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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.

Using the Short Ratio to Avoid Under Performing Stocks

In investment analysis and portfolio management, short ratio is a widely-used tool, which indicates the number of shares that investors sell short over the average daily volume of the stock on the basis of 1 or 3 months. As a strategy of active investment management, the short ratio can be interpreted in various ways, but basically, it provides an indication of the future performance of the stock.

How Short Selling Works

Short selling is a sophisticated strategy, mostly implemented by experienced investors. Their goal is to leverage the downside risk of a long position by anticipating a drop in the price. Therefore, successful short selling is mostly used in a bearish market with a downside potential rather than in a bullish market with an upside potential.

short ratio

Usually, investors that use short ratio are not so optimistic about the future trend of the market. So, they short their position by buying a stock at a given price, anticipating that the price of the stock will drop lower than the strike price (the price that they short the stock). So. Instead of the classic mantra ‘buy low, sell high”, short sellers sell high and buy low to resell higher. The best part of short selling is that the stock traded are not owed by the investor, but they are borrowed.

Let’s look at an example.

Assuming that you hold 5,000 shares of Ansys (Nasdaq: ANSS) that currently trade at $108.36. Rumor has it that the stock will decline over the next couple of days due to a drop in the company’s total revenues by 3%. So, you decide to enter a short-sale contract by borrowing 3,000 shares of your broker and selling them in the open market for a total of 3,000 x $108.36 = $325,080.

Indeed, within a week, the stock price drops to $102.35. You then decide to exercise your short sale, and you sell 3,000 shares at $102.35 for a total of 3,000 x $102.35 = $307,050. You return the 3,000 shares to your broker and you make a profit of $325,080 – $307,050 = $18,030 minus borrowing fees and broker commission.

strike price profit

This would be how you close the position if your anticipation of a price decline comes true. On the contrary, if the stock price rose to $112.47, you would return the 3,000 shares to your broker for a higher price that you bought them. In that case, you would incur a loss of (3,000 x $108.36) – (3,000 x $112.47) = -12,330 minus the borrowing fees and broker commission. [click to continue…]

Crafting a Personal Margin of Safety Formula Inspired by the Greats

Buying stocks with a discount to intrinsic value is also commonly referred to as a margin of safety. That term was first made popular by Benjamin Graham in his bestselling The Intelligent Investor, and later on as the main topic of a book by Seth Klarman. For the individual investor trying to beat the market, it’s imperative to craft your own margin of safety formula that aligns with the investing foundation you follow in your stock picking.

Insight from guys like Benjamin Graham and Seth Klarman shouldn’t be taken lightly. In a market where 10% per year is the standard average, Graham’s firm returned a CAGR of 20% from 1936 – 1956 and Klarman’s posted a CAGR of 17% from 1983 – 2014. Graham is credited as Warren Buffett’s biggest investing influence, and Klarman’s book is so coveted that it’s price online is over $1,000.

margin of safety formula
Now, the task of creating a margin of safety formula isn’t as simple as copying the ones shared in their books. For one, the market is constantly evolving. What worked yesterday rarely works in the future. You also don’t have the advantage of being in the heads of these successful fund managers.

At any time, a large number of stocks could have favorable margin of safety values– with investment in all of them at the same time likely creating over diversification. Selecting which stocks in this group to pick is extremely difficult when you are just blindly following a formula. Conversely, an exuberant bull market could eliminate most if not all of your stock buy signals on a standard margin of safety formula calculation, which could lead to significant opportunity costs.

This is why it’s crucial to craft your own margin of safety formula, one that you could potentially adjust over time to suit your personal needs. Think about the act of blindly following again. Without an understanding of the founding principles involved in a margin of safety calculation– an understanding that can only be mastered through the act of doing– you will have great uncertainty at not only the buy points but also the sell points.

Many investors commonly lament previous decisions when selling too early or too late, and this feeling only intensifies when combined with ignorance and confusion.

So what’s our best option here?

Instead of copying, let’s absorb the main principles behind the way these wildly successful investors crafted their own strategy. The foundations that create stability for the investor caught in the chaotic storm of the market. After all, that’s what a margin of safety is.  [click to continue…]

IFB05: Going 100% Stocks Even as a Conservative Investor

 

conservative investor

Finding the right mix of stocks and bonds is a common question among beginners. As a conservative investor, it is a must that I find a good mix to mitigate risk.  Most conservative investors go with a mix of 75% stocks and 25% bonds to help lessen any risk of loss. But as a younger investor, we argue that going 100% stocks is a better way to go.

  • Pros and cons of 401k/IRA accounts for beginners
  • Pros and cons of Robo-Advisors
  • Advantages to Roth IRA
  • Best Allocation strategy for young investors
  • Dollar Cost Averaging for those just starting out
  • Better to do it yourself or have someone manage your money? Or a Robo-advisors?
  • Any advice for where to start for beginners?

 

Welcome to Session number 5 of the Investing for Beginners Podcast show notes. Today’s session includes our guest, Phillip. He is a beginner that subscribes to Andrew’s eletter and he asked us some really awesome questions today.

So let’s get to it! [click to continue…]

IFB04: Why DRIP Investing Your Stocks Should be Integral to Your Investing

DRIP investing

DRIP investing is one of the untapped resources to investors. It can be one of the keys to growing your wealth. Compounding is one the eight wonders of the world, according to Albert Einstein. Utilizing it with DRIP investing is a great way to double compound your investments. We will discuss this and much more in today’s session.

  • How the DRIP works and how it can benefit you
  • Differences between the Roth IRA and Traditional IRA
  • Tracking your Brokerage Account
  • Portfolio Diversification and limits on total number of stocks invested in
  • How do Bonds work?
  • What is the best Asset Allocation for my portfolio?

 

Welcome to Investing for Beginners show notes for Session 04 with Erin. Today we spoke with Erin who is just starting out and recently became a subscriber to Andrew’s eletter. This letter has helped her find a few companies to start investing in, but Erin has several awesome questions for us today.

Let’s dive in to find some answers for her. [click to continue…]

IFB03: Doesn’t a Stop Loss Contradict Buy and Hold?

 

 

Stop Loss

 

When you are looking for advice on how to buy stocks, you will find thousands of articles on the internet. All of them touting the various ways to buy stocks to make money. But what about selling a stock? Crickets. There is not much out there to tell you when to sell. Having an exit strategy when you sell is almost as important as your buy strategy. This is where having a stop loss is so vital to your success. What is a stop loss? It is a set point that you establish as your base point for selling a stock if it starts to fall. The best advice I have seen is setting the stop loss at 25%. Setting the stop loss point here helps eliminate some of the guesswork. And it avoids any impulse sells in a case of sudden movement down.

In today’s session, we will discuss the stop loss and much more.

  • Setting Trailing Stops
  • Yahoo Finance for Stop-Loss alerts
  • Portfolio maintenance
  • Selling stocks to limit your portfolio to 25 stocks or less
  • Best strategy to buy stocks, dollar amount or share amount
  • Dividend reinvestment program or DRIPs explained
  • Lump sum investing or dollar-cost averaging
  • Investing outside the US

[click to continue…]