I Read My First Book on Investing and This Is What I Learnt
A few months back I stumbled upon a book with a very attention-grabbing title. That book was “How to own the world” by Andrew Craig and after skimming the summary, I knew I had to read it. Before reading this book I had never read anything on personal finance or investing as it always seemed like a dry and arduous subject. However, this book definitely changed my perspective on the topic of investing and making your money work for you.
At its core, the book is about investing in a variety of assets around the world in order to build a pension pot. It explains the basics of investing and covers topics such as inflation, pensions and various types of investments.
I would definitely recommend the book to anyone and everyone who wants to understand investing but is a complete beginner at it. The book’s author is British, so a lot of the examples used in the book are targeted towards British people, however, the advice itself is applicable to anyone from anywhere.
If you want to get a snapshot of some of the things the book covers, below are the top things I took away from it.
Real Inflation
Real inflation is a lot higher than the inflation numbers quoted year on year by the government. This is evident in the stock market (pre-COVID), where the stock market index was the highest it had ever been. That sounds like a positive sign about the world’s economy, but it is not. Of course, the stock market index is higher now than it was 20 years ago; everything costs more than it did 20 years ago. The stock market index is simply a reflection of real inflation. Understanding true inflation is important as it will help you in your journey of “owning inflation”. It will make you realise how little you’re growing your money whilst you’re using either one of these common tactics:
- Not investing at all
- Using a savings account (with a pitiful interest rate)
This point was crystallised for me when I finally made the decision to switch from a cash ISA, that I had been holding for years, to a stocks and shares ISA.
On the day that I switched my cash ISA to a stocks and shares ISA I received a letter in the post from my bank telling me that they were changing their interest rates for cash ISAs to 0.1%. This was 2 months ago and at the time of writing this article, I am currently up 4.47% from my stocks and shares ISA. Imagine the money I’d be losing if I had kept my money in the cash ISA…
P/E ratio
The “price to earnings” ratio (P/E ratio) is, in simple terms, the cost to profit ratio. This, according to the book, is the most important thing you will ever learn about shares as it will help you understand whether a share price is cheap or expensive. Andrew Craig explains the P/E ratio in a really simple way in his book:
“If you buy a Tesco share, you pay £10 to own £1 of profit, but if you buy a Sainsbury’s share you are paying only £8 to own £1 of profit. The price of a Tesco share is ten times the earnings per share and the price of a Sainsbury’s share is eight times the earnings per share. […] All other things being equal, you can see that Sainsbury’s shares are ‘cheaper’ than Tesco shares.”
Pensions
If you’re in your 20s, like me, and you’re thinking that you don’t have to worry about your pension right now — think again. It is highly likely that by the time we retire, we will not be able to rely on a government pension.
The combination of people living longer, the cost of living steadily increasing and the government snowballing into debt all paint a pretty clear picture — the country will not be able to provide everyone with a sustainable pension. The only way to guarantee a pension is to start saving and investing now. And the earlier you start, the better, as this will allow you to save more over the years and use compound interest to your advantage.
“The average British adult has about £50,000 saved by retirement (that is around £25,000 for women and just over £73,000 for men according to pension provider Aegon). This is enough to buy them a pension income of about £2,500 a year at current annuity rates.”
The importance of investing
The reality is that if you do not do anything with your money now, it will lose its value. If you’re a British person reading this, I’m sure you’re aware of the largely discussed rise in the price of Freddos over the last 20 years. Take that as a trivial example of inflation and the impact it has on the value of your money/assets over time.
“Whether we like it or not, we live in a capitalist era. One of the fundamental truths of capitalism is that capital makes a great deal more money than labour; it should be pretty obvious to you that people who own businesses tend to make far more money than people who work for them. […] The great news — and what so few people realize — is that the stock market and other forms of investment are fundamentally just fantastic innovations that enable anyone to become a business owner — potentially of one of the best businesses in the world — almost no matter how little money they have to start with.”
De-risk your portfolio by diversifying
This is where the title of the book “How to own the world” comes from. By investing in a wide variety of assets around the world you diversify your portfolio and mitigate the risk as much as possible. You are also able to build your portfolio and then forget about it, which for people like me who have a full-time job (and side hustles), is ideal!
So far, I have personally invested in:
- A variety of index funds (FTSE 500, commodities etc.)
- International bond ETFs (government and corporate)
- Individual company shares (some of which I intend to keep for the long term and others just for the short term)
- Property
And there are investments/tactics I want to try my hand at:
- Spread betting
- Trading Forex
- Crypto
- Precious metals
I hope you found this useful as a very brief introduction into some of the concepts introduced in the book. As I mentioned, I would highly recommend reading “How to own the world” as I’m sure you will find it as useful and insightful as I did.
Good luck!
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