Economics and Investing

I became interested in economics years ago when I started saving for our kids education, and for retirement for my wife and I. Once you venture beyond the savings account in your local bank the world can be a scary place, and I wanted to understand how it works.

Little did I know that economists are still trying to figure that out.

That doesn’t mean there aren’t things you can learn that will help. There certainly are, and as with most things the more good knowledge you have the better off you will be. Whether you choose to use an investment advisor or venture out on your own, good knowledge can help save you from disaster.

There are a lot of people out there who would like to separate you from your money. Unfortunately some of them write books with titles like “How To Get Rich Quick” (hint: they are trying to get rich quick by selling these books). There is a lot of both good and bad information and learning to know the difference is critical.

Before you decide where to put your hard-earned savings, here are my suggestions.

First, for an introduction to economics and to learn the terminology, my recommendation is to start by reading Economics 101.

Next you need to decide what kind of investor you want to be. Do you like spending time researching companies? Does the idea of reading financial reports appeal to you? Be honest, I would say that most people would say “no”. If that applies to you, then your best bet would be to invest in low-cost mutual funds. I prefer Vanguard funds for this purpose as they tend to have the lowest fees.

You could also turn over your life savings to an investment advisor. Understand that it is very easy for these folks to make more money if they invest in their best interest rather than yours. It takes someone with outstanding integrity to keep your interest above theirs, and if they work for a big investment firm they may not be able to do this even if they want to.

If you do decide that you want to manage a portfolio of individual investments, I recommend a value-oriented approach. Start by reading Value Investing From Graham To Buffett And Beyond. This is the best introduction and approach to value investing that I have seen. If that catches your interest then you may want to read The Intelligent Investor. This is the book that started Warren Buffett on his very successful career in investing many years ago. Although the book was originally published in 1949, the basic principles still apply and it will give you a good foundation on where value investing came from.

Now you’ll probably be excited about rushing out and picking some great stocks. Before you do, understand the risks involved.

1. Read What I Learned Losing A Million Dollars to learn how to create a plan and avoid common mistakes.
2. To understand why the markets are more risky than shown by traditional analysis, read The (Mis)behavior of Markets.
3. If you want to go farther with this, and enjoy a more storytelling and irreverent style, read The Black Swan

I think it also helps to understand the environment you are investing in. Even though you can’t predict where the market will go next, you can learn from history and that helps put things in context.

If you want to know why the economy goes up and down, you’ll find Ray Dalio’s explanation in this video.

Ray’s video is very useful and describes a lot about how things work. Unfortunately his economic machine has one thing that is not controlled: People. If everyone behaved like machines as shown in Ray’s video, borrowing and spending as much as they can, then the economy would be fairly easy to predict. In reality people do not always behave rationally and are influenced by a wide variety of things. This has led to something called Behavioral Economics. Robert Shiller of Yale is possibly the most famous proponent of Behavioral Economics. You can watch his lecture on this subject in this video. He may not be the most compelling speaker but he has definitely put a lot of careful thought into this.

Finally, world events can have a large effect on the economy as we have seen with the COVID-19 coronavirus pandemic. These events are often hard or impossible to predict.

One last word of advice from me: Invest in yourself first. Invest in those things that can make you better at whatever you do – training, education, experience, and good advice are some examples. You are your best asset, and being good at what you do brings rewards that go far beyond the economic benefit.