Learning About Money
This is part two of a series I'm doing on how I wiped out my student loans.
In part one I gave you my situation coming out of college and talked about how I saved money.
The thing is, saving money is only one piece of the puzzle.
Getting Into Stocks
Now that I was saving a piece of what I was earning every paycheck, I started looking at different ways to put it to work.
I decided to go with stocks because I didn't have a lot of money to invest.
Something like real estate is a great long term investment, but in order to avoid paying mortgage insurance you need to put 20% down for the loan. I just didn't have the cash to do that.
Stocks on the other hand were much easier to get into. I only needed $2,000 to fund my TD Ameritrade account.
When I first started off I had a mentor to bounce ideas off of. In the beginning a lot of my ideas were heavily influenced by him.
The next part is going to sound cheesy but it's absolutely what happened.
Finding My Own Strategy
The 2008 financial crisis hit when I was 15, just when I was starting to really open my eyes to how the world worked. It affected my world-view a lot.
One day I was on a flight home from somewhere and I was looking for a movie to watch. I decided to just watch The Big Short.
After watching that movie I wondered how they saw it coming, so I decided to look up how they did it.
As soon as I got home, I looked up Dr. Michael Burry and got introduced to the idea of value investing.
The TL;DR of value investing is you bet based on what the asset you're looking at is actually worth. I'm not going to get into it here because what's important for this post is that I came up with my own strategy, not what the strategy was. I think everybody needs to come up with their own strategy that works for them.
In 2008, Dr. Burry saw mortgages were worth nothing close to what banks were reselling them for, so he made a bet with those banks that the prices of the mortgages would fall, and he was right. He made a killing.
It doesn't take a lot of Googling to find out that Warren Buffett is a value investor. After Googling him, I found his two mentors, Benjamin Graham and Phil Fisher.
Benjamin Graham is the guy people talk about most often because he invented value investing when he wrote The Intelligent Investor. It's the first book on investing I ever read.
It really resonated with me because if 2008 taught me anything, it's that Wall Street is full of shit.
It's a bit old though, so I started looking at other places to try and learn how to actually value a business.
The sidebar at r/SecurityAnalysis had a lot of resources I used to learn more about valuation. There I learned about things like discounted cash flow models.
The thing is, the more I dug into valuation, the more I realized it was more art than science. It felt like I was missing something.
At around that time, I remembered Warren Buffett had another mentor. His name was Philip Fisher.
He wrote a book about investing called Common Stocks and Uncommon Profits.
If there was ever someone who thought the complete opposite of Benjamin Graham it was Fisher.
His strategy was to completely ignore value. The only thing he cared about was quality.
This book had some answers for me. When I started using my value strategy, I noticed a lot of the things I wanted to buy were things that weren't necessarily great businesses.
I couldn't really understand the value of a great business because I was so rigid in how I looked at the financial statements.
In this book, Fisher talks about how he finds good businesses, and he never says anything about value. (Actually, he does. He says it's pointless to think about.)
It was the missing piece for me.
Even though these two philosophies seem like they are completely opposed to each other they actually have worked well together.
By investing using both of their ideas, I was able to grow my savings enough to pay off my loans two years after I graduated from college.
The Moment of Truth
A year after reaching my goal, I made my last payment.
You might be scratching your head wondering why I didn't pay them off right away. After all, the point of this series is to pay off the loans!
The reason why I didn't just sell right away is because investing is a game of percentages.
For example, let's say you want to make $2000 in a month of investing. If you have $2000 to invest, you have to make a 100% return on your investment in that month. It's pretty much impossible to do once, let alone month after month.
However, if you start off with $20,000, now you only need to make 10% in that month. Still hard, but much more possible.
If you start off with $200,000, you only need to make 1% in that month. A lot of stocks go up more than that in a single day.
My investments were growing much faster than my debt because not only was I adding to them over time, I was taking any profits and reinvesting them. The more money I had invested, the easier it was to make more money.
Meanwhile, my debt was growing because of the interest rate, but at a much slower pace.
If I would have gotten out when I earned enough money to pay off the debt, I would have had to start investing from $0 again, but based on the math I saw that the more money I had invested, the more money I could make with less work. I could theoretically grow my investment to 100 times what I owed and pay off my loans with one day's gains.
At the same time, I had just proposed to my wife, and I knew wedding related expenses were coming. I wanted to have enough to help out with that, still have some money invested, and still have some savings in the bank.
So, I stayed invested for another year, kept my investments growing, and finally when I got back from our honeymoon I looked at our financial situation and decided to pay off all the loans completely.
I get it though. Things are different now. After all, we're in the middle of a pandemic. Next time I'll write about what I would do differently if I were to start now, knowing what I learned from my own experiences.