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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.

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IFB73:Wall Street Studies Pitfalls

wall street studies pitfalls

Welcome to Investing for Beginners podcast, this is episode 73. Tonight Andrew and I are going to talk about Wall Street study pitfalls, this is based on a book that Andrew is a big fan of by James O’Shaughnessy and we’re going to talk a little bit about some of the potential pitfalls that you may run into.

We’re going to start off by talking about data mining and I think the easiest way that I could explain this was a metaphor that James used in the book and he talked about if you’re in Grand Central Station which is obviously a very large place with lots and lots of people around.

If you find a specific area that has let’s say you go into one too but where one of the trains is running and you see 75 percent of the people there are blonde then you would be potentially thinking that hey everybody in Grand Central Station is 75 percent blonde and that’s not actually the case.

It just happens to be at that particular time at that particular place that you find that and so the data mining is something that if you’re doing Studies on different Wall Street things you different factors of looking for let’s say you want to buy stocks on a Wednesday every 16th month well that’s not necessarily that’s data mining because you feel like you have to only buy stocks on a Wednesday on the 16th of the month.

And that’s it could lead to a lot of pitfalls and okay that means dude but I mean.

Andrew: that’s now uh that’s part of I think having tests that look at history you have to be very careful I think when it comes to studies in general and I’m sure you can extrapolate this to things outside of Wall Street and it’s very easy to take facts and weaponize them and make them sound like basically a way to advance your own agenda and you can manipulate statistics to do that.

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How Negative Growth Calculations Can Actually Mislead Investors

Earnings growth is the life blood of Wall Street. You see this with the obsession of earnings season and analyst projections and estimates. However, when beginning investors try to make these calculations themselves, they can get really tripped up when it comes to negative growth.

Half of the time the calculation for negative growth is straightforward, and the other half of the time it isn’t. So it’s extremely important to know how you can make the wrong calculations for negative growth and instead make sure you’re accurately portraying the correct figures for your earnings growth calculations.

After all, you want to be buying stocks that are growing earnings over the long term– as these will have the ability to pay out increasing income streams in the form of dividend payments, which can compound fantastically over the long term. Oh yeah, and great earnings growth also tends to lead to great gains in share price.

negative growth

I know that the formula for negative growth can be misleading. I know it for an absolute fact because I’ve received several emails asking for help with it.

This blog post will outline some parts of those emails, which perfectly show where the confusions in growth calculations with negative earnings can appear. I’ll also walk you through my answers to these great questions, and hopefully give a good guide for investors looking to calculate earnings growth on their own.

How to Calculate Earnings Growth

Before we can differentiate between negative growth and positive growth, we need to know how to calculate growth in its simplest form. Here’s the most basic way I can think of to explain this.

Say you have $100. It grows to $125. So it’s now $25 more. $25 is 25% of 100, so you got 25% growth.

The formula for this is (present – initial) / initial. [click to continue…]

IFB72:Shareholder Yield Metric: Cheap Stocks with Good Capital Allocation

shareholder yield

Welcome to Investing for Beginners podcast, this is episode 72. Tonight Andrew and I are going to talk about shareholder yield, this is a term that I came across when I read a book by Meb Faber. One of my favorite podcasters, he’s a quant investor that runs a ETF that he’s a fantastic guy really interesting super smart and sometimes he can be a little technical.

But he’s very interesting and he wrote some great books that are on Amazon and quite a few of them were actually free. So the book that we’re going to talk about tonight that we’re going to reference let me rephrase that is actually free and I will put the link to that in the show notes. If you guys want to check out a little more deep dive into what Andrew and I are going to be talking about tonight that’ll give you an opportunity to check that out so well then further ado Andrew once you go ahead and start us off and talk a little bit about shareholder yield and capital allocation.

Andrew: yeah so shareholders yield a metric it’s a good kind of description for a metric where you’re essentially looking at a CEO management of a company and seeing how are they allocating capital. You have earnings that you get right profits up that these companies have and as we’ve mentioned in previous episodes two to three episodes ago these companies have various decisions that they can they have various purposes that they can use this cash that they have for.

And so shareholders yield is a measure to evaluate that and it can identify companies if there’s a high shareholders yield can identify companies that are really rewarding shareholders giving a lot of that cash and giving it back to shareholders and it doesn’t have to be in the form of a dividend that’s why it’s different than like the dividend yield.

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Robinhood DRIP Problems and What Dividend Investors Should Do

One of the drawbacks to investing with Robinhood for the dividend investor is that they currently (as of Sept 2018) don’t offer automatic DRIP with their positions. A Robinhood DRIP would be a fantastic feature for users– especially considering that many of the investors who use their platform are beginners.

There are many benefits to DRIP that can lead to serious long term gains over the long term. And while Robinhood can be a great place for investors to start (especially because of the no fee commissions), the loss of potential return from no DRIPs on stocks can more than negate this initial benefit.

However, many investors might have accounts with Robinhood already and an outright liquidation into a new brokerage account might not be the best choice. It really depends on the person.

robinhood drip

This blog post will talk about some of the implications for investors considering moving away from Robinhood, or even just getting into DRIP investing in the first place. Hopefully this will give you more clarity and information on what this means for your results and empower you to make the right decision for your finances.

We covered the basics and the pros and cons of the Robinhood platform in episode 39 of The Investing for Beginners Podcast. You can listen to it right here, or read the transcript here.

That discussion spurned additional concerns for a listener who wanted a Robinhood DRIP in place for their current investments. I’ll show case the question and my answer, which can apply to many of you who may be faced with the same problem. [click to continue…]

IFB71:Combining Entrepreneurship with Investing Through Website Flipping

 

website flippers

Welcome to the Investing for Beginners podcast episode 71. Today Dave is taking a break and I am taking over the reins. We have an interview for you today with somebody who has a really unique take on investing and it’s a cool little mix between investing and entrepreneurship.

We have Greg Elfrink from Empire Flippers and what his company does is provide an outlet and a unique investing possibility and approach where like I said it kind of mends these two ideas of investing and entrepreneurship. And it quite literally is something that wasn’t available before the internet.

This is something very new a new type of investment opportunity and for somebody who is particularly like me because I’m super passionate about entrepreneurship. I’m type A going to go out and spend way too many hours of my day kind of hustling and trying to make a secondary income and some of the who’s familiar with the online space is definitely this is a resource that you might be able to find useful for being creative and finding other investment opportunities.

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IFB70:The 3 Major Types of Investment Risk and How to Combat Them

types of investment risk

 

Welcome to Investing for Beginners podcast this is episode 70. Tonight Andrew and I are going to discuss risk, we’re going to talk about all the different types of risks there are with investing and we have a very interesting show coming up for you.

So without any further ado I’m going to turn over to Andrew and he’s going to start us off.

Andrew: yeah so when I think about risk and when many people define risk and whether you talk to investment advisor you talk to maybe an individual investor who is more experienced and kind of understand what the risks are when it comes to investing your money.

Well there’s kind of like three major ones so we’ll discuss each of those and it’s very important to talk about risk and think about risk. If you go back to the very basic definition of an investment which I always love to refer to when I’m talking about dividends.

But if you say investment 101 what is that it’s essentially money that you put it you put money at risk and in order to be compensated for that risk you have a reward you have gains you have an income stream and that’s essentially what an investment is.

And that’s no matter how what kind of investment you’re making that’s going to be how it works even if you do something like as simple as lending money to somebody and charging them an interest rate there’s going to be risk there. There’s risks that you lose all your money because some of the skips town and then they don’t pay you those payments right.

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Mastering the Valuation of Shares in Stocks by Combining Ratios

Trying to determine a reasonable valuation of shares for a stock you are considering can be equated, in some ways, with the way and strategies many people use when they go hunting.

I had my first hunting experience back in early 2017 with a friend who was a seasoned hunting enthusiast. I found that the basic approach was fascinating and also very intuitive. From what I understand, there are two busy hunting seasons in the place where I hunted in North Carolina– deer and turkey.

valuation of shares

For both occasions you tend to use a shotgun. But, the type of round you use is dependent on what you are hunting. For turkeys you use a round that functions more traditionally like a shotgun. One that sprays wide. For deer, the round tends to be more compacted.

Here’s the logic behind it, and it makes sense for building an idea of the valuation of shares for a publicly traded company.

Turkey are small so you don’t need a big bullet. You just need to hit one with a piece of a bullet. The spray gives you a better chance. With a deer, you need a much more powerful bullet. A little bullet fragment won’t do it, so you need as much firepower to take it down. Of course, you’re consequently more likely to miss.

When I pick stocks… and especially when it comes to price valuations… I prefer a more spray type round.

Let me explain.

Finding the valuation of shares for a stock is a way to calculate whether a stock is cheaper or more expensive than it is really worth.

For example, if you’ve calculated the share valuation of a company to be $20 billion and the market cap of that stock is $10 billion right now, you’re gonna want to buy.

The pitfall I see in any price valuation is taking a more sniper, or concentrated, approach– by only honing in on one or two ratios to calculate valuation. This becomes a problem because the market tends to regulate certain valuations over time.

For example, sometimes you’ll have a couple of years where buying low P/E stocks would have out-performed any other strategy. Other years this could be low P/B stocks, or high cash flow stocks. But, if you buy based on a wide set of price valuations, specifically by using all 3 financial statements, you’re increasing your chance that the stock is truly a low valuation as a whole. [click to continue…]

IFB69:Listener Q&A: ESPP and Ally Brokerage

ESPP

Welcome to investing for beginners podcast this is episode 69, tonight Andrew and I are going to take a few minutes we’re going to answer some listener questions. We got some great questions over the last couple weeks, and we wanted to take a few moments to read through those and answer those on the air, so without any further ado I’m going to turn it over to my friend Andrew, and he’s going to go ahead and start us off.

Andrew: yep cool so let’s get going got an email it says.

Hi, Andrew and Dave thank you so much for your podcast which is very helpful to me as a beginner I also enjoyed Andrews free ebook I feel like both of you guys have a lot of useful insight for people trying to get into the market as beginners.

My question is a bit specific and then is about employees stock purchase plans ESPP particularly the one that my employer. I’m not going to say which employer he has. But let’s see he says the cool thing about the ESPP is that in addition to being a no-cost except for on sales which I wouldn’t plan on regularly doing Drip plan I get a 15% discount on the market price of the stock at the time of the buy for every buy.

Also get the discount when shares are purchased with automatically reinvested dividends then when I stop then when I sell the stock I get the full market price at the time of the sell for taxes. The capital gain would be the same would be the sale price plus the disc – the discounted price not the market rate at the time of the buy. [click to continue…]

IFB68:A Simple Balance Sheet Primer for Beginners

simple balance sheet

 

Welcome to Investing for Beginners podcast, this is episode 68. Tonight Andrew and I are going to talk about the balance sheet and give a kind of a brief overview of that. We’re also going to talk a little bit about some ratios that you can derive from the balance sheet.

This will be a great primer that you can use to look at 10ks, 10-qs and also kind of combine it with the cash flow statement analysis that we did a while back. Without any further ado I’m going to turn it over to Andrew and he’s going to start us off.

Andrew: so that cash flow statement episode you’re talking about that’s episode 17. We went super in-depth into that one but it was a good overview on the different financial statements and some of the key things you can kind of pullout from that. Last week we talked about basically earnings and what companies do when they get earnings.

We talked about how they can reinvest in the business they can hold the cash they can pay out dividends or they can do they can do share buybacks. The other thing they could do which I forgot to mention is they can use that cash and use those earnings to pay down debt.

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Examining the Net Profit Ratio of Different Industries and its Stages

There’s a lot of widely held beliefs about net profit ratio and how it can vary based on industry, whether the industry is mature or in its growth stage, and how certain business models function. This leads to lots of justifications and poorly made assumptions.

This blog post will outline, with data, why much of it is overblown, and what the REAL implications of margins and profit ratios are.

net profit ratio

Before we start, I want to warn you that this is a very advanced topic requiring a decent mastery of the financial statements of a stock. If you are still a beginner to investing, I highly recommend going through the guides first and then coming back.

To truly understand the net profit ratio, we must define it first.

Then we’ll look at live data spanning almost 100 industries to examine the net profit ratio and how it relates to particular industries.

Finally, we’ll make some key conclusions on what the data is truly telling us and how we can use it to make smart investing decisions on individual stocks.

Defining the Net Profit Ratio/ Net Profit Margins

The net profit ratio is actually a very simple calculation. You simply take the following 2 figures from the income statement of a company’s 10-k annual report:

Net Profit Ratio = Net Income / Sales

It’s often expressed as a percentage, so to do that, simply multiply the calculation above by 100.

The net profit ratio is a profitability ratio designed to tell you how efficient a company is at taking its revenues and converting them to profits (or earnings).

As you’ll soon discover as you wade into the world of fundamental analysis of stocks, one of the difficult things about accounting and stock market financial metrics is that there can be multiple terms that define the same thing.

So for example, profits can also be described as Net Income, Earnings, Net Earnings, Net Profit, or even “the Bottom Line”. As it relates to this blog post, the net profit ratio can also be described as Net Profit Margin, Profit Margin, or Net Margin… depending on who you’re talking to it can be described in several ways.

Alright, back to the definition of net profit ratio. It is a measure of efficiency. In other words, how much do expenses eat up potential profits. [click to continue…]