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  • The median age in the U.S. is 36.8
  • The median income in the U.S. is $51,939
  • The average 401k match is $1 for $1 up to 6%

A 36.8 year old investing 10% of their $51,939 income with a $3,116.34 match:
With just average stock market returns of 10% would have $1,114,479.31 by retirement.

Join 13,800+ other readers who have learned how anyone, even beginners, can easily make this desire a reality. Download the free ebook: 7 Steps to Understanding the Stock Market.




Investing for Beginners 101: 7 Steps to Understanding the Stock Market

Welcome to this 7 step guide to understanding the stock market. I’ve created this easy-to-follow Investing for Beginners guide to simplify the learning process for entering the stock market.

By leaving out all the confusing Wall Street jargon and explaining things in simple terms, I’m hoping you’ll find this as the perfect solution, if you are willing to learn.

Before we get started, here is a breakdown of the 7 categories for the official Investing for Beginners guide.

1. Why to Invest?
2. How the Stock Market Works
3. The BEST Stock Strategy and Buying Your First Stock
4. P/E Ratio: How to Calculate the Most Widely Used Valuation
5. P/B, P/S: The Single Two Ratios Most Correlated to Success
6. Cashing In With a Dividend Is a Necessity
7. The Best Way to Avoid Risk, and Putting it all Together!!

Why is investing so important?

Let’s imagine a life without investing first. You work 9-5 for a boss all your life, maybe get a couple raises, a promotion, have a nice house, car, and kids. You go on vacation once a year, eat out regularly, and attempt to enjoy the finer things in life as best you can.

Now since you haven’t invested, you get old, become unattractive for hiring, and live with a measly social security allowance for the rest of your life. You might’ve made good money when you were young, but now you have nothing to show for your lifetime of work.

Now let’s say you did save some money for retirement, but again this money wasn’t invested and won’t be invested.

Let’s even stay optimistic and assume you saved $1400 a month for 26 years. This would leave you with $403,200 to live on, which on a $60,000 a year lifestyle would only last you 6.72 years. You’re retiring at 65 only to go broke at 71 and you’ve been a good saver all your life.

Well then what’s the point of saving you may ask? Now let me show you the same numbers but add investing into the equation.

The Power of Saving + Investing

Again, lets say you saved $1400 a month for 26 years. BUT, this money was invested continuously as part of a long term investment plan, solid in the fundamentals you learned from this investing for beginners guide.

Now, including dividends in long term stock market investments, I can confidently and conservatively say that you can average a 10% annual return on these investments.

The same $1400 a month compounded annually at 10% turns your net worth into $2,017,670.19 in 26 years!

But the story gets even better.

With this large sum of money at your retirement, again conservatively assuming a 3% yield on your dividends, you can collect $60,530 a year to live on WITHOUT reducing your saved amount.

investing for beginners

Answer: Compounding Interest

By letting the power of compounding interest assist you in saving, you leverage the resources available in the market and slowly build wealth over time.

It’s not some mystified secret or get rich quick shortcut; this is a time tested method to become wealthy and be financially independent, and it’s how billionaires like Warren Buffett have done it all their life.

For those who don’t want to think about tomorrow, I can’t help you. But tomorrow will come, it always does.

Would you rather spend the rest of your life with no plan, dependent on others and unsure of your future? Or would you rather be making progress towards a goal, living with purpose and anticipating the fruits of your labor you know you will one day reap for years after you sow?

The choice is yours, and only YOU will feel the consequences of that choice.

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What is a Good Dividend Yield?

Dividend (and dividend growth) investors have long debated on what is a good dividend yield. How little yield is too little, and is a high yield always better?

These questions and more are explored by contributor Andy Shuler, with a couple of great examples and data to back up his claims…

investor getting a dividend

If you’re like me, when I first started listing to the Investing for Beginners Podcast, I had absolutely ZERO experience with investing.  Sure, I took some finance classes in college, but that didn’t exactly focus much on dividends or investing, and even if they did, it’s now been quite some time without that being used in my daily life, so any knowledge learned at that point was completely gone from my brain. 

Sure, the company that I work for issues a dividend, so I vaguely understood that money was being given back to the investors, but I had no idea if the right amount was being given back, or anything really that defines the purpose of a dividend. 

So, as I listened to the podcast, I kept hearing Andrew and Dave talk over and over about dividends…and the power of the DRIP…and how they won’t really invest in a company unless it has a dividend.  So, I started to research and try to understand dividends, and there’s a ton of information on the internet about them! 

But, if you try to find what a good dividend yield is…you just can’t do it.  So here I am.  I’m going to tell you. 

What is a good dividend yield, you ask?  Well…

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IFB106: The Sears Bankruptcy Fallout – Is Telsa Next?

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers. Your path to financial freedom starts now.

Dave:                                    00:35                     All right folks, we’ll welcome to the Investing for Beginners podcast. This is episode 106, tonight Andrew and I are going to talk about that, the disaster, true. That is Sears and all the goings on with that. And talk a little bit about bankruptcies and some other things. So Andrew, why don’t you go ahead and tell us about the article that you sent me today and we can talk a little bit about that.

Andrew:                              00:55                     Yeah, it’s actually kinda depressing then, would piss a lot of people off, especially the people that work there. So Eddie Lampert, he was the former Sears CEO. Um, and I don’t know, maybe you know better than I was. He, did he have like, um, a big ownership stake in the company too? Is that why?

Dave:                                    01:17                     I think so. Yeah. He’s a hedge fund billionaire. He was supposed to turn series into the next Berkshire Hathaway.

Andrew:                              01:26                     How’d that, how’d that work out?

Dave:                                    01:28                     Not so good,

Andrew:                              01:30                     So I guess he bought them out of bankruptcy. Sears had promised their workers that they would pay a week of severance for every year that they were at the company. So this woman, and this is from the CBS News, are the, this woman Brenda from California said after 21 years of service, I was laid off in January of 2019 and received just four weeks. Um, so obviously not that that’s a sticky situation for everybody involved, right? You have workers obviously very upset, nobody likes to lose their job. And then the severance debacle and then you have the fact that lamper probably lost a ton of money on this, I think somewhere on here. Yeah. He bought the struggling chain for 5.2 billion earlier in the year. So from our perspective as investors, maybe we, we understand like what happens in the bankruptcy and then from there, what that, what the implications are for investors.

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Stock Market Infographic Shows How Eerily Predictive the Shiller P/E Is

This single stock market infographic is perhaps the biggest selling point for Robert Shiller’s method. It clearly outlines that when the Shiller P/E has been high, the market has done poorly– and vice versa.

In this post, contributor Andy Shuler introduces Robert Shiller and also presents a great chart showing how the Shiller P/E has been less volatile than the regular P/E.

Shiller P/E and the Stock Market (Infographic Link)

But first…

Who is Robert Shiller and what’s the Shiller P/E?

Introduction to One of the Most Popular Stock Market Valuation Ratios

Robert Shiller is a very famous economist from Yale who wanted to develop a method to measure whether a stock was under or over valued by comparing against a much longer history than the normal year that is used when evaluating a stock’s Price to earnings (P/E) ratio. 

Shiller decided that the best way to do this was to use a period of 10 years and adjust it to inflation, to then determine the PE. 

This method is commonly referred to as the Cyclically Adjusted Price-to-Earning ratio (CAPE), or the Shiller P/E. 

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IFB105: Q&A: Is Acorns Worth it? Should I Buy Small Cap Stocks?

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:37                     All right folks, welcome to Investing for Beginners podcast. This is episode 105, tonight. Andrew and I are going to read some listener questions and we’ll go ahead to answer those on the air and we’ll have our usual banter and witty, witty comments from each other as we go forward with all this. So I’m going to go ahead and read the first question. Andrew, would you like to say hello?

Andrew:                              00:58                     Hello.

Dave:                                    01:00                     Excellent. Good job. All right, moving on. Hello. I have been following your podcast for months and just recently signed up for your service. I noticed you’re using your Roth IRA for your stock recommendations and tracking your 40 year portfolio. I understand the benefits of using a Roth to avoid taxes but is absolutely unnecessary for the goal of your slash our investing. My Roth is being utilized with an advisor service from vanguard. So it was not available for individual stocks. I’m using a separate, separate taxable brokerage account for my stock picking. Would this still be beneficial in the long run with having to pay taxes yearly on dividends and capital gains are selling if in a taxable brokerage? Thank you Jared. Andrew, what are your thoughts on this?

Andrew:                              01:43                     So we were kind of talking about this off the air before I’m heading record. I think like, like what you mentioned Dave, obviously, um, you can have multiple Ross, so he talks about how he has an advisor who’s handling one of his, you know, his Roth account. You can open a second one and use that for your stock picking instead of doing it with a taxable brokerage account. So just as a quick overview refresher, maybe if you’re not well versed in all this stuff, the individual brokerage account, um, it gets taxed. And so like he said in the question, you get taxed on dividends, you get tax on capital gains. What’s key to understand is even if you’re doing a drip, like a dividend reinvestment, you’re still going to get tax on those dividends. So let’s say you’re reinvesting all of your dividends and the given year, let’s say you had like $1,000 in dividends and you invested all of them, um, you’re still going to get a bill come tax time.

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Calculating the Annualized Rate of Return for Good Financial Planning

Ever tried planning for your financial future, only to realize how difficult it is to project into said future? Contributor Andy Shuler is back with another excellent article about how calculating the annualized rate of return can give a road map of what kind of future wealth to expect…

Question – what is the most desirable frequency for your interest to be compounded?

Answer:  I’ll tell you later…

If you have read any of my blog posts before, you probably will get the sense that I am a bit of a spreadsheet fanatic. 

Rather than download Mint, I will create my own excel spreadsheet. 

Rather than Google a compound interest or a loan payoff calculator, I will do it in Excel. 

I prefer to do it this way.  I think it helps me understand the numbers better and therefore helps allow me to make better decisions.  Hell, I might even say that I think spreadsheets are excel….lent.  Wasn’t that funny?  No?  I agree.  Bad joke.  Oh well…

This post really goes hand in hand with my post about compound interest.  If I invested $10,000 in a bank account that earned 10% interest, that was accrued at an annual rate, then I would have $11,000 at the end of the year, right?   Right.  BUT!  My friends, what if it was compounded monthly?  Well, then you would be in an even better situation! See below:

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What to Do With a Money Windfall (with 2 Real-life Budgeting Examples)

Imagine this situation – you’ve just had a lot of money come into your life unexpectedly – maybe it was an inheritance, or a big bonus from work, or maybe you won the lottery!  You feel like you’re invincible – completely on top of the world and rich. 

But the question is now, what to do with a money windfall… and every situation is completely different, but below is a guideline of how I would handle it if I was lucky enough to get a big bonus check!

Option #1: 401k

This is the most important thing.  I think it is a 100% MUST to contribute to your 401K to at least max out the company match.  I know many people that won’t do it and it’s literally throwing money away. 

If you make $1000/week, or a salary of $52,000, and say your match is 4% for every 5% you put in (pretty common to see a 100% match for the first 3%, then a 50% match for 4-5%) then you get $80 for every $100 that you put in. 

And if you really think about it, it’s not even $100 that you’re actually “sacrificing” from your paycheck because it is likely pre-tax (unless you select the Roth option), it’s more like $75 – $80. 

So, essentially a 1:1 match. 

I used to have a teacher in sixth grade that would always say “DBD” which stood for Don’t Be Dumb.  So please, I’m begging you, please max out your company match if you have one.  DBD.

[Editor’s Note: Wondering what a Roth is? Here’s a simple explanation on the differences between a Roth and Traditional 401k.]

Option #2: Emergency Fund

Admittedly, this is the one that I struggle with the most.  It is very hard for me to convince myself that just sitting on cash is a good thing and should be of very high importance.  But I’m trying to make it a priority. 

I’ve heard people say things like you need to have six months of salary saved up so if you lost your job you could continue to maintain the same lifestyle.  I think that is absolutely ridiculous. 

I’m not sure about you, but if I lost my job, I would start doing something before I got to the six month point of no income at all, and I would definitely cut back my expenses and not live the same lifestyle. 

I think 2-3 months of expenses is a good spot to have saved up.  And the bigger your family, and the more that other people are depending on you, the more important it is to grow this number. 

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The Continuous Compound Interest Formula Excel Function for (us) Nerds

Ever wanted to illustrate exactly how powerful compound interest can be? Wanted to have an Excel function to do it for you? This post by contributor Andy Shuler reveals the continuous compound interest formula and how a function built into Excel will calculate it for you.

“Compound Interest is the eighth wonder of the world.  He who understands it earns it…he who doesn’t, pays it”

– Albert Einstein

This is truly one of my favorite quotes ever.  At first, I really didn’t understand it.  “yeah, you earn interest on your money…. who cares?  That happens in a bank account too”.  Boy, was I wrong. 

What’s the difference between a quote and a saying?  Looking at face value, not much really seems different – they’re both just a couple sentences, or maybe even just a few words. 

But there is one key difference – inspiration! Quotes INSPIRE you to do something…lose weight, save more, be a better person, anything at all! 

That’s why I love this quote from Einstein. 

This quote is truly what inspired me to start investing in the stock market.  The concept of compounding interest is pretty simple really – it’s simply earning interest on your principal investment, but then continuing to earn interest on top of that principal and the previous interest that you’ve already earned. 

For example, if you earn 6% on $1000, you will then have $1060.  But, the next time you earn 6% interest, it will now be on $1060 instead of $1000, and that then will result in a new value of $1123.60. 

Not a huge difference for this time, but it was $3.60 more than that $60 that your 6% interest on $1000 generated.  To explain this a little bit better, I’ll put it into a real-life scenario that I went through with my wife less than a week ago…

Convincing the Wife about Compound Interest

We’re finally gotten to the point that we feel like we have a sufficient emergency fund, so now the thought process is, what do we do with it? 

Previously, it had just been sitting in my bank account earning a whopping .01% interest.  Yes, I said .01%

I was shocked when I saw it at first, but I started doing more research and realized it was pretty common unfortunately. 

I then started looking into some high interest savings accounts, and from hearing some recommendations of Ally from Andrew on the podcast, I decided that I thought that was the best way to go about holding our emergency fund. 

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IFB104: Intrinsic Value Warren Buffett Style

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcasts. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome Investing for Beginners podcast, this is episode 104 tonight, Andrew and I are going to talk about in terms of Warren buffet style. So I recently wrote a post, I had this idea and I ran it by Andrew to see what his thoughts were. So I kind of, and he liked it. So I kind of flushed it out and posted a blog post on his website. It’ll probably be up sometime next week and Andrew and I thought we could talk a little bit about it and I could kind of go through my idea and my thesis and then Andrew can try to pick it apart. Ala Charlie Munger style.

Andrew:                              01:08                     So, um, can I say, yeah, of course. I just want to, um, I’m excited for this. First off, um, be, I think it’s very important that we talk about this and we haven’t really, I don’t think we’ve really talked about DCF at all. So I’m excited for this and I guess, see, I’m going to interrupt you at times just because I think we need to think about the beginners who don’t know some of these terms at you and I are so familiar with. Right. So if you don’t mind, I’m uh, I’m going to interrupt you here and there to hopefully give context and help people understand better because I think if there could be a podcast episode that like makes DCF easy. I know for me, I try to learn DCF many times and vitality’s book, um, we had the telly on several episodes ago, his book, something about it just made it so simple that it all made sense to me. So maybe this episode can be that way for some other people. Plus it’s just a fascinating idea on topic. So I’m just really, really excited. Thanks. Yeah, I agree with you. Yes, of course. You can interrupt me at any time. Uh, and it is, you know, it is something that can be very daunting and hopefully I can shed a little light on kind of how this works and, and make it a little bit easier for everybody.

Dave:                                    02:32                     So, uh, we’re talking about intrinsic value. So intrinsic value is obviously a very important concept that we need to embrace if we’re going to try to find the value of a company before were interested in buying it. And as Andrew and I always like to say in our little tagline, invest with a margin of safety, emphasis on the safety of this is one of the ways that I go about trying to find a company’s value and determining whether I could have to build in a margin of safety or if it’s already there for me. And I’m going to read you a quote from a blog that I follow called basin investing. And uh, it’s, it’s comes right from Warren Buffet’s owner’s manual. And if you’ve not read that, Eh, I do have a link to that in the, in the blog. And it’s very, very interesting.

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Calculating Intrinsic Value with a DCF Like Warren Buffett Would

“Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”  

Basehit Investing

These thoughts come directly from page 4 of Warren Buffett’s owners manual.

Buffett has commented on intrinsic value multiple times throughout his annual letters to shareholders, as well as his speeches, interviews, etc.

However, he has never exactly outlined the exact formula that he uses, if he even uses one.

According to Charlie Munger:

Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.”

My idea with this post is to explore some of his ideas and see if we can put together a formula based on these ideas that we can use.

And then put the formula to the test to see if it could work for us.

Remember, with any formula we are looking for approximate value, not an exact number.

As Warren likes to say “it is better to be approximately correct than precisely wrong.”

Warren Buffett thoughts on Intrinsic Value

“Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover – and this would apply even to Charlie and me – will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value.  What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.”

Valuewalk

Why is he so vague on the exact formula he might use? Especially considering he is so upfront about everything else in his investing philosophy.

My thought is this. Warren wants us to do it for ourselves because it is an estimate only and not a precise number.

Warren believes, and I agree that intrinsic value calculations are an art form, not some exact model that you plug numbers into and out spits a number you can use to buy stocks.

He gives us all the information we need if we put together the clues from his annual letters to shareholders. As he says, it is all right there for us to use.

It is just a matter of us picking up the pieces and trying to put the puzzle together.

Owner Earnings

The first things we need to calculate is the owner earnings for our company. As I have explained in a few articles previous, this is how Buffett looks at free cash flow.

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IFB103: Our Thoughts on the Uber IPO

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcasts. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence, crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:39                     All right folks, we’re welcome to Investing for Beginners podcast, this is episode 103 tonight. Andrew and I are going to talk about IPOs, uh, with the upcoming Uber IPO on the horizon. It’s going to begin here very shortly. Uh, Andrew and I thought it would be apropos for us to talk a little bit about IPOs and a little bit about Uber and just kind of our general thoughts about how this will work, what we think is a good investment and so on. So Andrew wants to go ahead and take your first stab at this, and then we’ll have a little conversation about it.

Andrew:                              01:12                     Okay. I want to, so I guess to overview on the Uber IPO and then maybe we can talk about IPO is in general. So based on or recording this the day of their IPO. So it’s happening kind of in real time as we’re talking. They, some people, there are huge expectations for this. Lyft had an IPO very recently. Some people, I don’t know where they got this idea, but some people were thinking the Uber with IPO at like a hundred billion market cap. Um, I read, I read 120 billion. Like where, where do they, they just like put a bunch of numbers in a hat and Oh, 120 sounds nice. And that’s what they decide. I don’t; I don’t get it at all.

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