First of all, I got him off the idea of jumping into marijuana stocks. Even
though pot is now legal, and the initial demand has outstripped supply,
there is no way of knowing the size of the potential market or which
companies will be the most successful.
I told him about the early days of the Internet (he was only a toddler at
the time) when investors poured millions of dollars into any company with a
good story. Some, like Apple and Microsoft, ended up being hugely
successful. But many others, ranging from Pets.com to Global Crossing, went
down in flames, taking all the invested money with them. The mania ended
with the tech crash of 2000, which took the whole market down with it.
This is not to suggest the marijuana bubble will end the same way. But
investing now, with the stocks having run up so much, is risky. With such a
crowded field, some companies are not going to survive.
Anyway, I told my grandson, there’s a lot that should happen before you
start investing in the stock market, or anything else. Here’s what I
1. Educate yourself
The financial literacy level of most kids when they leave high school is
abysmal. They know little about the banking system, debt management,
investing, mortgages, or any of the other basics. So, my advice to him was
to start by educating himself. Spend 15 minutes a day scanning the business
pages of the newspapers (or in his case, the on-line version). Go to
websites like GetSmarterAboutMoney.ca, which is packed with valuable
information for people just starting out. Read a couple of books likeThe Wealthy Barber or Personal Finance for Canadians for Dummies. The more knowledge you
accumulate, the greater your chances of success.
Start a disciplined savings program. It doesn’t have to be a lot at the
start – even putting aside 5% of each pay cheque can get you going and
establish a life-long savings habit. Have the bank set up an automatic
savings plan that will deduct a specific percentage from each pay and put
the money into a designated account.
3. Use tax sheltering
Most people who are just entering the workforce don’t even think about tax
shelters. Unless they’re software engineers or animators, they’re probably
not making enough money to be worried about it. But as the years pass and
income grows, shielding as much as possible from governments becomes more
of a priority. So, why not start early? Begin by opening a Tax-Free Savings
Account (TFSA). Most Canadians 18 and over are eligible (in a few provinces
and the territories the age is 19). You’re allowed to contribute $5,500 per
As your income increases, consider adding an RRSP. Unlike a TFSA, money
contributed to RRSPs is tax-deductible. That won’t mean much if you have a
minimal tax rate but if you’re being hit for 40% on each dollar earned, the
deduction will be worth a lot of money.
4. Avoid bad debt
This is the advice that young people most frequently ignore. They want what
they want, and they want it now. But instant gratification comes with a
price, typically in the form of a credit card bill with a high, almost
usurious, interest rate. I know people who have taken years to pay off
these debts and I have seen them deplete their savings and even cash in
their RRSPs to try to get out from under the debt load.
That doesn’t mean you should never borrow, I said. Using other people’s
money to advance your education or to buy a home can repay the cost many
times over in future years. But don’t get in over your head – to do so
means years of financial misery.
5. Understand fear/greed
Investors are driven by these two emotions. That often means they buy when
markets are high (“Everyone else is getting rich, I want my share”) and
sell when stocks crash (“I have to cut my losses now before it gets
worse”). This is the exact opposite of successful investing. Instead of
buy-low, sell-high, this is buy-high, sell-low. And it’s a path to the
In the 18th century, Baron Rothschild advised investors to “buy
when there is blood in the streets.” In those days, that advice was true in
a literal sense; today it can be simplified to “buy when everyone else is
selling” – in other words, in a market panic.
I told my grandson that these will probably occur four or five times during
his lifetime. That’s when he can make his fortune, I suggested. He doesn’t
have to buy at the precise bottom – no one can ever make that call, except
in hindsight. Just focus on buying good companies at a point in time when
they look absurdly cheap and then be patient. You’ll eventually be rewarded
many times over.
6. Don’t chase dreams
There are some people in the financial community who trade in dreams, not
reality. They’ll try to persuade you to part with your money by investing
in what is “sure” to be the next great diamond mine or an app that everyone
will want to buy. I’ve heard many such stories, and in my youth even
invested in a few of them. Not one ever paid off. I lost money every time.
The experience almost put me off the stock market forever, until I wised up
and started to pay more attention to revenue and profits.
7. Buy a home – eventually
Anyone who bought a house or condo in Toronto 20 years ago (about the time
my grandson was born) has done very well. In many cases, the property has
more than doubled in value. Right now, home prices in this city are far too
high for my grandson to even contemplate a purchase. But despite what has
happened in recent years, prices won’t go up forever. There will be another
recession, which will knock prices down. The last big real estate crash in
this city was in the early 1990s when the average home price fell about
35%. That will be the time to make a move.
Above all, I told him, be patient. Don’t try to go for the big score – even
Steve Jobs and Bill Gates took years to build their businesses, and their
wealth. Save your money, buy a home at the right time, and focus your
investing on good-quality securities when they are on sale. Follow those
rules and you’ll never have to worry about where the next dollar is coming
These suggestions actually apply to anyone of any age. They’re simple. And
they work. I’d like to extend my wishes for a happy holiday season to you
and your family, and for a healthy and prosperous New Year.
This is an altered version of an article that originally appeared in
The Toronto Star. Used with permission.
is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investor
newsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters,
check the Building Wealth website.
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Notes and Disclaimer
© 2018 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
BUILDING WEALTH WITH GORDON PAPE