbers might be the wrong way around for you but don't worry about it. And then you highlight both of them and you can do that by just dragging it down, and you see the little blue box here in the corner. Apologies if you are an Excel whiz. And then you drag that down and as you drag it down you can see the dates change to match yours, right. And obviously you have to drag it all the way down, just do that and tap your fingers a little bit, get a cup of coffee, and literally it'll change it for you.

2:42:06And now I'm going to undo that so that it just sits back at whatever date it was. And that's how you update that. You don't need to update the green part at all, that will always do things automatically. So if I'm putting in here a $500 amount you will see that those numbers will increase substantially. And say you saved $500 a month, for example, what would you have in 2040? For a laugh, here is 2040, you would have $5 million.

2:42:37And okay it shows here it's pounds and I apologise for that, I will also change that. So when you open this spreadsheet it will actually be dollars. I don't know why it makes that. That's a little bit strange format. Data, format, number, here we go. All right, currency, but we want to change the currency, we want it to be US dollars and we want to get rid of those little decimal places. So there we go, so by the end of 2040 you will be absolutely loaded beyond all recognition. So there we have it, there is the sheet.

2:43:25And what would I do with that? I would keep this sheet and I would then write next to it every week. I would make another column here and I would call it actual or something similar that makes sense to you. And you'd say, well, actually this month I actually put in $590 because I had a little bit more. And then in the next month actually I was a little bit ahead so I was at $1,146, whatever. And keep a track of it and it'll give you a nice feeling of where you are and it'll keep you incentivised.

2:44:01So that's the second thing I would do. And if both of you have incomes, do it twice, do it separately for each person. And if one of you is more spreadsheet literate than the other, one can of course help the other. And you can do that, sit down every month and update that number. It's quite a nice thing to do actually, it becomes quite a fun thing to do. And it also creates financial transparency, which I think is also incredibly important.

2:44:30Now to go back to our little notes here. So we've set some goals, we've explained compounding and we've done a little bit of education on that. Share some of the videos that I've made here, there are of course also lots of others on the internet, there are lots of books on it, there are lots on YouTube just on the magic of compounding. Just keep watching and reading that.

2:44:59And you will also then start to realise that if I spend $50 on something frivolous I don't necessarily enjoy, if I'd invested that money, I'm starting to see what that money is going to be worth 10 years down the road, right. And that's good and bad. If you take it too far you will stop enjoying life and you will become a raisin and shrivel up and hope to have some fun in 10 or 20 years, and I don't encourage that. But there are certain things that we don't need, and we're going to look at budgeting here in a second.

2:45:33But before we get to that we should think and talk a little bit about debt. If you have debt, there is good debt and there is bad debt. Good debt is asset backed debt, so you have a mortgage. Generally speaking, mortgage rates at present are pretty moderate, it's not really a problem, it's actually in the long run probably quite a good thing that you're doing. So I wouldn't sweat that.

2:45:56I would however look whether I can get a better mortgage rate, because if you can save 1% on that, that's a lot of free money that you're freeing up there. You could invest that and you can get your 9% or whatever it is per year. Makes a huge difference. You could up your target ever so slightly, and upping your target ever so slightly makes a huge difference. If I could save $50 a month extra and if I could make that $250, then in 20 years' time I wouldn't have $133,000, I would have $166,000. So I get $33,000 extra from saving $50 per month.

2:46:41So therefore big expenses like that are very important. Now if you have other debt, now there is bad debt. There is student loans, they are not quite so bad because generally speaking the interest rates are more moderate. If the interest rate is significant, and by that I mean above 2 or 3%, I would focus on paying that off.

2:47:09And you could do that. If it's 2 or 3% you're thinking, well, if I can get 9% of the market in the long run, the rational person would perhaps say, well, I'm going to keep that debt for as long as I can and I'm going to invest my money and do that. And you can of course do that. I would at the very least split the money half half and pay it off, half of it, and then perhaps invest the other half. And that way you're kind of spreading your risk a little bit.

2:47:36If your interest rate is substantially higher than that, get rid of it, get rid of that debt. That is going to be your number one first thing to do. And that might seem like a really difficult thing to do, but unless you get rid of that debt, or at the very least, if you have credit card debt, for crying out loud, do not have credit card debt. It is the worst thing to do, interest rates are absolutely insane. Find a way to get that interest rate to as close to zero as possible. You might be able to move cards, you may be able to consolidate it. That is got to be the one thing that you do, don't do anything else with your life basically. You have to figure out how to get that interest rate down and how to pay that off as quickly as possible, because if you don't do that and your

2:48:21Credit card debt is 12% or 19% or 30%. No other investment is going to give you that kind of return. You are just burning money, and while you're doing that, that's the only time where I would say stop having fun. Stop buying Starbucks, stop buying things you don't need, stop buying clothes and shoes you don't need. Just stop it, cut up those cards and get rid of it.

2:48:46Now you can use credit cards and they're wonderful to use, but you have to pay the balance off every single month and it has to be an automated payment from your bank account. So that's for me the only thing. You cannot ever ever ever get credit card debt or store card debt or any of those kind of consumer debts. They are terrible, horrible. Same thing for any sort of hire purchase items, get rid of it. You don't need it, you don't want it. You want to have a happy, healthy, wealthy life and this stuff is setting you back decades. So get rid of that stuff, but that's enough said on that debt front.

2:49:29So provided you can take care of that, and if you have any questions or issues on debt issues guys, send me a message on the Discord, send me a private message. I'd be very very glad to share my thoughts on that because that's really something you need to address yesterday. Don't sit on it, don't hide it, don't not open these credit card bills and things like that. That is all really really terrible thing to do to yourself, to nobody else, just to yourself.

2:49:55So we've gone through our compounding, we've gone through setting goals, and that goal is essentially I'm going to invest this amount every month and I now know what that will be worth in 10 or 20 years. Right, that's my goal. And then once you've established that goal for 10 or 20 years and you want that to be a million or 2 or whatever it is, that is the big goal that you write on your wall. Write it on somewhere you see it all the time, and then your little brain is going to start ticking just like mine and it's going to try and figure out ways how to get there faster. And at that point it becomes a lot of fun, but you're going to get into that.

2:50:43Now the way to get there is to do a budget, and I don't like the word budget because it sounds, well we have government budgets which are permanently in deficit, so that's not a very good association. And then you have budgets which say well you're only allowed to spend this, you're not allowed to spend that, and that's not really what it's about. What it really is about, and again this sheet here, I'm sharing the link with you below so you can use this, and most budgets are monthly and it's useless. There is no point in doing a monthly budget.

2:51:19There isn't a single successful business in the world that does monthly budgets. Why? Because they do weekly budgets. Why? Because there are 52 opportunities to correct course and fix it, whereas if you do it monthly there are only 12. So the advantage is simply that you have 4 times more opportunities to amend things and you save an inordinate amount of money doing exactly that.

2:51:48So the simple thing is okay, you can start here with January and then you can do week 1, 2, 3, 4, and then for February you can do the same thing. And I have not made this an entirely weekly sheet. Why? Because I actually want you to become a little bit more spreadsheet literate. And you might think I hate spreadsheets, but it's required, it's part of life. If you really hate it, find an app on your phone that gives you a weekly budget. There are plenty of those, they're more fun, that look like games, you can do that.

2:52:22Otherwise if you can handle a spreadsheet and it doesn't make your head spin around, then do this. So what you do, I've already put the 1, 2, 3, 4 here, and so we can do it for February for example also. So you highlight the next 4 columns across. So you highlight 4 on the right of February and you right click on the column at the top and you insert 4 to the left, right of where you are. So you have 4 empty columns here now and you're going to call these week 1, 2, 3, 4 again if you want, or you could use the calendar week numbers and go on with 4, 5, 6, 7, 8 et cetera.

2:53:07And what you do then is you copy across the totals basically from here and you literally just copy and paste them in there. And you want to always check, double click on them and then you can see does your formula add up the right area. Right, so that's a fairly simple thing to do. If you go over here for example and you want to copy this one across, so you take the previous ones I've made here and you copy them here, and then again you can see it'll add these together.

2:53:42Perhaps the better way of doing it might be to take the total from over here and copy that and then drag it across. Or you could simply take that little blue square here in the corner, so you get a little cross, can you see the little cross symbol, you drag this across and now all of them say 106. And you're thinking hang on, there's nothing in my week yet, why does it say 106? So what you got to do is here at the end, and that's literally the only slightly technical thing I'm going to go through here, is on spreadsheets you see these dollar signs. The dollar signs fix the column.

2:54:19So you go back into your 106 and you get rid of the dollar signs, you just delete the dollar sign. There are other ways of doing that but this is the simplest way of doing it, just delete the dollar sign in front of the letter here at the end. And if you then drag it across you will see now that they correspond to the column that they are in, whereas before if I pull this one across it'll give me $400 because it's always sticking in column D, you see.

2:54:51So again, show this one more time, I get rid of the dollar signs in front of the D, and there we have it, and then we drag this across and there you have it. So that's what I would really really really really really beg you to do. Is done your income, of course that's important, but really the important thing is expenses. And you want this to be as detailed as possible. So it's groceries, childcare, dry cleaning, dog walk, whatever it is. You might have other things that are not on here yet, add them, make it as detailed as possible.

2:55:28And you have no idea how many times I found things on my credit card, on my PayPal statements, I have no idea what they were for. I don't know why I was paying for it. I bought something online and it was $5 and then there must have been a little tick box that made that a monthly amount and then I was paying $5 for 3 months in a row. Thankfully I noticed that after 3 months. If I hadn't and I'd let that run for 20 years, well how much money would that have been? Over 20 years that $5 would have been $3,339 wasted, and that's a tiny tiny amount and there are many of those examples.

2:56:05Now if you have a gym membership and you never go because you don't really like the gym, you don't really like working out, it isn't for you, cancel it. Cancel it today. If you've got some sort of movie subscription, some sort of streaming service, anything like that, get rid of it unless you get value from it, unless you use it. There are many of those examples. Could be Amazon Prime, maybe you don't use it very often, is it really worth it? And I'm not saying it's that particular one, but there are a lot of small things that we spend every week and every month.

2:56:42And you don't really notice it because if you look at a month there are so many little expenditures you think, how that many? You look at a week, you'll remember, because it'll say on Wednesday you spent $18.93 on this. You will remember what it was because you did it only 3 days ago. So the weekly discipline is really the core thing. And you might think I have lots of money, I don't need to do this. It's not about that, it's not about whether you have a lot of money or a little money. This is all relative anyway, and the more money you have the more you realise that there are other people who have a thousand times more, and to them the millions you have are still smaller amounts of money.

2:57:18So it's not about the size of it. It's just if it's good enough for the world's largest corporations, I think it's good enough for us. And they handle billions, we might handle hundreds of dollars or thousands or tens of thousands of dollars. It is super super super worth doing, and trust me you will find stuff that you don't need. And if you think of those dollars and you think that the $5 a month are actually worth $3,300, you start to pay more attention.

2:57:49To the little things that you can go without without affecting your life. I'm not suggesting that you give up your car and you now work and then you live a miserable life and you turn all the lights out. But there are, I can guarantee it, there are things you spend money on every week that you get zero or near zero value from that you can do without. And you'll be much much happier when you put that money into your investment account.

2:58:16And that of course is the next step. You have to, when you found the $10 saving, the $100 savings, you have to up the amount you invest. You have to go back to your plan and you have to say, well actually it's not $500 a month now because I found actually $19 that I can save this week, so let me up this to $519. Because if you don't do that you're going to squander $19 on something else you didn't need. And then that's going to make a difference and it's going to make quite a substantial difference. And if you are in doubt head back to the compound interest calculators and keep doing that, and that to me is the simplest way building a lot of wealth, and it's so easy and it becomes fun.

2:59:03And going back to this together element, you and your other half might have slightly different risk appetites, and that's fair enough, that's fine. In a way a lot of the time that works off quite well. If one of you is a little bit more risky and the other one's a bit more risk averse, actually you balance each other out, provided you have separate incomes and invest separately. And if you do have separate incomes, get two investment accounts, get two brokerage accounts, make two plans. Why? Because if you are investing your money and you are in charge of your expenses you can control, then you have a lot more ownership and a lot more dedication to it, and everybody feels better about controlling that and is likely to actually invest and save and do better and do more.

2:59:56All together it becomes a little bit like government. Everybody throws a bit of money into it, everybody feels it isn't really entirely their money, so they do a bit of this, they do a bit of that, and well you bought this so I'm going to buy that. You get into that kind of situation. So don't do it, do it for yourself, don't do it for anybody else. And of course do share it, do be transparent about it, I really encourage that, and it's a fun thing to do. And print them out, have the targets on the wall, have them somewhere private in your bedroom or wherever you wanted to be, and share it and enjoy it.

3:00:28And look at it every month and go, oh my god, look how much more money we made and look how much more money we've got now than we did when we started this 6 months ago. It really is a fun thing to do and you will keep finding little things that will make you greater and greater investors. So guys, that's the wrap on this one really.

3:00:48Set goals for each debt, I talked about that. Play that back if you are in debt or send me some messages if you want some help with that. Compounding in education, really look at those calculators, do it again and again and again and again and again until it really sinks in. And then record what you spend, and as soon as you start doing that the budget follows because you'll start to remember what you spend and you'll start to notice, hang on, why did I spend this amount in that week, and why was it 3 times more 3 months ago, or why was it half 3 months ago. You'll start to notice those things because you have a track record, and without that record you have no idea. And as I say, be super detailed about it, really break it down, don't have other categories, don't have miscellaneous things or vague descriptions. Be super specific so you remember what it is when you look at it again in 9 months time.

3:01:45All right guys, you have lots of homework to do. Goal setting, talking to your other halves in a friendly and happy manner, and start recording your expenses. You're going to enjoy this, trust me, it's a little tedious at the beginning but you are going to enjoy this and you're going to get into this rhythm. And you do it every Friday, every Sunday, every whenever it suits you, and stick to that, don't ever let that day shift. No matter where you are in the world, no matter what's happening, if you can't do it on that day, do it the day before.

3:02:18Bye guys. We're talking inflation investing. That may or may not be topical but it does come back every couple of years one way or another, so it's an appropriate subject I think for us to cover here. We are going to go through all the traditional investments and then I'm going to also tell you at the end what it is that I do.

3:02:40So inflation investing, what are the options? There are TIPS, there are bonds, there is a little bit more to that. There is real estate. And there is also a couple of others which I want to look at. There are of course stocks, and not just any old stocks, but we're going to look at exactly what sort of stocks. A lot of people say gold is a great inflation hedge, we're going to look at that. And then we're also going to look at crypto, yes, because again a lot of people believe that that is a great inflation hedge.

3:03:25So these are the main ones we're going to run through and I'm going to show you some historic performance charts, I'm going to explain what they are, and let's get cracking. Let's get cracking in that case with TIPS. Now what are TIPS? TIPS are treasury inflation protected securities. What does it really mean? Well it basically means that there are bonds and they are indexed to inflation. So what it means is that when inflation goes up the bond pays out more, and it does that every 6 months. You can get them at 5 years, 10 years, 30 years. There are also a bunch of ETFs.

3:04:02And you can buy, and this is one of the old school things that financial advisers tell you to buy, banks tell you to buy, and nothing wrong with it, but I just want to show you what the performance is of it. I've pulled up here, so in blue here you have the CPI, core Consumer Price Index, basically for some reason it's for all urban consumers, but it's basically US inflation. I guess they are because they're excluding the whole farming side of life.

3:04:34Now if you turn on TIP, TIP is a big ETF, I think it's an iShares ETF or one of those big ones, and they basically invest in a range of TIPS, inflation protected securities. So basically these are government bonds, as I said, where the coupons, the coupon is the bit that pays you dividend if you will for lack of a better word, that changes, goes up and down with inflation. So if you'd bought that since, let's see when this particular ETF was created, it was created in 2004. If you'd bought that in 2004 and held it the whole time because you are fearing of inflation and you wanted to have something in your portfolio that gave you more stability, security, that didn't move so much, you bought this nice basket of TIPS through this ETF, you would have made a 24 per cent return over what is that, 18 years. Not great, right.

2:05:36And you can see already that the inflation rate, the Consumer Price Index, went up 43 per cent in the same time period. So you've underperformed the CPI substantially. You kind of think, well how's that possible when the coupon the bond pays is linked to it? Well it's over a long period of time, they obviously buy a mix of 5, 10, 30 year ones and it doesn't always work in your favour, quite evidently. So not the greatest thing.

3:06:13Now it has in a sense kept its nominal value, I mean it's gone up 24 per cent, it hasn't gone down, so it isn't a terrible thing to hold. But it's definitely in my view not caught up with inflation. And the other thing to bear in mind with that is that the inflation basket, and I think I should probably start off by explaining that, the inflation basket, the CPI measure that the US government has, is a fundamentally flawed one in my view. Why? Because it excludes assets that create a return.

3:06:48So it excludes stocks, it excludes bonds, it excludes crypto, it excludes real estate. And you're kind of thinking, hang on, but isn't some of the biggest expenditure for most families real estate? Aren't they saving and putting money into bonds and stocks and whatever other financial instruments, and therefore isn't that a pretty sizable chunk of expenditure? Yes it is, but the US government doesn't want to track it because if they did inflation numbers would be much much higher. So they have this very core kind of inflation measure that was created and adjusted, in my view, because it's a pretty old measure, to make it appear like there's less inflation. Because when it was created inflation was a problem. Now where we are right now, not quite so much the case, but that's kind of what it is.

3:07:37Is here. So if you let me just throw in for a second here, the S&P 500 in the same time period, 275% inflation. So if you put all the money in the S&P 500 you would have gotten 275%, and if you put it in cash you would have lost 43% according to the inflation measure, and you put it in TIPS you would have gone up 24%. Now why do I say lost or gained here?

3:08:04Well really what I want to illustrate with these two bars here, the yellow one and the blue one, is that the inflation measure at 43% isn't a truly honest one if you are an investor and you have spare cash to invest and you're wanting to build more wealth for the long run. Then really I think your inflation measure is more like the SPY and not the CPI.

3:08:32So that's really the thought there on TIPS. You can do it, there are a lot of studies on if you have a small percentage of government bonds in your portfolio, yes they won't perform but they reduce volatility. Some people just buy things because they know that they're still going to be there if the world ends, at least they believe they're still going to be there. And if there is some sort of cataclysmic, is that the word, the end of the world is coming, they think there is a greater chance the US government's going to pay them than perhaps private companies. And that's a really personal wonder. They could of course pay you but they could just print more money, but that takes us a little bit off the subject.

3:09:17Now what is the second thing I want to look at? The second thing I want to look at is floating rate bonds. And I know I put over here just bonds, but the bonds are two types really. There are fixed rate bonds and there are floating rate bonds. And what does that mean? Well fixed means exactly that, it means it's a bond that comes with a coupon and it says it's 1% or 2% or 8% depending on its risk level, and it'll pay you that until 2050 or whatever time period the bond runs at.

3:09:58And the amount of coupon, the amount of dividend if you want to call it that, typically dividends are used for stocks, for bonds we call them coupons, but it's essentially the same thing, just financial people trying to confuse you. So let's call it the dividend because it's easier. So that dividend is fixed, it'll be the same, which means if inflation picks up from say 1% to 5% and you bought a bond when the inflation was 1% that would pay you 5%, then initially you thought okay I'm getting 4% more than inflation, that's pretty good, I'm happy with that. Now once your inflation reaches 5% you're now getting the same amount as inflation, so you're getting absolutely zero, nothing at all. And that's the risk with long-term bonds.

3:10:42Now of course you can sell the bond, I hear you, but when you do sell that bond you will be selling it at a lower value. And if you're really interested in bonds guys, ask me some questions on bonds on Discord. We can of course also cover that, but at the moment the main differential I want to draw is fixed bonds, fixed rate for the life of the bond.

3:11:01Floating rate bonds are tied to something, and that could be LIBOR, some sort of interbank interest rate. It'll be that plus a certain amount or minus a certain amount. And that's also how a lot of mortgages are priced. A lot of mortgages are some sort of interest rate that moves every day or every week or every month plus minus a couple of percentage points, and that's how they're calculated. So that's basically I think the easiest analogy, is a mortgage. A fixed mortgage, you know what you're paying. A floating mortgage, you don't. It might be better sometimes, it might be worse sometimes. It's very much the same with floating bonds.

3:11:44Now how have they performed historically? Well again I've pulled up here an ETF called FLOT, and let's be fair to it, let's go to the start when this ETF was created. And you can see here it's given you a 1.2% return. Now in fairness to FLOT, I think it would have paid you out some dividends so it probably wasn't quite as abysmal as this, but certainly there isn't much capital appreciation here. But there is probably a couple of per cent per year, I don't know maybe 2%, 3% a year. So that would over this time period perhaps take us up to, what is this, this is about 10 years, so say it was 2% maybe it was 20%. So maybe it would have beaten the CPI just, it might have given us a little bit more.

3:12:34And you can also see that when the CPI goes down up here, let me highlight that for you, so when the inflation goes down the value of these things also goes down and vice versa. So it does move with inflation but not all that much. So again a very very stable thing to buy, nothing wrong with it. Again you want to look at what is the average coupon they've been paying out, which perhaps isn't portrayed here in that chart.

3:13:00So it's been an inflation hedge but it's a very very very conservative one. And I'm not dissing conservative things, I think there is place for conservativeness in every portfolio, but it depends very much on your mindset, it depends on your age, it depends on your available income. Where are you in life? You have 9 businesses that are paying you loads of money every month and you don't know where to put it, you're probably not going to put much into that. Or are you 76 and your income is coming from a small pension and a bit of a stock portfolio, in which case you might want to be a bit more conservative, right? So it's a different time horizon there for people.

3:13:40So that's FLOT really. So again obviously if I pull up the S&P 500 it doesn't look very pretty, right? I mean in that time period it went up 26%, FLOT basically didn't move at all, though as I say you probably would have made 20, 30% return on that. So it's still better than inflation, better than sitting on cash, better than cash in the bank or cash under the mattress, but not something that's going to make you rich. Although not every investment needs to be that.

3:14:10Now what about real estate? And I think if you look at real estate you got to look at two things. One is a lot of people say the house you live in is a pretty good inflation hedge, and yes there is something to that because you use a mortgage to buy your house. And if you have a long-term mortgage, which most people do, rates are pretty low, pretty attractive at present. So you can lock in pretty cheap funding for 20 years, 25 years, maybe even 30 years.

3:14:39And as there is inflation, hopefully your income, your salary, your wages, your business income, your other investment income picks up over that time period, that mortgage payment becomes smaller and smaller and smaller. You get some capital appreciation hopefully for your house as well, though given that you're not unlikely to sell it, it's not a particularly liquid asset because it means you have to move out, you'd have to go find somewhere else to sleep and you'd have to buy something perhaps similar, at which point you might pay more or the same. Unless you at some point going to downgrade or move somewhere cheaper in the world.

3:15:14But that's certainly better than renting. Usually, usually in most markets, and there are some exceptions, rents go up with inflation or ahead of inflation, which means that your expenditures keep going up alongside with inflation. Whereas if you have that long-term mortgage locked in at a decent rate, it's the opposite actually, inflation's helping you, right?

3:15:42So that's an interesting one. Now you can of course also look at real estate as an investment, and I wanted to pull up one. I think so, I think that was the, let me just double check, that's the one I wanted to pull up, EQR. Yes indeed. So this is a residential REIT, a real estate investment trust. Let's go back to when they started so we have a nice long comparison point here, and that has gone up rather dramatically, right? You can see 46% okay since 1994. It's a pretty long time horizon but it has certainly performed okay.

3:16:25There was the housing crash crisis in here but that recovered. There was, what is that here in 2019, early 20, we have basically housing crash here that was pretty substantial. But other than that if you smooth that out over time it has certainly performed very very nicely. So real estate generally speaking tends to go up faster than inflation in most places in the world. There might be some exceptions if you live in places with a lot of rent control and those kind of things, very high taxes. But generally speaking, and this is obviously here a fairly sizable US REIT investing into residential property, that has performed pretty well.

3:17:14How can we make that any bigger down here? Let's assume a little bit, if you can see, is there any correlation between the two? It's pretty hard to see isn't it, because one is moving so much faster than the other. So I think quite hard to see an actual correlation between these two and inflation, but I would say pretty obvious that real

3:17:35Estate seems to outperform inflation most of the time. Now the next one on our lovely list here are stocks. Then we're going to look at gold, we're going to look at crypto.

3:17:49With stocks, as I pulled up here earlier, you pull up the S&P 500, which is probably the least focused way of investing. You're just saying the 500 largest US listed companies will just on average be a pretty decent bet. And of course there are great companies in that and there are so-so companies in that and there are some fairly terrible companies in that, but they are some of the world's largest and therefore I'm just going to make my life really, really easy. And that's a totally fair way of doing it, and since 1994 it would have given you a 43% return.

3:18:24Let's just put back EQR here, very similar actually, right, pretty similar. There is, I think in my view, a fairly strong correlation between real estate prices and the stock market for all sorts of reasons. People have more wealth to spend more money on real estate, right, and vice versa.

3:18:42So stocks, even the least focused way of investing in them, is a pretty good way to go. Now what if you went and bought just really good companies instead? And for example let's just say Facebook here, I think is a really good company. And over time that Facebook's been listed, Facebook listed here on the left at 30 and it's now at 130, so again it's gone up very, very nicely. What is that, 3, 4, 4 and a half times, so fairly good return there.

3:19:28Or you could look at something like a Microsoft or something like that. The reason I pulled up Facebook is because Facebook started as a growth company, right, and now it's really more of a value play. Just probably the world's largest publisher and therefore advertising income recipient. And you can see that in the early days when it was still a growth company, you would think that higher inflation would tank the stock. You've watched my lecture on how inflation affects growth companies, and is that the case?

3:20:03Well it certainly was here at the beginning. So you see here in 2012 inflation picks up, the stock plummets, and then similarly here in 2013 inflation goes up, this stock plummets. But then it starts to turn around and people start to realise that Facebook is more than just growth stocks in 2013, and the relationship no longer really becomes that. So the growth issue tends to be more of a problem at the beginning of the lifespan of a company, or certainly at the beginning of the listing of such a company.

3:20:43So you have some of that growth trajectory here at the beginning where inflation, higher inflation, causes the stocks to tank. But in the long run, and that's also the point I was trying to make here, in the long run if you just held on for dear life from 2012 to 2013, well you would have made a very nice return. June to June, it would have taken you a year to recover, and then say a year later you would have been, despite a bit of a dip up there, you would have made 100% return over 2 years. So decent return.

3:21:19So what I'm going to get to as well in my conclusion to this, will come back to this. How about gold? And I like gold. I mean look at this little friend here, can you see him? You see how shiny he is? Don't you just want him? Don't you want to buy some? You want to buy some more. Look how nice and hard and heavy he is.

3:21:41There is something quite mysterious and mystical and attractive and appealing about gold. When you see and you feel that weight you just like, I just want more, it's so very shiny. And as you can see, I've fallen to that marketing prey also. Now gold was traditionally seen as a safe haven when we had inflation, or even when interest rates are very low, in both scenarios.

3:22:11So even when you have negative interest rates, gold has historically done very, very well. And people think it's a great play if we have tough economic times, and there is all that historic data where it has done incredibly well, and it's true. Now there is of course something about buying this which is quite charming, but it's also cumbersome. It's probably fairly inefficient, fairly expensive, you got to store the thing and look after it. And it could become a problem if you become Scrooge McDuck rich, you need to build bathhouses that you can jump into them, which is my goal of course.

3:22:53So most people don't end up buying a lot of this. They might buy a couple of coins for fun or as some sort of, if the world ends I still have my little gold coins. And that's why actually some people buy the really small gold coins, because if they are worth $150 or something like that, you could actually use them as a legal tender equivalent. Say we get hyperinflation, you could perhaps use that coin, or if the financial markets, industry, governments, Fed, everything went up in flames, you could probably go and buy things with gold if people believed it was genuine.

3:23:27How about though how most people are investing in gold nowadays? Well most people buy an ETC, which is an exchange traded commodity index. And this one here which is called GOLD, pretty good ticker name isn't it, it basically goes back. Actually sorry, no, this is not an ETF. GOLD, this is a tracker of the value of gold in ounces. So you can see here since basically the end of World War II, about 1947, we have the price of gold in orange.

3:24:01And has it been a good inflation hedge? Well I think you can see the answer from this chart, right. The blue line is inflation, the CPI, which has gone up 134%, and then you have gold which has gone up 650%. So, not, actually, is that true? No, apologies guys, that isn't true at all because it doesn't make any sense. I put a different, let me remove that and make it a percentage scale as well, because gold should have gone up quite a bit more than that.

3:24:35So let's put this one up here again on the same percentage scale, and there we have it. So yeah, that makes a lot more sense, I was thinking that number seems a little bit conservative. So gold has gone up in that time period 3,700%. CPI has gone up, what is that, 1,000% or so. And therefore this theory that gold is a fantastic inflation hedge would appear to be absolutely true, right, absolutely fantastic.

3:25:03So look at the 70s here where we had massive inflation in the world, which is oil issues, and it really, really boomed. So what if though we look at the more recent history of gold, and that's where things start to change a little bit. So say we start in 2010 or so. Ah, there you can see that gold, yes it went up into 2011, 2012, about 60% or thereabouts, and then it's been tumbling down. And we are wondering why, why, why, why wouldn't this have gone up a bit more.

3:25:38So let me go back to where we are presently. Here's present time, I'll make that a little bit smaller. So if you then look at, say if you look at it from a 2010 point, it depends a little bit on what point you're starting at. So sometimes it does a little bit better, but the more you look at recent history, yes it's gone up a bit. So say just since 2019 or so, it has certainly outperformed most measures of inflation. In this government measure here, yeah, still very nice, right. You think okay, I went up 36% since early 2019, whereas inflation's only gone up 5%.

3:26:20But, and here's the big but I'm going to throw in, SPY has done better. And SPY has done quite a lot better. After 2009, the world really seems to have changed and put a lot more money into stocks and a lot less money into gold. So is it going to turn around again? Well, you talk to gold buffs, absolutely. I mean as you can see I've got some here, so I'm not entirely against it, and it probably has a place.

3:26:47Though bear in mind it is an asset that does not give you any income, and therefore the intrinsic value of that thing is just whatever we think it's worth. It's not like a Microsoft or a Facebook who are profitable, you're creating money, or like real estate which gives you an income, it gives you a return, right. Or buy a farm and it gives you food every year. It just doesn't do that, it doesn't give you anything other than storage costs perhaps.

3:27:19So how about crypto, is that the reason that gold has not performed well? Have a look at Bitcoin here. Now Bitcoin of course only kicks in from late 2018 in this particular chart here. Not saying that's when it was created, but that's when it really started to pick up more on the mainstream level. And again let me just make that a percentage chart so it's a little easier for us to.

3:27:53Compare, and we are going to use the Coinbase one. There we are. So we go back a little bit more in time. Yes we can. It really starts to become relevant, okay, maybe by 2017. I suppose that's really when it starts to kick off, and then you see this incredible rise here, almost 6,000 per cent to the end.

3:28:13So if we can go in a little bit more, is that where gold starts to underperform? Well I think really to answer that more visually we need to look at this a little bit different. So let's get rid of Bitcoin again and gold, and we do a comparison of gold, not bold, by the ounce on a new price scale, and also of BTC USD on a new price scale.

3:28:54And okay, now here the colours are too similar. The gold has to be a golden colour surely. Let's make it yellow, make it a bit fatter so you can see it more easily. And Bitcoin is that green one, and the blue line is inflation, which is perhaps slightly less relevant here. But you can see that with the tremendous rise of Bitcoin here, this is Bitcoin going up, right, gold at the same time starts to fizzle out a bit.

3:29:33So this is a speculatory announcement for me, but I do think there is a bit of an inverse relationship between the two. Now I do think that cryptos generally are stealing some of the money that would have otherwise gone into gold. There's been a lot of marketing by the Bitcoin miners and everybody out there to say that Bitcoin is the new gold.

3:29:54So there we have the key 5 asset classes. So as a quick recap, we have TIPS, they give you some return but probably not inflation beating. You have bonds, the floating rate ones will give you a slightly better return than inflation. Real estate typically has done very very well, though there is a fairly close correlation with stocks. Stocks, quality stocks will outperform inflation quite substantially. Then you have gold, historically fantastic, recent years not so much, and it's quite possibly because crypto is stealing its thunder. And therefore perhaps crypto is something to put a little bit of money into as an inflation hedge as well.

3:30:38Now what is it that I do? Well let me hide a couple of things here. And basically the way I look at this is I don't worry about inflation to start with, but what I do do is I just buy some good companies. So something like a Microsoft, something like a PayPal, companies with very very high free cash flow, with good pricing power, which means that they have brand loyalty. So if PayPal's fees go up a fraction, most people don't notice, most people won't change it, it won't really make much of a difference.

3:31:19And if you go back, let's see when these guys started to list, we can compare that to inflation. Okay, we can see, let's be fair and start when all 3 of these stocks have listed. It's not really about a comparison of these 3, but you can just see they have outperformed inflation by many many times. So Microsoft 440%, PayPal 570% and thereabouts, and inflation at the same time period here in this 5 year period has only been about 12%.

3:31:49So for me the most convincing investment when there was inflation, quite frankly also when there isn't inflation, is stocks with high return on common equity, high free cash flow, very good profit margins especially compared to their peers in this sector. Now software is a great one because it's a service, so they're going to have profit margins, gross ones, of 70% or thereabouts. And that's the big thing. In addition to the profit margins you want good growth, so double-digit growth. All of these would have 20, 30% plus growth.

3:32:27And therefore with that high return on common equity, the way I look at it is I'm in the long run, apart from some crazy blips here and there, pretty much near as near a guarantee as they can be guaranteed a very very high return each year that will far far outstrip any inflation out there. So therefore I don't worry about inflation.

3:32:48Now what about growth stocks? Growth stocks will get temporarily hit. We saw that with Facebook, right. But you then, if you wait out that 2 year time period, because you've done your homework and again you believe that this is going to turn into a company with a great moat, a great product, a great technology that will be very profitable, that isn't so easily substitutable. So there are lots of choices out there.

3:33:12And look at Apple for example. If you have an iPad and you want the new iPad, are you going to buy it even if the price goes up $30? Probably you are. Probably not going to go and switch to a Samsung or Xiaomi or any other brand out there, because to you only the iPad is acceptable. And that doesn't apply to everybody, but it applies to a fair chunk of the populace. And therefore Apple has big pricing power, and therefore they're likely to continue growing, they're likely to retain their high margins and their high returns on capital employed.

3:33:47So for me, short-term inflation fears and impacts on growth stocks are not really a concern, because I believe, and I hope, that I've picked companies to start with that will do very well. And just close your eyes, fast forward 2 years down the road, and probably the market's forgotten about the inflation fears. And that early stage growth company is now 2 years further ahead, they would have sold a lot more products, they might even be profitable at that point, so it becomes a very very different value proposition.

3:34:22So also the growth companies mature, they become teenagers and then they become fully-fledged traditional companies that are no longer growth stocks. So for that reason also inflation I think is much overhyped. The media love it, it's exciting, we can jump up and down about it, lots of headlines, lots of clicks. But in reality I'm with Buffett here on this one, is that ignore what economists say most of the time, and changing your whole investment strategy because of inflation probably isn't worthwhile.

3:34:55Now there are some benefits in thinking about these things. Why? Because if you diversify your portfolio in these times, because perhaps your existing portfolio isn't very diversified, perhaps it is 100% one stock, or perhaps it's just 2 stocks and therefore maybe they're both growth stocks and therefore inflation's hitting you rather hard, a bit of diversification in that holding is probably a good idea. And it'll help to maintain your wealth and reduce your volatility of your portfolio. And therefore you will actually get probably better returns in the long run.

3:35:33Now if you just sell everything and rotate completely out of the sector you were in, which you believed was a good one, let's assume you've picked good stocks, and then you changed to something else, well you're probably buying the something else like the value stocks at high prices at that point. So you are increasing your risk, you are diverting away from your long-term goals, and you are probably again creating a portfolio that is very overweight in one particular sector.

3:36:03So the starting point I think is always a good strategy and a good set of stocks. And then a lot of the time the smartest thing to do is to do nothing at all, and that's the hardest thing to do. But I think short-term inflation fears, generally overstated, generally the market overreacts to it. So I would go back to my long-term strategy of monthly buyings into stocks. And yes you can change them a little bit if you want, if you see some opportunities, but more or less blindly keep buying the same stocks, provided there hasn't been any fundamental change to those. And a little bit more inflation here or there doesn't really fundamentally affect 99% of businesses.

3:36:46And we are looking at the psychology of the financial market. Some people call it behavioural investing or psychology or whatever you want to call it, it doesn't really matter. Now economic theory says that financial investors and all of us as human beings are profit maximising individuals who will always seek the most utility out of our money and our actions and our time spent.

3:37:17Now I think most of you probably will realise by now that that isn't really the case, otherwise the market wouldn't overreact. And why does the market overreact? Why do most investors hold on to losing stocks, underperforming stocks? Why do underperforming mutual funds rarely have outflows, whereas the overperforming ones immediately have mass amounts of money flowing in? So there are quite a lot of concepts and psychological problems that we have, that we are all wired with, that I want to address here in the next couple of lectures. And really with the aim that we understand it better and with the aim of turning ourselves into more rational beings, rather than these irrational psychotic investors that most of us are.

3:38:07And so we're going to run through some of that here. We're going to dive more deeply into it and see what can we learn from it, how can we become more rational, or can we profit from the irrationality of others. That part, to give it away, is a lot harder to do. But look at the dot-com bubble, right. Most of you will, maybe you don't remember it, maybe you weren't around at the time, but let me just pull it up for you here on the screen as well. And I'll open that just in a second here, just to highlight again what a whopper of an event that really was.

3:38:45Look at the chart, which I know you cannot see yet because I'm only just opening it. You will remember that in, let me just make myself a little smaller here. Here we go, and then we're going to throw QQQ at this, all of them. There we go, and let's get rid of absolutely everything else.

3:39:10So if you go back in time a bit here to 2000, you can see that we had that massive, massive rally here. If you bought at the top of that market, which unfortunately some people did, and then you got terrified and you never bought another security ever since, so the whole rally down you didn't buy a thing, then it would have taken you from 2000 to really July 2016 to make your money back. Which of course would have been horrible because you would have also had inflation and that opportunity cost. So in reality you didn't really make any money for nearly two decades.

3:42:47Why was that? Well, because this rally here in 2000 was an irrational one. I remembered very distinctly because I was working for a company at the time and we had a palatial office, most expensive real estate ever built in the city. We had probably space to house maybe 200, 300 staff. We had about 20. We had however little Sony robot dogs that were semi AI powered, were kind of our pets walking around, about $10,000 a piece. We just had basically unlimited budget and every week or every month we would meet with the private equity investors.

3:40:27We would look at our cash burn rate as the metric for our success, and anybody who basically criticised that model and said well you can't measure the success of a business by how much money it burns, we would have pointed a finger at them and said you don't understand how this works, you're a dinosaur. So this is the new world, you are missing out on the greatest acceleration and creation of capital and money ever in human history, and you just don't get it. And then of course reality kicked back in.

3:41:05So I personally have long-term faith in markets, but in the short run they certainly can go absolutely nuts. I'm going to give you a couple of psychological examples why we act the way we do. For example, if I give you the option of either you have to give me $50 right now for no real reason, but you just have to give me $50 right now, you're very welcome to, PayPal link is below, just kidding, or I'm going to flip a coin and either you give me zero or you have to give me $100.

3:41:42What would be the rational thing to do? Well, really the rational thing to do would be to give me $50, because with the flip of a coin you have a 50/50 chance of having to give me $100, so your potential risk, your potential loss, can be twice as big. But most people will go for the coin flip. Why? Because they hate the loss so much that they're willing to accept a potentially greater loss to forgo the loss, if that makes sense.

3:42:14So that is one thing we're going to look at a bit more. We're going to go into more detail in these concepts in the next couple of lectures. I just want to give you a bit of an overview here of some of the things that we have in our heads. That's exactly the same reason we buy a stock and it's a dud and it goes down 20% and we hold on to it. It goes down 30% and we are more likely to hold on to it. It goes down 40% and we are even more likely to hold on to it.

3:42:38Does it make sense rationally speaking? Probably not. You could probably put that money into a better stock, but we don't because we don't want to realise that loss. It would be an admission to ourselves and we fear the loss so much, we are so averse to that loss that we don't want to realise it, therefore accepting the possibility that that loss could get bigger and bigger and bigger.

3:43:01Now the second part is just the whole herd instinct. People tend to invest when the market is near its peak. In 1999 loads of people were throwing money in, even in beginning of 2000s, the first two, three months just before we managed to crash, people were putting money into the market, lots of it. That's because they had read about NASDAQ going from 52 to 109 and they thought okay, I missed a 100% gain, I want to get the next 100% gain, and ignoring the fact of course there could be a risk that we might be at the peak of a market.

3:43:43So people generally speaking, we are kind of herd animals. We like to follow the herd, we like to do what everyone else is doing. FOMO might be the way to express it, but that's kind of what we do. The other thing that we do very, very badly is that if we look at an investor, some sort of celebrity investor, and they picked a stock and that's gone up 20 times, we now think that person's a genius. Which probably isn't the case, they were probably lucky, unless they've done this over many, many years.

3:44:20That's of course what you see in stock rallies, that the person who just started 6 months ago, yes they were incredibly lucky with their timing, they were not a genius. Observe them over 10 years and you know whether they're a genius, and there are very few of those. And then we of course also always tell ourselves that any drop in the market is a buying opportunity. Buy the dip, buy the dip, buy the dip is a popular mantra, and we don't necessarily see the longer picture.

3:44:51Now how does it help us to understand the psychology of the market? Well, if we can understand when people deviate from rational expectations, we can then ourselves make more rational decisions when it comes to our investing. We are going to look at macroeconomic indicators. So to recap, macro is the whole economy, micro is looking at a specific company. So macro, the bigger thing, and what are the main macro indicators that matter for the stock market and investing?

3:45:27I'm going to go through the key ones here, the core ones. Before we do that I also wanted to share with you this link here because I think this is quite a useful one. I think this is a pretty good resource if you want to keep track of economic data, tradingeconomics.com/calendar. I'm going to show you that website here it is.

3:45:58If you do look at this, and I would recommend don't look at it too often, but there is some value in looking at it, there's a little impact thing here. Take the 3 star impacts because that way you get the really important core stuff. You get the retail sales, Fed interest rate decisions, GDP growth, payroll numbers, the really core stuff and not too many. As you can see, if you go down into 1 star in terms of they're not that important, you get all of this. I mean you get building permits, Michigan inflation expectations, mortgage applications. You probably don't care about any of those and you probably don't need to fill your head with a million numbers. Better, I always think, to look at less important numbers and then look at more less important numbers.

3:46:43Now we're going to go through the key ones here and also to discuss each time, are they actually important, are they relevant, what's the economic theory and do they make sense. So let me give me a clean slate here. GDP, that's the first one. Why? Gross domestic product measures all the goods and services of a certain period in the economy, and therefore it is really the core measure of economic activity. If that index goes up of course it's growth, when it goes down it means it's the opposite, it's some sort of recession type event happening.

3:47:25The theory is, the macroeconomic theory is that when GDP numbers go up the stock market will go up, stock prices will go up. Is that the case? Well, sometimes. That's the easy answer here. So for example, on here I've charted in blue GDP, in red the S&P 500, I've taken the SPY ETF, and then in orange down below here the QQQ, so therefore the NASDAQ ETF.

3:47:57You would think when GDP goes up, blue line here, when it goes up, let me move that up a little bit so it's easier to see, you would therefore think that the market would go up, right? Generally, broadly speaking, yes. But there is always a but. Look at this period here. When you look at October 2007 until the middle of 2008, you can see the blue line is going broadly speaking up, right? We have economic growth in that period, at least perhaps the first half of 2008.

3:48:45So below, between my second and my third line here, you can see our blue line of GDP growth is going up. What is the S&P 500 doing at the same time? It's absolutely collapsing. The NASDAQ losing quite a bit also, perhaps not as dramatic as the S&P, because 2008 we remember, financial crisis, so the big banks make up more of the S&P, not the NASDAQ, so therefore the S&P gets hit harder. So there is for example a situation where your theory of well the economy is still growing, everything will be fine, it wasn't quite the case.

3:49:20Then it was actually the market that tanked GDP. Because the S&P 500 continued to sell off here, GDP growth eventually fell off. So the banking crisis caused a real world crisis. So they can sometimes work the other way around. Economic theory says it's the other way around, but it isn't always the case.

3:49:48There are plenty of other situations where you can look at, March 2010 for example. Look at that time period here. Again let me magnify that for you here. Very nice looking GDP growth, right, that number is going up. And no, the GDP, you can't really chart the percentage increase, it's quite hard to do, so it charts it as an index. So at the moment we're somewhere in the 20,000s, it's basically an index that just keeps going up and up and up. Well hopefully it will keep going up and up, but you see at the same time S&P 500 took a real nosedive while the economy is doing rather well.

3:50:21Now it did recover, so if you smooth this out much more on a quarter by quarter or year by year basis then you might have more positive correlation. But you can certainly have short-term periods, and there are quite a lot of them. Here will be another one for example. That's perhaps not the greatest example, but here is another one. So in October 2018 for example, again nice smooth GDP growth up in blue, look at what the S&P 500 is doing at the same time, NASDAQ also tanking. Similarly in June 2011, GDP growth very very nice and something nasty happening in the market down here.

3:50:58So in the long run I would say yes it is a decent indicator. So say we smooth this out to a month level, you can see it gets a little bit smoother, but you still have these irrational behaviours of the two, if you believe that that theory is right. So GDP generally speaking good, but you have to still understand the microeconomics of each company. Because you can have a recession like we've had, Covid in the second half of 2020, and you see a lot of companies doing exceptionally well because there's a change in consumer habits and consumer expenditure, there's an acceleration of technology adoption.

3:51:42So there are winners and there are losers in these situations. So again looking at the whole macro level is perhaps not that useful unless you simply buy the S&P 500 and maybe QQQ and you leave it at that, in which case GDP numbers will be a fair, at least over a 5-year period, will be a fair indicator for you.

3:52:05Now unemployment rates and job numbers is probably the second most looked at thing that we look at here. So we have jobs. Now generally speaking, economic theory says that lower unemployment means more growth, therefore stocks should do better. When there are more jobs available it means we're going to have more growth in the market. However, there is a link here with inflation, and that's the next one we're going to look at.

3:52:47But before we do that let me just show you the genius of economists. So if we look at non-farm payroll for example. Okay, so here we had a prediction, doesn't really matter when this was, but this was in early May 2021 as I'm recording this. And you can see that non-farm payrolls, so this is the whole payroll sector excluding the agricultural sector. Why do we exclude the agricultural sector? Because it's exceptionally cyclical. So there is a harvest season when they employ lots of people and then they don't employ very many people at all for the rest of the year. So therefore generally speaking you exclude farm employment because it really screws your numbers quite substantially.

3:53:40Now the forecast was 950,000 people on the non-farm payroll. The number we got was 266,000. So all those smart economists with their macro theory and all their beautiful data models were off by 700,000 or so. So again macroeconomics not as useful as microeconomics.

3:54:03Now what does the market do when it gets a number like that? Well there's two ways the market can play it, and that's the other challenging part of macroeconomics. There is always two ways of looking at it. Talk to two economists, you generally speaking get two different interpretations of the same fact. So one, you could say well the economy is not doing as well as we expected and therefore at least your S&P 500 stocks should decline.

3:54:34Or you look at it the other way around and you say well, because the economy is not doing as well as expected, inflation will grow less quickly, therefore interest rates will not rise as quickly, therefore the present value of those earnings of growth stocks will increase, therefore growth stocks value. Which is actually what happened here on that day, just for one day though, it was a bit of a blip. But there are always two ways of looking at these numbers, which is why I always say don't overthink the macro numbers too much.

3:55:12Now what's next guys? What's next is two things, it is inflation basically. Now inflation is CPI and PPI. And what's the difference? One is consumer, one is producer. So the Consumer Price Index is a basket of goods that the average household, according to some bean counters, spent their money on. So it's your groceries, your milk, fuel, heating costs, probably a bit of insurance, your car, all that stuff that the core household expenditure falls within.

3:55:55Now there is always a bit of politics in that as well. You can obviously tweak that basket and governments have done that in the past to get lower or higher numbers depending on how they feel about the world at that particular time. The Producer Price Index basically measures the changes of goods and services costs more related to the manufacturing sector.

3:56:23Why is it important? Well, if you're a manufacturer and it increases the cost of your inputs, the raw materials, the components you buy, your salaries, your wages for your employees, if there is that increase, that's inflation for you. If you cannot increase the prices of whatever you're selling, so say you're making these pens and they cost $10, but you can't increase the price of them because there are another million companies out there that make essentially the same pen, then if the cost of your ink and whatever goes up, it becomes a problem for you because your margin gets squeezed, your profitability is reduced, and therefore you would expect the stock price to fall. So that happens to a lot of manufacturers.

3:57:15On the growth stock side we have a situation that's a little bit more complex to explain, and I will do a separate video on that because it is a little bit harder to get your head around. So watch out for that one, it's coming up down the list below.

3:57:35Is there a benefit to inflation? Well, if you are a company that can pass price increases on, then you haven't got an issue with it. In fact a lot of the time a bit of inflation is quite good because it means you can increase your prices more than inflation. So say you're Apple and you make your iPhones or whatever it is, and you've got a pretty strong brand, you've got very strong customer loyalty, and not that much in the perceived alternatives in the market. Of course there are other phones that you can make calls with, but your Apple followers who like to use their iPhones and they've got lots of other Apple equipment in their homes and their cars and everywhere else, they want to stay within that ecosystem.

3:58:25So for them to change brands is a pretty tough pill to swallow. Therefore if inflation is 2%, Apple can probably put their prices up 5%, 6%, 8% and people just think oh it's just a bit of inflation. They don't quite realise it's actually improving that company's margin. So for those company stocks it can actually be a boon if there is a bit of inflation.

3:58:48So that's the quick inflation explanation here. As I say we will look at growth stocks particularly separately because that is a little bit more complicated to get our head around. What are some other key ones? Retail sales. So retail sales is a fairly important one. It's a fairly direct measure of how consumers feel about the economy, how confident they are that they're going to keep their jobs, how confident they are in economic prosperity in the short term.

3:59:28So when you see a drop in retail sales expenditure, let me see if we can find one here. Here for example, so look at this chart here. You can still see on here at the very beginning, okay if I move my mouse off it you can no longer see it, but you see that first bar there that's going down, that was obviously a Covid related issue. And apologies guys if you're watching this post-Covid, there are the occasional Covid references in here, but the same applies to any kind of external crash.

4:00:01And then you get a recovery and then you get that kind of slump, not a lot happening, and that tells you okay consumers are not really spending. All of your consumer staples, a lot of your brands, a lot of your retailers will suffer. That will eventually feed down into the manufacturers, to the wholesalers, because if you stop buying whatever it is, pens, then the guys making the ink, making the components will also suffer down the line. It might take 3 months or 6 months because there is a time delay in deliveries.

4:00:30And inventories, but it's an early, fairly quick indicator of whether things are going well or not so well. Again, generally speaking, higher retail sales should push stocks up and the other way around.

4:00:48Now the other one, and that's perhaps slightly less important, is industrial output. Industrial output, well, it used to be much more important because most western economies used to be proper industrial economies and now they are much more service economies. Therefore a lot of the industry sits overseas, manufacturing is somewhere else, so it doesn't matter as much. But it still gives you a nice snapshot of the health of basically all the factories in the countries, and we get that number once a month from the Fed.

4:01:31It can be very volatile. Actually they've ignored it here, which I think is quite sensible. They're saying it's not that important. Why is it not that important? Because it's very volatile, it's very seasonal, also because there is a huge seasonality to manufacturing. That could be Christmas or big events or whatever seasonality there is in the market.

4:01:59For example, people tend to buy cars in the 4th quarter of the year, so you're going to see a lot more manufacturing perhaps towards the end of Q3 and Q4, and then you're going to see very little in Q1. Does that mean the economy is tanking in the 1st quarter of the year? No, it doesn't. So when you look at industrial output you have to look at quite a few months and see if there is a trend, and definitely compare it to the 12-month period before, because otherwise it's not really a very useful indicator.

4:02:30So I hope this is somewhat a useful, very macro overview of some macro indicators here. I think if I was going to look at 1 or 2 of those it would probably be inflation, yes, but it's a short-term issue. I think generally speaking, unless you get really massive increases there, if you want to get a short-term feel for what's going to happen in the market, I think retail sales are quite an interesting one.

4:03:00Jobs numbers also tend to vary quite a lot and there are a lot of incentives in there as well. Say unemployment benefits get raised, then you might have less job seekers, you might get less jobs filled, because some people think well I'm going to stay at home, I'm going to wait, take that government cheque and look after my children or something. Which is a rational response by somebody there who's being offered 2 carrots, one perhaps slightly smaller but with the benefit of all the time in the world, and the other you have to go to work every day.

4:03:33So you have to really think through those numbers, and that's why I personally think macroeconomic indicators should not really form the basis of a long-term investment strategy. Yes, they will give you short-term noise and short-term ups and downs, and in this kind of fast media sector we live in where everybody wants content, people pounce on these numbers and it becomes a big story for that day or that week. But really in the long run it probably doesn't matter all that much.

4:04:07We are talking economics today. I've always had a great interest in economics, I studied economics for 3 years in London, and I want to show you some of the basic principles that I think can be useful. But I want to also really highlight the limitations of it and why a lot of the time economists get things rather wrong. So today this particular lesson, there will be some others of course, is about macro versus micro.

4:04:34I remember the first time someone told me those 2 words I thought, what does that mean, what does one letter difference really mean? And in investing in particular this distinction is very very important. So there are 2 types of economic theory segments. Most people who study economics split their time somewhat perhaps evenly.

4:04:58Microeconomics is the much much older theory. And what is micro? Micro looks at the smaller part. So micro would look at a company and would look at the demand and supply say for that company, and therefore how that's priced and what happens if your prices go up 10%, what happens to your demand, what is your elasticity, all these kind of things, very much on a small level. So it could be a household, it could be a company, and for our purposes a company obviously a little bit more interesting.

4:05:29Now microeconomics couldn't always explain everything that was happening to say a company, and therefore some dissatisfied economists decided well let's create this field we call macroeconomics. That looks at a much much bigger area, taking into account the whole economy or the world at large, or however big you want to go. And that then became a new set of theoretical rules, probably only about 100 years old or so, the whole macro space, whereas the microeconomic space is a much much older theory.

4:06:11What is more useful for us as investors? Well, there's a lovely Warren Buffett quote which says, I don't pay attention to what economists say, frankly. He always is a chap who makes quite bold statements, but he has some sense with that, and I'm going to show you why.

4:06:29So macroeconomists, you can often see them on TV stations, CNBC or whatever, and one is preaching the end of the world because of inflation and the other is preaching on another channel live at the same time about the risks and fears of deflation. Both looking at similar data, both interpreting it completely differently. So one of the main problems with macroeconomics is that the economists in that field tend to disagree widely, and there are theories, some are more left leaning, some are more right leaning, and they subscribe to different schools of thought.

4:07:06So the trouble with those economists is that when they speak they always speak like, I am right, these are facts, this is science, this is what's happening. And very very rarely are they actually right. Now when you look at predictions from economists on economic statistics that we get out, whether it's inflation or GDP growth or any of those, they tend to be wrong most of the time. Yet they still get air time, they still get printed in papers or wherever you're reading, and people never really seem to tire of it, even though most of the time they're actually quite wrong.

4:07:48Now the poor ability to predict what's going to happen in the economy or the investment market overall in the long term is to me a fact. And I'm a retired, if you wish, economist speaking and telling you it's a fact, it's true. But I think look at the data, they're very very rarely right.

4:08:11So when people ask these questions and people come out and speak on TV and say, hey the S&P is going to hit X by the end of the year and the NASDAQ will be this in 12 months and China's economic growth will be 8% in 2024, those numbers are not very useful as an investor day to day. And they also tend to be very inaccurate because it's just one person with a model. And I'm going to show you in a second just how difficult it is to model this because of the amount of data out there.

4:08:43So for me macro is, I wouldn't say it's complete nonsense because it isn't, I mean there is something to that and of course our governments etc. use it. But I'm going to cross it out here a little bit and I would encourage you to pay as little attention to it as possible. And then you might be saying, but what about inflation, what about this growth, what about that? Okay, we're going to get to that, we're going to get through that in the next couple of lectures, and we're going to hit each one of those items to understand better and to understand how that can and should affect our investment strategy.

4:09:17Now micro is more useful because let me show you here 2 sets of data and I think that'll illustrate it a little bit. So here is a NASDAQ large cap benchmark which I've put on our Patreon, I'm sure a lot of you have seen it already. Basically every single large cap NASDAQ company, and there are 270 of them, and it gives you here for example efficiency numbers.

4:09:45So say I look at, random company, Autodesk. I see their gross profit margins, 91%. I can see their return on common equity, 250%. I can see their cash conversion, which is always quite an interesting one. And I can see all sorts of things, I can see their EBIT margins, earnings before interest and tax, is 17%. I can see their revenue, and then obviously these are forecasts so these then become a little bit less factual.

4:10:13But from that I can get a pretty tight set of data on a specific company, and that could tell me quite a lot, at least relative to other companies. Are their margins better, are they growing better, what is their profitability like on each dollar of revenue that they get? So fairly simple set of data to look at for a company, and that's microeconomics. So microeconomics will look at an Autodesk or an Intel or an Airbnb or

4:10:47Google or whatever it is, and you look at that company and you look at how profitable are they, what are their margins, how are they growing, what's their free cash flow, how much debt do they have, how much capital do they need to continue growing, all these kind of things. And then I suppose you still need to look at the actual business model and the standard and look at competition. We're going to get to competition because that's what economists call elasticity of demand, and it's a concept we're going to look at because that's quite a useful one.

4:11:16Now let's look at a macro set of indicators. Here they are. So you look at retail sales numbers, export prices, industrial production numbers, capacity utilisation, you look at consumer sentiment, you look at inflation expectations, you look at oil output, you look at net capital inflows, outflows, you look at housing permits, building permits, you look at mortgage applications, oil prices, all sorts of stuff like that, manufacturing indices, jobless claims, unemployment numbers. It's a lot of data, right?

4:11:56And how does it all fit together? That's really the big problem that macroeconomics economists face. And there is a lovely little bit with economics called econometrics that tries to take all of these factors into statistical models. I studied that for a year, it's a horrible thing to study, it's all numbers and models. But each model comes with about 255 assumptions, and when you have that many assumptions the output is determined largely by your assumptions and not by your facts.

4:12:31Because look at this here, we had GDP price index was going up, corporate profits were going down, durable goods orders were going up at the same time, home sales were going through the roof. Which one of these numbers do you take as the most important one? Income was going up 20% month on month, does that mean the economy is booming or does that mean the previous month or the comparative period was particularly horrible? Why are wholesale inventories going up? There could be two reasons for that, less demand from their customers, or the wholesalers are bullish and they're building up more inventory because they expect more demand. You can look at all those things one way or the other and you get two different outcomes.

4:13:14So you are typically buying equities or perhaps bonds in companies, right? And you might do that through ETFs, through funds, or directly. And therefore the useful thing for you is to pick good companies that can pay back the debt or can grow and provide returns, are profitable and can either give you dividends or just grow the value, give you a good return on capital.

4:13:46So much easier to understand is this here with numbers specific to a company. And we can look at the last quarters, we can look at the forecast for the next quarter from management. And then yes, we might want to look at the sector a little bit, and that's where your micro and macro overlap a little bit. Say you are looking at a chip company or something, you need to understand a little bit about the supply chain there, about the demand for that product, and that's a little bit where macro comes in. But jobless numbers for example, pretty irrelevant to that. If you're looking at Google, house prices pretty irrelevant. Inflation I'd say largely irrelevant, and certainly manufacturing numbers and things like that, you can just forget about it. You don't need to worry about those things provided that the company you've picked for equity or for debt is a good one.

4:14:38And I think that's really what I want to get across here before we start delving deeper into the macro side, that the market reacts in the short term to these macro numbers because these economists yabber on all sorts of TV and news channels all day, everyone gets freaked out about it, but they give you very short-term movements. And I generally advocate a more longer term investment strategy, because as Warren Buffett says, something like no one's ever gotten rich with a weather vane, or he said something like that. So if you swing with the direction that the wind blows, much much harder to make money in the short term. It's much much harder to make money. In the long run it's much much easier to make money because you don't have to be right on all the little things all the time.

4:15:29So that's my quick wrap up here on macro versus micro. Just as a wrap up, macro, all the big things and the whole economy together, jobs, inflation, GDP, output, manufacturing, taxes, all that stuff together, that's macro. Micro is the small little company in the middle. And I think it makes a lot of sense that it's a lot easier to look at one company rather than all those thousands of data sets. And generally speaking, macroeconomists are very very rarely right.

4:16:00So next time you hear somebody speaking on a news channel and it says economist, most banks have an economist and most banks' economists write lots of papers because they're paid to do that. In my experience the traders rarely pay attention to it. There can be short-term plays on things like inflation and stuff like that, yes, but they're short-term plays. I wouldn't change my long-term investment strategy just because we get a little bit of inflation thrown in the mix or because GDP numbers go up or down, because your good company will do well pretty much no matter what. So that's my rant here on micro versus macro, guys, and we're going to dig deeper into these in the next couple of lessons.

4:16:45This is the first in a series of lessons on technical analysis, chart analysis, might I want to call it that. What are we going to look at today? Well, we're going to first of all look at what is it, what is technical analysis, what is it good for, what are the pitfalls. And then we're going to look at 3 basic concepts. The first is candle bars and candle charts, it's really important to understand what that means. And then secondly we're going to look at support and resistance lines, and then thirdly volume. And you might think, well I want to know about more and more and more, but that's quite a lot taken already, guys. And then we're going to do a second lesson on some other wonderful things, I'm going to tell you at the very end here what is that going to be.

4:17:23So what is technical analysis? Well, it's basically using statistical analysis to predict the way a stock or index for that matter, or forex, or anything else really you can chart, is going to move. So it essentially predicts and interprets the psychology of traders and our emotions in some sort of technical chart type thing.

4:17:47Now what is it good for? Well, precisely that. It can give you good in and out options, so it can tell you when you might want to buy a stock, when you might want to sell a stock, if you're holding things in the short run. And then for the long run it can show you things like what are the trends, have we fallen out of the trend, are we moving onto a new trend. And it can also show you really where those changes are occurring, so it's quite a useful one I think.

4:18:13Now what are the pitfalls? Well, the pitfalls are it's a dumb indicator, all of them. What I mean by dumb, it means it doesn't read the news, it doesn't know what's happening in the real world, it doesn't know about Covid, it doesn't know about government investigations, it doesn't know about mergers, stock splits. So basically event-driven things are not something technical analysis can tell you about. So you can't just stop reading all the news and all the basics and the fundamentals just because you're looking at a technical analysis, that is still something that you need to do. So it complements rather than replaces that sort of stuff.

4:18:50So what's the first thing here, guys? Well, we're going to look at an actual real chart here, we're going to look at Nio because a lot of us here are holding Nio stock. Now can you see that all right? Let me just move that a little bit over. There we go. So the first thing is really candle bars. Now you're wondering why do we use candle bars rather than just a simple line chart, right? Well, it gives you more information, and I'm going to explain exactly how.

4:19:15So a bearish candle, a red candle, is a sell-off candle. So it's pretty easy to tell, red sell-off, green is buy. Now if you are in China it is possibly the other way around, but that probably doesn't apply to many of you. So what does it mean here? So in a bearish, on a sell-off candle, a red candle, you've opened here, let me just get a little pen here, it means you've opened here at this line and you've closed the day at that line. So that is the difference between open and close.

4:19:43Now what are these little tails here, the top and bottom? Well, that was intraday movement. So you've moved in fact above the price you opened at, so you moved all the way up to there, and then at one point you were lower during the day down to there, but you closed at these points here. So that actual filled in coloured candle is the real difference between open and close, everything else is intraday volume. Now a bullish candle, so a candle where the stock price has gone up that day or that time period I should say, because you could be looking at a 1 hour or even a 1 minute.

4:20:19Chart, if you so prefer, then you are opening down here and you closed up there. So it's the opposite, and it makes sense because you're going up. And again the tail here just means, well, that was just what was happening during the day, but it didn't really affect, it doesn't tell you where we opened and closed. So that's really why that is useful.

4:20:41Now the tails are quite useful, and if you can see here, for example, the last trading data I've got on here, so I'm going to put a little red arrow there under that. And what you can see, and I'll magnify for you guys, there is a huge tail at the bottom here. I will get on to that in future lessons to explain really why, but it implies to you that we had a massive drop in the market and then there was a massive buying again. And that can be useful, for example, when calling the bottoms of markets. Not that anybody can accurately call it, but it gives you an indication of just the amount of buying there was and therefore gives you a new support line as well. And again we're going to get to support line next.

4:21:20So that's the real simplicity of bars. It just gives you more information than if you are looking at this, because this doesn't tell you what happened during the day, it just gives you a more simplified view. Now you feel free if you want to start with that, and there are also other candles. There are Japanese candles and there are hollow candles. Some people like that. I think the simplicity really is, at the moment let's stick with red and green ones here that I coloured in.

4:21:49Now let's look at support lines. So support here, this is a nice little chart I'm just going to zoom in a little bit on. So what happens is, and I show you this on a real chart in just a second, when you hit a, so imagine that this green and red line here, that horizontal line, is a price, say that's $5, right. Then your stock chart is this black zigzaggy line. Now it went from wherever it was, $10, down to $5, and it then stopped at $5 and it went back up. And it did that once, it did it twice, and then it did it three times. So you get these V movements and that builds a solid support level because you've hit it again and again.

4:22:33Excuse my cat, he seems to disagree with it. It hits it again and again and that is what builds a support line here for you. And resistance works the other way, the opposite way again. So you have a top line here that you are hitting again and again, and your stock price goes up to it but it can't break through it. It goes up to it, it can't break through it, and that builds a resistance.

4:22:57Now support lines actually become resistance lines once you've gone through it. So if say we had a stock that was at $6, it fell through the $5 support line we have here, and then it wants to go up again, the $5 will act as a resistance and you're going to have to work your way to get through that.

4:23:16So let's have a look at an actual chart here and we can see some examples of that. Well actually this pink line that I've got drawn in here already, that is a real life support line for the NIO stock. It is at 38.13, and you can see that over here the stock price at this point of me recording is 38.11. Hopefully if you're going to be watching this in the future you'll be thinking, oh my God, that was so cheap. Well that's another story.

4:23:51Why have I got that support line in here? Well, we have hit that line a couple of times. So you can see here the tail of that green bar where that green arrow is, it hit it. And then again here's the red tail of that red bar, hit it. And then we go back over here and now actually we closed at that point, which is also somewhat a support line. So I've got, it's a double support, that's what I would call it, it hits it twice.

4:24:18And funnily enough, on this last day of trading we fell a great deal down and then we stopped the day exactly pretty much at 38.11. Well, I'm not putting my lines in exactly to the cent precisely, so that's pretty much the same thing to me. 38.11, 38.13. And so it shows you here it is a support and it's an acting support.

4:24:43If you wanted to look for a resistance, for example, you could try and find something similar. Let me see if we can find one on here that would be useful. Okay, I can't see one this particular moment. Well, say we put one in here for example, and I'll zoom in a little bit of that. And you can see we had a couple of points here and there and there, three I would call it, where support lines, we've then fallen through it. And then you can see after we broke through it, so let me get a little pen out here. So I'll zoom in on this also a little bit guys so it's a bit bigger for you.

4:25:28Okay, so we fell through this line where I'm putting the first arrow here, right. So that was when we fell through our blue support line there. And that support line should be ever so slightly lower. When you zoom in you can see then they are slightly off kilter here. There we go, thereabouts, a couple of cents in and out don't really matter. And then we fell through it here and then we tried to go up again. And at that point you can actually see that the previous support now acts as resistance. We went through it ever so slightly and then we went back down again. So there is an example here of a NIO support and resistance line in action.

4:26:09Now another thing I'd like to show, we will look in more detail at this guys in some future lessons into more details on this, and we'll look at some other indicators for that. Now from a volume point of view, because that's also a good basic thing to understand, is when you have an upward rally and your volume increases, so like here for example, you have at the top a nice beautiful rally moving up and at the same time your volume down here moves up. That's a good thing. That is a rally supported by increasing volume. That's a very strong rally.

4:26:52Now when you then continue to rally from there onwards but your volume is falling off, it starts to indicate to you, ah, this might change. We are nearing the peak of this rally because my volume's falling off. And then when you get the fall off here and at the same time your volume increases, then that's telling you, well, this is a serious selloff because there's actually more volume into it. More people are selling each day than the previous day. And so that's what the volume indication there means, or just more market participants are in this, but still at the end of each day we are selling off.

4:27:33So when you get flat volumes like we have down here for example, we've had that for a lot of February and we were whinging about it, and at the same time your stock is essentially moving sideways, it tells you very much that it's moving sideways. It can also give you an indication that the trend is changing and that what's coming up might well be a different direction than what you had before. And that's exactly what happened. Previously we had a nice rally and now we're having a not so nice selloff for those of us who are long on the stock.

4:28:08Now you can see here towards the end of our rally down here, and I should perhaps make that a different colour so you can see what I'm talking about, my red line here is again accompanied by increasing volume. So that therefore again indicates to you this selloff is more serious and it hasn't stopped yet.

4:28:30So there are ways of, basically you want to watch out for, is my volume and my chart moving in the same direction. If it isn't, I'm near an inflection point. And if it is, well, if you're moving up and your volume's going down, you think, well, that rally is going to come to an end soon. If you're selling off and your volume is moving up, you don't know, but you're predicting that the selloff is going to continue. If you have a selloff with falling volume, you are then predicting that there will be an inflection again and that that's going to fizzle out fairly soon, that selloff.

4:29:08So I hope that makes some sense guys, and I'd love to hear your feedback and comments below. Of course this is just for our membership community here guys, so do let me know what you think of it on our Discord and our Patreon. Now what are we going to cover in the next lesson? We're going to look at Fibonacci, that's a really really big one I think, and then we're going to look at things that I use every single day.

4:29:28Pretty much, and that is RSI and MACD indicators. I'm just going to explain how those things fit on, and then after that we're going to look at some more detailed other lovely things that we can do with technicals and just generally why I think they are very, very helpful. I think they're very, very interesting.

4:29:44We're starting to look at technical indicators here. Yes, we have graduated from primary school to middle school here to look at something a little bit more complex, though the one we're looking at here is a relatively simple one, moving averages. Moving average, or often simply MA, you'll see that quite a lot.

4:30:11What does it do? It's basically a simple technical tool that gives you a trend indication, up or down. It is a lagging indicator because it's based on past prices, so it literally is taking the mean of the last whatever time period you select and it gives you that. It flattens out the line of the actual stock price, and of course we're going to look at some real life examples here. But if you have say a 200 day moving average it'll have a much much greater degree of lag than if you have say a 10 or 15 or 9 day average, which would be much closer to the current stock price.

4:30:50The most common periods you see used are I would say 15 days, 20 days, 30 days, 50 days, 100 and 200. And you're thinking well isn't there some rule on this? Actually no, there really isn't, and we're going to get into that, the why and the how. I would actually add to that list, I quite like looking at the 9 moving average as well. That's one of my particular favourites, and you might well develop your own favourites with these because there is a bit of a personal aspect to this.

4:31:23Generally speaking the shorter the time frame, so if it's 9 days or 15 or 20 days, then it is more suitable for short term trading. If you have a much longer term outlook on a stock you might start looking at the 100, 200 day averages. There are also situations, we'll look at some charts here, if you have a very fast growing, very fast moving stock, looking at the 200 day line might be a lot less useful. So say a growth stock might not be that useful to look at the 100, 200 day line, whereas if you're looking at a 100 year old company that just grows very calmly and steadily by 5, 10% a year, then the 100 and 200 day lines might be much, much more useful. So that's a quick intro there.

4:32:10Let's look at some because I think that's really the best way of doing this. I'm going to get rid of everything that's on here and I'm just going to pull up say a 30 day moving average line. There it is. What does that tell you? Well let's go back a little bit. So when it's going up what does it tell you? Well it tells you you're on an upward trend. Then it goes down, it tells you you're in a downward trend, and then it goes on an upward trend. So you're thinking well that isn't really telling me much more than the stock price at this point, right? And you are right with that.

4:32:38Now if you look at, well actually let's go back to this, it also provides a support and a resistance line, and you can actually see that here quite easily. So you can see it acted as a support line here on the 6th of January, and I'm going to make a couple of copies of these. You can see it acted as a support line here on the 15th of January. It also acted as a support line here on the 1st of February, and then again on the 1st of April.

4:33:10Now what about this period where we were below the line? Well you could look at it as either it was a real significant trend change, or perhaps it was the buy opportunity of all buy opportunities. And what you really see here, you turn it upside down and you see that it also acts as a resistance line when you are below it. You see that here. So you can make a very simple strategy therefore for QQQ. You can say whenever it is below the 30 day line I'm buying, and when it's above it, well we can work out an exit, but at the moment we're just a long investor here.

4:33:48And if you go back a little bit in time you can see quite a lot of points here. I'm not going to put a million arrows in here, but you can see here and there it has acted as support quite a lot of the time. And then here for example it was acting as a resistance, here was acting as a resistance again, then we went through it and then on the way down again here it is support. So actually not as unuseful as it appeared at a first glance, right?

4:34:14So you can start to see a little bit of value here of just having one moving average line. Why am I talking about one? Because we can have two, we can have multiple lines, as many as we wish really. And that then gives you crossover indicators. So then it is not just looking at one chart, because from that point of view I think it isn't all that useful because you can see whether the price goes up or down without drawing a line in it. But it gives you as I say here the support and resistance line.

4:34:42So say I'm going to throw in a 15 day moving average line into the mix and see what happens there. So let's go into the most recent example here, and let me get rid of a couple of these arrows because there are just too many. This arrow here I am going to keep because it is in the perfect position. I'm going to make it purple. Why am I making it purple? Because my 15 day moving average line up here is purple.

4:35:08And if you're wondering how to get these in, let me delete one for you, show you. So you can go to indicators, you can save them as favourites as I have, or you could simply type in moving average, and there it is, moving average, and it then pops up up here. And you can see in this case it's done it automatically as a 9 day moving average and it's done it in blue. Right, you can maybe you can't see that, but there it is, 9 day moving average in blue.

4:35:39So what you can do is you can click on that little settings symbol and you can change the length of it. For a laugh let's look at 15 days, and you can change the style as in you can change the colour, so I'm going to make it purple, it's a bit brighter. Sadly you can't seem to make this one any thicker, but there it is. There are also other options. You want to look at the length of it, you can open as the close or the open, the high, there are variations to it. But probably don't need to play with those unless you really want to get into this on a much deeper level. I would leave all those settings as they are, press the okay button, and then here it is.

4:36:17So what happens with that then is when the purple line crosses from below above the longer moving average, so the black one is 30 days, the pink one or the purple one is 15 days, so when the shorter one crosses from below above, you get a buy signal. The other way around, when the shorter time period crosses, because the short, I think of it, it's the faster moving one, I think that's really the best way to think about it. Short time period was more quick, it gives you a more rapid movement. Then the longer, the longer the time period the slower, the more smoothed out this curve is. So if it comes from above to below it gives you a sell signal, and the other way around.

4:37:00The buy signal here for example was certainly a pretty good one. I think it's pretty obvious to say that would have gotten you in on QQQ at 316, and as we speak we're sitting at 342, and it hasn't given us a sell signal yet. Why not? Because this whole area here in between these two lines, you can see that is actually the differentiator between the short term trend and the longer term trend, and that therefore continues to be a positive one.

4:37:37Now when it goes the other way around, so say up previously here, you can see that distance there, it gets smaller over time, and then you get to a point where you get a sell indicator. And so that's the way this happens. So I'm going to get rid of all of those marks and let's add in one more. We're going to add in another moving average, and this one this time we are going to leave it at 9 days.

4:38:05So the 9 days is the blue line now, and why am I doing that? Because I want to confuse and obfuscate? No, not really. I actually want to make things clearer. So to start with I'm going to hide our 15 day line, and then you can see that we got a sell signal here. I'm going to put a line in here, this vertical line, that is our 9 day sell signal. And we're going to write that next to it so it's clear. So this is the 9 day crosses 30 day. 9 day MA basically gives us a sell signal.

4:39:07Sell indicator as AC crosses the 30-day MA, that's what happens at this particular line. If we put in back the 15-day line you can see that also gives us a sell signal, but a little bit later. And similarly I'm going to put that in here to explain. So that is the 15-day sell crosses 30-day MA.

4:39:42What can you see from that is that the shorter the moving average line, the more sensitive it is to giving you a sell indicator. Which was better here? Well, that one gave us a sell signal somewhere around 315, so the 9-day one around 315, and the 15-day one around, a little bit higher I would say. It's a little hard to tell on this chart, probably around 310 or so. So it isn't always necessarily better to be sooner or later, but certainly you wouldn't want to have been any later than that, right?

4:40:24One day later, say if we changed the 15-day one perhaps a 20-day line, you would then see it would have given you a sell signal a few days later. At that point you were sitting at 300 and 300 or thereabout. So there is an importance in, especially if the stock you're looking at is very fast moving, and NASDAQ is relatively fast moving even though it's an index because it's all growth stocks. So it makes sense, again the faster, the higher the volatility of your stock, the shorter are the time frames you're comparing here.

4:41:01Now you could take it one step further and I'm going to hide the black 30-day average line. And now we are just looking at the 9 and the 15-day line, and that also gives you buy and sell signals. It'll give you them more frequently and more rapidly. So that would have gotten you out of the stock here at around 317 up here, and then it would have gotten you back in down here at, is that 317 or so?

4:41:38So you would have gotten out at about 323 and you would have gotten in at about 315 or so. So that would have been quite a nice trade really here. And then it would have gotten you out again here, it would have gotten you in again, so it makes you trade more. And so that's really one thing to realise is that the faster you make them the more you trade.

4:42:07Now let's turn this around and let's make these really, really, really long ones. So let's make our moving average line here, make it a 100-day line. We're going to make this one a 200-day line, not 2,000, that would just be silly. And we make this a 50-day line. So then we have three pretty long lines and I can unhide them here for you. Are they all on? Yes they are.

4:42:38So let's see then on a longer basis, where does that take us, how useful is that for us? So you can see the purple one is the 200-day moving average line. How often does that give you a we are in bargain basement prices situation? Not all that often. So in the last year or so it's only done it once, when we were here in our Covid crash, which hopefully by the time you're watching this you will no longer recall. Distant memory.

4:43:11So that's, I'm going to make that purple, that is our 200-day buy opportunity. Now our black line is our 100-day buy opportunity, and I actually really like that for the NASDAQ I must say. I think that's a really good one for buying in the NASDAQ because it gives you enough trade opportunities but not, to actually buy every once in a while but not so many that you are doing nothing but trading NASDAQ.

4:43:42So here for example on the 30th of October or thereabouts, that would have been our 100-day one. Again in March of this year we've dropped below it, so there would have been pretty good entry points. And of course if it's a buy signal on a 200-day line moving average, it's also going to be one on the 100-day moving average. But if you go back a little bit in time you see a lot more opportunities here where we crossed below the black moving average line, and each one of those I think would have been rather brilliant buy opportunities.

4:44:21So that I think goes to show the benefit of these longer, slower lines. Not on an everyday basis because you simply won't be doing very much, but there is also real wisdom in doing very little. I think a lot of the best traders trade very, very rarely if ever. Then if you look at our fast one, the blue one, well it makes you a much more active trader really doesn't it. It gives you a lot more opportunities absolutely, but it also moves much, much more closely to the actual stock chart and therefore also gives you less benefit for each trade.

4:44:55So I think there is, you have to find a happy medium and this is different for every stock. So QQQ is an average of a whole index. Say you look at something like Tesla for example, and again let me remove my annotations here. So that's obviously a much more rapidly moving stock that has had a huge uptick. Therefore your pink 200-day line is virtually useless with the exception of what is undoubtedly Covid.

4:45:25The black 100-day moving average line also really only was useful during Covid and now in the March correction where we had a move towards safer tech stocks than these. And you can also see the three lines don't really ever cross, they're not really telling you much there either. So on the short-term basis this also isn't that useful. If you want to trade something like Tesla more short-term, look at 9 days, 15 days, 20 days, 30 days. Look at some of those shorter ones and look at how often they cross, and look at back test how sensible was it to have traded at those.

4:46:08And you'll find this is different for every stock. Every stock has a technical personality if you will. So you can't simply apply the same thing to everything. Within a sector you will find that they will be quite similar, but it isn't always that useful to apply exactly the same strategy for everything.

4:46:26So I hope that's an interesting guidance on moving averages. I'd like to move one step further. We're going to advance here as a class to the MACD, and you're wondering well what the hell is that. It is the moving average convergence divergence, and yes that's not me mumbling, that is actually what it's called. People seem to call it MACD or MACD, which I don't really like, it sounds like McDonald's for some reason.

4:46:55So how does that work? Quite similarly. So it gives you, well first of all one thing to understand, you go into the settings and you understand that the fast length of the moving average is 12 days, the slow length is 26. So we can therefore replicate this up here. I'll get rid of one of them and we make one 12 days and we make one 26 days. And it should then, well it doesn't quite work like that because it smooths it out. So okay, that effort was a feeble one to show that. Anyway we'll hide those for the moment and we'll just look down here at MACD. So I'll try to make this as big as I can while you can still see the stock price above.

4:47:41The simple theory is fairly simple. You have a blue line and orange line, of course you can change the colours if you want to confuse yourselves. The orange line is the MACD line and the blue line is basically the, well one is the signal line, one is not. I can never remember which one's called which, but it doesn't really matter. Basically as the blue line crosses the orange MACD line from above down below, it gives you a sell-off signal. And it crosses from below to above, it gives you a buy signal.

4:48:12So let me put an arrow here as a buy signal, I make that green. And then I'll also put an arrow up here and I'll make that red. So you can see what I am talking about. You can see here the blue line crosses below the orange MACD line, that's a sell signal. And the other way around, blue line from below to above, you get a buy signal. Helpfully it also gives you these volume bar chart indicators which also tell you very clearly what it means. If it's green it's buy, if it's red it isn't.

4:48:48Now what does that mean to the stock up here? So let's put in some vertical lines. We put in two here, the first one will be red and the second one I will make green to make the illustration a little easier. So up here you can see it would have told you to sell there. What would have happened? Well yes, you would have sold, you would have missed that dip, and you would have bought in again there.

4:49:13So what would have been your profit? Let's put in some horizontal lines here. Would have gotten you in there, so it would have gotten you out at this red line. Again I'll make that red. And in at that line. And the difference between the two, we can measure that on here. The difference between the two would have been 17%, $150. Pretty good call, right? But simply following just the one indicator.

4:49:44Now my big word of warning is, actually there are two big words of warning. One is MACD tends to lag. Why? Because it takes moving averages from the previous time periods which inevitably lag. You can see that if, okay, if you set it to zero.

4:50:01If you set it to near zero then it would move like the stock price, but it would defeat the purpose. So it tends to be a little bit too slow. That's something to bear in mind. The second and the more important word of wisdom warning here is don't trade on one indicator because it's risky. You want to look at several indicators together. You want to build pairs that work for you.

4:50:27You can do that, for example, simply by throwing in some moving average lines. So you can say, well, I have moving average lines, say I use 9 days and 30 days, or 9 days and 20 days, which I do quite often for these fast moving growth stocks. And then let me make the stock a little bit quicker up here, and we can see, no, we don't get a sell signal for that here for some time. We get the sell signal here on the 5th of February. So the sell signal from the moving average lines crossing is right there on the 5th of February. You can just about see that where the pink line falls below the blue line, that's the signal.

4:51:11So you could have said, okay, I've got one indicator telling me to sell but I need another one. Now I have another one. Now these two in fairness are fairly closely correlated, so they're perhaps not the best pair, but I will show you more technical indicators down the road. One of my favourites for MACD is the RSI or the Williams %R because it's quite a nice pairing for statistical reasons.

4:51:34Similarly, the buy signal, let me put another arrow here, from the moving averages lines crossing it would have been there. And I'll also make that green and I'll show it to you on a bigger screen. You can see that the purple line crosses the blue line and gives you a buy signal. Now it very quickly again gives you a sell signal and then another buy signal. But again, if you had then bought in there at 681, or here later at 665, still would have been a pretty good trade move.

4:52:09So how do you know that you've got your indicator set up right? How do you know it's working? Back testing. Really the best thing to do is take a chart like this, come up with your strategy and you think, hey, this worked really well last time, go back as far as time will allow you to. There are also some services that allow you to do that. Capitalize.ai, for example, is one of them where you can run them back. I'm just writing this down so I'll give you the link in our little list of clever resources. That only goes back 90 days though. There might be one or two others I can find and I'll throw them into our resource list.

4:52:45Otherwise you can do it manually in here, or if you're an absolute genius then you can actually write a bit of code in here and back test that, but that might be beyond most of our abilities. I have not spent the effort to try that. I actually simply go back on the charts, and if you follow a stock for a longer period of time you'll also start to remember and understand what works. And again, maybe keeping a little notebook and saying, hey, now look at Tesla, this is what worked for me, leave your annotations in, save the charts. I'd encourage you to do that, or at the very least take some screenshots and dump them into a Word file or something like that so you have a reference. I think you might have to pay for it if you want to save these charts here.

4:53:32So that's the lesson so far, guys. So what am I going to tell you to do? Play around with moving average lines. Find some indicators that give you consistent and reliable buy and sell signals for some of the stocks and ETFs and indices and whatever it is that you trade. You can do it with commodities, with Bitcoin, with orange juice, anything at all. And then once you set that up, throw in the MACD and see whether they give you the same kind of signal, or would it have been better to wait for both signals together. And I think in most cases it certainly is the case.

4:54:05We're going to look at 2 more technical indicators which you see me using all the time. The first one is RSI and the second is Williams %R. We're going to go through both of them and I'll explain the difference as well. In a nutshell, Williams %R is a bit faster than the RSI. So if there are stocks that are highly volatile, then Williams %R can be a more useful item.

4:54:40Now what does RSI really do? Well, it measures the consistency with which prices increase or decrease over time. So a high RSI reading basically means prices have increased with greater frequency than they have declined over the particular time frame that you're looking at. Williams %R, on the other hand, it compares the most recent closing price with the highest high of a particular period you're going back to. And that will become more clear as we look at the actual chart.

4:55:11So I'm looking at the same chart here that you might have seen in a previous lesson on MACD and moving averages. And I'm going to hide the MACD for here for a moment and I'm going to call up the RSI. And how do you do that? You just type RSI into pretty much any piece of software, TradingView of course here, relative strength index, and then it pulls up this chart for you. And I'm going to make it a bit bigger.

4:55:38There are 3 elements to this, I think, as you can see. So this bit up here is the overbought area. Above that dotted line, above that purple area. And down here is oversold. So one thing I'm also going to do is I'm going to make that one of my favourites, so now I can access that tool down here in that favourites toolbar, which is quite useful.

4:56:36Now what's happening in the middle here? What does it really say? What does it really do? So you can look at it initially. When you are in the overbought area up here, that at some point you are basically overvaluing the stock, it should come down again, shouldn't it? Well, it can, but it doesn't have to. Because you can be in the overbought or in the oversold territory for quite some time. So for example here, this stock being Tesla, between 10th of December and 5th of February 2020, it was in the overbought territory. It was quite happy living up there.

4:57:14So that you then think, well, that isn't terribly useful, is it? I don't really use it for that very much. It's kind of an indicator, yes, it might help your conviction if you're looking at some other things on other indicators already, or on the chart, Fibonacci, your exit entry strategies, absolutely. But really what I look for is the halfway mark at 50. I put in a horizontal line.

4:57:41And what does that really mean? Well, that really gives us a trade signal, and that's what I like it for. When we go from below to above, we get a buy trade signal when we cross the 50 point line. When we go in the opposite direction here, so when we are going in that direction crossing over the halfway mark, then that is a sell signal. When we go in this direction, then that is a buy signal. And the buy signal happens as we cross that line.

4:58:18Now let's go back, how useful has this been? So say this was a buy signal here, so let's put a vertical line into that. That was a buy signal. Here is also, well, that's a bit of a choppy buy signal, so let's just look at this one here. That would therefore have been the sell signal. So I'm going to make that line red if it'll allow me to. Sometimes these charts are a little bit temperamental. Here we go. So that's the sell signal. So you can see the buy signal would have gotten you in Tesla at about 400 and a bit, and it would have gotten you out at about 810, 820. Pretty good call, right? I mean, that would have been a fantastic trade in a very short period of time.

4:59:08So I ignore all the bits above and below, all that zigzagging. I don't ever trade on, don't ever act on those. Yes, you can keep an eye on it, it tells you what momentum is doing in the very short term, but for me I look for that 50 line. Occasionally you will find a stock that never ever crosses the 50 line and it just lives between say 50 and 70, or below between 30 and 50. If you're wondering what those numbers are, they are down here on the side, in which case you are going to have to set your 50 line a bit higher or a bit lower. But for the vast majority of stocks, 99% of stocks, this is basically the strategy. Now would I act on this on its own? No, I wouldn't. I would never trade on one indicator alone. But now I have my RSI up here.

4:59:58Still have my moving average lines up here, right. And I get pretty much at the same time a buy signal here, pretty much at the same time a sell signal there. So now I have two indicators telling me the same thing. So why don't I pull back up MACD. MACD and RSI are a really nice pair, they work quite differently and therefore confirm strategies quite nicely.

5:00:23Now if I make our MACD a bit bigger, you can see that it agreed with the entry point here. More or less we got a buy signal there, you can see the bars go from red to green. So now we have a triple indicator telling us to buy at this particular point, that's starting to look a little more confident. Now don't forget all the fundamentals, you still have to research the company and do all that understanding part. What is their business model, what is their moat, all that kind of stuff, what are their prospects, growth, competition, margins, all those things you still need to understand. But here you get a very nice entry point on 1, 2, 3 indicators at the same time.

5:01:01Now on the sell side we have one indicator telling us to sell, we have another one telling us to sell. MACD doesn't for ages. Actually no, I'm absolutely wrong, apologies. I've just phased it out because I made it too small, it actually tells us to sell earlier. It tells us to sell on the 22nd of January, which was that first line I'm putting in here. And let me make that a dashed line so you can see that is what MACD said, it said sell sooner.

5:01:32And what would that have meant? On the 22nd of January that would have meant selling at about 830 versus 840, which is what RSI and the moving average lines recommended. So again it therefore validates our model. We have this one here telling us to sell and it doesn't change its mind, right. You can see the red bars there getting bigger and bigger and bigger, it's basically saying get out, get out, get out, get out a little bit louder every single day.

5:02:02So then when you get that and then your next indicator tells you the same thing a couple of days later and your moving average lines also told you that in between the two, basically then now you have three indicators. So that's kind of how you can build a combination of indicators that work for you, and again back tested. And that is your homework, guys. It doesn't have to be Tesla, it can be any stock, any ETF, any commodity, any crypto, absolutely anything at all. Use these three indicators, RSI, MACD and some moving average lines, and see if you can find a good pattern that you can back test 3, 4, 5, 6, 7 times, as long as you have time.

5:02:45Then you can leave that on and you can watch that moving forward and it'll give you some interesting trade ideas. Now before I close this off I'm going to close the RSI and I'm going to pull up another indicator which is called Williams R, Williams percentage R. It works very similarly to RSI but a little bit differently. It basically looks at the most recent closing price and compares it to the highest price in a particular period.

5:03:19The standard Williams R that we get here, can we see the standard settings for this? Normally it shows us, anyway it doesn't at this particular juncture, I don't know why, absolutely no idea why. For some reason it doesn't, but anyway what it does is it is a little bit faster than RSI. It is essentially the speedy brother and it is therefore more useful if you're trading more rapidly, more quickly, more frequently, and when you're looking at stocks that are highly volatile.

5:03:53Especially, I mean Tesla is fairly volatile, but there are other stocks that go up 10, 20% up and down each day, at which point RSI will take too long to catch up. The trade signal will always be lagging a day or two, as well MACD. So on this one here for example, when did they tell us to sell? Well they told us to sell actually a little bit later interestingly enough in this case, right here. That was the, I'm going to make that a dotted rather than a dash line. And the buy signal for the similar period was on the 17th of November here, let's make that a green line, green dash line. Apologies it's very very faint, but that would have gotten you in at 460 and would have gotten you out at 840.

5:04:41Versus this, RSI I think got you out a little bit higher. So you have to kind of do the tradeoff and the comparison and see which works better for the particular stock. As I say, Tesla is volatile but not insanely volatile, so Williams R, sorry RSI might actually work better here. In this case though, checking at once doesn't really count, you have to put in the work and back test it, or find a smart friend who will back test it for you via script, which you can do in TradingView.

5:05:08And perhaps we should find somebody who can do that and pay them to write some scripts for us. We could share that as a community, I think that might be an interesting idea. So for now, guys, that is a wrap. I hope you find this interesting and useful, and of course your homework is to use these three indicators combined, moving average with MACD and with RSI and or Williams R, and see what works best for at least one, hopefully two or three of your stocks. And then you'll start to really understand technical analysis. You don't really need to know much more than that, I think these tools already really get you quite a long way.

5:05:51So thanks for watching, guys, and please do share your homework, your screenshots, anything interesting you find, share them with the community over on the Patreon channel for this course. I'm sure a lot of people would like to know and see what you've also found, and you can also of course chat with everyone and see whether it makes sense.

5:06:09In this lesson we're looking at Fibonacci or the golden ratio, and a lot of people always wonder what is that all about. Fibonacci, an Italian chap, lived in Italy around 1200, so a fair time ago. And he basically came up with this, I don't know if he came up with it but he certainly documented this kind of magical financial sequence or number sequence.

5:06:37And how does it really work? It's basically a sequence of numbers and it says that after each 0 and 1, the sum of the previous two numbers makes out the next one. So the sequence goes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 35, 89, 144, 233 and so forth, always combining the previous two numbers together. And that means that each number is about 1.618, and that's an important number to understand, 1.618 times the previous number. And that's kind of the ratio this is based on. A lot of the time you also see the golden ratio expressed as 0.618, and that is kind of what we're going to be using here.

5:07:26What is this really, this 1.618 or golden ratio? Well you see it in a lot of art, you see it in a lot of architecture, you see it in lots of things, nature. All of these flowers, plants, the way they're laid out always follow the Fibonacci sequence. Most buildings that are aesthetically pleasing follow the Fibonacci sequence. Trees do too, the number of branches on trees as you go up follow the Fibonacci sequence. It is absolutely incredible, if you want to do a bit of Googling or watch some videos on that, it really is one of the most fascinating pieces of mathematics that you could ever come across.

5:08:09And if you want to design something, as some of you know I paint for example, I look at exactly those ratios too. And I think it just makes layout actually very easy, because you kind of know you follow that proportion, 0.618, in terms of shape and size, you are likely to end up with something that is fairly pleasing at least on the bigger scale. Buildings also, the proportions of windows, proportions of doors to the whole building, the width of the building to the height of the building, all that stuff, it all follows Fibonacci.

5:08:42But that's not what you're here for, you didn't come for an architecture lesson, right. But there are many examples, Leonardo da Vinci's paintings of the Mona Lisa, the Parthenon, lots of flowers I said, the galaxies, spiral galaxies, hurricanes. And I said I would stop with the examples but I find it hard to. It all follows Fibonacci, so it is incredibly interesting and useful, and we use it in financial markets a lot. And if you follow me on the YouTube channel you see me looking at support and resistance levels from Fibonacci pretty much every single day.

5:09:14Now how does it work? Well the easiest thing to do is, well there are different indicators and some softwares you have to draw them in and then you're always wondering where do I put it and what do I do. The wonderful thing about TradingView here, and I am not selling it in any way shape or form, perhaps I should start, hey, you can throw in an auto fib retracement. And that shows you exactly what I have in here already, so all of these numbers are auto fib retracements. And if you want to you can go into the settings and you can see here, you see that 0.382, 0.618, that's what I was talking about just now. And then you have more and more of those numbers.

5:09:54You can throw in lots of these. You can extend them to a fairly lengthy degree depending on how significant your crash or rally really is, and then you get all these numbers pulled up, these lines that I've gotten here. So how does it really all work? Basically they give you support and resistance lines and also a trend to some extent.

5:10:18So say we start, let me zoom in a little bit, get rid of that. We start here, this is the Neo chart by the way. It doesn't really matter what stock it is, it works the same for all of them. But what we see here is you have this, the peak of that particular period, and you tend to draw them from the peak down to the next trough. So from top to bottom, that dotted line here in the background is how you would draw it if you were drawing it yourself. TradingView does a fairly good job of putting them in. Sometimes you might want to draw them yourselves so you want to look at longer periods or things like that, but for now I think that is a pretty good place to start.

5:10:56So we started at 46.29, we went down to 34 here, which is the zero mark on Fibonacci. That acts as a very, very strong support line. And we can see here that we have the next rally up. So we break, well let me magnify that for you, we try to break through the next, now resistance line above. So the support lines on the way down become resistance lines on the way up, which is about 36.9. So the number in front is the Fibonacci number. What you generally as traders or investors want to look at is the number in brackets because that's really what matters to you. So that's the red line here, and that was the low of that day, the candle there.

5:11:41And then here we have two days where we don't quite manage to break through. On the third day we do, and then on the fourth day we break through the next one. When you go through two lines in the same direction continuously you have a trend, you build momentum. That works in both directions, up and down. And therefore you can see that the next day we managed to go quite a bit higher than that. Well we certainly opened a lot higher and then we closed a bit lower, but we opened very, very much higher on that momentum basis.

5:12:12Here the following day we go down again but we get stopped, the low of the day again the Fibonacci line 36.90. Now the next day we open at just above, which is about that thick candle, that's the opening of the day, again above that green Fibonacci support line. And so on the day after that we sell off a bit, but where do we stop the sell off? Well we stop it at 36.90, which is the Fibonacci support line. So you can see here it plays an important role.

5:12:43Or here, our last trading day as we speak, the low of the day was what? Well it was $34, and that is precisely the Fibonacci support line here, the zero Fibonacci support line that we were talking about. So it is incredibly, bizarrely, strangely, fascinatingly accurate when it comes to support and resistance levels.

5:13:06Now how do you trade on it? I suppose that's what you're thinking. The short answer is I wouldn't on its own. I don't think it's enough on its own. It gives you the intervals and it allows you therefore, if you are trading rather than long-term investing, or if you are long-term investing, it helps you with entry points. It gives you points where you can space out your, where I'm going to take profits, where I'm going to set stop losses also.

5:13:36Because if you break through two of them in a row, say you were buying a Neo here at, say you bought Neo right here for a particular reason at $38. It then goes, actually sorry I need to go one higher. Okay, say here, my example, you bought Neo at say 39.61 where I put that blue arrow. It then goes down one Fibonacci line here, that light green one, and then the next day it goes through the next one. You might then want to set a stop loss at the next support line which is $34 and just say well if I go below that I know we're in trouble because we were likely to go down as low as 31.10. I'd rather not take that loss, I'd rather get out at 34 and wait for this to recover. So you can do things like that. Obviously you can also do that the other way around.

5:14:26So how would you combine this with other things? Well I would combine it with, you could certainly combine it with trend lines. If you had a stock that was broadly moving on a trend, Neo not so much because it's too volatile, but if you're looking at something like QQQ. We could look at certainly volume patterns, what volume is doing.

5:14:47So for example, you have this rally here, this little mini rally here, what I'm painting in red, and at the same time your volume is falling off, right? So you kind of know this is going to fizzle out fairly soon. And then you can say well where am I going to get out? I'm going to get out at the next Fibonacci point. So that could have been 43 something, I can't see that here, or it could have been 46.29, and you could have actually gotten out at 46.29. It would have gotten you out exactly at the top of that rally.

5:15:22So it is very, very useful in combining it with something. So you spotted yes an upwards trend but falling volume, so you think this is not going to last, I'm going to get out of this rally. And therefore you could have pinpointed any one of these Fibonacci numbers here. 43.60, that's the blue one, would have been the more conservative one to wait for. The next one would have been a bit more risky.

5:15:47Also you can look at moving averages and we will get to that, and we will also get to indicators. You see me using things like RSI, MACD, Williams %R, things like that, and I will get to those in different sessions.

5:16:00But why don't we look at one more, say we look at a QQQ here to illustrate the point of this a bit more. So say you are, right, okay so say we are living somewhere in, let me see. Well we haven't really got a clear trend here have we? But what we could do, and that's perhaps something that might make sense, we draw a longer term trend channel here. So we are drawing this here, pretty broad trend channel that takes in most of QQQ's movements.

5:16:55And say we are buying here in somewhere around the 320 mark or so, and we are holding it and we are wondering, hang on, how low is this going to dip? Should we get out? Is it going to go to the bottom of the channel, or are there opportunities to get out before? And really what you want to look for, you want to look for double indicators, so points where the two indicators combine or are at least close to combining.

5:17:26So there is one here for example I can spot, I'm pointing an arrow at it here, that was the 25th of March. And you can see here the low of that day, it broke through the bottom of our channel and it also broke through here the Fibonacci line which was a support line then. And then as you see that trade during the day moving back up, the little tail here, because obviously that's what it did, it moved all the way up to the top of that green bar. You can be like, ah okay, we've called a bottom here from two sides. One, my channel, which perhaps I'm not 100% confident with, but I also have the Fibonacci support here. So what I'm going to do is this is for me a good dip to buy some more QQQ at, and that would have been a valid strategy.

5:18:12And you could have done the same thing here for example at, I think that's the 7th of March or thereabout. You see again you had that sell off on the previous day, also actually it went, it touched the line and the next day it went even lower, it broke out of the line. And maybe your strategy is I only buy QQQ when it's a real bargain basement prices, when we've fallen out of my big green channel here. And it went down to the number one Fibonacci line here at 297.45, and I was like, ah okay, that support held and now I'm moving back up into the channel, now it's actually time for me to get in.

5:18:49You could have also seen that and waited for it to cross one, two more Fibonacci lines here, which would have been the 303 and the 306. And then you would have really established momentum also from that point of view, two lines crossing. So that's a fairly straightforward way to combine two indicators that we have looked at so far. We will look at some more in the coming lessons, moving average lines and things like that.

5:19:15So what are you going to do for your homework guys? Have a bit of a play with Fibonacci retracements, go to tradingview.com, let me show you.

5:19:23Exactly how you get that in here, let me just delete that. So now you haven't got any lines. You go to indicators and you type in auto fib, and you generally want the retracement one. Don't worry about the extension one for now, that is more for setting profit targets. I wouldn't worry about that too much for now, just go for the auto fib retracements. That is what 99% of traders look at. So there you have it, it pops it in for you automatically and it keeps moving it over time as well each time the chart pattern moves.

5:19:55So now that we've covered the real basics of technical charts, we're going to get into a little bit more details. We're going to look at some actual indicators and what they mean. What are we going to start with? Well, we're going to start with simple stuff really but quite useful stuff, and the first one is trend line. And then we're also going to look at channels, and I'm going to show you why they're both quite useful each in their own right.

5:20:24So what is a trend line? Well, it is pretty much that, it basically helps you determine the current direction of where the share price is going. And if you are a believer of technical analysis and statistics, the trend is essentially your friend, that's kind of the theory. So you can use that on different time frames and I think that's a question often asked. Do I look on, this is for example here the NASDAQ QQQ at a 1 minute chart, which is, I don't actually know where it went, you have to reset it here. It looks like that, it looks pretty erratic with little gaps in between for each day, or do I look at the day perhaps, or I could look at the month in which case the whole thing would be a hell of a lot smoother.

5:21:14Right, now there's no hard and fast rule really on this, it depends on your trading pattern. So if you are trading intraday 25 times a day, looking at a minute or 5 minute chart might make a lot more sense. If you are looking to time things more for weeks and months ahead, I would generally recommend looking at a day chart. You can make it weeks or months but then you are smoothing out a great deal, which perhaps actually with an index like this QQQ might not be such a bad thing, but it does give you a different kind of pattern.

5:21:48So if you look at this for example here since 2019, this is NASDAQ, and we say we make that a week and we look at the same time period, also 2019. Well in fact what we could do is we could pull up the same chart twice, might be an interesting exercise, and you can kind of see a little bit for yourself. What would happen if that was a week chart now down here? So here we are and we're just going to move it so that 2019 matches up with 2019 there on the left, or thereabout. So you can basically see similar chart, one is slightly bigger than the other which doesn't help, it is always quite tricky to get them to line up perfectly. You'll start to understand that.

5:22:35So it looks pretty similar so far, right? If we then make this say a month chart and then again we kind of have to zoom back quite a bit because of course now there is a lot less information to look at and to play with, so then it looks like this. So you are missing out on some of the finer bits here, you're missing out on some of these little dips here that we have. For example this one here corresponds with the one down there, you can see it's linked, didn't line it up entirely, and the little sell off there becomes a teeny tiny almost invisible one on the month by month chart.

5:23:13So it depends very much I'd say on your time frame. Generally speaking I would say I look at things on a day basis because I think it gives us a little bit more detail and more information is generally your friend. Now what is a trend line? Well the way you draw a trend line is, and again I recommend play with tradingview.com guys, it is entirely free, and you can simply pull up a trend line here, it's called the trend line. If you select it up there you can then set little stars so you can make your favourite list, which is what I've done, because typically most of us only ever use 3 or 4 or 5 of these.

5:23:49So a trend line, say for example you bought in the NASDAQ, let me just move this out of the way a bit. So you bought the NASDAQ here on the 15th of June for example, that's when you bought it. So what's your trend line? Well you're going to go back in time, you're going to go back say to the previous low and you're going to connect the lowest point with where you are here, because that's all the data you have up till then, right? So then you think well actually I'm only connecting 2 points, perhaps I shouldn't take that dip because the market has changed somewhat. Perhaps I should look at the more recent lows, and that way you can see that you've connected 1, 2, 3 or 4 points really, and that gives us the trend.

5:24:40So you have 2 options when you connect lows. You have the option of, and I zoom in here, either connecting, which is what I've done a little bit roughly, of connecting the low tails, so the lowest part of that candle, which basically means it was the lowest price point during that day here, which is kind of what I've attempted to do. That's a bit more accurate, so that's what you can do here. Some analysts also like connecting the opening or closing of the day, so that means ignore the tail and you would go for the points where the thick part of the bar basically connects. So you would then connect these bars. Doesn't make a huge difference to be honest with you, I think either way is fine. I tend to go for the bottom of the market.

5:25:39Now how useful is that really? Well you're here and then what happens, well the stock does actually really well, you're really happy, it bobs along a little bit here and then it goes to there. And then you're thinking, can I extend, are we still on this trend or is this a new trend now? So you can extend this and you come to the conclusion okay, we dipped very briefly below my trend but it still looks like it is my trend, I'm happy, I'm not going to do anything. And then the stock goes up here and I think at that point you realise okay the trend has changed, and that's kind of the limitation of trends. Trends change, and particularly when you look at volume at the same time.

5:26:16If you were looking at a stock you might not see quite such even volume. So for an index like this, volume is pretty smooth, it doesn't vary all that much. So I will also show you just in a second a stock. So say we pull up Xang for example here on a date chart for no particular reason. Okay, reset price scale, let's make it days. So there we go, say here negative trend, fair enough. Say you bought Xang here on the 11th of February for no particular reason and you wanted to know about the trend. So you might connect the lower end of these with that and you kind of think, ah okay, we're above the trend.

5:27:13So why did you buy at that point, it doesn't make a great deal of sense does it really? So you basically would have to draw a couple of different trend lines here, that's really the answer to that. Because you can see here the trend is kind of moving sideways and then a few days later your trend would start to fall off rather dramatically. And that's when you pull in volume, you will start to see there are quite big changes in volume down here, where we have pretty flattish falling off volume here and then here also pretty low volumes.

5:27:53And the whole, if we go back a little bit, the only time this rallies is when our volume does that. So we have very volatile volumes down here, you can see ups and downs and ups and downs, and that basically means that your trends keep changing all the time. So if you have a stock with high volume volatility, trend lines will only ever take you so far. I think that's something that's quite important to understand.

5:28:18Now let's graduate a little bit then onto channels. What is a channel, what's the difference, is it just 2 lines? Well, sort of. There is actually a tool on that here as well called parallel channel, you can find that here as well. I've starred it again so it's on my little favourites list. So you can connect the lower ends similarly like what we've done here, say we take it for this time period, and then connect also the highs. Now do you need to connect all the highs? Well this is I think where a little bit of experience comes in. So you can draw very wide channels to take in all the peaks and troughs, but really what you're actually looking for is entry and exit points. So if this is your

5:29:10Trend, and I'm going to zoom in a little bit on this. Then you can see that when you are near the bottom end of that channel, say you're here, or there, or in fact you've fallen below it, they would be, if you are long on that stock for the long run, better entry points than say the one up here or the ones here. So it gives you a visual of, well, that's the trend, it's the dotted line in the middle, and if we are far away from that and we are near the top of that channel, then it is perhaps a little bit more expensive relatively than if I buy on the dip here below. We're going to get in future lessons also onto moving averages, which is a similar story, which also can give you good entry points.

5:30:09That's why I'm saying there is no real science here with these charts. You can, for example, if you wanted to say you started this channel a little bit earlier, you started down here in the December period when the channel was a bit more narrow, then you could stick to your narrower channel and you could then see more clearly perhaps the breakouts or the dropouts down here, where you have perhaps 3 rather interesting entry points. Or perhaps there's another one here, and then this one I suppose could also be counted as one but not quite as good as these 3. And then if you wanted to exit, the 2 arrows I pointed up here again might be quite good ones, and you could swing trade. And that is what swing trading is. A channel is a very nice representation of a swing trade.

5:30:57Now do these channels last absolutely forever? No, of course not. There are essentially trend lines, so they do indeed change. And you can look at stocks in a very long-term fashion and say, well, what's really the long-term trend here? And you can do a rough general trend line which will miss some of the peaks and troughs and say, well, 80% or 90% of the time we are actually in this channel here, this new channel.

5:31:31Can I make that a different colour? I think I can. Let's make it that lovely green colour. So you can actually say, okay, we are within that, and then that will again help you to time entries and exits. You can see that here, and I'm going to change the colour of these as well to green. That would have been a fairly good entry point. This perhaps would have been a good exit point, so I make that red so it's clear that is an exit. Can I copy and paste these? Yeah, brilliant.

5:32:01So here is another exit point. That up here, well, somewhere this whole range in fact would have been a good exit point. And then similarly down here on this basis you would have also had a few more entry points. Well, that perhaps not quite as strong, that one, but you get the idea. I think the value of looking at long-term trends, and a lot of traders and a lot of analysts look at that, and because a lot of people look at the same theory it becomes true. So for timing things this is an interesting way of looking at it, and as I said I will show you a little bit later down the road how we can achieve a similar situation by looking at moving average lines.

5:32:45So as I said, if you look at very short time periods they become less useful I would say. I'd always look at this as more of a medium-term thing. Eventually your chart will deviate from it. So say if I go back a little bit here in time, you can see for example that we would have had a different trend heading in this direction here. That was a different one, it's a bit of a rough draw there. Or you would have had one here that went perhaps in that direction, and then another one that started somewhere here perhaps and then it went up to here, and that's when we really broke out.

5:33:27So trend lines don't last forever. If you smooth it out more on a weekly or monthly basis, especially with ETFs or indices, you can get a much longer-term horizon, and then you will ignore the breakouts. So say I wanted to extend this one here till 2019 or so, you can do that. It's just the usefulness of it becomes a little bit smaller because you are going to have to make this channel a bit wider. But it can be sometimes helpful to visualise just what is the long-term trend of this, what's really the pattern if I ignore all the little crashes, the little disasters, and all the little bits of fantastic news. What's really our long, long, long-term trajectory here?

5:34:11For these stocks though, if you do that, if you want to go really far back in time, I would then recommend smoothing it out on a weekly or even monthly basis, and that way you get a lot less of these kinks in here. So you can see here, that's QQQ smoothed out on a monthly basis, and then you can actually see it is a fairly smooth story here with an acceleration starting from about the summer of 2019.

5:34:39So I hope that gives you a nice overview of what the usefulness of these are. It really is, I think, largely to time entries and exits. I think that's the benefit, and to also observe visually, is this stock still on track? And if you don't draw the channel in, it's kind of hard to tell because things can go up and down quite a bit. But if you do have the channel painted in, then it does tell you pretty clearly whether we are within or below or substantially above that channel, and therefore whether it might be worth looking at. Have the fundamentals changed? I mean, technical analysis does not exclude fundamentals.

5:35:14Or simply, if it's something like QQQ that you're perhaps buying every month or so, you might be thinking, ah, okay, this is a good time to jump in, which perhaps March 2020 would have been right on this kind of scale. And it really also helps, I find, take the emotions out of it. If you just forget for a moment what your portfolio is doing and instead look at what the opportunity might be from this point of view. So the whole period from March to May 2020 of course was a very good buying opportunity, but there have been others as we can see. September, October 9th of March, they were all interesting buying opportunities.

5:35:55I have now as you can see made that channel a little bit wider because we were looking at something else here. So that's also something to bear in mind. When you mess with them, do them in different colours rather than keep adjusting the ones that you're messing with, and that way you can keep them. And also another good thing I think to do is write something next to it, put a date next to it or a little note, and you can do that in here quite easily. There is somewhere in here a text option. You can either do it by handwriting, which is what I typically do, or you can do an anchored text for example.

5:36:32So you can put in here, I don't know, April 2021 channel, maybe day, so that you know it's on a day basis. And then you have that in here and you can move that about and you can leave it in there, which is I think always a good thing to do. And do save different charts for yourself, and that's again why having I think a TradingView account, which is utterly, butterly free, is a good idea with a sign up, guys.

5:36:58So I'll see you on the next TA class. There is lots more excitement to come. What I would recommend you do in the meantime, look at a couple of your stocks, draw some of these channels in and see where it would have been good to buy or sell, and where are you right now. Or do you think it is perhaps an opportunity to get in on something at a good rate compared to the long-term trend? And though if you do have breakouts in one direction or another, you also have to go back to the actual fundamentals, look at the news, look at the numbers and see, has something fundamentally changed?

5:37:34What are we looking at today? Well, we're going to look at triple tops and triple bottoms. So you might be thinking, triple, what is that, a drink or something? So, triple bottoms and tops. I'm not going to write triple twice because my handwriting as you can see is already strained with my pen. What does that look like? Well, I'm going to show you an actual chart, but a triple top would be something like that, and then you have one top, 2 tops, 3 tops. A triple bottom, so that would mean you basically came up this way and then that reverses the trend. The other way around, if your chart is zigzagging around here and then falls once, twice, 3 times, you

5:38:25Would then expect it to recover, but you don't have to rely on my horrible drawings. I actually have found exactly the pattern, and guess where, on a NEO chart. Isn't that convenient? So NEO is doing us a really good service here, actually giving me both formations in the space of a couple of months. Can you see it? I suppose that's the first question. Well, let me paint it in for you so it is a little bit easier to identify.

5:38:50So if you look at this trade, let me use a highlighter. You look at this movement here. So we had this massive rally in November 2020, we then went down once, up again, struggled, down again, went up again a little higher, the bulls were still fighting, and then here's the third one, and then up to the moon, right? That was the pattern.

5:39:19So what you have here therefore very clearly is you have 1, 2, 3 bottoms, right? And what does that indicate? Well, it basically means it is a change in trend. So a triple bottom tells you that the selloff trend, that was this one here, is being reversed. And what you also dearly want to see at the same time, you want your volume to fall off.

5:39:49So in this situation here I'm exaggerating this slightly, but you can see down there that our volume, it certainly didn't get any bigger. There is a decline in volume here over that time period, and that basically means that the bulls won over the bears here. In these 3 instances it's always a power struggle essentially between buyers and sellers trying to reverse the trend in this situation.

5:40:14And they failed on the first attempt here, and then we know we went down again to the second dip, and then that failed again, that rally. But it isn't really a failure, because you have one bottom, the second one, and then the third trough or bottom here. On the third one the market basically, the sellers give in because they see the trend is clear. And this is a fairly common trend pattern, actually not that common I would say, but it is quite a powerful one. And at the same time it's accompanied by less volume, which just means that as the stock is selling off less people are selling, and that then gives us the momentum for the next rally to the top.

5:41:03So what is important in terms of these? Well, first of all of course you have to actually spot it, I suppose that's the first starting place. And one way to do that is to draw trend lines I would say. So if you wanted to draw a trend line connecting these 3 lower points here, and I'm doing that a little bit roughly, I'll make that a different colour and make that purple. And then you also drew a trend line from the top through to here, you see these sort of triangle patterns emerging, and we are going to talk about that down the road in some lesson.

5:41:38Which also gives you, identifies a force. The market basically has to decide, are we going to go up or are we going to go down? You can't dip up and down like 1, 2, 3, 4, 5, 6, 7, 8 forever. Typically you see 2 or 3 max and then the market makes a decision here. So that's one way of identifying them, and then literally counting of course the bottoms, taking a pen and drawing it. And there are some indicators called zigzag for example. Here's one here, I don't find it particularly helpful, but if you like it can help you identify things perhaps a bit more clearly. It isn't always 100 per cent accurate I think, but you can use it.

5:42:19And then once you've looked at that, look at the amount of volatility. Basically if your pattern, let me get a pen, if our pattern instead of this rather dramatic movement which we have here was more of a 2, 3 kind of a pattern, that would give you much less momentum. And you'd likely see that sort of a pattern because there wasn't very much volatility in between the tops and the bottoms. Basically the more volatility you have in that, the more likely that once the price does break out will you see a significant price movement, in this case upwards, because these are triple bottoms.

5:43:00In terms of volume, the other thing of course to look out for is that if your volume activity changes substantially from what it has been doing in the previous period, that also indicates that something is changing. So when you have, as we do down here, this sort of very dramatic buildup of volume, I'm referring to the red and green bars right at the bottom here, and then it does that, that actually tells you hang on, this rally is going to fizzle off because the volume is falling off while the stock price is rallying. And then we entered this period of indecision where the sellers and the buyers are fighting with each other, and we form this pattern of these 3 bottoms, and therefore the buyers won on that score.

5:43:52Now let me get rid of this green line here, because the next pattern that is basically the opposite of that is a triple top. And a triple top is exactly the opposite, you just flip it around. And as is very convenient here, thank you NEO, we have that here. We have here is 1, here is 2, and here is number 3. So let me also write that here, 1, 2, and 3. So you have exactly the opposite pattern to what we saw over here.

5:44:21And what does that tell you? Well, it says to you exactly that the trend is being reversed. But what was our trend? The trend is what happens before top number 1. So we were on an upward trend here, whereas previously from the previous pattern our trend was a downward trend, right, that one there. So I'm going to delete that line here so I don't confuse you. So that was a downward trend, in fact let me make that red so it's clear.

5:44:50Whereas now over here we are in an upward trend, and we have one high, we struggle down to here, we manage to rally back up again, the buyers are feeling rather bullish, it doesn't quite work out, we go up to the third one, and that is when the buyers basically throw in the towel. And you see this pretty substantial selloff in this direction here, and that's precisely what the pattern predicts.

5:45:20So the pattern here, it was quite unusual actually that you have this pattern happened here like that, but some stocks are susceptible to these patterns. Once you've identified a pattern in one stock quite often you see it reoccurring quite a lot. Now the interesting thing is that as live as I'm recording this here in the mid to end of April, you can actually see possibly the same thing happening again down here. We have one dip, we have two dips. I'm not going to put in the third dip, and why not?

5:45:47Now you might think this is a case of 1, 2, 3, but you haven't got 3 yet. You know why? Because what if this goes further south? That's the possibility, right. The possibility is that it goes further south, in which case your third dip wasn't really a bottom, it was just a falling knife so to speak. So you have to kind of allow a little bit for this to pattern its way back up here.

5:46:18Now you might ask how far. There isn't really a hard and fast rule on that. I mean putting some trend lines in I think does help. So that is sort of our trend line from the second bottom. The moment we are, we are kind of here. So perhaps if it drops below a horizontal line here, because it has already dropped below this kind of pattern here, that is when you would say well I'm kind of giving up on this triple bottom slightly. At least you have to wait for it to, it could be a lower bottom and then it could shoot back up, in which case I would wait for it to cross at least the level of the second bottom here. So I would wait at least for it to stop at this level there, and that is when I would call it a rally.

5:47:07As a predictor, very very dangerous thing to do I think is to predict the predicting indicators. It tends to land you very much in hot water. So don't think it looks almost like that therefore it's going to be like that. No no, it could go either way at that point still, it's about 50/50. So really it's important to have a little bit of patience.

5:47:31So what's a summary here? Basically the triple bottom as we have here and the triple top here at the top, they basically signify that an established trend is weakening, it's changing. There is that power struggle up and down 3 times, and you have a shift. In this case where you have bottoms, from sellers to buyers. So let me also write that in here. So this is the bottom, right, and that basically means you are moving from sellers to buyers, and then you get that rally.

5:48:02In the opposite, in this case here where you have a triple top, you have a move from buyers, because we were previously a green rally, you are basically moving on to sellers. And this one down here is potentially heading in that direction where we are going to see the trend reverse, but it's a potential. So I personally wouldn't act on it. I've made that mistake before and I've always regretted it, so now I am a little bit more patient. It's kind of taught me that.

5:48:36That's why the volume is important to watch. When we have the rally up here, the green rally, you can see our volume increases at the same time. When we have that triple top or triple bottom sector, our volume tends to be rather flattish. It's probably actually even less than that, it's down here. Then as you are selling off, as you get that major trend reversal, you get volumes increasing. Then when the volume once again falls off, that is when you get that sideways struggle, and then here again volume's pretty flat, so you tend to see that kind of pattern at the same time.

5:49:18So watching volume is an incredibly powerful tool in addition to the real indicators above, or the patterns above. I think making sure that you understand both of them and look at both of them, quite frankly a chart without the volume turned on is near useless. So always turn that on guys, that is super important. So there we have it.

5:49:41Now I would say to you, find some of these triple tops and bottoms. Certainly in the tech space, if you look at November 2020 to March, April 2021, you'll find quite a few of these. So see if you can spot one or two of them and see if you can draw them in and therefore think about what that would mean for where would you have bought and sold. You can write down, okay it gave me that indicator here, so perhaps I would have sold once I was really clear that it was a triple top. So I would have sold somewhere along here, the 56 line, and then where would I be getting out, where is it telling me that signal, or getting in rather if you're not short selling. Just so you can write out a couple of hypothetical trades and just see, well am I just speculating here on hindsight or could the facts at the time have actually told me that.

5:50:43So it depends exactly on when you trade, a little bit on how bullish you are. So some people, let's just zoom in again here on the triple bottom which is perhaps the more common pattern of the two. Some people will wait for the last bottom to go up again at least to the previous top, so it means you can put a line in here horizontally, that green line, and then you would have traded up here. You would have bought in at say 49.80 or thereabouts rather than buying just as that scrapped up. If you are a bit more of a risk taker you could of course also have bought a few dollars earlier.

5:51:23But I think drawing in these horizontal lines or actually the triangle patterns, and we're going to get to that, that would have been the other place to buy. So I think really here from an indicator point of view you had two options to buy in here. Either it was here where it crosses the green line, or it would have been here where it crosses our triangle line. Both obviously valid strategies, one is a little bit more conservative than the other. As I say, we're going to look at some of those more in the next lesson.

5:51:55So guys, do share with the community what you found. Say we see where you've spotted some triple tops, triple bottoms. Perhaps you've spotted double bottoms and double tops, and they're actually also useful and valid, and see if you're going to find the third one down the road. So share some screenshots of that with our community guys for the course, I'm sure a lot of people would find that quite interesting.

5:52:20We're looking at another one of the more popular chart patterns that you'll hear people talk about quite a lot, and again it's very good at predicting trend reversals in both directions, so it's quite a useful one. And what is it called? It's called head and shoulders.

5:52:42And that has nothing to do with shampoo. It has more to do with a particular pattern that looks a little bit like a head and shoulder. I'm looking here at the Baidu chart for no particular reason other than I can find here a fairly clean looking head and shoulder. I will show you a couple of others as well that are perhaps a little bit less clean after that, because in theory these patterns are always very clear. By clear cut I mean a head and shoulder would look something like that, then a bigger head, maybe make that zigzag. So you do that, you do that, and then you have a shoulder. So you have here the left shoulder, you have here the right shoulder, and in the middle you have the head. That's the theory.

5:53:30In reality, charts very rarely look that perfect. So what I mean by perfect is that here the peaks are pretty much at the same level, as are these two the same level exactly. That very rarely happens in the real world. You will see them a little bit skewed, so you have a slightly hunched head and shoulder, or somebody who needs to go and fix their back or shoulders or something. A tailor's worst nightmare basically.

5:53:55So this is a pretty clean one here, and can you see it? I think you might be able to. You can see here left shoulder, head, right shoulder. Left, head, and right shoulder over there.

5:54:16Why is it not quite as perfect as I'd like it to be? Because if I draw a line in here horizontally where the left shoulder has its high point over here, in an ideal world the right shoulder would be exactly at the same level. But as I say, that very rarely happens, so you have to take it as it comes and be a little bit more forgiving with charts. It's still the same valid pattern here. So that's the right shoulder, and then of course up here is the head.

5:54:51So what really happens? Well, what happens is that you have a long bullish trend, and that is here, a long bullish trend. That is the bull trend. Let me find a smaller pen. So here you have basically your bull run, and it goes up to a peak. The price then declines slightly down to here, in this case down to 213, and it forms this trough here. That's the first step. So that way we formed our shoulder here, this is our shoulder.

5:55:31The price then rises again fairly substantially above this peak here. So that's our first peak. We then have this rally again to the top, and that is basically caused by buyers just going, no no no, keep buying this, keep pushing, this has been going up for so long, I do not believe that this can tank, let's keep pushing it. And it causes this new peak here at the top.

5:56:03However, then there is a selloff, a bigger selloff than the first one. So that's what forms our head here. So this up here is basically our head. You could put some eyes in here if you wanted to, making a one-eyed monster. Anyway, so my attempt of drawing a laughing man did not succeed, but you see the point. This is here our head, and then over here we get our next shoulder.

5:56:32So there you have a second attempt by people who just do not want to believe. And typically you have the two lows of basically your neckline here at more or less the same line. So we have that here. If I put a trend line to connect these two, you can see that is almost a horizontal line. I mean slightly off, but almost horizontal. And that is again typically what you see.

5:57:02To form the head, you then have another attempt. People are thinking, well that's support, surely we're going to have to rally up again. And then your right shoulder rallies up to about the same height as the left shoulder, sometimes a little bit higher, sometimes a little bit lower. In a perfect world that would have been exactly here, but it wasn't. And then it sells off again and we again hit this line here. And that is really when we give up, when we really see that the momentum is changing very fundamentally.

5:57:37So it's a real momentum play. It is really an indicator that things have changed, the bull run is completely over. So basically the bulls give up, the bears defeat them on the third attempt so to speak. And that is exactly what this pattern is, and it's fairly common. You see this quite a lot, especially with stocks that have had a long bull run.

5:58:07Now there is also, this is of course this bullish to bearish sentiment, there is also the opposite of this, and that literally looks flipped upside down. I don't think I can show you one of those exactly, but let's have another look. I think it was Palantir here that has a similar situation. So some people have also with Palantir here been calling a head and shoulder. It's a little bit harder to spot I would say, but you can if you want to. So this is your bull run up here, this is your B for bull run, and then you form a shoulder here, you form a head up here, and then you form your right shoulder here. So that should then.

5:58:52Indicate to you that this bull run is basically over. It's not as clean cut because you can see a few other dips in here, so it's a little bit harder to spot. And it isn't just harder to spot, I think the cleaner they are the more powerful they are in a way. But it is still arguably a head and shoulders.

5:59:16The other thing you will see is you will also see there's changes in volume happening. So you see down here, the last, so we have volume down here. In the real bull market it goes up, you then see it falling off, you see it flattening out over here, and you see this last dash effort at really getting a rally going again that fizzles out. And then again when we see, when you get the actual trend reversal, we get the head falling off. We had a lot of volume here, over here, and then again volume flattening out down the road.

6:00:01So always do watch the volume as well. So let me show you that again with Baidu. Where did Baidu go? You can see that. I think you can see that somewhat. The average volume in the bull run here was there, whereas after it hits the first shoulder you can see the volume does fall off quite a bit. Then there is this attempt here to form another rally, it doesn't really quite last, and then when we do fall off we get bam, this massive spike.

6:00:33Now that was a little bit of an event driven event, 26th of March, Baidu selling off, that AOS collapsing. But the pattern still held. So despite a huge massive event driven thing happening in the real world, you still see this shoulder pattern.

6:00:49So again your homework guys for today, find some head and shoulders patterns, find some upside down ones as well. They look exactly the same just upside down. And you can just trawl through some stocks, basically anything with a decent trading history, and see if you can find something like that. Sometimes you have to look at them a little bit harder to find something.

6:01:11Here's Apple for example. Can we find something like that with Apple? Not on a day chart for some time, for example. So you do need to watch out for it. Now some people might think that this here is a head and shoulders pattern, but it isn't because the head is too small. The head needs to be bigger than the shoulders. That is not a valid head and shoulders pattern, so don't just start seeing them everywhere.

6:01:39Really it needs to be that core pattern where the head is taller. So I can't find one with Apple as you can see here. It needs to be basically this pattern here I've drawn more or less ideally with these highs and low lines I've put in here at those levels. But as I say it can be a bit skewed, the chart can be like this or like that, that is completely fine as long as the shoulders are below the peaks.

6:02:02Today is a bit of an advanced head and shoulders class. We're going to look at actually how you trade the pattern, how does it make sense. And for that I found an inverse one on the SPY. And you might be looking at this thinking I can't see it. One thing I like to do, I think it makes it easier, is make a line chart sometimes, and then I think you might start to see what I'm looking at here. Done some annotations already there, can you see it? It's an inverse head and shoulders, rather crudely drawn in by myself.

6:02:34And if we go back to the candles here I think you can still make it out. So you have the neckline here which is basically connecting the two high points now. And if you look at this actual pattern here, you can see coming down from above we have a sell-off pattern, and that is now reversing into a more bullish sentiment here on the right. And this head and shoulders inverse is what makes that happen.

6:03:06So how does it make that happen, and how would we trade it? So it's important to draw in the neckline here, which is always in this case the high point of that shoulder. Yeah, in this case as you can see it isn't a perfect line. So you might be thinking well shouldn't it be like that because it's a bit crooked. Yes, possibly, you could possibly do this if you wanted to be a bit more cautious. You could say it's just very crooked and that is actually the neckline, but it's still a head and shoulders pattern. There's nothing perfect about it. You could even do it like that if you wanted to exaggerate it, but either way the pattern is fundamentally there.

6:03:49Then you have two shoulder low points on the left here and on the right. And how do you trade it, you're wondering? Well really what we do is the most important thing is always wait for this pattern to establish itself fully. Don't trade halfway through. You can start to write down the prices you want to trade at and this is how it would actually play out, but don't do the trade until it's actually been established as that pattern because you don't always get what you expect with these patterns.

6:04:20So what we do is we use the price difference between the head low point and the low point of either shoulder. And the way you can do that again here in TradingView is click on this little measuring chart and then go to the top of that. And then I would, conservative as I am, go for the higher shoulder, or in this case lower shoulder. And you can see here the difference is 3.51, whereas to the right shoulder the difference is 4.68. So it depends on how bullish you are. I would normally go for the smaller one, so basically let's call that a 3.5 is our difference.

6:04:56Where do we trade it from? We trade it from the neckline. So we add it on top of the neckline. So again if you want to be more cautious, you would add it on top of the, well if you added it here, by the time you are up here, so the right neckline is 110, so you want to trade up to 113.5. Then you wouldn't have much of a trade. If you did that up here, which is why in an ideal world this would be a smoother head and shoulders.

6:05:28But say we added to the left side, say we take this point over here, the 112. And then 112 plus 3.5 takes us to 115.8. So that would be our exit. So we would buy in at the neckline, which in this case, arguably I wouldn't pick that one because you wouldn't have had your pattern established fully. So I would draw this horizontal line across from what is essentially the neckline and trade here.

6:06:03So let me write that in for you just to make that really clear. So that neckline is sitting at 112. So you take the neckline, 112, and add the difference between top of head and top of shoulder. Or if inverse head and shoulders, basically bottom of head and bottom of shoulder difference.

6:06:54Just what we're looking at here. So I'm going to put that in here. You can maybe take a screenshot of that or something. That doesn't come out particularly well, does it? Why does it do that? Okay, so we're going to have to hit some of these in here so it makes a little bit more sense.

6:07:10So here is our explanation. Therefore what we have to do is take this line here at 112. And I'm going to put an arrow up here, so that 112. And let me get another one of these and write down, we're going to do 112 plus 3.5. So we're going to buy at 112 and sell at 112 plus 3.5, i.e. 115.5.

6:07:57And that will be our profit on this deal. And you might think well that's not the greatest profit in the world, but it serves to illustrate this purpose here. So we are selling at 112 plus 3.5, and 3.5 is the difference here between this top and the higher, or the lower shoulder in this case. And when would we get to 115.5? Well not any time that soon, but you will get there over here, you get to it up here, basically up here, 115.5. This here is our then exit. So this is where we exit the trade at.

6:08:47So we have made a nice profit. I mean not the greatest profit in the world, I grant you that, 2% or so. But that is essentially the conservative way of trading these. Now if you are of course particularly long and bullish on the stock rather than a speculative trader, you can use it as an entry signal and simply hold on to it. That is also of course a valid way of doing it.

6:09:09Now if you wanted to set a stop loss, there are two options really. If you are particularly cautious you'd set the stop loss at the shoulder low point, so this one I'm pointing at here. That can sometimes get you out of the trade, which it would have done here, you wouldn't have made any money at all. You can also set the stop loss at the top, or rather the bottom of the head in this case here, which is a little bit more risky. But here you have it. If this was a more perfect head and shoulders, then I think it would have been a more profitable trade. So therefore spotting patterns that are more perfect.

6:09:48Rather than more imperfect like this one, do tend to make you more money, but I hope this illustrates the point. And exactly the same applies of course if you do this upside down. So homework for you, find one of these patterns, look at the previous one we looked at or any other one, and write down where you would have bought and where you would have sold and perhaps also your stop losses. And that way you start to fully understand how this trade works.