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Professor of Finance at the Fuqua School of Business, Duke University Cam Harvey joins WIRED to answer the internet's burning questions about investing.
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00:00I'm Cam Harvey, professor of finance at Duke University.
00:03I'm here today to answer your questions from the internet.
00:07This is investing support.
00:13A Reddit user asks, why doesn't everyone just stick with an index fund?
00:19Well, that's actually reasonably good advice.
00:23So it's really difficult for an individual investor to actually pick stocks.
00:30That takes a lot of effort, a lot of time, and you don't necessarily have access to the data.
00:36So for most investors, the easiest thing to do is to invest in a low-cost exchange-traded fund or
00:45an index fund.
00:46That gives diversification, and you don't need to worry about the individual stock that you're picking.
00:53Civil employee 4736 asks, is holding individual stocks worth the stress anymore?
01:00It is stressful, especially if you're only holding a few stocks, which is not advised.
01:07However, I actually recommend holding out a small amount of your portfolio, let's say 10%, to pick individual stocks.
01:17You're going to learn a lot from that, and you should keep track record of your investments, and it's also
01:24fun.
01:25Yad Killer G asks, why do so many people say that gold is a bad investment,
01:31while the returns are consistent and sometimes better than the S&P 500?
01:37Well, gold is a very interesting investment in that it's the oldest investment in history.
01:44We've held gold for millennia, and gold has got this safe haven status.
01:50So when there's market turmoil or economic turmoil, it tends to hold its value over the long term.
01:57But that said, gold is volatile, and most people don't realize that gold is about as volatile as the S
02:06&P 500.
02:08Gerth Ferguson 69 asks, if you had $20,000 today, how would you invest it?
02:14What I recommend is most of that investment goes into a combination of equity, meaning a diversified equity portfolio.
02:27Not just the U.S., but international as well as the U.S., and then some portion to a money
02:34market fund to earn the maximum yield, so a smaller portion.
02:38And then what I recommend is holding out some.
02:42So hold out 5% to 10%.
02:44And with that, invest in stocks that you've researched.
02:50Do the work.
02:51Actually follow them, collect information, and make investments.
02:55It is something that is valuable for you in terms of learning what's important for valuation of these stocks.
03:04And it's also important for you to measure the performance of your picks.
03:10Fire Tyrant asked the question, how much international allocation do you have in your portfolio?
03:16Most investors don't have enough international allocation, that their portfolio is dominated by U.S. investments.
03:27And it turns out that historically they've done fine because the U.S. has done really well.
03:34So if you think about today in terms of the overall value of stock markets, it's extraordinary that the U
03:42.S. stocks are worth 50% of the world value of all stocks.
03:50And let me put that number in context of GDP.
03:53So the U.S. is only 15% of world GDP, yet 50% of the value of all stocks.
04:03So it's a good idea to have some diversification where you're buying stocks outside of the U.S.
04:12So an exchange-traded fund that has allocation to the U.S. as well as other developed markets and emerging
04:21markets.
04:22So the simple answer to the question is 50% international, 50% U.S.
04:31Olive's 82 asks, what's the deal with the AI bubble?
04:35What are the implications and ramifications of an AI bubble burst?
04:40The value of stocks that are related to AI has exploded.
04:46Indeed, most of the value creation in the stock market over the last year is due to stocks that are
04:56related to AI.
04:58And it's a reasonable question.
05:00What if the AI bubble bursts?
05:03Is this 1999?
05:05And that was the year just before the tech bubble burst in 2000.
05:11So I argue that today is definitely different.
05:17And this talk of the AI bubble bursting, there might be a correction, but this time is sufficiently different that
05:24I think it's lower probability.
05:26So in particular, what are the differences?
05:30So number one, the technological disruption of AI is far different than the introduction of the Internet in the 1990s.
05:41Think of the Internet as something that allows you to collect information efficiently and it allows you to socialize.
05:49AI is completely different, AI not just collects information, it can be creative, it can solve problems.
05:58The implications for productivity are vast.
06:02So number two difference, the Internet in the late 1990s had really a differential effect.
06:08Some companies were really impacted, other companies were not.
06:12Well, with AI today, every company is impacted.
06:18Indeed, even within a company, there could be hundreds of different applications of AI.
06:25So this disruption is much more diversified.
06:28It touches everything.
06:31Number three is this idea of self-disruption.
06:35And this idea is a bit complex, and that is that companies today are more than willing to initiate projects
06:46that destroy or weaken parts of their existing business.
06:52So think of, I'll just give an example, Tesla.
06:57Many people think that Tesla is a car company.
06:59Tesla is not a car company.
07:02It is a robotics company.
07:03And they're more than willing to invest in technology to disrupt the business lines that are making them money.
07:11So the last point is the fundamentals of these companies.
07:17If you look back in the 1990s, people were betting on future earnings, that the earnings were not really growing
07:25that much.
07:26Whereas today, it's completely different.
07:29These firms are massively profitable.
07:32Four West of the Moon 4 asks, why does the P-E ratio matter to me as an investor?
07:41So the P-E ratio is a very popular way to think about the valuation of a stock.
07:50So the P is the stock price, and the E is the earnings per share.
07:56And there's often a second version of this, where you divide the price by the expected earnings rather than the
08:08past earnings.
08:09So both of these are common measures, and this is a measure of valuation.
08:15So the idea here is if the P-E is very high compared to, let's say, the stock's history,
08:24then there is a substantial probability that the stock price will revert to its previous P-E.
08:35So stocks that have very high P-E's are often called expensive, and stocks with very low P-E's are
08:45often called cheap.
08:46And we should be careful with these definitions, because a stock might have a very low P-E because it's
08:52in distress.
08:53It's not cheap.
08:54It's just in distress.
08:56But again, this is an indicator of valuation and very popular.
09:02Indeed, there is a P-E for the market as a whole, and that P-E for the S&P
09:07500 is very high.
09:09And when you look historically at the P-E and then look at returns for not the next year, but
09:18the next number of years, there is a very clear relationship.
09:23So when the market has a very high P-E, and this kind of makes sense, because with a very
09:31high P-E, this might indicate overvaluation or expensiveness.
09:36And there'll be a reversion to what is more normal.
09:41So the P-E is a very important indicator for the market as a whole and for individual securities.
09:55Well, there's a lot of people using AI tools for investing.
10:00One key thing in using any tool is to understand how it works.
10:06Those that are using AI tools are large institutional asset managers that have a team of people that are trained
10:16in artificial intelligence and machine learning.
10:19They know exactly what these programs are doing.
10:22They understand the implications, and they fine-tune the applications to a vast amount of data.
10:29So this is an application of AI that makes sense.
10:35Typical Broccoli325 asks, can the stock market really keep returning 7% a year?
10:44So 7% is the long-term average return on the S&P 500.
10:51And sometimes it's greater than 7%, like last year, and sometimes it's a lot less.
10:58And this is the notion of volatility.
11:00So the stock market is a volatile investment, and the 7% is a longer-term average of performance.
11:10So one mistake investors make is they invest in the market, it goes down, and then they bail out, and
11:17then they wait for the market to go up before buying in again.
11:21So in order to get this 7% over the longer term, you need to be in the market and
11:28to ride out these episodes where the stock market draws down.
11:33And if you do that, then this longer-term return is obtainable.
11:38It's not guaranteed, but it's obtainable.
11:41And really what this return is is two components.
11:44The 7% is composed of a real return and an inflation compensation.
11:51So if we think of inflation at 2%, which is the Fed's target, the return that you're getting, the real
11:59return after inflation, is about 5%.
12:04Doom Shallot asks, what percentage of your portfolio should be in crypto?
12:10So number one, crypto is a very broad category.
12:15So there are cryptos like Bitcoin that are not backed by anything.
12:21They have value because people believe they have value.
12:25And then there's another class of cryptos that are actually backed by something.
12:32So think of a stablecoin that's backed by U.S. dollars or a tokenized version of gold.
12:41In terms of your portfolio, I would be careful.
12:44It's a big mistake, in my opinion, just to invest in crypto.
12:50I'm okay having some exposure to crypto.
12:53But this is not the type of investment that warrants, for example, a 10% of your portfolio.
13:00It's more on the side of like 2% to 4%.
13:04And be careful when you do that.
13:06So SuccessfulWar5671 asks the question, what's one investing mistake beginners always repeat?
13:15That one's easy.
13:16So the biggest mistake that beginner investors make, and I hate to say even non-beginners,
13:24is this idea of buying high and selling low.
13:29So let me unpack that.
13:30The best strategy, of course, is to buy something when the price is low, and then sell it when
13:38the price is high.
13:39Make a profit.
13:40But it's often the case that a stock goes up in value, it attains a lofty valuation, and
13:48then people buy it.
13:50Because they've seen that the price has gone up.
13:53And when you buy high, you're often disappointed.
13:57Because at that very high valuation, that's the point where people are giving it a second
14:04thought.
14:04And there could be a correction.
14:06Scrum Julios asks, does the brokerage I use matter?
14:11Brokerage definitely matters.
14:13And it really depends upon the investor's needs.
14:18So, for example, if you're younger, it's probably best to use a very low-cost broker.
14:25For example, Robinhood or Schwab.
14:29And this allows you access to stocks and trading and different products like exchange-traded funds
14:35at extremely low fees.
14:38However, for more mature investors, and in particular investors that are older in age, like me, you
14:47go to a broker that is much more expensive in terms of fees.
14:52And they charge, let's say, a half a percent to one percent fixed per year.
14:59But they offer other services.
15:02So you might need some legal advice on an investment.
15:05You might need advice for the planning of your estate.
15:11And they provide services like this for you as part of the deal.
15:16And it turns out that that can be very valuable.
15:19So helpful reason 5782 asks, what's your process for researching a new stock you might invest in?
15:27So number one, I recommend investing most of your funds in a diversified index fund.
15:35But I also advocate holding part of your portfolio for individual stocks that you pick.
15:42And let me describe my process.
15:45So number one, I'm looking at the news very carefully.
15:49But in particular, a company and all of its news, whether it's in the main media or the information that
15:59it releases.
16:00So look at its annual report, its quarterly releases, the 10K filing with the SEC.
16:08And what I also look at is analyst coverage, if that's available.
16:14So there's many people out there commenting on individual companies.
16:18Collect that information.
16:20And then one thing that I particularly like is the quarterly earnings call.
16:28So this is a situation where the company announces its earnings and takes unscripted questions from the audience.
16:37So this is not responses that are vetted by lawyers or anything like that.
16:45And we know that all of the official company materials, like the 10K, have been very carefully vetted by a
16:53legal team.
16:54The next thing is to look at the fundamentals of the company.
16:58So just because the company has gone up in value, that's not a sufficient reason to invest in that company.
17:07Indeed, it might be the opposite.
17:09It might be that the price has gone up so dramatically that you've missed the boat.
17:14And you need to step back and exercise restraint and avoid this company until there's a correction in the value.
17:24And when the value corrects, then you actually enter and buy.
17:29So CharmingJury8688 asked the question,
17:33Is there a way for an average Joe like me to participate in private equity companies?
17:40I wish.
17:41So there are so many exciting companies out there that are not available to the average investor.
17:49Think of SpaceX, for an example.
17:52So you can't buy into that company.
17:54You need to be what's known as a qualified investor.
17:59So in the U.S., to be a qualified investor, you need to make a certain amount of money.
18:05So even though you might be quite knowledgeable, you might not be allowed to buy into the equity of companies
18:12that are not listed on an exchange.
18:15And that's the definition of non-public equity, or sometimes people call it private equity.
18:22So private companies, they have equity.
18:25So often what happens with these private companies is at some point they do an initial public offering,
18:32and that private equity turns into public equity.
18:36And this is unfortunate.
18:38And let me give you a very tangible example.
18:40You've got somebody that has got an advanced degree in biology, and they decided not to go to the university
18:48route,
18:49but they're a high school biology teacher.
18:51And as a hobby, they're an expert in biotech.
18:55That's a flaw with our system.
18:58It should change.
18:59So to be qualified, in terms of the way I think about it, you should be able to do your
19:05research and pass a test or something like that to be deemed qualified.
19:11And these companies should be made available to a broader set of investors.
19:16It's just not fair that only those that are rich get to invest in these very exciting stocks.
19:24User just another f*** boy has got the following question.
19:30Are people really making money with meme coins?
19:33Okay, so meme coin is a type of cryptocurrency.
19:35It's got no fundamental value, meaning it's not backed by anything.
19:42It's more traded for fun, like trading cards and things like that.
19:48These meme coins are extremely volatile.
19:50So if you think the stock market is volatile, these are 20 to 100 times more volatile than the stock
19:59market.
19:59So that means extreme moves up, extreme moves down.
20:03There's no evidence that I know that a portfolio of meme coins makes any money.
20:10So you might get lucky, and the meme coin that you buy goes dramatically up in value.
20:16But more likely, you lose everything.
20:19So if you're going to invest in a meme coin, make sure when you put your money in, that you're
20:27fully prepared to lose 100% of those funds.
20:32Double A plus Ron has got the question, my company gave me stock options.
20:38How do they work?
20:39So options provide the awardee, the employee, the right to buy the stock in the future at a particular price.
20:51So this is a call option, and it's very long dated.
20:56So think of the following situation where the stock is trading at $90, and then the employee gets some options
21:04to buy the stock in five years at the price of $400.
21:09So the price today is $90.
21:12It's way, way lower than the $400.
21:15But you never know what happens in the five years.
21:20So maybe the price of the stock goes up to $1,000.
21:26So now the employee's got the right to buy stock for $400, and then they can sell it immediately for
21:35$1,000.
21:36So that's worth $600.
21:38Companies do this.
21:39It's a way to compensate employees.
21:42It's also a way to retain employees, where your stock that you've got the right to buy, you need to
21:51be like an employee to actually do it.
21:54So people tend to stick around.
21:56So this is a popular way to retain employees.
21:59And it's also kind of cheap for the company in terms of cash flow.
22:05So again, this is popular.
22:07It aligns incentives.
22:09So the employee actually wants to do everything possible to make sure the stock is worth as much as possible,
22:19ideally the $1,000, because that's when they're going to get the big payday.
22:25Electronic doctor asks, potentially obvious question, but is mad money just insider trading?
22:31Well, insider trading's got a very specific meaning.
22:35And obviously, you should do everything possible to avoid being tempted by insider trading.
22:44So insider trading is when you've got some non-public information.
22:49So somebody has tipped you about a big deal that the company is making, or you've got somebody that tips
22:56you about results of a clinical trial.
22:59This is not stuff to use for trading.
23:01It's unfair, unethical, and illegal.
23:05However, stuff that's on TV, or video, or on the internet, that's public information.
23:11So they could be talking up a stock.
23:13And sometimes people take that advice, buy the stock, and the price goes up because people are buying.
23:19This is especially the case with very small stocks where there's not that much trading, and a sufficient number of
23:26buyers could dramatically drive the price up for a while.
23:31So just taking advice from some pundit or on the internet, in forums, stuff like that is fine.
23:41It's where you get information from an insider of the company, and trade upon that.
23:49That will get you into trouble.
23:51So Sisted Wister asks, why is day trading considered so hard?
23:56So day trading is hard to make money off of for the average investor.
24:03So day trading is essentially buying and selling the stocks every day, trying to capitalize on trends or things like
24:12that.
24:12And it's really hard to make money because there are competitors that are doing this at institutional-grade scale.
24:21So these are the hedge funds, the high-frequency traders, that have massive computing resources, data feeds that are incredibly
24:33fast, software that they've developed on their own with their team of engineers.
24:40This is very difficult to trade against, and that's your competition.
24:45So the day traders don't make money because, effectively, they're trading against these high-powered institutional traders.
24:54So day trading is something I definitely do not recommend.
24:58So Jana DD126 asks, what exactly is a hedge fund, and what does a hedge fund manager do?
25:06So there are many different types of hedge funds, different styles.
25:11Let me describe the most common style, and this is an equity hedge fund that has got part of their
25:22portfolio where they buy stocks and another part of their portfolio where they short or sell a group of stocks.
25:30So this is different than our portfolios where we're just buying and holding.
25:35So they've got that also, but they're buying the stocks they think will be winners, and then they're selling, which
25:42means if the stock goes down in value, they profit, the stocks that they think will be losers.
25:48And it's called a hedge fund because they are hedged against market-wide movements.
25:55So let me give you an example.
25:57Suppose the market drops by 20%, and if we're just in our index fund, we're going to lose 20%.
26:05So for this hedge fund, they've got a long portion, the stocks that they buy, and suppose that those stocks
26:14lost 20%, so just like the market.
26:16And then the stocks that they're selling, suppose those stocks dropped by 30%.
26:22Well, with the short side, it means the hedge fund profited plus 30%.
26:28So on one side of the portfolio, they lost 20%, the other side, they gained 30%, so overall, they're up
26:3510%.
26:35So even though the market tanked by 20%, this hedging of having both a long side and a short side,
26:43they make money.
26:44So relatively immune to overall market movements.
26:49Thank you for all the questions.
26:51I really appreciated them.
26:53Keep them coming.
26:54Until next time, I'm Cam Harvey.
26:57We'll see you next time.
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