Make Investing Your Side Hustle (Transcript)

By datatrekresearch in Blog

DataTrek co-founder Jessica Rabe discusses how to make investing your side hustle in the latest video on our YouTube channel. Many of her peers want other sources of revenue to supplement their salaries and create wealth over the long run. Investing is one way they’re interested in making their money work for them instead of them just working to make money. However, they often confuse trading and investing, which are very different. The key to success in either is understanding your goals and developing a strong, repeatable process.

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Transcript:

Hi, Jessica Rabe here, one of the co-founders of DataTrek Research, and for today’s video I’m going to discuss how to go about making investing your side hustle. I’ve found that many of my peers are eager to create multiple income streams so they don’t have to be limited by a 9 to 5 job like our parents or grandparents. The short bear market and follow on equity rally during the Pandemic Crisis, and the rise of cryptos have certainly piqued my generation’s interest in investing as a way to make our money work for us instead of us just working for money.

However, whenever I get investment related questions from my friends in their twenties and thirties, I often find that they conflate trading and investing. In reality, the two are actually very different. Whether people want to trade or invest is up to them, but having a process is key to success in either approach. So with that I’m going to share my two cents on how to go about both trading and investing.

Let’s start with the spicier of the two, trading. Both trading and investing come down to finding and exploiting a systematic market flaw, but traders are more focused on short-term arbitrage opportunities. With that, I have 4 key takeaways here:

The first is that trading ultimately comes down to repeating a process with a track record of success. In order to find it, start by setting an initial weekly goal. For example, have a target of making say $100 dollars a week just to use simple numbers. Once you get to that goal, either cut back on your positions to almost zero or sell everything. Then spend the rest of your time working on ideas to execute the next week. Once that next week comes, your goal is to still make $100 that week.

Once you consistently make $100 dollars a week for a couple of months, increase your goal to $200 dollars. After meeting that goal regularly for a few weeks again, you can up your goal again to $300 dollars. Additionally, once you consistently make money, you can put more money to work. However, if you’re struggling meeting a new goal like making $300 dollars a week, then go back to your $200 dollars a week target. You know you can do that since you did it reliably in the past. Easing into trading by finding and executing a successful and repeatable process will help build confidence, which brings me to my second point on trading…

It is very important to identify and plan for what could go wrong. Academic work on confidence shows that a proven hack for improving conviction without being overconfident is by writing down why you could be wrong. Good traders go into every trade by setting targets, stop losses and time frames before buying their first share. Just as imperative, they have the discipline to stick to it. As much as it’s important to let your winners run, it’s just as imperative to recognize when to cut your losses. Save yourself the time of worrying by selling your losers and move on to what’s working or can work.

My third point is to respect trends and understand that other traders know more than you. On the first point, momentum is a powerful factor, which is why we say to never short new highs or buy new lows. On the second point, I’ll use the example that you shouldn’t buy or sell names just based on valuation alone. Think of all the gains you would have missed out on in so called expensive Big Tech names that leverage disruptive new technologies like gen AI over the last year. On the other end of the spectrum, cheap is likely cheap for a reason and you don’t want to be early on a call. The upshot here is that someone always knows more than you and they are likely acting on the knowledge you’re unaware of. That’s true for both stocks and cryptos.

My fourth and last point is to know yourself and trade according to your own risk tolerance and experience, because trading styles differ for everyone. Some traders can use lots of leverage and stomach that volatility like with cryptos, for example, while others are more comfortable limiting drawdowns and always keeping some cash on hand to deploy should an attractive opportunity arise. The more comfortable you are with your investment style, the less impulsive you’ll be.

Now let’s move on to investing.  Investment ultimately involves finding undervalued stocks, sectors, or markets that will rise in value over time. With that, I have 3 points here:

The first is that it’s important to keep in mind that most stocks don’t work over the long run, so the beauty of investing is that you can let the broader US equity market find the handful of long-term winners for you. There’s some excellent academic work which I put a link to in the description that shows from 1990 to 2020, just 1-2 percent of all listed equities created all the total gains in non-US and US stock markets over that 3 decade period. This is why indexing works, because it casts a wide net of names and increases exposure to the stocks that are actually creating value. As a result, you own more of winning stocks, and just as important, you own less of names that aren’t working. Individual stocks don’t always come back from market downturns, but indices like the S&P 500 do.

Moving on now to my second point, investing is an exercise in patience and delayed gratification for a larger payoff in the future.

To set the stage here, there’s a widely cited and legendary experiment in child development from the 1970s called the Marshmallow Test, which seemed to show that some people have an innate ability to defer gratification. That’s of course a key life skill, so researchers at Stanford offered young children their choice of treats like a marshmallow. The researcher would then tell the children that they would be left alone for 15 minutes and if they didn’t eat the treat, they would be given another when the researcher returned. Some children were able to wait and got a second treat, while others did not. Children who passed the Marshmallow Test by waiting were shown to have better outcomes later in life. Now, more recent research shows that all this experiment actually measures is how reliable a child’s home environment may be. The more a child is used to reliability and predictability at home, the more likely they were able to wait since they trusted they would actually get a second treat.

Nevertheless, the Marshmallow Test still applies to the power of patience relative to investors because they choose to invest rather than consume. Investing may not be as exciting as trading, but it’s not meant to be. The longer you can wait for that theoretical second, third, fourth and fifth marshmallow, the more gains your future self will likely reap.

Third and lastly, it’s important to not mistake a trade for an investment. For example,most sectors and non-US geographic regions are trades rather than long term holds.As much as we’re always on the lookout for out of favor groups and regions to boost returns, when it comes to core investments, we think it’s better to stick to US large cap Tech and high-quality growth stocks. That study I mentioned earlier shows those are the only two groups that persistently create value over the long-term. By way of example, the core of my portfolio includes the iShares Core S&P 500 ETF since it tracks the S&P 500, and also the Invesco QQQ Trust ETF since it tracks the Nasdaq 100 has outsized exposure to Big Tech.

So to wrap up, investing is certainly a worthy side hustle to someone’s career in order to generate long-term capital appreciation. But there’s a big difference between investing and trading. Choosing either or both approaches to create more potential streams of income depends on your risk tolerance and personality. But it’s important to understand your goals and process to make investing or trading as effective as possible.

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