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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 15,000+ 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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Irrational Exuberance: A Book Review

Irrational exuberance refers to extreme behavior enthusiasm, often compared to the stock market and investor behavior. Typically, it means that investors are excited and driving up stock prices regardless of the fundamentals that would support those increases.

Irrational exuberance is the perfect analogy to illustrate the market reaction to the current Covid-19 pandemic, with many companies stock prices rising at crazy rates regardless of the fundamentals of the company.

A perfect example of this is Tesla, which has crossed the $1000 a share earlier this year, despite still losing money and producing fewer cars than any of the other big car dealers.

Irrational exuberance has become associated with bubbles and the creation of unsupported asset prices. All of which leads to those bubbles popping and leads to further market panic and “blood in the street.”

In today’s post, we will learn:

  • The Origin of the Term “Irrational Exuberance”
  • Robert Shiller and Irrational Exuberance
  • Key Takeaways from Irrational Exuberance
  • Common Criticism of the Book

Ok, let’s dive in.

Origins of the Term “Irrational Exuberance”

Irrational exuberance is a term that came into the consciousness of investors from a speech given by Alan Greenspan in 1996. Greenspan was the Fed Chairman at that time, and the speech is known as:

The Challenge of Central Banking in a Democratic Society

An excerpt from the above speech which contains the most famous phrase:

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”

The speech was given in the mid-90s, which was the onset of the dot-com bubble, which is the perfect, textbook definition of irrational exuberance.

To breakdown irrational exuberance a bit.

Irrational exuberance is undue economic optimism, which is widespread. Think about Bitcoin mania a few years ago, everyone who had never expressed any interest in investing was asking questions about Bitcoin.

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Valuation Basics: Market vs Book Value – and The Argument for Both

When performing a DCF valuation, the equity analyst must make a distinction between using market vs book value for debt when calculating the weighted average cost of capital (WACC).

The easy way, of course, is to just use book value of debt from the company’s balance sheet and be done with it—but this can lead to unbalanced weights for the WACC calculation. It’s a quick shortcut, and seems harmless, particularly when analyzing companies with low leverage.

However, using this lazy approach can be dangerous in either understating or overstating the cost of debt in the overall WACC equation, which will ultimately distort the discount rate used in the valuation process.

Market value vs book value is a simple concept. Take equity for example.

Market value of equity = how much the equity is worth in the market. In the stock market, this means the market capitalization.

Book value of equity = how much shareholder’s equity is on the books for the business. This doesn’t necessarily equal market value, as various equity/ assets can have different earning power and value.

Oftentimes these two metrics are used as a comparison to approximate the expensiveness of equity (such as a common stock) in a simple ratio called the Price to Book Value (P/B) Ratio, calculated as (Market Value / Book Value).

Now let’s look at the difference between market vs book value of debt.

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IFB159: Trailing Stops For Value Investors and Aggresive Investing In Your 40s

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.

Dave (00:38):

Welcome to the Investing for Beginners Podcast episode 159 tonight, Andrew and I are going to pick some time out, and you’re going to talk About some listener questions that we got recently. We’ve got some fantastic ones as always. And so we thought we would take some time and answer those on the air for you guys. So I’m going to go ahead and read the first question. It’s in two parts. So I’ll go ahead and read the first part of the question. We’ll answer that. And I know we’ll come back to the second part.

Dave (01:00):

So the first part is, hello, Andrew. My name is Tim, and I started investing in January of this year. I’ve been listening to the investors podcast around episode 42 now, and have been very grateful for the advice that both you and Dave have shared as it has helped me get a broad understanding of the stock market and the confidence to get my feet wet. I’ve also appreciated that I choose your podcast. I chose your podcast and ebook to get started as all the metrics and strategy of value investing general makes sense to me as a nerd who likes numbers, yay.

Dave (01:32):

The ratios and rationale behind them make so much sense. So the first question is listening through the podcast so far, I’ve heard both you and Dave talk about the importance of setting trailing stops to stop your losses before they get too far down, which makes sense at the time I am 27 years old, and I’m, it makes sense to hold for the longterm and not to buy and sell all the time. Both of these strategies seem to clash heads a little bit in the current environment of a stock market collapse. From what I have learned, I would think that the trailing stops are when the market is relatively stable, and stock is still hitting the trailing stop that you are talking about—otherwise, everything you need to be sold. And then the compounding of drip would not take effect. Also, I know that I have not lost money until I finally sell, from listening to some of the more recent episodes. It seems at times like those, it seems at times like these, that it is about whether you trust it and the research you’ve done in choosing a good company, is this the correct way to think of things? Or am I missing something? Andrew? What are your thoughts?

Andrew (02:36):

Yeah, this is a great question, Tim. So it kind of comes down to one of those ideas where it sounds nice, but in practicality, it’s not the greatest strategy depending on how you’re approaching the stock market. So this is something that I covered in June the June 2018, eLetter issue, where up until that point, I had split my portfolio into two sections. I had a regular portfolio section and a dividend fortress portfolio section. So the dividend fortress section never had any trailing stops. The regular portfolio ended up having those. I found as time went on that I was being forced to sell out a company’s a, I didn’t want to sell out of. And for all the reasons that you mentioned here, I mean, you lose the compounding of drip—you lock-in that loss. And if anything, sometimes when a stock drops, it makes you want to buy more and you, you become more confident in that investment, not less. And so the following stop kind of takes a lot of your freedom away. So I think it’s good, it’s a good way to kind of get some training wheels on when you’re first starting a trailing stop, how it works in practicality is you have a certain percentage that you’re comfortable with.

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The Big Guide to Little Dividends

Dividends are one of the best ways that companies can return value to shareholders. Share buybacks have become all the rage in the investing world, and dividends have been pushed to the back burner. But this underappreciated method of investing creates wealth over time like no other with the power of compounding.

I thought with this post, I would create a guide about dividends to give you a one-stop-shop to find out everything you might need or want to know about dividends.

Not all companies pay dividends, and they have their reasons for doing so, but the companies that do are regarded as shareholder-friendly. Even though Warren Buffett doesn’t pay a dividend with Berkshire Hathaway, he invests in companies that do pay a dividend.

Buffett understands the power of compounding and how dividends can grow the wealth of both shareholders and companies. Buffett has shown over the years that he can compound Berkshire’s money at rates that are difficult to replicate elsewhere and has arguably earned the right not to pay a dividend. But that is an argument for a later day.

Items we will learn today:

  • What Are Dividends?
  • Dividend Metrics That Matter
  • The Impact of Compounding and Dripping
  • The Best Dividend Paying Stocks

Ok, let’s dive in.

What Are Dividends?

Put simply, dividends are payments made from a company to the shareholders or individuals that have purchased shares of the company. Any owner of the stock of the company, individual or fund, is eligible to receive dividends from the company.

Not all companies pay dividends; some of that will depend on where they are in their life cycle. Typically young companies will not pay a dividend; rather, they will reinvest any cash flow back into the business to grow the company.

Examples of this might be Amazon, Google, Facebook, and Netflix. These companies are still in the growth at all costs stage and are using any extra money to grow the company. Our discussion today will not delve into the right or wrong of this idea, rather how we can benefit from the companies that do pay a dividend.

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Cash Flow Statement: The Final Stage of a 3-Part Financial Model

Forecasting the cash flow statement is the final stage in developing a 3-statement financial model in what was a linked and iterative process. The figures on the cash flow statement will in large part be driven by the changes in amounts on the balance sheet as well as certain non-cash income statement items. As we talk about cash movements in and out of a business, the general rules investors should keep in mind are laid out below.

General Rules for Cash Flow Movements

  • Growth in assets year-over-year on the balance sheet will be associated with a cash outflow as money is spent to acquire that assets. A basic example of this will be the cash outflow associated with purchasing new fixed assets or inventory.
  • Growth in liabilities and equity year-over-year on the balance sheet will be associated with a cash inflow, as cash is received or saved in return for the liability or equity in the business. A basic example of this would be the cash inflow from issuing debt or the cash saved from not paying suppliers of inventory immediately.
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How to Save For Your Short-Term Financial Goals

We spend a lot of time talking about saving and investing for retirement but one topic that we don’t touch on much is the importance of saving for your short-term financial goals. Well, I’m here to show you how to do that and that the value of investing early will pay dividends for you in the future!

I feel like I can speak pretty well on this topic because I was in this exact situation recently.  Just a few years ago, my wife and I lived in Lincoln Park, a very expensive neighborhood of Chicago, and we were paying out the you-know-what in rent each month. 

In addition to that, we had only been out of college for a few years so we had student loan debt, credit card debt (because we were dumb), car loans and others! 

PLUS, I was saving for an engagement ring, which then led to us saving for a wedding, and we were also saving for a home as my company moves us every couple of years and we wanted to buy a house in our next location.

In short – we had no money and we needed to pay off what we owed as well as trying to save for what we wanted.

It was really, really tough.

The first thing that you absolutely have to do is cut your expenses.  While there is a finite amount that you can cut your expenses, it is absolutely the easiest and quickest way to create additional money in your cash flow. 

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Summary of the John Burr Williams Formula – The Basis of Intrinsic Value

The Theory of Investment Value by John Burr Williams is a classic, and was referenced by Warren Buffett in his 1992 annual shareholder letter as “the equation for value”.

This post will present and explain this exact formula published by John Burr Williams and help modernize it in today’s terms. Nobody has done it better than Warren Buffett himself, and so I recommend reading his 1992 letter for yourself for additional insight.

The equation for (intrinsic) value that eventually came to form the basis for modern DCF valuation is admittedly difficult to model even when reading the John Burr Williams classic, so I’ll have to explain some of the Greek symbols he presents in the final equation, which are scattered throughout the book.

You’ll find the equation in its final form on p. 94, as so:

Keep in mind that some of these Greek terms won’t necessarily correlate to the general terms used in regular algebra.

  • Capital Vo (on the left of the equation) is defined as the investment value per share (page 76), which is what we are trying to solve here
  • π (pi) is used to by Williams to signal dividends paid (also p.76)
    • The subscript is used to indicate the year a dividend is paid
    • The lower case “o” in this case indicates a dividend paid in the initial year examined
  • ω (omega) is defined by Williams as lower case “u” times lower case “v”
    • ω = uv
    • Found on page 88
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Regular Savings Accounts are Trash! Say Hello to a High-Yield Account!

Have you ever heard some of the horror stories of regular savings accounts?  Maybe that was a bit harsh, but there is really nothing in the personal finance world, in my eyes, that is more deceitful!

“Wow Andy – you followed it up with something that was even more harsh!”  Dang right I did.  But hear me out – I’m not saying that the banks that offer them are being deceitful but I am saying that it’s deceitful in the way that people use them. 

I know many people that will put their money into regular savings accounts and they think that they’re setting themselves up for a better future but guess what?  They’re not.

You see, most regular savings accounts earn less than .1% interest!  That is such an insanely small amount of interest to earn from a bank.  I have oftentimes talked about how when I first started my personal finance journey, I learned that my money was sitting in an account with Fifth Third where I was earning .01% interest and it just made me so mad.

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A Look Through Johnson & Johnson (JNJ) Dividend History

Johnson & Johnson (JNJ) has been increasing their dividend for many, many years!  In fact, that have increased it for 57 consecutive years, and as they’re a member of the S&P 500, that also makes them one of the sacred Dividend Aristocrats that we talk about oh so often!  If you stay tuned, I’ll show you how I find Dividend Aristocrats of the Future, but first, lets take a walk through the JNJ dividend history!

Source: JNJ

It’s incredible when you hear about a company that is able to have such a long period of sustained success growing their dividend.  When you think about all that has gone down in 57 years you will really be shocked with all of the market downturns that they have been able to successfully navigate without shrinking their dividend.

Sure, dividends are just one aspect of importance, but the ability to find a company that is going to continue to grow its dividend is the definition of compound interest because you then can DRIP those dividends right back into future shares of the stock! 

I have heard some people say that they don’t like companies that pay dividends and some that say that they only like companies that pay dividends.  For me, it depends if I am wanting to be risky or if I want to be conservative, or if I’m playing for the short-term or the long-term.

I view a dividend as a bird in the hand.  Sure, you can want your company to keep the earnings to continually reinvest and potentially try to reinvest into the company but that could mean that they’re doing things like buying back shares or investing in the company in a very inefficient way, which is the opposite of what Visa and Mastercard do.

Let’s take a look at this JNJ history and see how things have trended for them in the recent past!

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IFB158: Stock Picking for Dummies

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.

Dave (00:38):

Welcome to the Investing for Beginners Podcast. This is Episode 100 Tonight, Andrew and I are going to talk about stock picking for dummies. So we have some stories we’d like to pass along to you guys, and we have some ideas that might help you along the way with picking out some stocks. So, Andrew, would you like to talk first, or would you like me to talk first?

Andrew (00:58):

I think your story is the better one. So maybe it’s such a perfect illustration of how, when you’re picking stocks, it’s really easy to get caught up in the numbers or get caught up in a narrative or get caught up in your biases, tore the stock. And sometimes depending on what price you’re paying with for the stock, it’s creating these expectations that you don’t realize might be unreasonable. So tell your story first.

Dave (01:30):

Okay. All right. We’ll do so. A lot of you know that I have been watching the videos that Professor Aswath Damodaran does on YouTube.

Dave (01:41):

And I’ve been studying valuation with his MBA classes as well as his undergrad classes. And it’s very interesting and very enlightening. And he was telling a story on one of his lectures the other day that I thought was kind of fascinating. And I shared it with Andrew a while ago, and we thought this would be a perfect illustration of what we’re going to talk about tonight. So what the professor related to all of us was that he had a student that part of their project is to do a valuation of a company at the end of the semester. And so one of his students presented his findings at the end of the semester, and everything was really good except for one small detail. So he called the student in and had him come in and talk to him about his, his work and everything.

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