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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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Operating Cycle vs. Cash Flow Cycle

A company’s Operating Cycle and Cash Conversion Cycle are quite similar with only one additional item added on to the Operating Cycle formula in order to get the Cash Conversion Cycle formula.

Both formulas are liquidity measures and can also be used as a gauge for the operational and financial effectiveness of a company.  

The Operating Cycle measures the time it takes a company to convert inventory into cash and the Cash Conversion Cycle takes into account the fact that the company does not have to pay the suppliers of its inventory or raw materials right away.

cash conversion cycle

As will be shown later in an example using Walmart, both ratios can be calculated using readily available figures from a company’s financial statements.

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IFB123: Investing vs Paying off Student Loan Debt

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:                                    00:36                     All right folks, we’ll welcome to Investing for Beginners podcast, this is episode 123 tonight. Andrew and I are going to answer some of our listener questions. We’ve got some great ones recently, and we wanted to take a stab at answering them for you on the air. So I’m going to go ahead and read the first question and then Andrew and I will do our little thing. So our first question is, hi Andrew. I currently make over six figures,  and my wife stays at home with our 20-month-old twins. Wow. We have a few school loans left, roughly 15,000. I am still balling the payments as well as to pay off quicker. My question is, should I continue to dollar cost average and invest or take that amount and put it towards the loans? I also put a little bit aside for my paychecks for my daughters. I also have a 401k with my company. I get a fully vested 3% than 100% of my first 3% and 50% of the following 3%. So I don’t want to lose out on the free money. Does it make sense? I just turned 34 last week, as well. Thank you to you and Dave for all the advice constantly. Andrew, what are your thoughts?

Andrew:                              01:46                     Hmm. So this kind of hits home a little bit because like I can relate with it and I think it’s something that more and more people who are a little, I’ll say like coming up, but you know, starting their careers, starting to look into investing. A lot of younger people have student loans. And so this is one of those things where, you know, not only are you trying to figure out, you know, how do I make a budget? And then it’s like, well, how does the stock market work? How does investing work? And then now it’s like, well, should I invest or should I pay off that? And there’s get millions of different answers. So let’s tackle that back half first. And I want to see what you think about the 401k to Dave. So basically, basically, I look at a 401k matches free money, and I think that takes priority over anything.

Andrew:                              02:42                     So when we talk about the stock market and getting returns from the stock market, 10% would be average. I would say if you’re getting 11% a year, that’d be great. So obviously that can compound over the years, and as time goes on, that little 1% can make a huge difference in your total returns. A match, you can kind of think of that as a hundred percent return. You know, where else are you going to be able to put $2, get $2 from somebody else, right? From the company that’s matching? Granted, yeah, it’s not 100% a hundred percent like, I can spend this tomorrow, it’s going to a 401k, and you have to wait until retirement to take that out. But you know, if you’re listening to a show about investing and you’re talking about the future building income streams retirement is a part of that as well.

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Famous Growth Investor on Why Conservative Investors Sleep Well

Phil Fisher, author of Common Stocks and Uncommon Profits, has been one to always talk about the power of how conservative investors sleep well, and he really hammers this topic in his Part 2 section of the book by identifying 4 key points.

Superiority in Production, Marketing, Research and Financial Skills

Fisher starts off this chapter by talking about the major importance of being the lowest cost producer.  Obviously when you’re the lowest cost producer, you’re likely going to be able to make the best margins, but there’s other reasons as well. 

Being the lowest cost producer allows you the ability to outlast competition in tough times and then also gives you the ability to grow when you need to, and to be able to support your own growth. 

This is so important because you can outlast some of the other smaller companies that might not be able to make it through these tough times and then when times are good and you’re able to grow, you can do so without having to generate more shares of the company. 

It is important to note that with this type of low-risk company, the rewards also are usually lower than a high-risk company – but that doesn’t mean that they are low!

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What’s the Tax Rate on my Bonus if I Invest it in the Stock Market?

So, you’ve just received a big bonus at work and you’re wondering what you should be doing with it, any quite frankly, you’re worried about losing a lot of it due to such a high bonus tax rate. 

First off, CONGRATS! 

A bonus is a big deal. 

It means you’re getting your stuff done and you’re killing it at your job.  I am a very firm believer that a bonus should be meant to treat yourself and that you should do something fun with it. 

Maybe that means spending some of it on some clothes, or a trip, or maybe your version of fun is investing in your retirement. 

No matter what your version of fun is, you really should use some of this bonus to treat yourself, but make sure that the vast majority is being used to help you get ahead in life, whether that means saving, paying down debt, or investing for your future.

So how is your bonus taxed, currently?  Employers have two options right now:

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IFB122: Analyzing the Growth of a Stock, Pt 2

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:                                    00:35                     All right, folks, we’ll welcome to the Investing for Beginners podcast, episode 122 tonight we’re going to do part two of analyzing the growth of the stock. And one of the things that are going to be a theme tonight is appearances can be deceiving. Not all growth is equal, so you never know what you’re going to get until you get into it. So like Forrest Gump used to say, life has a box of chocolates; you never know what you’re going to get. So tonight I think, you know, worst you’re going to get, but Andrew and I are going to talk a little bit. So Andrew, once you go ahead and start us off and then we’ll chat a little bit.

Andrew:                              01:11                     Yeah, sounds good. I’m excited to hear about the example that we talked about off air. I think that kind of ties it in nicely, and it’s, you know, we’ve been talking about growth and, you know, if you haven’t listened to the last episode, I would recommend doing that. But bottom line, you know, a business grows, a stock goes higher in the stock market because it’s able to grow earnings and profits over time. And so as an investor, there are so many different ways, and like a box of chocolates, I guess. There are different flavors of ways that you can try to reevaluate a stock’s growth. And what’s frustrating is there’s never one perfect way. And you know, one, if you have some indicator that you found this year that’s worked to help you pick stocks that grew, maybe that, that indicator doesn’t work next year.

Andrew:                              02:06                     But you know, if we zoom out and not necessarily try to look for a magic bullet, but maybe try to look for general trends and maybe if we just have a bigger understanding of what some of that accounting jargon means, what are some of the causes and effects of growth and, and some of these metrics. So if we understand those kinds of big-picture elements, then as we’re digging into the stocks that we look at, we get more understanding, and it’s not just random. We understand situations where maybe like you were saying in the intro; growth was deceiving. Or when a company’s track record is showing that at that it’s not only growing but looks like maybe

Dave:                                    02:59                     A sustainable growth, and it looks like growth that has come from a strong business model, strong core business, and not anything else with the numbers. So I think you mentioned a bank you have been looking at, and from some of the numbers you started throwing to me it made me think of some of the other parts of growth that we didn’t cover in the last episode. So I would love to hear what you have been looking at lately. So, yeah. Andrew and I, after last a recording, we had talked a little bit about some other possible aspects of growth and maybe exploring a little bit, some other things that we could think about. So as I’ve been doing more and more writing about actual companies for seeking alpha recently, I’ve been noticing a trend when I’ve been looking at these companies, and my mentioned this to Andrew, and he and I were going back and forth a little bit about this.

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Should Investors ‘Buy the Rumor, Sell the News’?

Have you ever heard the saying “buy the rumor, sell the news?”  I hadn’t heard it before until Dave said it on an episode of the Investing for Beginners Podcast, but the more that I thought about it, it seems like that’s the exact philosophy that so many people seem to have nowadays.

If you really think about it, that’s what a lot of people seem to be doing when they’re buying stock. 

For instance, Fast Money, a show on CNBC, ends every show by saying what their ‘Final Trade’ is going to be. 

The term ‘Trade’ in itself implies that you are treating that decision, regardless if you’re buying or selling, as a short-term decision.

CNBC even has a show where they only talk about trading options which is even more of a risky move where you’re betting that the stock will either increase or decrease by a certain amount by a certain date. 

You have the option to place a put, where you think the stock will fall, or a call, where you’re betting that the stock price will rise, by a specified date.  Again, this is extremely short-term thinking.

While this short-term mindset really seems to be the talk of the town lately, and I think it’s because people think that they’re savvy and can outperform the market (Spoiler, you probably can’t), I think it’s a good thing for us value investors. 

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AOS: Dividend Aristocrat’s Phenomenal 25 Year Track Record

In the most recent episode of the Investing for Beginners Podcast with Andrew and Dave, they talked about some of the companies that have recently been added to the Dividend Aristocrats.  One that really stood out to me was a company called A.O. Smith (AOS) and the AOS dividend. 

If you have listened to any of the podcast episodes before, you likely know that Andrew and Dave really focus on investing of a margin of safety, with an emphasis on the safety.  One part of accomplishing this is finding companies that offer a dividend.

Companies that offer dividends are typically perceived as a more conservative investment as they’re giving you some “cash back” every quarter when they report their earnings. 

Some people will use this as in income stream while some will reinvest that money back into the market, either in that same company using the Dividend Reinvestment Plan or into a different company.

But you know what’s even more of a “sure thing” than a dividend paying stock?  A Dividend Aristocrat. 

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The Information Ratio – CFA Level 2

An investor’s Information Ratio is a measure of the Active Return that is being achieved per unit of Active Risk. The Information Ratio is important to investors because it is one of the best indicators of the skill level of the portfolio manager or individual retail investor.

This article will discuss the calculations of the Information Ratio as well as its interpretations and implications for institutional and retail investors.

How to Calculate the Information Ratio

The Information Ratio can be calculated by dividing the portfolio’s Active Return by its Active Risk. Active Return is the amount that the portfolio return is above that of the benchmark.

Active Risk (also commonly referred to as Tracking Error) is the standard deviation of Active Return which means it is a measurement of the volatility of portfolio returns around the benchmark return.

information return formula
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How to Open an Investment Account for a Child

I talk a lot about the power of compound interest and how time in the market is better than timing the market, and I feel like I’ve shown some good examples, I really outline a great example in this post that shows the value of investing early and why you should start as early as you can.  I even touch upon the fact that you should Open an Investment Account for a Child if you can, but you should be sure not to do this at the detriment of your own retirement. 

If you want to pay for your kids’ education, you should start as early as you can – and the data shows that!

Below I’ve shown the impact of starting early with five different scenarios that show you should start as early as you can.

Click to zoom
  • The first scenario is simply a base scenario where you put in $50/month from birth and receive an 8% Compound Annual Growth Rate (CAGR), which is fairly conservative as the average CAGR since 1950 is 11%.  Try to view this as a “control” like you might think of from a science experiment.
  • The next situation is the exact same, except you’re starting with $1000.  So, starting with $1000 in your account will give you more than $4000 in 18 years when that child goes to college.  That’s some pretty serious motivation to start early.
  • Next shows that if you start 5 years before the child is born, you only have to put in $31/month to have the about the same amount of money when that child goes to school.  And, you actually put in $2,244 less than you would in the first example as $31*12 months*23 years = $8,556 total saved vs. $50*12 months*18 years = $10,800 total saved.
  • The fourth example shows that you would have to save $100/month if you started when the child entered first grade.  This would cause you to have to save a total of $14,400 ($100*12 months*12 years).
  • The last example is if you were a procrastinator and waited until they entered high school, and this would require you to save $425/month, which would result in you needing to save a total of $20,400 ($425*12months*4 years).

I mean, I think the data is pretty obvious, save as much as early as you can and invest that money and you’re going to be much, much more prepared for your future.

You might be wondering how much college really costs nowadays, and it’s going to blow your mind, so I’ve included an amazing chart below that shows the average cost of tuition for both in and out-of-state students by state, as well as how that tuition has changed, provided by the CollegeBoard website.

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IFB121: Analyzing the Growth of a Stock Pt. 1

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 walk up to Investing for Beginners podcast. This is episode 121 tonight. Andrew and I are going to talk about Benjamin Graham and growth. Andrew has been on a bit of a Ben Graham kick lately. He’s been writing some great blog posts about some of the stuff that he’s been discovered in the intelligent investor as well as security analysis, and we thought this would be a perfect time for us to talk a little bit about growth and Ben Graham, we teased this a little bit a few weeks ago and tonight is the night, so Andrew, why don’t you go ahead and start us off and we can have our little conversation.

Andrew:                              01:08                     Yeah, thanks, Dave. I think it’s always a good idea once you are established and you have a good base of knowledge when it comes to investing, and I think it’s good to reread stuff because now that you have a new context, you have a greater understanding. You can pick up things I didn’t pick up the first time. So you know, a few select books, whether that’s Benjamin Graham, obviously a huge, he’s an investing legend. Not only was he Warren Buffett’s mentor he taught Warren Buffett at Columbia. He also had his investment funds, and we return 17% per year. Quite a nicest performance. And I think it was over like 30 years. So not only was he a great teacher, but he also walked the walk and made some fantastic returns. And so his books his most popular one, the intelligent investor, that one’s probably one of the best selling investment books of all time.

Andrew:                              02:08                     That one’s recommended by many, many people. Security analysis is one of those that are literally like a textbook. I’m holding it in my hand right now, and it’s 700, almost 800 pages. They’re just reading it. Like I, I will admit, I haven’t read the entire thing through. There’s some stuff in there that’s outdated. There’s stuff on bonds which isn’t applicable. So, you know, it’s one of those like I kind of think of it like the Bible where I don’t even know pastors. I’ve read that all the way through. Right? But you pick different parts of it, and you try to learn the best you can and try to take the best parts. So while I think of security analysis, I think of that. And so I found a couple of things when I somehow I stumbled on this rabbit hole, and I found some things he talked about with growth that I never really noticed before.

Andrew:                              03:09                     And I think when people talk about Benjamin Graham, you know, when we’ve talked about Benjamin Graham, it’s always margin of safety, a lot of talk on the price, the valuation of a stock the price to book ratio, you know, buying stocks with more assets rather than less because asset values tend to fluctuate less than earnings, right? The fact that Mr. Market is irrational and the stock market can price things wildly different depending on how it feels at any given day. And that’s another concept popularized by Ben Graham. But you know, he did write some stuff about growth, and I don’t see it talked about much and I think it’s something that we can learn from. The thing with growth, and I think we got to tread carefully here, is there are so many different ways to talk about growth and to think about growth.

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