Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

HEY! DID YOU KNOW…

 

  • 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 7,200+ 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.

Value Investing for Beginners

In a nutshell, value investing is about buying undervalued stocks of strong companies and holding them over a long period of time. Patient, diligent investors have seen a lot of success with value investing. When you have gathered a considerable amount of information on the company you’re investing in, it reduces risk and gives a lot more understanding.

value investing for beginners

After performing a lot of fundamental analysis, you decide to purchase stock in a company. The five must-have metrics are the price-to-earnings ratio (P/E), price-to-book ratio (P/B), debt-equity ratio, free cash flow and the price/earnings to growth ratio (PEG). There is a lot of focus on the long-term growth potential of a stock. Strong value investors additionally look to buy with a margin of safety.

[This is a guest contribution from Vinayak Maheswaran]

Books to read

Value investing was a concept that was established by Benjamin Graham and David Dodd who were professors at Columbia Business School. The following two books are a great introduction to value investing for beginners. The Intelligent Investor by Benjamin Graham is a book that many value investors read cover to cover. It has all the information necessary for a value investor to succeed in the markets.

The 1934 book Security Analysis by David Dodd and Benjamin Graham is another work that galvanized value investing. It is considered to be the longest running investment text ever published. The book was written after the Wall Street Crash of 1929 that almost wiped out Graham. It has some very important pointers for value investing students to take note of.

Three principles to stick by when doing value investing

  1. Do your research

Take the time to analyze the company you are considering to be a good investment. You should know the company’s long-term plans, business principles, financial structure and the management team.  [click to continue…]

Trend Following for Beginners

Trend following is probably the single-most successful method I have used in stock speculation and it can be an easy strategy once the necessary research has been conducted.  I believe that our results in practically any endeavor in life are directly proportional to the amount of effort we are willing to expend.  Get ready for trend following for beginners.

trend following for beginners

What is trend following?  According to wikipeida.com, trend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the companies. In financial markets, traders and investors using a trend following strategy believe that prices tend to move upwards or downwards over time. (https://en.wikipedia.org/wiki/Trend_following).  In this article I’m going to cover some basic ideas for trend following for beginners.

Something you probably won’t hear a lot about regarding trend following is what sets off the actual trend.  This is something I call a “trigger event” and could be anything from proposed legislation, a new oil discovery or innovation in technology.   Yes, it is great to ride a trend, but it is better to be one of the first to discover a trend or anticipate a trend – I have found this to generate the highest returns for me.  [click to continue…]

Quick Ratio Analysis: The Fundamentals

The quick ratio, also known as the acid ratio, is one the most important metrics of a firm’s short-term liquidity. The ratio estimates if a company can effectively meet its short-term financial obligations by using its quick assets, i.e. assets that can be quickly converted into cash, such as marketable securities and short-term investments.

quick ratio analysis

Financial analysts use quick ratio analysis to compare companies that operate in the same industry or sector and determine their financial health. In addition, quick ratio provides an indication of how much of its debt a firm can cover by selling its liquid assets in less than 90 days.

How does it work

In its simplest form, the quick ratio excludes inventories and estimates a firm’s short-term liquidity as:

(Current Assets – Inventories) / Current Liabilities

In a more elaborate form, you may encounter it as:

(Cash + Marketable Securities Short-term investments + Accounts Receivable) / Current Liabilities

Ideally, the quick ratio should be equal to 1, suggesting that the company can meet its short-term obligations with its current assets.

If the quick ratio is > 1, you should look at the cash that the firm has on hand or at the average collection period of accounts receivable. If the quick ratio is < 1, you should look at the firm’s inventory levels. As inventory is hardly a liquid asset, perhaps the company relies too much on inventory to pay its short-term liabilities.  [click to continue…]

Discussion on Shorting the Market

Once you’ve begun to understand the basics of the stock market, it starts to become clear to you when the market is generally overvalued or undervalued. This is a great sign in your development as a savvy investor. Then you start to think you can start shorting the market or overvalued stocks and make a grand profit. I know because I’ve been there.

shorting the market

Shorting the market is a great idea but a poor investing practice. There’s a lot of risk for small gain potential, time turns against you instead of for you, and you can be wrong for a lot longer than you realize. Again, this contrarian attitude is a great thing to have. But you must guard against its pitfalls. Here’s the question that prompted this fantastic discussion by a VTI Spreadsheet client, Benoit D.

I appreciate the time and effort you put in all your mails. I really enjoy them.

Do you think it’s wise to take a position in shorting the index S&P 500? For example: ProShares UltraShort S&P500 (ticker SDS). I think the market is really overvalued for the last year (maybe even longer).

Or do you think the market will continue to rise over the next few years?

You’re right about the market. I agree that it is overvalued and has been for some time. However, if I were in your shoes I wouldn’t short the market. Let me explain why.

The basic premise behind buying a stock that makes it so attractive is that there are two possible results in the most extreme of circumstances. The worst result is a stock that goes bankrupt and you lose all of the money you put in. On the flip side, the amount of money that you can earn is unlimited, with it being very possible that you earn much more than you put in.

Compare that to shorting a stock. The risk and reward profile for shorting a stock is reversed. Now you can lose an unlimited amount of money were the stock to keep rising. At the same time, your upside is capped, as a stock can’t ever trade below 0.

Since shorting a stock is again the opposite of going long, someone shorting a stock must pay out dividends to the owners. So instead of collecting interest and compounding it in a slow and steady way, the short seller is paying out interest. This puts the short seller on a strict time limit, with quick profits needed to mitigate eroding losses.
[click to continue…]

The simple way to avoid getting ripped off

So I was at the dealership the other day and narrowly avoided getting taken for a run. If you know me by now, you’ll already know I try to avoid the dealership like the plague. The only reason I was there…

My wife needed a new radio since the backlight broke, so I went to Best Buy to get a fancy aftermarket deck with Bluetooth. The very first time she’s on the freeway since the installation the whole car shakes and the EPC light comes on. She’s also having trouble shifting gears.

Of course that grinded my gears, so I got Geek Squad to replace the wiring harness for free since that’s a common trouble maker. That still doesn’t work, and the manager tells me he can reimburse me to fix the car if I go to a major dealership and they determine it was the new radio’s fault.

ripped off

Just my luck and it’s a sensor under the engine block that syncs to the crank shaft, and nothing to do with the radio. Bad timing I guess.

The mechanic there gives me the general diagnostic and I specifically ask him to give me the front tire tread depth since I know it’s getting low. He gives me a list of repairs to monitor for the future, being a VW that’s no surprise there.

He determines that I need new tires in addition to the crank sensor because in his words, the tread on the shoulder was down to secondary tread. I hadn’t heard the words “shoulder” or “secondary tread” when it came to replacing tires before, so I was skeptical.

Like I said in the title… to avoid getting ripped off I did basic due diligence.

Instead of letting the stealership overcharge me for new tires, I took it to a tire place I knew that gives free tire diagnostics. Is it surprising to find out that the tires had a good year left in them?

Look, you can easily do the same thing in the stock market. Either a quick Google search or asking a trusted friend who is more experienced than you can save you from a lot of trouble.

For example, did you know that over 80% of active mutual fund managers under perform the market? Did you know that Merrill Lynch did a study over 80+ years showing that value stocks greatly outperformed growth stocks?

You can do easy due diligence to confirm this. But most people put their finances on autopilot and accept inferior results. [click to continue…]