Busting Common Investing Myths – A Tweetup With Motley Fool’s Tom Gardner and ShareBuilder’s Dan Greenshields

A little while back I had the pleasure of attending a Tweetup at the NYC ING Direct Cafe hosted by Sharebuilder‘s president Dan Greenshields with special guest speaker Tom Gardner, CEO of The Motley Fool.

For those wondering what a Tweetup is, it’s basically an organized meeting of sorts over the social site Twitter.  The meeting was held at the ING Cafe and people from all over could follow along and participate via Twitter.

The premise of the Tweetup was to help investors bust common investing myths and take the complexities out of investing.

I tried to takes notes as best I could so I could pass them along to you.  Keep in my I’m paraphrasing here and some of the words are mine, but I think you’ll get the general ideas of what was being said.

To start, Tom Gardner talked about four basic investing rules we should all follow (this is just part of his full list of rules):

1) Start as early as possible.

In order to get the most out of compounding we should start as soon as we can.  You don’t need a large amount to start investing; you can start with a small amount [Me: especially with an online brokerage like Sharebuilder!].  As you move along in your career your salary will go up but we don’t always use that extra money to invest.  It’s better to put something away early towards investing.  If you’re under 30, you’re investing risk is lower since you have more time to make up any losses.  You may find, when you start investing, that the amounts are small but over time your investments will start to curve upward and grow exponentially.

2) Invest in businesses not stocks.

When we listen to friends and family about what stocks tips to follow, they tend to mention obscure companies that you may not know much about.  It’s hard to understand why you should invest in them and if they are good companies.  It’s better to look at the things you use and the places you shop for investing ideas.  Ask yourself where you spend your time.  These are places and things you know something about and have a real experience about the company.  Then you can ask yourself – Why do these companies succeed?  You will have a better understanding of why a company may be a good investment when you know their services and products.

3) Have a time horizon to give your investments a chance to succeed.

On average, investors hold onto a stock for about 120 days.  It’s absurd to expect good returns over such a small time frame.  The real value in stocks is over a longer time period.  You should aim for a time horizon of at least three years.  In doing this you will be better off than 90% of investors.  With a short time-frame you aren’t giving the company a chance to grow.  Many stocks that go down in the short-run will make gains over a longer time-frame.

People tend to watch the news or investing programs to see where they should put their money.  The problem is, these shows give you stocks for right now and change their minds often.  See, it’s boring to have a show with a long-term portfolio so they alwasy have to show you something new to look into.  As a result, many who watch these programs misunderstand investing and think it’s good to jump in and out of companies.  Stick to a long-term investing horizon.

4) Start with a passive index fund.

The Motley Fool has articles and newsletters that talk about all sorts of different stocks to invest in.  Yet their CEO says the best place to start is with passive index funds.  In this way, an investor can invest across an entire industry or market with a low expense.  For example, with one fund you can invest in all U.S stocks.

Passive index funds are tax efficient since the stocks in the funds aren’t turning over all the time (that is, being bought and sold).  The average managed fund has 100% turnover in a year and this becomes less tax efficient.  An index fund basically buys and holds the stocks in its fund.  It’s easy for a beginning investor to buy one or a few passive index funds for low cost with an online brokerage.

An index fund also acts as your scorecard or your baseline for returns.  If you can’t figure out what individual stocks to pick to beat the market average then you might as well invest in the market average with an index fund.

At this point Dan Greenshields added that it takes very little to start investing. I believe he said that Warren Buffet started investing with one thousand dollars (and that seemed to work out pretty decent).  Investing is a slow process and isn’t a sprint.

After this, Tom fielded questions from the audience, both in attendance and over Twitter. I’ll go over some of the concepts that were talked about:

What to read?

• The Motley Fool (would you expect a different site?)
• One Up on Wall Street by Peter Lynch
• Buffett: The Making of an American Capitalist by Roger Lowenstien

What about diversification (asked to Tom by Dan)?

• More time you have investing, the more comfortable you can be with a smaller portfolio.
• 25-50 stocks should be a good size portfolio.
• With a small portfolio it’s tough to not be emotional when a stock goes down or up a lot.  More stocks in the portfolio help to level out your emotions which reduces the temptation to sell too early (both stocks that have gone up as well as gone down).
• Make sure you diversify across industries.
• One of the biggest reasons Buffett is so successful is because he is good at managing his emotions.

How to not be overwhelmed investing…

• Invest in passive index funds.
• When talking to friends on Wall Street, Tom found that the brokers had to sell managed funds to make a living but they themselves tended to invest in index funds.
• If you need to, work with a fee-only planner rather than a commission-based financial planner.  Better to pay someone $100-200/hour than deal with someone who has a financial incentive to sell you certain funds.
• Everyone should own at least one stock.
• You should buy a stock for your child.  Kids have a great nose as consumers.

What to do when a stock goes up a lot?

• Remove past performance from the equation.
• Look at the company from a single point in time, now.
• Read up about the company.  Does the company have a good culture with it’s employees?  If it’s a great company you may not need to be concerned about selling when the price goes up.

Tom also discussed what to look for in a good company:

• Evaluate the company’s culture and people rather than look to the price of the company.
• Find CEO’s that believe int eh products.
• See if the employees think the company is a great place to work.
• Do you shop there yourself?  Do you like the product?
• Did the CEO found the company and is still there?
• A good company has a CEO who, though is very rich, still comes to work every day and has his reputation on the line.

What about investing in emerging markets?

• Investors should have more international exposure in general.
• Do research on the country you want to invest in.  Make sure you understand the standards, laws, and accounting practices that are in place.
• Also understand a country’s political risk.
• When in doubt, invest with an index fund.
• It’s pretty smart to invest in China these days.

There were other questions asked but I listed most of the basic general ones that were talked about.

After the Tweetup, there was an informal meet-and-greet where Tom and Dan (see how I’m good friends with them already that I call them by their first names?) answered questions from the audience and chatted.  I got to meet both of them and talk to them (and hand them my business card for the site).

I was really impressed with how approachable they both were and easy it was to talk to them.  Dan was friendly, laid-back, and answered questions in a relaxed manner.  I guess I expected the president of an online brokerage to be constantly checking his Blackberry but that wasn’t the case at all.

I’ll admit, I was nervous approaching Tom Gardner. Back in the day when I was still neck-deep in credit card debt, The Motley Fool was one of the first sites I found that talked about money and gave advice on what to do with your finances.  There was literally a time where I visited the site every day and went through the archives taking in all the wisdom I could!  I used the Motley Fool’s steps to Buying a Car to help me research and save money when I bought my first car.  I let Tom know this and also told him how his site helped me with my personal finances and helped me to a position to create Free From Broke.

In all, I had a great time! I got to meet and talk to both Tom Gardner and Dan Greenshields and I learned a bit about investing as well as reinforced some concepts I already learned.

ING has been hosting these seminars and meetings around their ING cafe locations around the country.  They only have seven locations but if one is in your city you should definitely try to make one!

What do you think of Tom Gardner’s investing advice?