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 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.

[continue reading…]

IFB174: Bottleneck Businesses and Secular Growth Trends with Braden Dennis

Announcer (00:02):

II 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. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now.

Dave (00:33):

Welcome to the Investing for Beginners podcast. This is episode 174. Tonight, We have one of our favorite guests back for us—another show. We have Braden Dennis from Stratosphere Investing and the Canadian Investor, the top podcast investing podcast in Canada, I believe. And it is fantastic, by the way, a little side note. Suppose you’ve not checked it out easily to check it out. It’s great stuff. He and Simon are fantastic. So I’m going to go ahead and turn it over to Andrew and Braden. And we’ll go ahead and have our little conversation tonight. So Braden, welcome back to the show.

Braden (01:05):

Hey, thanks, Dave. And I appreciate the kind words I get to have you on again.

Andrew (01:11):

Braden, I figured we’d just get right to it. So you sent us a cool framework that you are describing some of the things you’d like to look for with stocks, and you call those stratosphere compounders, a lot of different, good elements in there.

Andrew (01:28):

Maybe you describe that for a high level, and there’s some good stuff in there that we can talk about.

Braden (01:35):

Yeah. So this framework that I made a couple of months ago was almost a stock checklist and all kind of notes I had put down on a document, but I wanted to make it into a graphic that was easy to understand, not only for interested people but for myself to wrap around what I think is a good longterm compounder and going back to basics. And sometimes you got to bring yourself back to basics. When it comes to investing, you are ultimately seeking to find companies that will be much stronger, more profitable, have a wider moat, and be more important in the future. And this is a framework to identify what those businesses are and the characteristics that they have.

Braden (02:31):

Just quickly, the elements that are consistent in a lot of these businesses are typically a leader or disruptor in a secular growth trend. And we can talk about what some of those growth trends are right now later; they have excellent re-investment opportunities. And this is typically quite easy to figure out by just looking at their ten median return on invested capital. And if it’s another type of business, like a bank, return on equity will do as well. I’d like to see some proven topline growth of both revenue and free cash. This is a consistent, proven topline that not only is potentially stable but accelerating from here. That’s what I like to see. I try to pay a fair price relative to those qualities of growth. Valuation does matter. The starting multiple you pay today does matter.

[continue reading…]

Avoid Value Traps by Understanding Various Valuation Multiples by Industry!

One of the hardest things to do when investing is figure out the proper value for a company.  Sure, “buy low, sell high” sounds easy enough, but with differing valuation multiples by industry, it’s not just a blanket process that you can apply to all companies that you look at.

When I first started investing, I was only a value investor.  To me, that made the most sense, and to many people that is still their preferred method of investing – and there’s nothing wrong with that.  The thing with being a value-investor is that your entire goal is to find a company that is undervalued vs. their intrinsic value.

How do you do that?

I could go into a very long, drawn out explanation about how to find good companies, but Dave actually wrote an awesome post on his stock checklist that you should check out instead.

When I first started investing, I was immediately drawn to the numbers and looking at many of the valuation ratios for companies.  For me, that was just the easy thing to do.

You frequently hear about how Price/Earnings, or P/E, is the end all be all for investing and finding out if a company is valued properly, with anywhere from 15-25 being the ideal range for a stock.

Easy enough, right? 

Turns out there’s actually a major issue with this – the companies that you can select are going to be very limited.  Different industries actually are going to trade at very different valuations.  It might seem wrong at first, but think about it – what is the true value of an up-and-coming tech company?

You probably don’t care about the actual income of that company – you want them to keep growing revenue, increase market share, roll out new, innovative products, and then start to maximize on their earnings.

So, why would you value that company off of a ratio that’s based on earnings, like P/E, the same as you would with a bank?  A bank is much more established and likely doesn’t have a lot of growth years ahead.

You know what it is – it’s a bank.  You’re going to get slow, steady growth and a strong dividend payment.  You’re investing in the bank for stability – not to be your next tenbagger.

So, yeah – the P/E is going to really, really vary by industry.

I found an incredible table from Siblis Research where they break down the different CAPE ratios by industry sector over the last few years.

Before we get into the chart, let’s first explain the CAPE ratio.  CAPE stands for “Cyclically Adjusted Price/Earnings”, otherwise known as the Shiller P/E Method and is commonly used to smooth out some of the volatility that you might see in the market.  CAPE basically takes 10 years of earnings and adjusts it for inflation to normalize the crazy swings that you can see from year to year.

Another important thing to keep in mind that as of June 8th, 2020, the average CAPE of the S&P 500 was 29.73, per Siblis research, so pretty significantly over that 15-25 range.  Let’s look at the chart!

[continue reading…]

Reason #1 to Invest in the Stock Market? 100 Years of Makin’ Money!

Do you like makin’ money?  That’s what I thought!  Yes, we all do!  And guess what – the stock market has 100 years of history doing nothing but making money for people.

At the end of it all, that’s why any of us invest in the stock market.  Sure, we might do it so that we can retire early, but the only reason that you can retire early is because you’re making money!

Maybe you’re investing your 529 money for your child’s education but again, you’re doing that so you have to save less. 

At the end of the day – it’s about nothing more than makin’ money!

It took me awhile to really be able to comprehend what investing in the stock market even meant.  I always used to think that people that invested in the stock market were super risky and that their money was being handled by immoral people…I couldn’t have been further from the truth!

There really were four things that were instrumental in getting me motivated to invest as much as humanly possible in the market:

1 – Understanding how Compound Interest Works

Of course, any sort of blog post trying to get people motivated to invest has to start with compound interest, and this is truly where my journey did start.

I felt like I could quite simply never get ahead no matter what I did, but once I truly understood why compound interest was so important, I was hooked.

If you invest $100 in Year 1 and make 10%, then you now have $110, meaning you made $10.  But in Year 2, if you make another 10%, you now have $221, meaning you made $11!

How did you make $11?  Well, remember that $10 you made in Year 1?  Now you make another 10% on that $10, so you get an extra $1. 

You do this for years on end and the gains are massive.  It’s why getting your money to work in the market is so incredibly important rather than just sitting on your hands and doing nothing.

2 – Understanding the History of the Stock Market

This was probably the second most important thing for me and one that I intend to spend most of my time on today.  You see, the stock market is undefeated – it always goes up.

Now I am not saying that everyday the stock market goes up.  I’m not even saying that every year the stock market goes up.  But what I am saying is that eventually, at the end of it all, the stock market is going to go up and it always has.

Below is a nice little graph to show exactly what I am talking about:

[continue reading…]

Price to Sales is NOT Relevant When Margins Are High – 20Y [S&P 500 Data]

The price to sales ratio (or the P/S ratio) has long been a reliable metric for uncovering value because (1) sales tend to be more consistent, and (2) they give a way to value companies that aren’t profitable. But this is changing as high tech companies become more of the norm.

And you can see it by the simple way that the Price to Sales ratio is calculated.

In this post, we’ll discuss:

  • The basics of the Price to Sales ratio
  • When the P/S ratio is a poor indicator of valuation
  • Historical (20 year) data of the P/S for the S&P 500
  • Average Price to Sales Ratio by Industry (historical)

Whether you’re a value investor or one who is a beginner, you might find the following conclusions to run counter to a lot of the information on the internet today. I hope after reading this post fully you’ll understand why.

Price to Sales Ratio Basics

Before we start, know that Net Sales and Revenue really means the same thing with most companies. It’s going to be the “top line” of a company’s income statement, and represents money coming in to the company before taking out most expenses (only a few exceptions).

I hope I don’t have to spend too much time on this explanation, because the P/S ratio is really a simple division formula:

[continue reading…]

A Guide to the Top Custodian Banks: What They Do and How They Work

“Banking is a very good business if you don’t do anything dumb.”

Warren Buffett

Banking is a fascinating business; not only does it provide the lifeblood of capitalism, credit, but its history woven with humanity’s history. Think about it, railroads, automobiles, telephones, airplanes, and all tech came after banks, with many of the US’s biggest banks tracing their lineage to the country’s beginnings.

Custodian banks have played a large part in that growth from the first colonies in the US, as holders of the wealth necessary to build and grow the country.

Along with commercial banks, brokerages, investment banks, and the good old community bank, banks have provided the financial backbone for the emergence of many people worldwide. Let us uncover a lesser-known type of bank that is nonetheless important to the economy’s financial health.

In today’s post, we will learn:

  • What Does a Custodian Bank Do?
  • How Does a Custodian Bank Make Money?
  • How to Analyze Custodian Banks
  • Top Custodian Banks

Ok, let’s dive in and learn more about the top custodian banks.

What Does a Custodian Bank Do?

Before we dive in and look deeper into what a custodian bank does, let’s define what the custodian bank is:

A custodian or custodian bank is a financial institution that holds customers’ securities for safekeeping to prevent them from being stolen or lost. The custodian may hold stocks or other assets in electronic or physical form.”

Because these firms are responsible for the safety of assets and securities worth billions, the custodial banks tend to be large, reputable firms.

In some cases, the custodian banks operate only in this fashion, which means they don’t make deposits or loans in the conventional sense. Rather, they operate only in a custodial fashion.

Others offer custodial services as part of the overall package of banking services the bank offers its customers.

[continue reading…]

Investing With Margin – Is it Risky or Genius?

I recently had a friend start investing with margin and not going to lie, he has had some freaking awesome results with it!  The thought of investing with margin was something that was always terrifying to be but it really made me question this belief.  So, the question is – should we all be investing with margin?

First of all – what even is margin?

Investopedia says that “Margin is the money borrowed from a brokerage firm to purchase an investment. It is the difference between the total value of securities held in an investor’s account and the loan amount from the broker.”

Basically, people will borrow money to allow them to invest more than they currently have. 

To tie it back to the example with my friend, he had about $15K in his brokerage account but by investing with margin, he was then allowed to invest in more companies, or maybe the same companies but by purchasing more shares, as his brokerage firm was letting him borrow that money.

Now, of course, nothing in life is ever free, so you’re going to have to pay interest on the money that you’re borrowing from your brokerage firm.  I have found that the interest rate can vary greatly by the brokerage so if you were ever going to consider using margin, I really think that this needs to be your first step to doing the math if it makes sense for you.

Brokerage-Review.com put together a really comprehensive breakdown of all the various brokerages out there and their various interest rates and it’s definitely worth a look:

[continue reading…]

How Purchase Obligations (in the 10-k) Affect Inventories and Capex

Purchase obligations can be a key part of understanding future cash flow. In 2002, the SEC made the disclosure of purchase obligations (POs) a requirement in the MD&A section of the 10-k. Because POs are not part of GAAP, I’ll discuss the two ways they can affect future financials of a company.

While Purchase Obligations is the official term used by the SEC, you can also think of a Purchase Order (PO) as essentially the same thing, as it’s a contract to purchase goods and services from another company or vendor.

The Basics of Purchase Obligations/ Purchase Orders (POs)

How this fits into normal GAAP accounting is simple enough.

Say you’re a manufacturer of machines, and you need to purchase steel to make those machines. Once writing a PO with a steel supplier, you might see the following impacts to the Balance Sheet:

Part 1: Purchase order = $100m for 2 units of steel

Balance Sheet

  • Accounts payable = +$100m
  • Inventory (raw materials) = +$100m
[continue reading…]

Valuation of Goodwill: Common Formulas Used to Estimate a Value

We don’t think in terms of appraising physical assets. We think in terms of economic goodwill. … We only buy if we think [economic goodwill] is going to appreciate.”

Warren Buffett

Goodwill is a controversial subject; many companies make up the majority of their assets with goodwill. Take, for example, the recent Amazon purchase of Whole Foods in 2017. Amazon paid $13.7 billion for the grocer, with $9 billion more than the value of Whole Foods and its other net asset.

The issue at hand is the $9 billion that Amazon added to its assets as goodwill. By accounting rules, Amazon expects to evaluate or test that $9 billion every year for any impairments or see if the value still holds. Which if they do find a change in value, the impairment reduces the profits of Amazon.

All of the above is perfectly legal, and there is no shadiness to the accounting. Still, companies can “pay” for purchases with intangible assets such as goodwill, putting the profits and shareholders at possible risk.

The valuation of goodwill is a process that any purchase undergoes to determine the value of both the assets and intangibles of that business. I think to understand that process helps us understand any purchase and the possible ramifications. Not only today but in the future.

In today’s post, we will learn:

  • What is Goodwill?
  • Accounting vs. Economic Goodwill
  • Accounting for Goodwill
  • Valuation of Goodwill

Ok, let’s dive in and learn more about the valuation of goodwill.

[continue reading…]

Spoiler: You Don’t Have to Invest in Volatile Penny Stocks to Make Money!

A common pitfall that I often see new investors fall into is that they get sucked into the “get rich quick” mantra that they think comes with the stock market.  Unfortunately, they think that this means that they have to invest in volatile penny stocks because of the high risk, high reward that comes with them, but let me tell you this – just be patient.

I completely understand why people think that the stock market is a get rich quick option.  Everything that you initially think about it leads you to believe that.  You hear about the corruption in classes and you see the insane movies like Wolf of Wall Street.  Before you actually know anything at all, you have this preconceived notion that it’s immoral but it’s not – the stock market is a place for good, and if you’re patient, you can make a ton of money in it.

I have noticed that for me personally, I have outperformed the market on average throughout my life.  But, ironically enough, I actually do worse than the S&P 500 in the great S&P 500 years and do better in the bad years – why is this?

I think that when the market is doing well, I will start to get greedy.  I won’t be happy with a 30% return that we saw in 2019 – I want MORE!

But when the market isn’t doing great, I tell myself to “just focus on finding great, cheap companies for the long-term” and I am able to stick to that.  I get short-sided in the great years and make dumb decisions.  And a lot of those dumb decisions have been me investing in some volatile penny stocks.

So, what even is a penny stock?

Investopedia defines it as “the stock of a small company that trades for less than $5 per share.” 

As you might anticipate, there are a quite a few stocks that would meet this criteria.  When I run a simple stock screener, I end up with a total of 2,837 companies out of 7,645 that currently have a price that is $5 or less:

[continue reading…]

IFB173: Why to Invest in Real Estate Investment Trusts (REITs)

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. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now.

Dave (00:33):

All right, folks, we’ll welcome to investing for beginners podcast. This is episode 173 tonight. Andrew and I are going to talk about REITs stand for real of a real estate investment trust. And we’re going to talk a little bit about them and how you can invest in real estate using these kinds of vehicles. So without any further ado, I’m going to turn it over to Andrew. We’re going to go ahead and start, and then we’ll go ahead and do our little give and take. So Andrew wants you to tell us your thoughts about REITs.

Andrew (01:00):

I’m excited to talk about rates and just to have you talk about REITs because you’ve been, you dove super deep into this, this topic and have, based on our conversations, you’ve achieved a decent circle of competence on it. And I think it would be very helpful for investors to share some of that knowledge, particularly when you look at the landscape we have today. Some of the opportunities out there mentioned the words real estate, and I’m sure that that probably triggers alarm bells with many people.

Andrew (01:36):

You know, how could you, how could you say you feel positive about real estate amid a pandemic and global depression, but I’ve talked about on the Eli there. I occasionally think on the show, I know we’ve had discussions about Dave, how the economic recovery has been different. And I mentioned months ago, how higher-income workers, where we’re not only doing just fine from an employment standpoint income standpoint, but they’re doing quite well. And then you had the lower-income disproportionately affected by the pandemic job, losses, income loss, and all sorts of things. You know, we have the presidential debates going on and, and, you know, there’s, there are talks of the K shaped recovery. So, you know, it’s not a foreign concept, and I think when you think about real estate today and where the opportunities are, it’s very dependent on you. You can’t pay it in a broad brush as you would, the economy, you don’t want to paint that in a broad brush either. There’s going to be K parts that maybe parts of real estate will do well in the coming months. And parts will continue to struggle regardless of what

Andrew (03:00):

Happens with the vaccine or not. And so maybe you can start by introducing certain types of rates because I think that’s interesting how there can be specializations within the rates. Maybe, maybe, why you personally, maybe start there, why you are excited about rates in general right now.

[continue reading…]