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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.

IFB14: Why Investing Metrics are More of a Guideline than a Blueprint

investing metrics

 

Welcome to the Investing for Beginners podcast. In today’s session we talk to Steve from England! Our little podcast is international, and we discuss some great topics. Our main focus is on investing metrics and how they are a guideline and not a blueprint for your investing success.

  • How much to allocate to different investments and what size investments to make
  • Setting up watchlists for different types of investments
  • The best metrics to use to find the best stock ideas
  • How to balance dollar cost averaging and trading fees
  • What are the best stock screeners out there and should you invest in those services
  • Are small caps a good investment or are they too risky

Andrew, was wondering when you split from your regular investing to adding the Dividend Aristocrats? Also how much do you invest in them, and when do you do it, and what size decisions do you make?

Andrew: I love that question, the basis of my approach is trying to let’s take somebody the average basically, a hard working citizen in any country. This show is now a global thing and let’s not exclude lower income, people who aren’t making seven figures and have umbrellas of wealth, these parachutes they can fly off if they make a mistake as a CEO. Let’s look at the average person, people who don’t have much but can scrimp and save a little bit, do that each month. And let’s see if those people can make a fortune, the working class of the world. Obviously, I am talking about more developed countries, aside from that, how that relates to my whole investing approach is the ultimate goal is for the investments to have compounding interest in the most efficient compounding machine we can get.

So we’ve talked about in previous episodes about dividend reinvestment, the drip and how that can roll down this hill of compounding and multiply the type of returns that we can see. The problem is when you’re investing smaller amounts of capital, you can’t always assume that you’re going to find a dividend aristocrat every single pick. If you have a portfolio that’s twenty positions, I like to keep it around 15 to 20. To think that I can pick a stock every single month and expect it to raise it’s dividend every year.

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IFB13: The Unreliability of Forward P/E and 10% Dividend Stocks

dividend yield

Welcome to session 13 of the Investing for Beginners podcast. In today’s session, we have a Q&A with Steven about many different topics, but the two main items for discussion are the forward P/E and 10% dividend paying stocks. Calculating a forward P/E can be tricky and relying on the financial websites to do it for you can be risky, they are not always using the most relevant data and sometimes rely on analysts reports. This is risky because the analyst’s data can be skewed by their biases, which can lead you astray. We discuss this and much more.

  • How to find great investments using the Value Trap Indicator, even when the investments are months old
  • The best financial websites to find the most up to date data to calculate a P/E
  • The fallacy of using a forward P/E and how the analyst’s data could be biased
  • Are companies paying a 10% dividend risky?
  • How to find safe, reliable dividend paying stocks

How would I know if any of the choices in Andrew’s eletter would be good investments now?

Andrew: Well, I have a good, nice and easy answer for you. That’s the good news, first off a hot tip for a fellow Californian, I bet it’s beautiful out there right now. Basically, if you look at the eletter portfolio and you will see all the positions like you said it shows what date I recommended it and then I also show what the price was when I recommended it and what the current price is now.

On that second to the last column, you will see a return percentage and that shows you much the stock has returned since recommendation. And all the stocks that are on there are going to be a hold unless a stock triggers a trailing stop or if I’m trying to take some profits then we’ll go ahead and activate a sell. But a majority of the time all the positions are going to be a hold.

And what I would do if it was me starting over trying to build a new portfolio I would try to build these positions slowly over time and if I was trying to buy maybe buy more than one position at a time I would just look at the stocks that haven’t appreciated yet, as in haven’t made any significant gains. I am looking at the portfolio right now, many of the stocks that have really high gains you are going to want to stay away from because those, not to say they won’t be great investments in the future.

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IFB12: The Validity of Scuttlebutt Investing and Qualitative Analysis

scuttlebutt investing

In today’s session, we are going to talk about quantitative versus qualitative analysis of stocks, this should be an interesting go around. I know how I feel about this, but I am not sure how Andrew feels about this, but I have an idea, but I think this could be interesting. Phil Fisher was the creator of the term scuttlebutt investing, it was a method he used to gather qualitative information to help him in his investment process. He used it to great effect and it was integral to his success. This process is a little more difficult for the individual investor but some of the aspects of scuttlebutt investing can be added to anyone’s arsenal.

  • Definition of quantitative versus qualitative
  • What it means to be strongly quantitative
  • The pros of quantitative analysis
  • The advantage of utilizing both quantitative and qualitative analysis
  • How biases can affect your thinking and investing

Andrew: Yeah, the guy who formulated the Value Trap Indicator, a quant-based system, obviously I might lean one way or the other. The way that I kind of look at and I think it is a little bit contrarian to what a lot of value investor that there is a lot of belief that you have to have a balance of quantitative and qualitative.

If we define that real quickly, for the beginners. Qualitative is talking about the aspects of the business that are more intuitive things like how skilled is management, where you perceive a trend as far as supply and demand. It is things that you can’t put a hard number on, but it still can have an effect on the business. So that’s qualitative and quantitative is everything that is strictly about the numbers, tangible data like assets, earnings, cash flow stuff like that.

So, I kind of want to hear your take on it, Dave, because I am all about the quant, I know there are guys like Phil Fisher, who wrote “Common Stocks and Uncommon Profits”, which was one of the first books I read about the stock market. He talks about a thing called “scuttlebutt” which is his way of using and doing qualitative analysis. He would go and talk to different executives at different companies that he was interested in, and try to get some information based on those kinds of conversations.

I think that Buffett tries to do the same as well. And I know guys like Jae Jun at Old School Value, I’ve interviewed him before and he talks about how there’s an art to value investing and you need to balance qualitative and quantitative. I don’t think there is a right or wrong answer and that is why we are having this discussion and having this episode, it is going to be interesting to see what the positives and negatives are of both methods and which one is better. Or should you try to merge the two?

Dave: That is a very good point. My thoughts on the battle of quantitative versus qualitative. I am going to say that I am a little more like Jae Jun, where I think I don’t know that I could necessarily put hard and fast rule number wise, 75 to 25 or 50/50 anything in nature. I know that Ben Graham, who we both admire quite a bit was definitely a quant, he was definitely all about the numbers. Warren Buffett who is one of our idols, he started off as a quant and he has merged through his life into a little bit more of both. And I think I probably fall a little bit more into that as well. [click to continue…]

IFB11: A Complete Guide to to the Most Useful Stock Valuation Methods

valuation metrics

Today we are going to talk about stock valuation methods. Andrew has a great ebook that he wrote a while back that talks a lot about how to value a stock. These are methods that I use personally every day .

  • A breakdown of the 7 valuation metrics that we use
  • P/E ratio and its importance
  • P/B ratio and the relevance to value investing
  • Debt to Equity is probably the most important ratio

 

Andrew: There are a lot of different ways you can evaluate a stock, there are a lot of different models. I want to talk about some of the simplest ones that you’ll approach, you can always take the subject a bit further. You can talk to experts, they like to talk about things like EV or EV/EBITDA, that is enterprise value to earnings before interest, taxes, depreciation and amortization. You could do a discounted cash flow valuation you can do free cash flow valuations.

There are all these different metrics that someone can use to really value a stock. some of the most basic ones I actually use. We are going to talk about 7 of them and they’re all part of the seven steps that I wrote about in my ebook. IT is also the same 7 metrics I use for my value trap indicator system. All of these combined are what I use to formulate my approach and it’s the exact same method I use to buy every single stock that I buy.

Now, keep in mind you certainly can use one of these. Some people do, you have the Peter Lynch approach where people just strictly look at a PEG ratio, which can be a combination of two of them that we are going to talk about today. You certainly could use just one, there is the Ben Graham approach, which early one was one that Warren Buffett used which he calls the “net, net” approach. Kind of like, the metaphor they use is picking “cigar butts.”

And they really use a price-to-book, more focused on net tangible assets. This is another variation of a valuation method that we are going to talk about today. My whole point is that you could center on any one of these valuations, I argue that when you value a stock, you don’t want a laser focus on making one ratio that much more important than the others. I think you want to take a complete picture approach, understand that there are three financial statements that every single stock needs to post to the SEC.

The SEC puts it on their website and it’s freely available information to us. A lot of investors will look at one little tiny sliver of the financial statements, completely ignore the other ones and get blindsided when they don’t account for things they aren’t looking for.

We are going to look at the whole picture, all seven of these and not so much that they are all excellent but they are all good enough to where you can feel comfortable that number one we are getting a stock at a good price. And number two, that were are getting a stock that has a great business model, and is likely to continue and gives us gains in the future.

The first method valuation method I want to talk about is probably the most common and every single novice investor knows of this ratio. And that is the Price to Earnings ratio or P/E. What this is going to tell us is, if you think about what a business does, the business will basically spend money and they are going to try to make more than they spend, and that difference is a profit.

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IFB10: Making a Quant Investing Approach Inspired by Baseball Sabermetrics

Quant Investing

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Baseball and value investing have much more in common than one would think at first. The discipline and analyzation that you find in baseball can correlate to value investing quite easily. Great hitters like Ted Williams, Tony Gwynn, and Barry Bonds were extremely disciplined in their approaches and did an extensive study of the pitchers that they faced. All of this lead directly to their success, as well as their incredible talents. Great value investors like Warren Buffett have taken these ideas and adapted them to their value investing style. Using quantitative investing is the investing version of sabermetrics. Numbers can tell a story and value investors use quant investing to help tell that story.

  • Value Investing and baseball have more in common than you would think.
  • Ted Williams was the first player to take a scientific approach to hitting a baseball
  • Warren Buffett adopted these ideas to his investment philosophy.
  • Patience is key to being a great investor
  • Intrinsic value is found everywhere
  • Keeping your mind open to any possibilities can lead you to unexpected investment ideas.
  • The study of numbers or quant investing is the investing version of sabermetrics used in baseball. 

 

Dave: Welcome to session number 10. In honor of the baseball season starting this coming Sunday we are  going to talk a bit about baseball and investing and how they go together. That may be a strange topic for some people, I am sure we are getting some funny looks from people as they are listening to this.

But you would be surprised there are some very strong correlations and a lot of big value investors are very big baseball fans and they use a lot of analogies about baseball and how they look at their investing. They get a lot of great ideas from baseball and some of the strategies as well as the discipline that baseball players adhere too.

 

I will start and talk a bit about an article that I wrote just recently about Ted Williams and value investing. And for those of you not familiar with Ted Williams. First, of all, he is probably considered, in a lot of baseball circles the finest hitter in the history of baseball. Better than Babe Ruth, Willie Mays, Hank Aaron and he has the numbers to prove it. He played from the late ’40s thru the mid-’60s and he was the last man to hit over .400, and he hit .406 in 1941 and it has not been done since. So that is over 66 years since it was last done.

He was really the first guy to study hitting as a science and he was a huge influence on scores of players who followed him, most notably Tony Gwynn. But Williams was the first guy to take baseball and apply science to it and analyzation.

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