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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 15,000+ 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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How a Tactical Asset Allocation Plan Can Earn You More for Retirement

A Tactical Asset Allocation plan is a plan that can allow you the opportunity to have a ton of success if implemented properly, but it takes a lot of knowledge and understanding of what is going on in the market and some serious market discipline.

So, what exactly is a Tactical Asset Allocation plan?

Essentially, you’re going to focus on investing more on asset classes than actual investment selection.  For instance, you would be focusing on investing in stocks, bonds, cash and potentially commodities. 

In essence, your goal when implementing this plan is to take advantage of the gains of certain asset classes while the others aren’t performing nearly as well.  Let me show you how it works:

1 – Decide your asset allocations

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IFB130: A Biotech Value Trap?

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 number, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome to Investing for Beginners podcast episode 130 tonight. Andrew and I are going to try a little experiment. Well, Andrew is going to test some stuff out on me so he had a great idea for the show and I don’t know exactly what we’re going to do. I do, but what’s going to happen is that Andrew is going to read some information from a tank K and some footnotes, and we’re going to talk about a possible value trap. And so I’m going to be a little bit of his Guinea pig tonight, so it is like if you, and he and I were talking to you guys as listeners, I’m going to be kind of the listener tonight, so this should be kind of fun. So without any further ado, I’m going to turn it over to Andrew and he’s going to do some pocket.

Andrew:                              01:18                     Yeah, let’s do it. I wanted to give like kind of a fresh perspective where you’re somebody who has no idea what’s going on, kind of a thing, and you can interject on when you have ideas or thoughts and see where the conversation goes from there.

Andrew:                              01:35                     Basically, what I’m going to do in today’s episode is I’m going to do like, like let’s sit down as if we were going to try to find a stock today. So we’re going to use a screener, we’re going to use some, some financial metrics. So for you to understand where this conversation is going, you’re going to want to know the basics of that. So like I say, over and over and over again, if you haven’t already, you can go back to the archives. We have lots of intro stuff. And so get that foundation first and then maybe come back and listen to this one. But you know, we’re going to, we’re going to do that now. And so it’s like, let’s take stock or a group of stocks today, run a through a screener. I tried to find good stock.

Andrew:                              02:22                     I’m going to show you one that looks like a great stock, has all the right metrics but is a value trap. And that I will show you why and we’ll see what that discussion kind of, if it takes off or if it’s just completely boring, you’re just going to have to listen anyway. But, you know, if you’ve been following the market at all. Recently, I’m recording this on December 20, 19, so many different stories. A sort of big one and one that I see just kind of over and over and over again is surprisingly, or maybe not surprisingly, biotech is still really huge right now. So there’s a lot of huge jumps in stocks. Like we’re talking about these biotech stocks that will jump 15% in a matter of minutes or drop 10% in a matter of minutes. And this is all kind of par for the course.

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AAA – Do You Get Enough Bang for Your Buck?

Have you ever heard of AAA?  Back when I was a kid, my parents had AAA (pronounced triple A) and I absolutely loved the service, but as an adult, I find myself now wondering is AAA worth it?

They would always include us on their plan when we first started driving and I honestly used it a ton of times.  When I first started driving, I had a really bad issue with locking my keys in my car.  Like I did it three times the first year of owning my car. 

I would always open my trunk, put my keys in there so I could grab my golf bag out, and then just shut the trunk.  Turns out that didn’t work so well as I only had one set of keys!

Some of my other uses with them included:

  • Getting a new battery when I went out to start my car and my battery just completely died on me from being old
  • Getting gas brought to me when I ran out of gas on the highway in the middle of winter
  • Getting my car towed when I was rear ended

You might be reading this and be like, “damn, Andy, you’re an awful driver.”  Honestly, after reading all of these I’m starting to question myself, but many of them happened when I was in high school or early in college.

But now that I am older, I find myself wondering if AAA is really worth it.  So, the question is – what does AAA even provide?

In my area, AAA has two different types of options – the Basic and the Plus plan:

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Coverage Ratios – A Tale of Two Companies

Debt is a powerful tool a company can use to help leverage return on assets but it needs to be used responsibly. While debt-to-asset ratios tell a good deal to investors, they can be a bit deceiving because they mention nothing about the profitability of the business and ability to service the debt.

Enter coverage ratios (also commonly referred to as debt-service coverage) which investors can use to help determine how tight a company is towing the line in terms of fixed payments. The higher the coverage ratio, the better, as it shows the company has a greater safety net to pay interest payments and other fixed obligations if times get tough.

This article will go through some of the main types of interest coverage ratios, such as operating income, free cash flows from operations, and EBITDA. We will also touch on the nuances of being sure to include fixed obligations such as operating leases into the coverage calculation as we look at two companies, retail behemoth Walmart, and auto supplier giant Magna International.

Coverage Ratios – As can be seen in the various formulae below, to get an coverage ratio, one needs to look at how well operating income, before any fixed expenses, can cover the same mandatory cash expenses that are being added back to the operating income measure. As the calculation concerns fulfilling obligation, interest coverage ratios can also be referred to as debt service coverage as previously mentioned. Let’s dive into some of the different methods now.

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A Complete What Works on Wall Street Book Summary

Recently I have been reading and reviewing the ‘What Works on Wall Street’ book by James O’Shaughnessy and it really has been completely eye opening to me as newer investor.

Quite often we hear people talk about the things that they look for and it usually involves something along the lines of P/E and then looking speculatively about the future opportunities that the company might have. 

While I do think that it is important to know the P/E of a company and to look at some of the qualitative factors, like new products or processes that the company has, that is by no means an end all be all.

My first review was on Chapter 10 of the ‘What Works on Wallstreet’ book where O’Shaughnessy talks a lot about the different value factors and which ones are considered best when trying to identify the potential for a future stock.  Some of the methods that he strongly recommends are looking for a low Price/Book (P/B), a low Price/Cash Flow (P/CF), or a low Price/Sales (P/S or PSR) ratio. 

Essentially, he is just trying to identify a stock that has a low price to some very important financials of the company as book can identify the company’s assets that they have, cash flow is simply just cash which can show the opportunity for them to continue to make investments or be able to make it through tough times, and sales can show you how the company is continuing to grow their revenue stream. 

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Stages of Industry Life Cycles

Understanding what stage of the life cycle an industry is in can help investors assess the valuations, risks, economics, and competitive forces that are being seen in individual companies and the industry as a whole. 

Company growth prospects and valuations tend to be effected by the various animal spirits seen throughout the cycle which can all have a big effect on the risk reward trade-off seen at different stages.

This article will discuss the stages of the industry life cycle while also using the cannabis industry as a real world example for some fun.

1) EMBRYONIC – During this pioneering stage in the industry life cycle, the industry’s product or service is in its infancy and just being introduced for sale or still being developed. As demand for the industry’s product or service is not yet fully established, economies of scale are weak and companies will be at their least profitable point. Revenues might be slowly ramping up or not yet meaningful at all.

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How Important is Sector Diversification for the Average Investor?

Chances are that if you have been investing for any period of time, you have heard about the extreme importance of diversification. 

While I do agree for the most part, I also think that sector diversification is one of the most overrated rules of investing for the average investor.

For starters, diversification is essentially spreading out your investments into many different groups that theoretically shouldn’t have a huge impact, or any impact at all, on your different investment groups. 

For instance, you might invest in financials because if your tech investments are hit with major, industry wide concerns (such as the China trade tariffs) then the financials should help keep the rest of your portfolio from being hit with these same issues. 

Diversification could mean anything – it could mean investing in bonds vs. stocks, or domestic investments vs. foreign investments, or anything at all that won’t be correlated with other investments.

That being said, typically when people are talking about diversification, they’re referring to spreading their investments out among the 11 different sectors in the stock market.  Those 11 sectors include:

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Walter Schloss – One of the Greatest Value Investors of All Time

Have you ever heard of Walter Schloss?  I’m guessing not, but by the end of this article you’re going to be referring to him as Walter BOSS!

Walter Schloss was one of the lucky few that was able to learn directly from Benjamin Graham, but he has maintained a relatively low amount of recognition when compared to the amount of success that he has had with his investing methodologies. 

In the words of Walter Schloss, his investing method really comes down to this quote, “Basically, we try to buy value expressed in the differential between its price and what we think its worth.”

When I first started researching Walter Schloss, I was instantly attracted to the title of this article on Walter Schloss’ website titled “The Other Warren Buffett:  Meet Walter Schloss.”

The article goes on to talk about his upbringing and learning from Graham and some of his success stories and his view of some of the important things to look for, such as P/E and liquidity of a company.

In the past, Andrew has had Tobias Carlisle on his podcast to talk about value-investing and the importance of taking a contrarian view on thing, more specifically trying to zig when others zag, and zag when others zig. 

Tobias Carlisle also has an excerpt on Walter Schloss on his website, The Acquirer’s Multiple, that talks about how to invest stress-free for 40 years.  The main takeaway that I got from reading this can be summarized with the Ben Graham quote, “a stock well bought is half sold.” 

That really sums up the mindset of some of these value-investors.  They’re always looking for the bargain buy.  The stock that is very under-valued and being sold at a discount to its intrinsic value.  And Walter Schloss is no different.

Some of the key factors that Walter Schloss evaluated are:

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How to Test Goodwill & Intangibles for Possible Impairments

As technology increases and goodwill and intangibles continue to get more common on the balance sheets of companies, it becomes ever more important to understand the accounting category. It is essential to be able to differentiate between what is healthy goodwill and intangibles and what is toxic goodwill and intangibles that are not being supported by cash flows.

This article will go over what goodwill and intangibles represent, how they are created, as well as how to spot potentially toxic balance sheets.

Intangibles on the balance can either be internally generated or created through an acquisition. Examples of some intangible assets would include a company’s brand name and trademarks (ie. Coke), patents, licenses, customer relationships and lists, and other proprietary technology.

Goodwill is essentially a catch-all figure created only through the process of purchasing another business. Goodwill could be considered to represent the reputation, human capital, and growth potential of the business being purchased and thus the reason why the purchase price was greater than the net identifiable assets of the company. 

How Are Goodwill and Intangibles Created?

Intangibles: Internally generated intangibles can be capitalized on the balance sheet under both IFRS (IAS 38) and U.S. GAAP (ASC 350) but as always, U.S. GAAP has more specific rules-based standards. Like all asset capitalization, costs incurred in the research phase should be expensed and only when the project enters its development phase can costs potentially begin to be capitalized.  

Under IFRS, internally developed intangibles can be capitalized only if 1) it is probable that the expected future economic benefits of the assets will flow to the entity and 2) the cost of the asset can be measured reliably.

Under U.S. GAAP costs should generally be expensed when incurred and not capitalized with certain exceptions for computer software intended to be sold, website development, computer software developed for internal use, among other specific examples. 

Goodwill: Can only be created on the balance sheet when a company purchases another existing business and the purchase price paid is greater than the net identifiable assets (including intangible assets) of the business being acquired. The amount by which the purchase price is greater than the net identifiable assets of the company represents the amount to be considered goodwill. There are two methods to calculate the amount of goodwill to be recognized during the purchase of another company. The full goodwill method is mandatory under U.S. GAAP but IFRS allows the choice of either the full or partial goodwill method.

  1. Full Goodwill (U.S. GAAP & IFRS):  Under the full goodwill method, the amount of goodwill recognised on the balance sheet will always be more than the amount recognized under the partial goodwill method as the non-controlling interest’s portion of goodwill is being recognized as well. 

Full Goodwill = Total Fair Value – Net Identifiable Assets

  1. Partial Goodwill (IFRS Only): Under the partial goodwill method, only the acquirer’s share of goodwill is recognized. As such, goodwill under the partial goodwill method is always less than the amount recognized under the full goodwill method as only the purchaser’s share of total goodwill is being recognized.

Partial Goodwill = % Purchased x (Total Fair Value – Net Identifiable Assets)

  • Example of Full vs Partial Goodwill: Company ABC is acquiring 80% of Company XYZ for $100M. Company XYZ currently has total assets of $100M and total liabilities of $40M on the balance sheet. As part of Company ABC’s due diligence, it was discovered that Company XYZ has a lucrative 10 year contract with a supplier to purchase in bulk at a 20% discount.  Company ABC estimated the present value of savings from this contract is worth $5M. However, it was also discovered that $1M of accounts receivable currently on Company XYZs balance sheet are from a customer who recently filed for bankruptcy.

Solution: Company XYZ’s total fair value is $125M given that Company ABC is willing to buy 80% for $100M. The total fair value of Company XYZ’s assets are now $104M given the initial book value of $100M plus the $5M intangible contract asset less the $1M accounts receivable write-down. The net identifiable assets are $44M as calculated by the $104M new fair value of assets less $60M fair value liabilities.  The detailed journal entries that would need to be made under each method of accounting for goodwill can be seen below.

full goodwill vs partial

Side Note: In our example, the company being purchased was being valued at 1.95x price-to-book value ($125M purchase price/ $64M net identifiable assets) which resulted in the creation of goodwill. However, the situation can arise where a company is purchased for less than the value of its identifiable assets in what is referred to as a “bargain purchase”. In a bargain purchase, both IFRS and US GAAP require the difference between the fair value of the acquired net assets and the purchase price to be recognized immediately as a gain in profit or loss.

Carrying Value

Under U.S. GAAP, intangible assets are measured at historical cost and amortized over their useful life with the carrying value also needing to be tested for impairment. Impairment testing under U.S. GAAP is done at the level of the reporting unit which can be an operating segment or one level below. Goodwill is not amortized, as it is assumed to have an indefinite lifespan, but is tested for impairment at the level of the reporting unit which can be an operating segment or one level below. An asset is impaired if the carrying value exceeds the expected future cash flows to be derived from the asset on an undiscounted basis. Unlike IFRS impairment testing, U.S. GAAP looks at the future value of cash flows on an undiscounted basis so that changing discount rates do not have any effect.

Under IFRS (IAS 36), intangible assets can be measured at historical cost less accumulated amortization similar to U.S. GAAP or, alternatively, intangibles can be measured using a revaluation model as permitted in certain instances. Impairment testing under IFRS is done at the level of the cash-generating unit (CGU) which is the lowest level that is monitored for internal management purposes. Goodwill is not amortized, as it is assumed to have an indefinite lifespan, but is tested for impairment at the level of the reporting unit which can be an operating segment or one level below. An asset is impaired if the carrying value exceeds the expected future cash flows to be derived from the asset on an discounted basis.

Either way, the important take away is that both intangible assets and goodwill need to be tested annually for impairment or more frequently if events or circumstances arise that indicate potential impairment.

The Hint a Write-down is Coming

Goodwill and intangibles need to be tested annually for impairment by analyzing their future cash flows. To get a smoke signal of upcoming impairments, we can look at profitability ratios (such as return on invested capital) to see if the assets of the company (which includes goodwill and intangibles) are generating a sufficient return. Here are a couple articles from myself and site founder, Andrew Sather, using the presence of unsupported goodwill and intangibles to point out frothy balance sheets in Kraft Heinz and General Electric.

Below is an ugly graph of General Electric’s declining free cash flows per share which left the company’s inflated balance sheet looking increasingly at risk. Ultimately, General Electric would see tens of billions of dollars in write-downs.

ge goodwill impairment

Keeping an eye out on profitability ratios and the composition of the balance sheet can help investors avoid being caught up in asset impairments.

A History of the HRL Dividend and Where it Could Go from Here

Have you ever heard of Hormel (HRL) before? Hormel is very well known in the grocery store space, but they’re equally, and maybe even more so, well known for an extremely impressive HRL dividend throughout the years. 

Chances are that you have even if it isn’t ringing a bell for you right now.  Hormel is a Fortune 500 company that has been around for over 125 years, so they must be doing things right. 

hrl dividend

They are a company that owns over 30 food brands with some of the more popular brands being Jennie O’s, Spam and Justin’s.  Not going to lie, I eat their Jennie O’s ground turkey at least once a week and I didn’t even know that it was a Hormel Brand. 

But that’s not what I am writing about!

I am writing about the HRL dividend.  I told you that it is extremely well known in the investing community and it’s well known for a great reason – they are a dividend king! 

You’ve likely heard the term Dividend Aristocrat which identifies a stock that is in the S&P 500 and has experienced 50+ straight years of annual dividend growth.  A Dividend King is very similar except instead of 50 years, the company has experienced 25+ years of annual dividend growth.  That is such an impressive feat. 

When you really think about it, it takes a very impressive company to have that sort of safety to be able to continuously grow their dividend and never need to stop the growth or even eliminate the dividend due to some financial hardships that the company is going through. 

Below shows the dividend history that HRL has experienced since they implemented their dividend for the first full year in 1990.

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