I got a very touching email a couple of days ago from a secondary school teacher, and I’m going to read it out to you, and then I’m going to give you some pieces of experience and advice based upon it.
Dear Alpesh Patel, I’m writing to you as a secondary school teacher of economics and mathematics who formally worked in finance. The older pupils are running investment lessons for the younger pupils to help them understand about financial literacy. One problem which we face is helping all young people engage in financial planning and speculation responsibly so that their purchasing of financial assets does not lead to a deterioration of their mental health, gambling, and addiction. We were wondering if you would be willing to speak for one or two minutes on the dangers of speculating and red flags to watch out for and how to do it safely. It would be very helpful if this was targeted at younger participants if you might be willing to post a short video on your YouTube channel. I hope this request aligns with your vision and values. One of my very close friends has experienced a meaningful improvement in his mental health from adopting your framework. We would really appreciate your help, and currently arrange virtual talks with a number of local schools with speakers across from many disciplines. Any help you could offer would also align with the government requirement to teach personal, social and health education to all pupils in the UK.
Absolutely, I am more than happy to do this, and I hope this will be shared widely amongst other schools as well. I started investing when I was 12 years old, so I was very much at school. The reason I did it is because I wanted to try and improve my family’s financial situation; you might argue you’re somewhat naïve at 12 and over-ambitious. So be it.
Importance of Responsible Investing
Let’s talk about those issues of responsibility, addiction, and gambling, Currently; if you look on TikTok or the internet, you see stories of people, thanks to crypto, to bragging about how much they’ve made. Okay. So it makes young people think, “Well listen, mate, I’m not going to take your boring advice about pensions and saving for the future and how much I could have when I retire in 50 years. My generation wants our money now, and we can get it. And old people like you, Mr. Patel, are stopping us from getting it.”
Well, not so. Okay. And then you’ve got a whole bunch of people, and by the way, it’s always a different thing at different times, today it’s crypto, ten years ago it was spread betting and CFDs, the same story, “Look how I made millions,” and ten years before that it was penny shares and so on.
Pitfalls of Speculation and Gambling
So trust me, every generation has its sort of magic wand. And of course, every Saturday on TV, you see the lottery, and you see somebody say, “Oh look, I won 14 million.” Does that make you all want to do it? Well, that’s quick money, go away and do the lottery: same thing, big gains, minuscule probability. So the first thing I want to say about this whole gambling issue that happens and differentiate it from investing is this. If you’ve got risk capital, casino money, or throw away money that you might use when you go to Vegas, feel free but at least know that that’s what you’re doing, that you are getting ready to throw it away.
Let me give you the other extreme of what happens when somebody does that. I was asked several years ago to be an expert witness in a court case where a man was being prosecuted. Prosecuted because he had made himself bankrupt through trading, and you might not know this, but it’s a criminal offense to become bankrupt recklessly.
So the court had asked me as an expert witness, “Did this man actually have a strategy which just happened to go wrong? Or was he being reckless?” Because being reckless and going bankrupt, that’s a criminal offense, and he could have gone to prison. Got it? And you might say, “Oh, but stop trying to… You’re boring. Stop trying to scare us with that extreme.” Mental health, addiction, gambling. Okay. I’ve lost a little bit; I’m going to try and make it back from that.
Mental Health and Investing
Those books, the very first one was called Mind of a Trader, my very first book published by the Financial Times. It wasn’t called How to Make Lots of Money Trading; it wasn’t called Get Rich Quick: Trade. It was about the mind, the psychology. So I’m afraid it is linked, and we realize more and more, our financial wellbeing is linked to our mental health.
There are statistics out there thanks to a broker called Brewin Dolphin; I’m not affiliated to them, who said the number of people who now have sleepless nights because of financial concerns. You might say, “Well, but surely then the answer is to gamble and speculate.” No, if you want to gamble and speculate, go Ladbrokes; at least you’ll know I’m gambling and speculating. The stock market’s not the place to do it; crypto’s not the place to do it.
Now I’ve done experiments where I randomly picked some crypto coins, and lo and behold, some of them went up, some of them went down, but it was with risk capital I could throw away if you’ve got my kind of money to throw away good luck. I suspect if you’re at school, you don’t. What will hold you in far, far, far better stead as it did me, and I’m a hedge fund manager, now is learning well actually let’s get rid of the trading and the gambling part?
What is Investing?
Let’s look at what investing is. What makes a good company and a good business? The great thing about that education is, as Bill Ackman, the multi-billion dollar hedge fund manager, said is, “You’ll learn business.”
So whether you go into business yourself or work for an employer, you’ll be more valuable because you’ll understand business. You’re going to do one of two things – either you’re going to work for an employer, or you’re going to be in business yourself.
More importantly, it’ll teach you how to be a better investor, make more of your pensions. So you’ll learn about valuation, cash flow, profitability, sales growth, those kinds of things you hear about occasionally on Dragons Den, and laugh at the people because they haven’t even worked out how to do it properly. Those things will be invaluable.
And then you might say, “Well, okay, Alpesh fine. Isn’t all investing speculative and gambling?” Yes, compared to a bank account, all investing is risky. All investing is risky, full stop. A bank account is safe.
Do Your Research and Keep Learning
So what’s the safest stock that I can think of? You might argue the toss on this, but let’s say Microsoft is the safest company I can think of in the world, in the sense I’m going to go bankrupt on it, it’s fairly growing at the moment and so on, and you might argue “No, no, no, no. Something else is safer.” I’m talking about volatility, and I’m talking about just what they do and all the rest of it. And so assume for a moment it’s the safest, I want you to look on the internet at their share price.
Okay yes. You’ll all focus on how it’s doubled and tripled over several years. I don’t want you to look at that. I want you to look at how it’s fallen and when it fell. So during COVID within a month it fell about 20%. If that’s going to cause you to panic, it teaches you something about yourself, which is what investing is about. Teach you about yourself, how much risk you’re willing to take? Whether that’s right for you? So that’s an important lesson, look at that and see, okay, that’s worse.
Look at The Upside and Downside While Investing
So all these terms people talk about, about risk, volatility, investing, learn what they mean by looking at things and saying, “Well actually that means if it drops I’m going to be potentially in trouble. But then again, if I hold onto it because it was a good quality company, I see how I get out of that, and that’s not too bad, but am I willing to hold over that period? Could I take that roller coaster ride?”
Don’t just look at the upside; look at the downside, look at whether or not it’s suitable to your circumstances to take that risk. Like I said, if your mom and dad are billionaires and they tell you, “Little Johnny, little Jane, here’s a load of money just throw it away, go burn it.” I suggest you might want to do some social impacts. Give it to homeless people rather than try and give it to rich fund managers and stockbrokers on the internet in any event. Because if you’ve got that kind of throwaway money, you’re set for life anyway.
So don’t gamble. It’s just rude; basically, it’s immoral when you’ve got that kind of money just to gamble. But if you haven’t got that kind of crazy throwaway money, then you don’t want to gamble either because you haven’t got throw away money.
Things To Look At While Investing
You’d want to look at what does investing mean? What does it mean to buy? Which are the quality companies? What does valuation, growth, cash flow mean? How long should your holding period be? Why might I not want to give it to a fund manager? Why might I want to give it to a fund manager? What are the pros and cons?
All of these life skills will hold you for the rest of your life. If in the first blushes of youth you’ve got the arrogance and confidence to say, “Nah, it’s just an old bloke trying to make me not get rich. I can go into any crypto.” Let’s work out how that story ends then. Let’s say you throw some money at crypto or a penny stock or Swedish kronor against the Australian dollar. There are lots of things out there.
Let’s say one of two things happens. You make some money because you can only either make or lose. You make some money, then what do you do? Do you stop? No, of course, you don’t. Then you think to yourself, “Oh, I might be good at this.” So you do it again. You’ve got to keep getting that right. Do you know when that game stops? When you don’t get it right. So you had a bit of beginner’s luck; it’s like tossing a coin. You can go up heads or tails 50-50; you get a string of heads, so you start thinking you’re the world’s greatest coin tosser. So learn about that. Learn about the fact that there’s a difference between consistency, and quality, and skill, and randomness, and the ability to be fooled by randomness is quite a common problem. So there’s a lot of things to learn about.
Life Skills You Can Learn
Here you’re going to be learning about statistics, business, entrepreneurship when you’re investing, great life skills. You’re going to be learning about logic, about rationality, about how people are so easily fooled by chance. So you’re going to have to learn critical thinking skills, all amazing, all from looking at what it is to invest.
So I’m all for financial literacy because people so often get it wrong, and it costs them money. Either they get it wrong, they invest, and it costs them money, or they don’t invest where they should have done, and they think they’re going to be the hare that’s going to win the race. I tell you in my life of experience in this industry, and I’ve got 18 books to prove it, and I’ve got an asset management company to prove it, and I’ve got some letters after my name to prove it as well, it’s always the tortoise that wins the hare looks like they’re getting ahead.
The sexy thing moving ahead, giving those great returns and they love bragging about it, so don’t forget hares are loud, right? It’s the quiet tortoise that ends up winning over the long term. That just put a little bit away and went into what people thought were boring companies; they just made it. Yeah, you’ll hear about the lottery winner on a Saturday night on BBC TV as they talk about the next person who’s won 14 million to try and get you to play the lottery, of course, you will. Of course, you’ll keep hearing about that. Don’t be fooled.
If everybody could make money playing the lottery, everybody would be playing the lottery and have gotten rich by now. It doesn’t happen, does it? Do you know any lottery winners? I don’t. They’ve been doing it for about 25 years; you would’ve thought the same with crypto, okay.
There’s a lot of people talking and bragging about a lot of stuff that aren’t making it. Anyway, hopefully, some of that was very, very useful. And to all of you, bottom line, listen, play the sensible long game. The world needs more people who can add value rather than ones who just want to speculate and be risky gamblers and are dangerous to themselves and eventually to society.
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Alpesh Patel OBE