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

Let’s find YOUR path to financial freedom…

  • 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 13,800+ 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.

[continue reading…]

NEWSFLASH: Data Showing That It’s OK to Buy High, Sell Low

Would you rather buy low, sell high… or buy high, sell low? Obviously we’d all like to buy low and sell high, but sometimes that desire makes us believe that doing the opposite is so wrong. Well today, contributor Andy Shuler wants to debunk that idea, with real data from the S&P 500 showing why.

I think you’ll find this very interesting, and hopefully it will motivate many investors out there to just take action… and keep the right mindset: time in the market is better than timing the market…

buy high sell low stock market trader hands on head picture

Buy low, sell high – the most common stock buying advice ever.  It’s sooooo easy, right?  Wrong. 

How do you know when you’re at the high point?  If you buy a stock at $100 and it goes to $150, is that the high point where you should sell?  If you sell, it will probably go to $200.  If you don’t sell, it will probably come back to $100.  It’s so tough to tell when the right time to sell is, and it’s just as hard to find out when to buy.  Depressed yet?  Don’t be.  I have some good news.

You can buy high and sell low, and still make a ton of money!

“Andy, I think you said that backwards.”  Nope, I didn’t.  I meant what I said.  Don’t believe me?  That’s fine.  The proof is in the pudding. 

[continue reading…]

11 Grocery List Items You Can Buy Online to Save $100s on your Budget

Do you know if you’re being overcharged at the grocery store? With the advent of online shopping, there’s things you probably buy at the grocery store that you can now buy on Amazon, to save money on your budget. Contributor Andy Shuler takes a look at 11 commonly bought grocery list items and how the prices stack up vs. a grocery store like Kroger.

budget grocery list

In the past I have written about how I used to literally go into a grocery store, look at the price of an item, and then look for that same item on my Amazon app on my phone, and purchase it whichever way was cheaper. 

While this wasn’t always Amazon, more often than not, it was.  A lot of times this involved buying in bulk, but who cares as long as you have the room to store it.  I still do this frequently, and the fact that it’s delivered is an extra bonus. 

I had an old boss that told me that grocery shopping is the most inefficient task ever.  Think about it:

  1. Find Grocery List Item
  2. Put Item in Grocery Cart
  3. Take Item out of Cart to have scanned
  4. Put item back in cart
  5. Take Item out of cart to put in car
  6. Take Item out of car

Or, you can do this:

  1. Find Grocery List item on Amazon App and purchase
  2. Open box when it’s delivered

One of these options seems quite a bit easier… along with getting the potential savings. 

[continue reading…]

IFB110: Value ETF Primed for the Value Investing Recovery with Tobias Carlisle

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premi investment guidance for beginners, led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the nbers, your path to financial freedom starts now

New Speaker:                   00:36                     Welcome to the Investing for Beginners podcast. I am Andrew Sather; we have another great interview for you today. Dave’s taking the day off again. Today we have Tobias Carlisle. He has done a ton of stuff in the online space, the investing space and made some great contributions to the value investing world as well. So with that, Tobias, I love to dig into all the stuff you’ve got going on, but thanks for joining us today.

Tobias:                                  01:05                     Hey, thanks for the very kind introduction, Andrew. Appreciate it.

Andrew:                              01:09                     Yeah, so I guess first things first, I’m just going to like dive right in and then maybe we can go over your background a little bit later. , just the top of the thing that comes to my mind cause I was listening to your book acquires multiple, which is a fantastic book by the way. For anybody, basically. We’ve mentioned your book several times on our show, but I think to cliff notes summary. It’s like I’m taking Joel Greenblatt’s ideas and adding an extra component to it and having a ton of backtesting research and all whole lot more than I’m not giving it full justice. But as I was listening to it, this huge thing that comes up as a theme over and over again is this idea of mean reversion. And I think it’s a fantastic way to kind of start a discussion about some of the things when you talk about value investing then that’s something that I don’t think is a term that gets presented to beginners a lot. So can you talk about what mean or diversion is and kind of how that applies to the stock market?

Tobias:                                  02:16                     Yeah, sure. I’m happy to do that. So there’s, there’s, there are lots of different main reversions. We’re not necessarily talking about mathematics law of large numbers. We’re talking here in a very specific sense about the stock market. And, if you’re a value investor, your expectation is that the, there are companies that are undervalued. There are companies that are overvalued in their companies that are what we might call fairly valued. And the companies that are undervalued and overvalued, we’ll at some stage in the future go back to being fairly valued. And it’s that path from being undervalued or overvalued to fairly valued. That is main reversion. So that’s one example of it. It occurs not only in securities prices, in stock markets, in economics, in GDP, it’s, but it’s also everywhere. But it also occurs in the underlying businesses. So businesses have a cycle, and sometimes they’re doing very well.

[continue reading…]

An Adjusted Return on Equity Formula so You Don’t Overpay for a Stock

The Return on Equity formula (ROE) is an important metric for judging the profitability of a company and how efficiently management is using the equity that shareholders have invested in the business.

However, having a high ROE ratio does not necessarily make a company a good investment. As always with investing, it comes down to price.

Sadly, the return on equity formula as calculated from financial statement numbers has nothing to do with price.

The method I present in this blog post, which I call Investor’s Adjusted ROE, is my personal favorite approach to value investing with ratios. It shows that a good deal can be approximated by combining some readily available metrics.

Combining ROE with the P/B Ratio

We can make the profitability ratio, ROE, very meaningful to investors by combining it with a valuation metric in order to make it show the approximate earnings yield that an investor could expect to make on their own equity investment at the current market price.

Bit of a big sentence I know… but I will add some calculus for all those visual learners.

The Return on Equity formula, for a quick refresh and to start adding in some formulas to play around with, is calculated as follows below:

[continue reading…]

‘Super 6’ List of Deep Value Investing Thought Leaders (and their quotes)

Deep value investing is a kind of value investing that compares the price of a stock to what it’s really worth. Rather than looking at a stock as a very long term investment in a fantastic company, a deep value investing approach looks to repeatedly take advantage of a stock priced at a discount to its intrinsic value.

Deep value investing relies on the mean reversion concept of stock prices, mainly that the prices in the stock market can swing wildly and stray from a stock’s true value for a time. A deep value investor recognizes that the emotions in the market tend to be temporary, and will confidently buy a beaten down stock until its price returns to more rational values.  

If you have listened to Andrew and Dave’s Podcast, The Investing for Beginners Podcast, or have read any of my blogs before, then you likely know that we’re all very high on the thought of value investing.

You’ve likely heard of Warren Buffett as being one of, if not, the most successful investor of all time, and he swears by value investing.  In his early days, Buffett was a major practitioner of deep value investing, often taking an activist role in the companies he invested in.

But outside of a big name like Buffett, there have been many other investors who’ve found great success while taking a value investing approach.   This post is about my “Super 6”—deep value investors not named Buffett, Munger, Lynch or Graham. Note that these are not listed in any specific order as each one of them has their own varying ingenuity that they bring to the deep value investing game.  Let’s get going!

Shelby Cullom

Shelby Cullom was a very early investor and founded his brokerage firm, Shelby Cullom Davis & Company in 1947.  Cullom tried to follow in the footsteps of Benjamin Graham and sought to find stocks that were undervalued at that time, as well as having a great dividend.  (Sound familiar?)

Cullom turned his initial $50K investment into a $900M fortune, and his son followed in his footsteps with an even greater return!  Cullom always was one to particularly focus on a margin of safety and is very well known for that.  As he once said, “You make most of your money in a bear market; you just don’t realize it at the time.”

With such a focus on price and finding that discount to intrinsic value, it’s safe to say that Cullom’s approach embodies the general philosophy of deep value investing, buying a cheap stock and waiting for its price to catch up.

[continue reading…]

How a Mean Reversion Strategy Can Take Advantage of Mispriced Stocks

A mean reversion strategy to the stock market can be applied in a variety of ways. Investors can take advantage of mean reversion whether through value investing or a momentum based trading strategy. Contributor Andy Shuler takes a look at mean reversion in this blog post, describes it and shows how it can be used with a technical analysis approach to the stock market.

Mean Reversion is not something that’s specifically tied to the stock market by any means. It applies to many things – one of which I specifically think of is a player shooting free throws in basketball. 

If a basketball player who historically shoots 75% from the free throw line has just made 10 in a row, odds are that eventually that player will start to miss more free throws, so his average reverts back to that normal mean of 75%. 

Same for the opposite – if the player misses 10 in a row, bet the house that they make the next one!  Not guaranteeing they will, but looking at historical averages, they should slowly revert back to that 75% mean.  This is a very basic example, but it’s the essence of mean reversion. 

Now, time for the fun, nerdy stuff 😊.

A Mean Reversion Strategy for the stock market simply is looking at the mean price of a stock over a certain period of time and then selling that stock when the price is significantly over that mean price, and then buying when it is significantly under that mean price. 

This makes a large assumption that prices will typically stay fairly consistent and not make major drastic changes, which can obviously have an impact if that is not the case. 

When I do this, I use the following steps:

[continue reading…]

IFB109: Practical Behavioral Finance Tips with David Keller

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers. Your path to financial freedom starts now.

Andrew:                              00:36                     Welcome to the Investing for Beginners podcast. I am Andrew Sather; Dave is taking the day off. So today I have a special guest with us. Today’s guest is David Keller. He is the president and chief strategist at Sierra Alpha Research LLC. I am very excited to hear what he has to say about behavioral finance. So before we dig into all of that and hear everything that David’s got going on and the stock market investing and finance world, first off, thanks to David for joining the show. And if you can give us the listeners just a short synopsis of kind of where you’ve been, how your investing journey has been and how it’s taken you and what’s something cool that you’re working on today.

David:                                   01:26                     Absolutely. Thanks, Andrew so much for the invitation. It’s great too, great to join you. And I, I’ve listened to some of the the the episodes of the podcast. I think it’s fantastic and I love your focus on educating, uh, beginning investors that’s there. There’s so much that, uh, investors have to learn as I get started. So, so thanks for what you guys are doing. I think it’s great. Um, so my, uh, I’ve been in the financial industry for about 19 years. I started in, uh, mid 2000, which if you know, your financial marketing history man means you, you know, that the first, uh, you know, six, 12, 18 months of my investing, uh, experience where relatively difficult, which was coming out of the tech bubble and, and watching people that had come before me sort of struggling with that. And I was at Bloomberg, got in New York for the first eight years of a, of my career, and that’s where I learned about behavioral finance investors, sentiment decision making, and then a technical analysis.

[continue reading…]

Changes in Working Capital

In our continuing series on owners earnings, this post will tackle the last difficult line item, changes in working capital. We will discuss what it means, the formula on how to calculate changes in working capital, and finally some real-life examples.

As we work through this topic, please read the page slowly and take your time. Some of the info that we will cover can be a bit confusing, but it is important to understand.

Understanding this topic will give you a great insight into the free cash flow of any company and how to use it as well as where it comes from in the process.

changes in working capital picture

Let’s get started, shall we?

What Changes in Working Capital Means

So what is changes in working capital and what does it mean?

Let’s get this out of the right first.

Working capital is not changes in working capital.

The simple definition of working capital is:

        Current assets – current liabilities

Unfortunately, this is a little too simple, and what we are looking for is the how and why of working capital.

According to Investopedia:

“Working capital is the difference between a company’s current assets, such as cash, accounts receivable (customers unpaid bills), and inventories of raw materials and finished goods. And it’s current liabilities, such as accounts payable.

Working capital is a measure of a company’s liquidity, operational efficiency, and its short-term financial health. If a company has substantial working capital, then it should have the potential to invest and grow. If a company’s current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors, or even bankrupt.”

[continue reading…]

Instead of using YOY Growth for Stocks, use averages. Here’s the big reason why.

YoY growth is a very popular metric on Wall Street.

The term YoY means year over year, and it’s the difference in a company’s financials between one year and the next. It’s often used to evaluate growth of revenues, earnings, cash flows and/or book value.

If you’re not 100% of each of those accounting terms, don’t worry. You’ll still understand this blog post and learn something important from it.

yoy growth variance visualized

Not only that, but using averages instead of YoY growth is something that most of Wall Street doesn’t really think about. Partly because there’s no financial incentive to the professionals in the thick of it (maybe even counterproductive career-wise). Maybe the other part is ignorance.

Anyway, let’s get to it.

First things first. Let’s show the formula for YOY growth, then talk about averages.

YOY = ([Current Year] – [Previous Year]) / [Previous Year]

This estimates the one year growth rate. So if you had a company that earned $100 last year, and then grew earnings to $120 this year, you’d have a company with 20% growth YOY ([120 – 100) / 100] = 0.2 = 20%

Now, here’s why I prefer evaluating growth with averages…

Averages paint a better picture than YoY growth for pretty much every metric used in the stock market.

YoY growth can vary wildly, while averages smooth things out and have a better chance of being more reliable. Especially as you increase the time range.

Let’s use an example.

[continue reading…]

The 7 Deadly Sins of Behavioral Finance (Common Biases that Investors Face)

Behavioral finance biases….where do I begin?  Is this really an article about potential pitfalls that you might experience or is it a biography about my first experiences investing?  Either way, below are seven behavioral finance biases that you MUST avoid! 

behavioral finance biases

If you have already fallen into some of these, it’s ok.  Stop, find your way out, and get going in the right direction!

Behavioral Bias #1: Endowment Effect

The Endowment Effect quite possibly has the greatest opportunity to trip you up in your investing journey.  I wrote about this at length in my previous posting, but in short, the Endowment Effect is when you place a greater value on something that you already have over something that you are looking to buy. 

For instance, a blanket that you own that you had throughout your childhood might be worth more to you than someone that is wanting to purchase it for the sole reason of keeping warm.  You have a perceived, non-monetary reason to place a higher value on it that others do not. 

Many studies have been done on this, with one of the most famous examples being where a group of people were split into two groups, half of which were given a coffee mug and the other half were not. 

The group with the mug was asked what price they’d be willing to sell it for, and the other group was asked how much they would pay to buy it.  The seller’s said they’d sell for $7.12 and the buyers on average were only willing to pay $2.87 – a difference of $4.25!

This is primarily impactful during investing when you hold onto a stock because you already own it. 

Maybe it’s a stock that you wouldn’t buy currently, but you don’t think you should sell.  You’re holding onto it literally only because you already have it. 

This is ludicrous! 

If the stock isn’t good enough to buy, then it’s bad enough to sell.  Move that stock into a new company that is worthy of your own personal ‘buy’ rating and reap the rewards.

Behavioral Bias #2: Loss Aversion Bias

To young investors, Loss Aversion Bias can potentially be the most damaging, long-term behavioral finance bias. 

[continue reading…]