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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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Example WACC Calculator Calculation with Walmart (WMT)

The attached calculator can be used by investors to estimate the weighted average cost of capital (WACC) for publicly traded companies. For a larger discussion on WACC and some of the various methods that can be used to calculate the cost of equity and cost of debt, readers are encouraged to explore our larger article on WACC.

Example Calculation with Walmart

To get readers comfortable using the attached WACC Calculator, we will calculate the WACC of Walmart as an example . The weighting and cost of capital is calculated on the first tab entitled WACC Summary with the cost of equity calculated in the second tab using the CAPM method and the after-tax cost of debt calculated in the third tab using the historic method. There are no preferred shares with Walmart but this has been included in a fourth tab of the calculator in case investors ever run across a company with some preferred equity outstanding. In each tab the red highlighted cells can be updated with the data from source links for the company being analyzed. Now let’s get into the details with Walmart.

Cost of Equity – CAPM

  • Risk-Free Rate: As a U.S. domiciled company, the risk-free rate used has been the short-term 3-month rate (13-week) as found from the U.S. Department of the Treasury website seen below.

Sourced from U.S. Department of the Treasury website

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Beginner Commodity Tips – The Basics of Commodity Stocks and Prices

In the most recent episode of the Investing for Beginners Podcast, Andrew and Dave talk about investing in commodities and talk about some different experiences that they have had doing so.  Drawing back on their experiences they were able to come up with a few commodity tips that I want to dive a little deeper on!

So…commodities – what are commodities?  You might remember the term ‘commodity’ from school as a raw material that is essentially sold entirely on price and there is no substantial difference from the quality of one source to another. 

You likely have heard oil or gold being referenced before as commodities and while those are two very common commodities, there are other commodities as well, such as:

  • Energy – not just crude oil but natural gas, heating oil, etc.
  • Metals – gold, silver, copper, etc.
  • Agriculture – corn, coffee, cotton, beans, etc.
  • Animals/Livestock – all types of various animals such as hogs, cows, etc.

Typically, when people talk about commodities, they seem to be talking about trading them.  That is 100% my own biased opinion, but I very infrequently hear people that are actually investing in commodities. 

When I talk about investing, I want to find a good investment that I can put money into and not worry about for many, many years down the road.  With commodities, they seem much more volatile and the opportunities seem to be more short-term focused.

But if you’ve decided to invest in commodities, and I don’t think that’s necessarily a bad thing, I recommend you pay attention to these tips below to make sure that you’re setup for success:

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How to Pick the Right Life Insurance Broker

So…. life insurance.  Nowadays you can easily get life insurance online if need be, but I think that a life insurance broker can help solve a lot of problems if your situation is a bit more complex!

life insurance broker sample file

I know what you’re thinking right now, and yes, I agree – thinking about death is very depressing to think about.  But do you know what’s more depressing?  Thinking about dying and not having any sort of plan for your loved ones after you’re no longer around.

If you’re wondering if you need life insurance, or even wondering how life insurance works, then I recommend that you read this article that I previously wrote that outlines all about life insurance and if you might want to consider getting it.

In summary, life insurance isn’t for you – it’s for anyone that depends on you.  If you die, that’s it – you’re dead.  I know that might sound ruthless, but it’s true.  But if you die and you’re providing income for your family then that income is also gone. 

Your loved ones are still there but now they don’t have your income to assist anymore. 

If you’re in this situation, then life insurance is likely good for you, but like I said – read the article and you can decide for yourself!

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Weighted Average Cost of Capital (with CALCULATOR!)

The weighted average cost of capital (WACC) is a cornerstone of any discounted cash flow valuation and a fundamental learning for every investor’s toolbox. This is because the WACC is used as the discount rate, or required rate of return, when doing a present value calculation of a company.

WACC can also be used by internal management of a company when evaluating the feasibility of new projects or continuation of existing ones taking into account the specific risk and capital structure of the project.

This article will discuss the logic behind WACC and provide various formula options for calculating the cost of different sources of capital. Readers will also be provided with the attached WACC calculator to use for their own investment purposes and walked through the use of the WACC calculator with an example of calculating the WACC of Walmart.  

The Logic behind WACC as a Discount Rate

Before we jump into the calculations of WACC, let’s briefly touch on the logic behind its use as a discount rate.

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How to Find Historical P/E Ratios for Any Stock

Price/Earnings ratios, or P/E, really seems to be one of the first metrics brought up at anytime when talking about a stock, and understandably so.  While it by no means should be the end all, be all, it is a good ratio to give you a quick snapshot of how expensive the company is.  But with that being said, doesn’t it make you question the historical P/E ratios for that company as well?

For instance, it’s good to understand that the P/E ratio of a company is 15, but I’d like to know what the previous P/E ratios for that same company might’ve been.  That might give me a look to how the company is trending and potentially give me some insight about whether a company is truly “cheap” compared to their history and their peers.

The main tool that I prefer to use when looking at historical P/E ratios is Macrotrends.  Macrotrends gives you a lot of great historical information and is completely free, which doesn’t always seem to be the case. 

When you go to Macrotrends, the landing page looks like this:

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3 Investment Quotes for the Investor who Thinks like a Business Owner

In episode 132 of the Investing for Beginners Podcast, Andrew and Dave talk about three key Warren Buffett investment quotes that really call for a person to think about investing like a business owner rather than someone that is purely trading prices of companies. 

Quote 1 – “Well, yeah, if you own stocks like it on a farm or apartment house, you don’t get a quote on those every day or every week. And I think you look, you look at the business, and the value of American does. This depends on how much it delivers in cash to its owners over between now and judgment day. And I don’t think it changes by 10%.”

This quote really hits home with me and has a lasting impact.  You know what, Buffett is exactly right – the things that I really “own” in my life are my house, my car, and a lot of junk. 

If you were to ask me which of these I was most attached to, the exact same order would be followed.  I think the reasoning for that is because not only does my house cost the most, the car second, and the junk costing the third most, I will likely have my house longer than my car and my car longer than my junk.  So, essentially, the things that I spend the most time and money on are the things that I feel the strongest sense of ownership towards.

You should feel the same way towards stocks.  Investing in stocks will likely be as long as a time horizon as will investing in your home and you’re going to require a lot more money in the market to be able to retire comfortably. 

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Investable Themes for 2020 Stocks and ETFs

So, 2020 is finally upon us!  First of all, congrats to everyone for making it through another decade and hopefully you’re a decade closer to meeting all your financial goals.  With that being said, now is as good of a time as ever to plan for the future with some investable themes for 2020 stocks and ETFs.

In episode 131 of the Investing for Beginners Podcast, Andrew and Dave talk about quite a few major investment themes that are likely going to be prevalent throughout the course of 2020, so let me give you some of my thoughts on those themes as well!

Margin of Safety

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Thoughts on the High Yield Bond Market from Warren Buffett

If you were to read Section III.A in the Essays of Warren Buffett, then you’re going to hear all about Buffett’s opinion on the high yield bond market and bonds in general, but let me summarize for you – he doesn’t like them.

Buffett’s personal opinion, and it’s one that I 100% agree with, is that just because a bond has very low volatility or a beta of 0 doesn’t mean that it isn’t risky.  In fact, it can mean that it’s even more risky! 

People will typically purchase bonds when they’re looking for something more conservative in their portfolio.  Maybe they’re getting close to retirement and want to start to decrease the risk in their portfolio.  Or, maybe they’re trying to time the market (which is likely the worst thing that you can do, especially if you’re new to investing). 

Timing the market seems to always be a “fan favorite” for new investors because they think that they can outsmart everyone else.  I mean, I know that was my thought when I first started investing but I was wrong, and you will be too. 

Don’t be upset, however, because you can still make money doing this…it just won’t be anything close to what you could’ve made if you didn’t try to time it.  But alas, I digress. 

Back to bonds – people will purchase them as they view them as a sort of “guaranteed income” and it’s hard to disagree with that, but the issue is that each year that income is digging a deeper and deeper hole for them.

Buffett talks about how the value of the dollar has absolutely tanked from 1965 – until he updated his book in 2011, and that it now takes $7 to buy something that was $1 back then.  Yes, you’re probably just sitting there thinking,

“I know, Andy – that’s called inflation.” 

And you’re right. 

But if a bond is earning you 2-4% like a lot of bonds will, you’re going to be consistently underperforming the market and even losing money! 

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How Options Time Decay Destroys the Prices of Calls and Puts

Options time decay can be one of the most insidious forces to lose you money as you buy call and put options. As I mentioned in my options for beginners guide, time decay (known as theta) erodes the price of an option over time and is the primary reason why an investor would take the other side of your options trade (selling to open an options contract).

Options time decay attacks both sides of the options chain, both the calls and the puts. Whether you are just starting out or have traded options for a while, knowing about the time decay factor of options is critical, and I hope to prove just how insidious it is with this post.

Instead of digging into hard core calculous, let’s take a couple simple examples ($INTC, $AAPL, and $GRUB). I’ll show you exact examples of how options time decay took its toll on my returns.

I’ll cover something groundbreaking… well, it’s more of an observation… but I think it’s a huge part of time decay that isn’t talked about HARDLY ANYWHERE (and especially with all of the algebraic greeks flying around)…

And finally, I’ll show you a comparison of my results trading with options time decay and against options time decay, and I hope someone will find that helpful.

Options Market Difficulties

Alright so here’s the thing about the options market.

It’s hard as I write this in 2020 to find any sort of historical data. Unlike the stock market, where you could find the high price of an obscure $2B stock on a Tuesday in January back in 1987 relatively easily– I struggle to find any historical data that isn’t behind a paywall.

And not only that, but even if I could find a good source of this, I highly doubt I’d get any sort of good intraday options trading data. 

In fact I still long for good source of free options intraday data, showing each price at where a contract exchanged hands– so if you have one, please kindly share.

So we have this data problem with options.

How this affects our education on time decay is that it can be hard to conceptualize this time decay easily.

Add to the mix that stock prices are volatile, and that options prices move with these stock prices, and so time decay on options can be masked as the prices move with the stock.

Someone who is too lazy or uninterested to, God forbid, refuse to dissect the first order derivatives of the Black Scholes model and solve for theta; that someone can lose a lot of money if buying options without considering options time decay. 

Simple Time Decay Example: Intel ($INTC)

I made a spreadsheet to show you time decay, and you can do this with any stock right now.

Here’s a snapshot of an options chain (this one is $INTC), at a random point of time in the trading day. I took this as a copy and paste from my brokerage Ally Invest.

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IFB134: Skin in the Game Book Review

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.

New Speaker:                   00:35                     All right folks welcome to Investing for Beginners podcast episode 134 tonight we’re going to do a book review. I’m going to talk about it, a book that I read recently and we’ll kind of go over some notes that I took on the book and Andrew and I will talk a little bit about it. So the name of the book is called Skin in the Game. Nassim Tabel wrote it. Now, if you have not read any of his books, this is his fifth installment of the Incerto series. So he’s also written, saw other fantastic books like a Black Swan Antifragile as skin in the game as it is a most recent one. That’s the one that I’ve read. I have not read the other four yet. Andrew, have you read any of his books?

Andrew:                              01:18                     I’ve done some of Black Swan [inaudible]. He’s like a fascinating guy’s got a lot of great ideas. People Revere him because when he wrote Black Swan, I think it was right before either the 2010 flash crash or the 2008, 2009 bear market. But the gist of it is that people try to reduce risk in the market and, but they’re investing, but they don’t think of what it is called, like a Sigma six-event or something. They don’t think of that Black Swan. The unprecedented event that we’ve never seen. And all it takes is that to wipe out all the other smarts and gains that you’ve had. And you know, the timing of that book was great. The theories in the book and everything like that is really good. And that’s something that, especially, I think as the internet goes on and on and on, and I’ll stop going on and on and on about it.

Andrew:                              02:21                     But you know, as we get more educated than people know more about investing, we tend to take kind of these mental shortcuts and think that, Hey, this is the way to reduce risks, but if we’re not defining risks in the right way, then we’re not reducing risk against something that could happen that we’ve never seen. And so, you know, his, it’s an idea that kind of flips the idea of risks on its head. And it’s profound and it’s true. And so, you know, that’s, I know that book had a lot of critical acclaims. I think Anti-fragile did too.

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