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Helping You to Analyze Value Stocks Better

Time to answer more great reader mail. One from someone who is struggling to analyze value stocks, and one from someone who is completely lost at what things to focus on as a beginner.

analyze value stocks

When you say you can help, how much would your book help me? I love the idea of your Value Trap Indicator. I am slowly becoming a more disciplined and patient investor, comfortable with averaging down and paying attention to balance sheets and cash flow, but my 8-5 is a counselor so I have limited time to research and read (with a family of 5 kids).

I have around $50K in my Roth IRA and $20K in my 401K. I would like to pickup some values in the sale that is happening in the market (I sold a large portion of my Vanguard 500 index about 3+ weeks ago in anticipation of the market downturn). Money is tight right now and I just want to make sure your book will help me with the formula to put into a spreadsheet that will. Help me analyze value stocks in a better manner. Thanks for the help, love your content.

Jay

The spreadsheet does exactly what you are looking for: a pre-calculated formula which allows you to compare value stocks. However, you have to put in the time and effort with regards to researching the stocks. There is no quick solution.

If you are already comfortable with sifting through balance sheets and cash flow statements, I’d say the book is a perfect next step to translating that data into a concrete numerical comparison. What you’ll have to do with the spreadsheet is manually fill in the common financial data points in each of the major statements (income, balance sheet, and cash flow).

The number of data points isn’t what’s time consuming, but if you are evaluating many stocks or many years the time involved can be quite liberal. I’ll tell you that when I’m evaluating a stock, I figure out if I want to buy it or not within 5-10 minutes of using the spreadsheet and the 10-k. You can easily get to this point after using the spreadsheet a couple of times.

About the reading… The book included with the spreadsheet package breaks down in extensive detail which data points are used to analyze stocks and the reasoning behind it, with historical examples to back it up. You’ll also collect valuable insight on which value stocks became the investor’s worst nightmare of a “falling knife” investment.

As always, remember the importance of dollar cost averaging, diversification, and long term investing. In perilous times such as these, the principles become that much more essential.

My biggest frustration honestly is not knowing where to begin. I have read a decent bit but I still feel like I don’t know so much….I opened my first account on Trade King but I haven’t done anything beyond that. Do I have to watch a ticker all day? Do I have to read articles about hot new companies all day? Do I have to wake up at 6 a.m. and read the paper and be there when the markets open???

–Brandon

First off, congratulations on starting your journey. Opening an account is a common first hurdle that many wanna be investors fail to do. And going with TradeKing will ensure you of lower commission fees which leads to better returns.  [click to continue…]

Financial Investing Rules for Your Money

An obstacle to getting started with investing can be not having a structure to follow. Things become easier to follow when there are guidelines.

Since the world of investing spans such a great space and there are literally endless possibilities and results for your money, it helps to simplify the process with some constraints or rules. Here’s 4.

financial investing

Financial Investing Rule #1: Get your financial priorities in order

This is the first and most important step for successful investing, and it has to do with your personal finances. The phrase “it makes money to make money” is ever so true in the investing world and has proven to be true over and over again.

Reliable returns from the stock market don’t involve a 10x return on your capital, which happens so infrequently. Rather, smaller average returns compounded over many years create reliable returns. But to make substantial money with these conditions, you need a high amount of starting capital.

So when it comes to your finances, you need to have them structured so you have a net profit each month. Spend less than you earn encapsulates this perfectly. Whether that’s through a budget or automatic withdrawals from your checking in month, I don’t really care. At the end of the day, you need to first have excess money to play with.

Once you’ve got the saving portion down, it’s time to look at other aspects. I’d say you at least need an emergency fund of $1,000 locked down. Some personal finance experts tout 3-6 months of expenses as an emergency fund, and I say if you want that then fine. For me, that’s too much and money goes too quickly to build that much when I have other places I want to invest my money. It’s really personal preference and risk profile.

The emergency fund is important because it keeps you from dipping into retirement accounts with steep penalties for doing so, or from accumulating high interest debt like credit cards once an emergency arises. Playing without an emergency fund and getting tacked on by these penalties that work like a negative compounding interest keeps you in a place where you’re going 1 step forward and 2 steps back. It doesn’t make sense.

Now let’s establish where to play your excess funds. First of all, I look for the things that will give me the highest return on my capital. Most of the time, this will be an employer match on a 401k. If the employer is matching you dollar for dollar, you are essentially getting a 100% return on your money. I don’t care what secret stock market trade you have under your belt, you aren’t getting 100% guaranteed returns anywhere else. Max out the match first and foremost.

Assuming you have no credit card debt, the next place to put yo money is in an IRA account. These accounts work as tax shelters and let you place investments inside them. These accounts also have contribution limits each year, so again max these out as much as you can.

Finally, you can put any remaining money you might still have into your 401k to get the tax advantages. If there’s any money after that, or you’d just generally prefer the taxable brokerage account, go that direction. The brokerage account is obviously nice because of the flexibility to buy individual stocks. Make sure you are definitely maxed out on the IRA accounts because those have the same flexibility of a brokerage account but without the tax implications.

Financial Investing Rule #2: You must fully understand the importance of long term investing

The reason why investing has become such a lucrative and important aspect of people’s lives is because of its results over the long term. The stock market is a generally volatile place and is not a great fit for the weak stomached casual investor, in theory. But even the most casual investor can make significant gains for himself if he understands this one rule. [click to continue…]

Beginner’s Guide to the Yahoo Finance numbers

This guide will assume you are an absolute beginner when it comes to using ticker systems like Yahoo Finance. The world of stock investments might seem confusing and overwhelming, with plenty of symbols and slang to mull over.

Don’t worry. I’ve broken down the basics to the stock market before, with my beginner’s guide having been viewed over 100,000+ times, and I’ll do the same for the standard Yahoo finance interface.

yahoo finance

I’m going to go through each individual category and explain exactly what each of the abbreviations means.

Some of these categories are complex and hotly debated topics that you can research further at your pleasure. I’ll link some good sources for that within. Others are really straight forward and don’t mean much more than the surface definition. Hopefully those will be easy to comprehend.

Now the first thing you’ll see when you enter Yahoo finance’s main page is a search bar at the top, and then a convolution of charts, ads, video links, article links, broker ads, games ads… the list goes on.

That top search bar is going to be the place where you’ll find the most use and get the most data for stock market investing.

Every stock that is publicly traded will have its own ticker symbol. This symbol holds the key to all of the charts and data behind that stock.

For this how-to guide, we’re going to use the ticker for the biggest stock in the market right now, Apple Inc (AAPL).

When we type AAPL into the search bar, a myriad of data immediately hits our screen. If you are following along, it should look like this:

Right away, there’s a big number in bold. That’s the current price of the stock.

yahoo-fin-1

In smaller numbers and in either red or green color is the difference in the stock price for today. You’ll see, in this order, an arrow going up for gain and down for loss, the amount of dollar value ($) gained or lost for the day, and the percentage of that difference compared to the price.

Right below these big numbers are the after hours prices, in a similar format to the above. These numbers represent some of the trading that occurred in brokers outside of normal business hours.

yahoo-fin-2

After hours numbers can be used as an indicator for a stock’s future movement. The accuracy of this, however, is suspect even in times when extremely high pressure is forcing the market to a high after hours percent drop or rise.

While the after hours isn’t sufficient to predict the future, you can basically utilize this number as the current price of a stock. Price is, after all, the point at which buyers and sellers meet.

Next, we have the Prev Close. This is pretty straight forward as the previous close value. It means the price of the stock when the market closed yesterday.

yahoo-fin-3

Keep in mind throughout this guide that the market hours for US exchanges such as the NYSE are 9:30am EST- 4:00pm EST. Other markets in other countries and time zones operate on their own schedule. As an investor, you can technically put in a trade at any time in the after hours.

The Open is the price of the stock when the market opened on this day.

yahoo-fin-4

Now getting technical with the nuts and bolts behind the stock price, we have the bid and the ask. [click to continue…]

Important Debt to Equity Ratio Analysis

Fellow spreadsheet and investing enthusiasts, the world of Wall Street is open for understanding. There’s no better way to learn the stock market than to dig into the financial statements. However, there’s some important details within this process to be aware of, especially concerning debt to equity ratio analysis.

debt to equity ratio analysis

Here’s a great email question from a reader that should help everyone following along. Whether you are doing debt to equity ratio analysis, cash flow analysis, or even just looking at P/Es, this knowledge should help you get a bigger picture at what the numbers mean and how much analysis is really necessary.

Good Afternoon Andrew,

First and foremost, I apologize if this email is a little “rookie” sounding. I am still new to investing (started about 9 months ago) and have been following your guidance the entire way. I just read one of your latest posts about looking for stocks that have increased their dividend payment over the last 10 years.

With that being said, I started to do some research and found a company that looked intriguing ($BRO if you care.) I was looking over the financial statements (latest 10K from FY 2014) and I noticed something that through up a amber flag for me. I was always told when looking at the cash flow statement for a company you want to see a significant positive value in the Operating Activities section, and negative values in the Investing and Financing Activities sections.

With this company, the Operating Activities and Investing Activities were good but the Financing Activities held a significant positive value. Almost all of the positive value came from “proceeds from long term debt”. With that being said, although they took on a significant amount of debt in 2014 they are still only at a .53 D/E. Additionally they had a positive value in 2012 and then a negative value in 2013. When looking at the latest 10Q, the Cash Flow statement in in the negative for the 9 months of FY 2015.

I am overthinking this positive number? In other words, just because the company took on debt last year should that prevent me from purchasing the stock? I appreciate any insight you can provide. Thank You.

Brandon

[click to continue…]

Dealing with Stock Market Losses

All eyes were on me. My heart was racing.

But as I took a deep breath, my demeanor was calm. I had mentally prepared for this moment all offseason long.

It was the first game of our flag football season. We were the new team of the league, eager to win and prove ourselves.

As I took my deep breath, I went through my progressions. Option #1 wasn’t open, and neither was #2. Then the pressure came and I was forced out of the pocket. The referee counted out loud until he reached 6. Man, that was a lot faster than I thought.

Just like that, our season started with a sack. I kept my cool and pressed on. 2nd down had one of our guys wide open. I made the throw, a little low, and he dropped it.

Our 3rd down play gained some yardage but not enough for the first down. We punted, and I went back to the sidelines.

It was quite a terrible way to start the season. Couple that with our opponent scoring on their first drive, and we were in a precarious situation.

No matter. I was mentally prepared for this, had rehearsed losing situations over and over again. I would keep my cool, not panic, and continue to scheme and find ways to beat the other team.

By the second drive, I already knew what the defense was trying to do against me. They had a zone on one side with a single man island on the other, so I called a play to counter this perfectly.

The route was run great, the man was open, and my throw was good. At the last second, my receiver tripped, and the play was ruined. Our team found ourselves in another unsuccessful drive, and that’s when things really started to unravel.

The seemingly insurmountable score and lack of time to make up the difference started to affect my gameplay, no matter how calm and rational I thought I was. I really started to miss some throws, make poor decisions, until the game ended in a mercy rule.

This humbling experience got me to thinking about how many investors out there probably feel the same way.

stock market losses

Our whole lives, the media tells us we will be rich, famous, and happy. The investment industry exploits people’s hopes, showing commercials with smiling actors who seem to never have to worry about stock market losses.

We spend our waking hours dutifully slaving away for the man, hoping to be rewarded someday with happiness, leisure, and luxury.

We’re told that the stock market is the place that will give us these things.

We’re told that these pleasures are reserved for retirement.

We’re told to keep our hopes high and our heads down low.

Surely the powers that be will reward our faithfulness and sacrifice with bountiful stock market returns, consistent and growing dividends, and wealth beyond our imagination.

Yet the reality of the stock market is much different.  [click to continue…]

Building a Dividend Stock Portfolio with a Late Start

It’s not too late, it’s never too late. Colonel Sanders didn’t start KFC until he was over 65. Look how big KFC is now.

dividend stock portfolio

Attempting to build a dividend stock portfolio when you are already in your 40s or 50s may be disappointing, especially when you see the kinds of magic compounding numbers I share about investing when you are in your 20s.

So you may not have 40+ years to allow small amounts of money to turn into millions. But you can still have at least 25 foreseeable years of compounding left in you if you are in your 50s, or even more.

Life expectancy has increased with the innovations in technology and medicine, and more and more people are living well into their 80s (big retirement companies like ING are shoving this down our throats with their commercials). It’s no mystery.

And so while I’m far from being an expert at your problems at 50, I do have expertise in helping hundreds of thousands of readers with starting to invest.

A particular question I received from a reader really caught my eye, and inspired this post. Hopefully it will help other people like him to kick excuses to the curb and make progress towards their goals.

Hi Andrew,

I happened to stumble upon einvestingforbeginners and have really enjoyed reading your articles/blogs – very informative and helpful.

I have $20K I would like to invest and want to begin building a dividend stock portfolio. I’m 49 years old, so unfortunately, I don’t have the benefit of an early start like someone in their 20s or 30s. That said, I have a few questions:

· What vehicle would you recommend I use to begin purchasing (brokerage firms, etc.)?
· I expect to have about $300-500 per month in savings to contribute on a go-forward basis – once I build the initial portfolio, would you recommend I use a lump sum approach for future purchases or just contribute on a monthly basis (dollar cost averaging) to grow the portfolio.

Any advice you have would be great appreciated. I look forward to hearing from you.

Thank you.

Piccolo

The first question is easy. I’ve covered it many times before and the best resource for you is probably this blog post: 8 Top Stock Market Brokers for Beginners.

The next question regards a dilemma between lump sum investing and dollar cost averaging.  [click to continue…]

How to Find Good Dividend Stocks: 3 Metrics

It’s easy to find plenty of websites willing to share a “top ten” list of good dividend stocks for the year. Yet it’s much harder to find actual useful lessons that will help you in the long term.

good dividend stocks

This frustrates me. Getting a quick tip about one good dividend stock won’t help anyone towards their financial goals.

Sure it feels good temporarily, but relying on new dividend stocks lists every year isn’t a reliable investment strategy.

So instead of give you what you’re looking for, presumably good dividend stocks, I’m going to teach you how to find good dividend stocks with 3 common metrics. I have no doubt this will be far more beneficial for you in the long term.

And it’s the long term that really matters.

Good Dividend Stocks: P/E

Let’s start with the most basic dividend metric. Price to earnings, or P/E ratio.

This ratio is simple to understand when explained correctly. It is the price you are paying for the earnings a company is giving you.

Look at it this way. If you buy a rental property for cash flow, the success of that investment depends on the price you paid for it and the cash flow it gives you.

A property that you paid $200,000 for might be a great deal if you can make $2,500 a month from it, and not such a great deal if you only make $1,500 a month from it. It’s not the dollar amounts, per se, but the ratio of price to earnings.

Buying dividend stocks works the same way. The lower the price to earnings on a company, the better deal you are getting on the company. It’s the simplest measurement of value.

Price to earnings works really well in helping you avoid extremely unfavorable situations. When a company is losing money, that stock will have a negative P/E ratio. You want to avoid negative P/E ratios at all costs because it indicates a company that is in serious trouble.

P/E also helps you avoid stocks that reach “bubble” territory. This is when Wall Street gets so excited about a stock that investors will literally pay anything to have it. A situation like this is so dangerous because the bubble always pops. We see it time and again.

For a good dividend stock, find a P/E less than 25.

Here’s the free tool I use to sort dividend stocks by P/E. It’s called FINVIZ, and it lets you sort from a wide variety of metrics. Simply select P/E: “Under 25” in the “Fundamental” Tab.

Good Dividend Stocks: D/E

The next dividend metric will help you avoid stocks that suddenly go bankrupt like Lehman Brothers did. I’m talking about the Debt to Equity ratio.

Debt to equity ratio works just like anybody’s personal finances. When people end up in bankruptcy court, it’s because they’ve accumulated too much debt on their credit cards, mortgages, and more. For stocks, it works the exact same way.  [click to continue…]

One of the biggest hurdles to stock market investing is a mindset shift. Many beginners can’t get their heads around the reasons to find stocks with dividends. And I don’t blame them.

stocks with dividends

After all, how can you get excited about a $1.15 payment that takes a year to accumulate? While on the surface, a small dividend may seem inconsequential…

I’m afraid that many beginner investors are missing the bigger picture. And as they miss this picture, they miss the most powerful worldly force for building wealth.

What we need is a road map towards making money in the stock market.

I’ll try to explain this in the simplest of terms. I’m hoping you’ll get a “light bulb moment” and it will help you see stocks with dividends in a much different way.

Once you understand the power behind it, you can go out and reap the benefits yourself.

Think of the following examples.

Take the game of Monopoly, for instance. We all know that the goal of the game is to collect as much money as possible. Coincidentally, this is the same goal in investing.

However, you don’t win the game of Monopoly by hoarding cash. You need to instead buy as many properties as you can. Those of you who are good at the game know that a few well placed houses and hotels on your properties will pay you thousands of Monopoly money in the long run.

In Monopoly, it costs money to buy properties and add houses and hotels. These properties don’t pay for themselves right away, yet you know that the key is to snatch up these properties as they will more than pay for themselves in the long term.

You have to look at stocks with dividends in this same way. You’re not buying them for the immediate return, but for the long term cash flows.

Tomatoes and Investing

Another simple example is planting a tomato garden. Let’s examine the goals and the effects. The goal of a tomato garden is for me to eat a tomato. This is obvious.

However, you don’t plant a tomato garden and expect to immediately start eating a tomato, or many tomatoes. You must plant the garden, water it, till it, and do other garden-like things to it (as you can tell, I’m not a green thumb).

But once the tomato plant has sprouted, it takes minimal work to maintain the garden. Plus you get not just one tomato, but an “income stream” of tomatoes. You must have the patience to reap the rewards, but the rewards are much plentiful than just buying a tomato at a store and consuming it.

The difference between buying a tomato to feed you once and a tomato seed to feed you indefinitely is the difference between buying a stock to make money and buying a stock for the dividend.

Notice that the goals are the same. In the tomato scenario, our goal is to eat a tomato. With investing, our goal is to make money. The difference is that you can take a long term approach for delayed gratification and greater benefit, or a short term gratification that quickly evaporates.

What’s interesting about the Monopoly example is that it utilizes a rare force in the world.

Most things in life take a great amount of upkeep and energy. The tomato plant, for example, requires maintenance– not as much effort as the initial plant but still significant. Exercise and our body takes constant effort and energy. I couldn’t possibly hope that one workout would have me “set for life”.

Money has a drain effect. It always seems to find a way to leak out of our wallets. We have to put constant effort and energy to keep an income at our jobs.

Monopoly properties don’t fall victim to this. You just buy it once, and it creates an income for you forever.

Guess what. Dividend paying stocks work the same way!!

Except in the real world, the best stocks with dividends will increase the payouts year after year. What this means is…

As long as you pick a company with strong financials, the income stream will pay you until you or the company dies! And those payments rise, that’s some serious earning power.

Let’s play this out with an example.  [click to continue…]

Stock Spreadsheet Q&A

Many long time readers know about the stock spreadsheet I offer as part of my book package. This is the exact spreadsheet I use when analyzing a company. It’s a simplified tool to help people buy stocks, but even within it there are questions and confusion.

stock spreadsheet

I had a couple of in-depth conversations with some of my readers and customers regarding the questions they had with the Value Trap Indicator Spreadsheet, and if they have these questions chances are many of you do too.

So I’ve included those questions with my answers in this post. Hopefully it will help those of you following along at home. It may just be the trigger you need to find the confidence in using spreadsheets for stocks.

Hi Andrew, I have a question about the seven categories. To calculate the 3 year average growth (category 6) do I use revenue or should I look at net income? And if my VTI is around 350 should I pass on this stock?

For 3 year average growth use net earnings.
A VTI of 350 is close to the strong buy signal of 250, so it’s worth keeping an eye on for a stock price pullback.

So can I use operating income? Or should I subtract interest and taxes?

Use net earnings which can be found on the income statement. Operating income minus interest and taxes won’t give you the same net earnings numbers that most of Wall Street is using (usually).

Do you use google as well to search through the financial statements? Or sec.gov?

I use sec.gov because it is the definitive source. Not to say that other websites will be inaccurate but I prefer to get my data from the source.

In category 6 of the book you implement the growth. But how do I calculate the 3 year average growth in excel? Because at Finviz it isn’t mentioned. I calculated the 3 year average growth like this: Gemiddelde means average (I am from Belgium). But there is something not right about this formula because the outcome should be negative.

value spreadsheet

Great question. Using your example, you’d take earnings from 2014 – 2013 earnings, 2013 -2012, 2012-2011. Then take the average of this sum (divide the sum by 3). That’d be the average growth.

It gets interesting when negative numbers are involved, because it skews the data. I make the calculations in my spreadsheet, but basically I’ll take growth from the last positive earnings. For ex, to take growth of 2014, I’d subtract from 2012 instead of 2013 since 2013 is negative.  [click to continue…]

One of the most common questions or criticisms I hear from skeptics goes along the lines of:

“If you’re so successful at picking stocks, then why do you share that information to others”

or the usual, “if you’re making so much money, why do you need to sell the information? Why not keep it for yourself?

And it’s a good concern. I know I sure shared this perspective when I started out.

stock market investing

Look, there are scam artists and fakes out there. I’m not going to pretend that they exist. Charlatans thrive in every area of popular interest, and make their money by their ability to create excitement. Usually this excitement leads to reaching for the wallet, with little or no value exchange for the customer.

I don’t by any means support or condone this kind of behavior. It makes me sick to the depths of my stomach. I strongly believe in the power of capitalism, free trade and exchange of goods, but it’s these types of criminals who ruin the image of the system for everyone.

Why am I not a charlatan? Well for one, I practice what I preach. I’m eating my own cooking. Hell, my Roth IRA is composed solely from the stock picks I share to my newsletter subscribers. My financial future is at-risk just as my customers are.

Number two, I take pride in maintaining my integrity. I do what I say and say what I’ll do. I try to live this way not only in my investing life, but also in my regular life. No one’s perfect, but I hold myself to the highest standard.

Of course, those first two statements are nice to hear but they don’t get down to the core of what a customer needs. We need to know if this philosophy works.

Since I’ve been there before, in a position of a clueless beginner, I remember how important it was to me that I get the right stock market investing systems in place. So I took the kind of due diligence that most average investors just aren’t willing to take.

I had a bit of an ego going in– I knew I was getting a good start as a young kid, and I’ve always been extremely gifted in math. I figured that the skillset would carry over into stock market investing. It sure has.

Doing this due diligence meant learning about every kind of major stock market investing strategy. There’s value investing, which I eventually decided upon. But there’s also trend following, growth stock investing, index investing, technical analysis, asset allocation, bond investing, real estate investing, options trading, forex trading, large cap, small cap, international… and so much more.

I know the myriad of options seems endless. And it really is. There’s a million ways to skin a cat. But only until I could grasp the basics from each strategy, and be able to explain it to myself, was I finally confident in sharing about my findings.

A quick observation will show you who has the superior system. In basketball, it’s Phil Jackson and the triangle. In the music biz, it’s Rick Rubin. In the stock market, it’s the students of Graham and Dodd who built fortunes through value investing.

Identifying these masters and learning from them is the best way to accelerate your understanding and mastery of a skill. Plus and perhaps most importantly, the material needs to make sense.

Value investing passes every test, and it’s the only reason I’m so confident to share about it to my readers. The concepts make sense even to the layman. Simplicity is important.

Now for the big question…  [click to continue…]