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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 21,000+ 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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Using 65 Years of Statistics to Make an Intelligent Cash Flow Projection

In valuation, the name of the game is expected future cash flows. It’s not about the past, it’s about the future. So in trying to estimate the value of an asset, an intelligent cash flow projection is critical. And it’s rife with pitfalls.

As we know, there’s a myriad of destructive biases and ideas that can lead a good valuation model astray. I won’t unpack them all here.

There are some key historical statistics to help us avoid many of those kinds of traps.

In his fascinating and in-depth book on stock market statistics and reversion to the mean by Michael Mauboussin called The Base Rate Book, Mauboussin dives into arguably the most important inputs for a good cash flow projection— including revenue and operating profit/margin.

This book is not light reading, especially if you are not well versed in high level mathematics and statistics; it took me most of a morning and a fresh cup of coffee to unpack just the revenue and operating profit part.

But it’s those sections that we will discuss, as studying their history of behavior (depending on stock market sector) lead to better cash flow projections and thus better valuation estimates for a DCF.

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Retiring at 55? 9 Tangible Steps to Turn that Goal Into a Reality!

Are you pumped for this blog post? I hope so! I know that I am extremely pumped to write it and show you all about my plan for retiring at 55…or maybe even earlier!

If you’re like most people and you want to instantly skip to the bottom the bottom of my post to find the secret sauce, let me save you right now – there isn’t one. This is going to be a post about hard work, focus and determination.

Am I going to share some concrete steps that you can take? Of course! But is there some sort of secret that’s going to allow you to live foolishly and then still retire early? Nope, definitely not.

So why waste any more time – let’s go ahead and get going!

1 – Define Your Goal AND Your Why

Knowing your goal AND your why is so incredibly important when you’re getting started on your journey. Simply saying “retire early” is not an actual plan. That’s nothing.

How early? 50? 62? Earlier? Later? Why do you want to retire early? What are you going to do? These are all types of questions that you need to answer.

For instance, my wife and I are aiming to have the option to retire at 55. Not that we will necessarily do that, but if we choose to retire then, we want to be able to. We’d rather plan for it and decide not to retire rather than do the opposite. So, our plan is a little vaguer in the sense of we’re not telling ourselves we’re only working 25 more years as we’re both 30. We’re saying we’re working 25 years and then making a choice.

Our other main financial goal is that we want to own a lake house at some point. We don’t necessarily know where, or what kind of house that might be, but if we have enough saved up at 55, then we could theoretically stop saving for retirement, work a few more years and just bank that money on a lake house – make sense?

It’s all about options.

So, in a sentence, our goal is to have the option to retire at age 55. And our “why” is to be able to spend more time with our family. We want the ability if our son moves 2000 miles away to visit him frequently. And if he has kids, we want to visit even more often to see our grandkids.

Honestly, that’s our mindset. Yes, we want the lake house, but the main goal is to have the ability to be around family and maximize the healthy years that we have in our lives – that simple!

Knowing these goals and our why is what’s going to keep us focused when things get tough. And trust me, they will get tough, so make sure yours is defined as well.

2 – Determine Your Retirement Number

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Predicting the Possibility of New Market Entrants Using ROIC

Analyzing the future success of a company involves creating an industry map of current competitors, but should also account for the possibility of new market entrants. This is especially important if analyzing a company who is a “small fish” in a much bigger pond.

Of course, industry analysis is so important because of the nature of capitalism. High profit margins and return on capital attract competitors, and those competitors tend to cause margins and ROC to revert to the mean over time.

Saying it another way—if you have a tasty pie, capitalism will endlessly try and steal it, piece by piece.

That’s why if you are investing in companies with high margins and returns on capital, evaluating for the presence of a sustainable competitive advantage is essential. Without a sustainable competitive advantage, or moat, great financial success is unlikely to be sustained over a long period of time.

And if you’re a “small fish” who’s a leader in your small industry, you might be subject to the risk of much bigger fish, with much greater financial resources, entering your market and quickly taking your leadership.

But… sometimes a competitive moat can manifest from a lack of new market entrants to begin with, simply because the economics of an industry naturally repel big fish.

We will discuss the probability of new market entrants in an industry and how we might be able to estimate this using the two components of ROIC, with the topics moving in this order:

  • The Background of Competitive Moats and Their Importance
  • Competitive Moats and Return on Investment Example
  • Analyzing Potential New Market Entrants With ROIC
  • Examining the Two Components of ROIC for the S&P 500
  • What’s the Rub: Margins or Invested Capital Efficiency?
  • Investor Takeaway

There has been some great work done on the subject of competitive moats and competitive strategies from great thinkers already; hopefully we can add additional considerations to the discussion.

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IFB193: Consistent Investing, ESG, and ETFs

Welcome to the Investing for Beginners podcast. In today’s show we discuss:

  • The advantages of investing consistently and using dollar-cost averaging to your benefit
  • The pluses and minuses of ESG investing and the ESG score
  • ETF investing, pluses and minuses

For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com

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Transcript

Announcer (00:02):

I love this podcast because it crushes your dreams of getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern with a step-by-step premium investing guide for beginners; your path to financial freedom starts now.

Dave (00:33):

All right, folks, welcome to Investing for Beginners podcast tonight. Andrew and I are going to read a great list of questions we’ve gotten recently. So I’m going to go ahead and turn it over to my friend, Andrew. And he’s going to read the first question to us.

Andrew (00:46):

Yeah. Thanks, Dave. So this first question comes from John King. He says, hi, Dave, I love the podcast. And I’ve been binge-listening to all of them this past month. I have a question about dollar-cost averaging over a very long timeframe. About a year ago, I researched and bought about ten dividend-paying stocks. I have been dripping into each position I own is small and only has about five shares of each. I run a vegetable farm, and with that family and other expenses, I never have large sums of money to put into stocks. I’ve heard you guys talk about dollar-cost averaging over one year. Would it be okay to add monthly to stock over 30 years as long as the company is in good shape? Keep up the great work. Thanks.

Dave (01:31):

Well, in a word. Yes. So I guess that is the easy answer. So let’s dive into this just a little bit. First of all, Don, thank you for reaching out and kudos to you to stay taking this step and diving in and embracing this with both arms. So I applaud you for taking that step. So that’s, that’s a great first step, and people struggle with that. So kudos to you for doing that. And the fact that you’ve bought all these great companies and are starting to put money aside is, is a great thing for you and your family in the long run and dollar-cost averaging, especially if we don’t have tons of money to put it into the market is a great way. And the studies show that well there’s, there are various studies. I’ve read about dollar-cost averaging talk a lot about more about time in the market than timing the market.

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Investing Implications of Earnings Before Interest and Taxes (EBIT)

Earnings before Interest and Taxes, or EBIT, is a very common financial metric that many companies will use when they’re talking about the performance of their company, but the almighty question that we must answer is, what are the implications of it on your investments?

First, let’s dive a little bit more into what exactly earnings before interest and taxes means. In a quick summary, it’s a general measure of a company’s profitability. It’s also common to hear EBIT referred to as operating earnings/profit.

Chances are, you may have heard of EBITDA, which is the same formula except EBITDA contains Depreciation (D) and Amortization (A).

The formula for EBIT is very simple as shown below by Finance Strategists:

Let’s run through a quick example of calculating EBIT to help hammer it home a little bit more.

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Return on Capital Employed: Ratio for Profitability and Capital Efficiency

One of Terry Smith’s investing foundations’ main pillars is to invest in good companies that he defines by companies with high returns on capital employed. For those of you not familiar with Smith, he runs Fundsmith, whose returns have almost doubled the returns of the S&P 500 over the last decade.

Smith’s Fundsmith has investments that have averaged over 29% since 2010. Return on capital employed, also known as ROCE, is similar to return on invested capital. It helps investors determine how effectively a company uses its assets to drive revenues and profits.

The better or more efficiently a company reinvests its assets, the better the returns will be over a long period. Charlie Munger on return on capital:

“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”

In today’s post, we will learn:

  • What is Return on Capital Employed?
  • How Do I Calculate Capital Employed?
  • What Does Return on Capital Employed Indicate?
  • What is a Good Return on Capital Employed?
  • Investor Takeaway

Okay, let’s dive in and learn more about return on capital employed.

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The Two Main Tendencies that Cause You To Panic Sell Your Stocks

Oh boy – the panic sell. It’s an age-old mishap that so many investors will find themselves susceptible to and one that literally takes years and years of practice to be able to successfully master.

What even is a panic sell, thought?

A panic sell is when you see your stocks dropping like a rock and you can’t help yourself. You see the stock down 5%. Then down 8%. 10%. Down 12%.

Ok – you can’t take it. You log into your account and hit the “sell all” button and boom, there goes your ownership in that company.

Now what happens?

Well, other than the stock immediately going back up because that’s how it always seems to happen, you almost have this sick feeling in your stomach regardless of what happens. You just lost 12% and then you sold – doesn’t that somewhat sound like you just sold low, the definition of what we try to avoid as investors?

Unfortunately, this is something that is just way too common with investing. It’s extremely mental and emotional and people just get in their way often.

I have currently been reading ‘Money Master the Game’ by Tony Robbins and in his 9 Investing Myths section he talks about how mental investing is and how your emotions can easily get the best of you. Have you ever been on this rollercoaster that he mentions?

I know that I have! In fact, I feel like I can get on that rollercoaster quite frequently, but that’s also because I am a proponent of checking my portfolio daily. It might sound ridiculous given that I just said I can be on an emotional rollercoaster at times, but the thing is I am only 30, and I would much rather make mistakes early in life than I would when I really need the money in retirement, so I still have a ton of conviction in my process!

The difference now is that when I ride this emotional rollercoaster, I don’t panic sell. Sure, I might not make the best decisions 100% of the time, but I make it a point not to panic sell just because my stocks are getting crushed.

In fact, when COVID really hit in March of 2020, I was able to liquidate my rainy-day fund and invest it into the market to capitalize on the massive market selloff that we were experiencing. Was I freaking out that my investments had all dropped by 30-50%? Heck yes!

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ROIC Analysis: Value Destruction From Growth and Other Pitfalls

Something that might shock the average investor is that growth can actually lead to value destruction for a company, depending on how a company is achieving that growth. Using ROIC analysis and comparing it to a company’s cost of capital, we can quickly determine when that is happening and steer clear from these types of investments.

In order to understand why cost of capital is important, especially in its relation to ROIC, we need to understand what cost of capital is.

Cost of capital can be thought of in two ways:

#1- the company’s cost of acquiring capital. This could be something as simple as the interest rate paid for new debts.

#2- the opportunity cost for investors. Going back to our simplified example, the company with a 1% ROIC is not doing the shareholder any favors when that money could’ve been reinvested elsewhere to earn higher returns, making an investment in the company as a whole a poor investment.

In either case, a company must earn a higher return on its capital than the cost of capital, otherwise it will drive its value to the ground. And in a rational market, a company can’t continue to earn lower returns (or ROIC) compared to its cost of capital as eventually that value drops to zero.

Let’s take a simplified example of a company whose cost of capital through debt funding is higher than ROIC and thus destroys value.

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How to Use Reinvestment Rate to Project Growth for Valuation

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”

– Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter

Finding companies that compound their returns on invested capital over long periods while growing simultaneously is the “golden goose” we are all trying to find. One way to help find these great companies is to use intrinsic valuation models such as a DCF. One problem with using models such as a DCF is the assumptions we need to input, such as a growth estimate.

We have choices when deciding on growth rates, discount rates, and terminal rates. With growth rates, we have three routes to choose from, and in this post, we will talk about the “choosing wisely” route, growth rates from fundamentals in the form of the reinvestment rate.

Return on invested capital is one of the best tools we have to measure how efficiently a company reinvests its capital to grow revenues. Using parts of the ratio helps us determine what kind of real growth we can expect from Visa, for example.

In today’s post, we will learn:

  • What Is The Reinvestment Rate?
  • How Do We Calculate Reinvestment Rate?
  • Examples of Reinvestment Rate
  • Investor Takeaway

What Is The Reinvestment Rate?

The reinvestment rate is the amount of growth we expect from any free cash reinvestment in an investment. For example, if we reinvest our cash in a company, we expect that cash to grow our investment to a higher level.

We express the reinvestment rate as a ratio, which allows us to compare it to other investment choices for our cash.

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The Growth Capex Formula: Simple Examples of FCF and Growth Potential

When a company invests in a long term asset for future cash flows, these are called capital expenditures, or capex. Capex can be divided into two buckets, growth capex and maintenance capex, as suggested by Warren Buffett.

Capital Expenditures = Growth Capex + Maintenance Capex

Distinguishing between each type of capex can provide an investor with insight into both the growth potential and capital intensity of a company.

The reality of business is that some assets require heavier upkeep (maintenance expenses) than others, even though those assets might produce similar cash flows. A business with assets like this will need to reinvest its profits just to remain in business; this leads to less available cash flow which can be distributed back to shareholders.

If you ever wondered why utilities have so often underperformed the market even during some of the most turbulent bear markets, it’s because many of them have to use their capital on expensive maintenance capex just to provide valuable services to their customers. What little is left is usually distributed to shareholders in a dividend, leaving little to none cash flows left to reinvest into growing the business. Thus, the mediocre results.

Companies depend on growth capex as fuel in order to maintain steady increases to their top and bottom line, and so just like no two assets are truly equal, neither are two different capital expenditures.

  1. Growth capex: used to acquire assets which are expected to produce higher revenues, profits, and free cash than the assets which are currently owned by the business
  2. Maintenance capex: used to either repair, maintain, or replace the assets which currently produce the company’s revenues, earnings, and free cash for the business
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