You do not need to be a Financial Analyst to obtain Financial Security

By, Bob Peters || August 16, 2021

Financial Security requires growing your Net Worth.  Growing your Net Worth is done by spending less than you make and wisely investing the difference as early in your life as possible.  You do not need to be a Financial Analyst to be a successful investor but just don’t pick individual stocks. 

The Goal of Investing and the difference between listening to music and composing music (Part 1) 

What is the goal of investing?  To achieve financial security by growing your net worth so that at some point later in life you do not need to have a job to earn income to support your needs and wants.   

At some point in your later life, you will not be able to earn a paycheck or you may choose to not work.  Look at your grandparents who have retired or people who have accidents or other disabilities that prevent them from working.  If these people were not able to build a net worth to support themselves when they could no longer earn an income, they would be subject to financial insecurity and consequences that often accompany financial insecurity, poor physical and mental health. 

To illustrate let’s use music as an analogy for investing.  I think it’s almost a universal human condition that just about everyone enjoys music.  I have yet to meet someone who does not like some genre of music.  The number of people who enjoy music vastly outnumber the people that play music, the number of people that play music vastly outnumber the people that write music and the number of people that write music for a single instrument vastly outnumber the number of people that compose symphonies.   Just because a person does not play music, just because a person does not write music and just because a person does not compose symphonies doesn’t mean that they can’t enjoy music. 

Now that we have the music analogy laid out…let’s look at investing.  Everyone can be an investor (just like everyone can enjoy listening to music).  Anyone today can purchase a very small piece of every publicly traded company.  If you have not studied finance or accounting, if you can’t read financial statements, if you are not an industry expert to understand if a company has a competitive advantage, you can still be an investor.  Now, if you want to pick individual companies you had best learn how to play, write and compose music…not just listen to music. 

What is Accounting and Finance…hint, it’s learning how to play, write and compose music? 

The path to financial security is growing your net worth.  Growing your net worth is earning income that is more than your expenses (including loan repayments) and investing wisely the leftover earnings. If you start young and do this every month, you will have a good chance of having achieved financial security later in life. 

The investing wisely part of this is fortunately about some basic knowledge and, most importantly, learning how your human brain processes fear and greed…. much less so about your interest or aptitude to study Finance, Accounting and become a Financial Analyst with industry expertise.  Let’s spend a minute to discuss Accounting and Finance before we move on. 

Finance and Accounting are fields of study.  What are fields of study?  

Linguistics is the field of study if you want to be an interpreter.  If you wanted to be an electrician you would need to study how to install, operate, repair and maintain electrical devices and systems.  If you wanted to be a lawyer, you would need to study constitutional law, contractual law, property law, civil procedure, tax law, legal writing, etc.

The field of study in Finance, includes how and why a company acquires the money needed to achieve goals and how it spends or invests that money.  The field of study in Accounting is the measurement, processing, and communication of financial and non-financial information about a business or company…accounting is often referred to as the “language” of business. 

To be an investor who selects individual securities (i.e., the common stock of a business) you need to pursue a field of study in both accounting and finance.   

While pursuing a field of study in both accounting and finance are required to select individual stocks you also need to pursue rigorous industry analysis, have a view on the competitive position of a business and make a judgement on why the price of the common stock of business is worthy of buying or selling. 

For example, Pfizer and Moderna were two companies that developed Covid-19 vaccines.  A portion of the value of both companies depends on the future cash flow that these vaccines will generate.  An investor who has studied accounting and finance can read financial statements but unless she/he has an educated view on the science of Covid, other businesses that may develop products that displace the Pfizer and Moderna vaccine she/he won’t be a knowledgeable investor because she/he won’t be able to make an educated assessment on the future cash flow generated by these vaccines. 

So, here is something else that is very cool…going back to our music analogy.  If you decide that learning finance and accounting are not really of interest and therefore you can’t read a financial statement and how to analyze all of the risks associated with a business’s ability to survive and be profitable then the responsible way for you to be an investor is instead to invest in a low cost, broad based exchange traded fund that owns a little piece of a large number of public businesses.  Why, because you have decided not to write music.  But here is the cool part…if, over many years, you buy a little bit of a large diversified number of businesses each month you will likely have higher investment returns than the folks who think they know how to write music…about 80% of the time. 

So, you are probably scratching your head about now.  Here’s you, “You mean to tell me that I don’t have to learn accounting and finance.  I don’t need to learn advanced financial analysis skills nor do I need to do in-depth industry research.  I don’t have to pay a financial advisor and an active fund manager who went to a top business school and I could likely have better investment returns 80% of the time if I just buy a little piece of a large number of businesses using low cost, diversified exchange traded funds?”  Well, over the long run, yes. 

Here is the most valuable takeaway: 

Anyone can be an investor and have performance that, over a long period of time, beats approximately 80% of the professionals whose full-time job is to “write music.” Just don’t pick individual stocks. 

So, let’s go back to the goal of investing.  The goal of investing is to build your Net Worth to achieve Financial Security.  Yep, got it.  Yes, if you are inclined to learn how to write music and have a passion to do rigorous analysis, go for it.  You can then be in a position to assess the merits of buying the common stock of a particular company.  However, you have been forewarned that only about 20% of people whose job it is to pick which companies to own actually could do better than the person who acknowledged that they did not learn how to write music and instead just bought a little bit of a large number of businesses.   

If you end up buying individual stocks before you have learned how to write music you are speculating, not investing. 

Investing is what you should do to have financial security in your life.  Speculating is only something you should do with hard earned money that you are prepared to lose.   If you are not saving enough each month to support your goal of financial security by wisely investing, you should avoid all speculation.  To refrain from speculating, it requires you to have self-control and resist eating the marshmallow.  We will cover more about speculation (and marshmallows) and give some examples of how people often confuse speculation and investing in Part 2.