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IFB92: A Refresher Episode on Some Investing Basics

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 and Dave, too decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers. Your path to financial freedom starts now.

Dave:                                    00:35                     All right folks, well welcome to Investing for Beginners podcast. This is episode 92, tonight Andrew and I are going to read some listener questions and take a few minutes to answer those. This is going to be kind of a refresher episode on some basics, so things that we haven’t talked about a while. I wanted to give everybody kind of a refresher on some of those and also to help some people that are just joining the podcast now that might feel like they might be a little bit overwhelmed.

Dave:                                    01:01                     So I thought we thought this would be a great time to talk a little bit about some, some of the old basics because that’s always the foundation for everything you ever want to do. So with the first one, Andrew, you’re going to go ahead and read the first question and then we’ll talk a little bit about that.

Andrew:                              01:17                     Yeah. Uh, and I’ll also add the disclaimer if you’re brand new and this is something where you’re an absolute beginner and you’re looking to get some really basic stuff. Obviously listen continuously in this episode, but we also have a couple of series that we’ve done that are basically targeted towards people who, you know, might not know anything about investing, personal finance or any of those sorts of things. So starting on the episode for the three, we have what we called back to the basics and that’s a five part series, getting you an introduction on stocks, Wall Street, other sorts of investments, why investing works, how it works. Well, there’s some easy ways to implement it. And then starting in episode 60, we did a personal finance series, also five part, talking about some of the basics. We get into like some of the nitty-gritty there where it’s like, okay, well what kind of account do I open if I want to invest?

investing basics

Andrew:                              02:16                     And so that’s the second episode, episode 61 and I would definitely, definitely recommend, I know not every listener goes through the archives and looks, but there’s a lot of the golden our archives and we obviously cover of wide very of investing topics. So I would recommend doing that if you’re just starting out. So this was a cool email we got and I think I wanted to read this before we got into some of the, the beginner questions here. Cause it was very inspiring. Um, a lot of the stuff that we like to talk about me and Dave and kind of getting some perspective from somebody who’s already done it. So we got this email from Curtis and he said, Hi Andrew, and I’m going to summarize parts of this. But basically Curtis says he was talking to a coworker, found out that he invests.

Andrew:                              03:12                     And the timing was great because Curtis was just starting to educate himself about the stock market. So he says he’s talking to this new friend at work. He’s like, what are you doing? The market? And he tells me, he’s 44 years old and about to retire in three years. Him and his wife already have a beach house in Florida. So he said, how did this happen? He says, his story is when he was 18, he knows his grandpa who had just a regular middle class job. All of his life had a bunch of money. And so he was interested in, you know, how the grandpa had this money. So he found out that his grandpa was investing with a few different companies that offered the drip programs. That’s dividend reinvestment programs. If you’re brand new to the podcast, that’s something we talk about over and over and over again. And so he did, he did research on some of these companies and he bought stock and did the drip programs with that. And now, you know, his grandpa had money.

Andrew:                              04:17                     First the co-worker also pulls up a dividend, reinvesting calculator, shows them some figures and it was very, very inspiring for Curtis to see a real life example of somebody that had made it work. And he says, I feel very fortunate. I found your and Dave’s podcasts, you two are awesome and so relatable. This was pretty recent, so of only had the chance to listen to half a dozen episodes and he says, I’m only contributing to my Roth Ira. Learned very quickly from my coworker to take free money when you can and he will take the 5% match. That’s a good idea on the 401k and he says he can throw $1,000 a month into his dividend paying portfolio that he was working on assembling. So awesome to hear, you know, the guy’s fired up. I remember being in that spot. I, I still get fire though whenever I get those dividend checks. So it’s something very cool.

Andrew:                              05:18                     It’s something I always like to talk about just average people building wealth over a long period of time by letting the stock market kind of work for you. The only thing, I would just mention before we move on is I know there are contribution limits on a Roth Ira. So when it comes to putting money into a Roth IRA and make sure you’re not going to over more than 5,500 a year. So I think that’s for 2018 or 2019 less the limit. If Curtis is throwing $1,000 a month into a portfolio, make sure you’re only doing the Max for the Roth contribution limit and then the rest is going to have to be in your regular taxable brokerage account. So you might have an advantage of upping the 401k, you know, like you max out the Roth and then you up your 401k, because you get tax benefits doing that rather than investing in a taxable brokerage account. So really cool story. I love hearing that. And uh, I think we should move on. What’s the next question, Dave?

Dave:                                    06:36                     The next question is from Erin and he says, Hey Andrew, I’m a new stock investor and have been inspired by your ideas. I am currently reading the free ebook and have been listening to back episodes of the podcast. To date, I have been using Robin Hood to dip my toes in the market, but understand it’s not a long-term tool. Slash. Brokerage. I want to take advantage of drip investing and auto recurring investments into my positions. So I’ve been looking at other brokers and weaning towards ally, but not clear whether I will be charged a commission for every recurring investment if I’m paying for each commission every month. That seems like it would add up quickly 4.95 times 20 positions slash. Month. What are your thoughts on this and how to navigate commissions when applying auto recurring investments? Thank you.

Andrew:                              07:24                     Yeah, good question. Uh, obviously something that we teach right away is you want to build a portfolio of 20 positions and the reason for that is you’re diversified. So if any one stock crashes or anyone company fails, um, you have enough spread out through a bunch of other stocks where you will be able to keep your money and everything will be fine. Like you won’t lose too much where it’s where it’s something you can’t come back from now. Yes, I say build a portfolio to 20 positions the way I did it and the way you will see and um, if you’re a subscriber to the real money portfolio of the leather, uh, I built it month by month, so it took me, I was just doing one new stock every month, not 20 each month. So, uh, there was one stock each month. I had a full diversified portfolio in just under two years.

Andrew:                              08:24                     And so that $4.95 fee, it was just a one, one time fee every month. And that’s what you’ll get with, with these stocks. If, if you use ally brokerages, which is the broker we recommend, I use it personally. I have a taxable brokerage account with ally. I have a Roth Ira with ally and I have ally savings account. Um, you’ll get a $4.95 commission on that. And it’s when, one time when you buy him one time when you sell. So, you know, ideally you’re going to be buying these stocks and if you’re trying to drip your, you’re going to be holding it for a very long time, hopefully. So you know, obviously you don’t want to buy, you don’t want to pay like five, five bucks for a stock and then pay a $5 fee. Uh, the way I would do it, like a very bare minimum is $150 and then paying that $5 fee comes out to somewhere around 3%.

Andrew:                              09:24                     So it does, you know, affect returns, but it’s not catastrophic. So you do that and you just do it and you pay that fee once a month and you pay it again when you sell, but it doesn’t add up to, you know, 60 bucks a month or anything like that are 100 bucks a month. It’s just a one time fee for each stock you buy. And that’s another reason I only buy just one stock every month because you know, you could buy multiple shares will say you want, say you got 1000 bucks and you want to buy, you want to buy a stock and you want to put up $1,000 into it and it’s going to buy you like a hundred shares. You’re not paying for 95 for each share or each lot of shares, it’s just one stock. If you were doing like 201 stock and then 200 then another stock, then yeah, each one would get $4.95.

Andrew:                              10:15                     But that’s, that’s how it works. And, and that’s, that’s what you have to consider. So yeah, uh, you don’t want to have too much of a proportion of your money going towards fees, but if you do what I recommend with the real money portfolio where we’re just doing 150 bucks a month or more, you know, whatever you can afford, then you should have good real good results over the long term. And, um, that’s what I do with the real money portfolio. And that’s how I think is a great way to get started. It’s a good kind of stepping stone from Robin Hood. All right, so we got another great question. This one’s from Von. Hello Andrew. I am a new subscriber to your ebook and daily emails. I had a couple of questions I wanted to ask to get a little more understanding when looking for the right stocks to invest in, how do you go about that?

Andrew:                              11:06                     Is it based on personal interest morals or just flat out to gain capital? I went through my app Robinhood and added multiple companies to my watch list in different industries. Also adding their competitors. Now how do we go get to the point of hedging out to competition for my investment? I understand the PE formula and apply it. I also look at the business ed is as it is, recurring subscription will be needed. I was just wondering is there a shorter process of lumination in this or am I looking at things somewhere correctly for my first buys?

Andrew:                              11:41                     OK, so to answer the first part of the question, you know, uh, do you go based on personal interest? Morals are just flat out to gain capital. For me personally, I’m, I’m just buying stocks to flat out gang capital. Obviously there’s different ways. I tried to make my impact in the world, and there’s different kind of utility for the different things that you kind of pursue. The way I look at it is as my responsibility as a newsletter publisher, as somebody who’s giving investment advice, it’s not, it’s not my responsibility to, to, uh, not impressed is not the right word, but to kind of push my morals and my values on other people. And so, you know, a good example of this is when I’m Warren Buffet and Charlie monger, they had, I think it was back in the 90s, they had this thing where they were doing, they were letting Berkshire shareholders pick a where because a lot of public companies will do this, but they’ll, they’ll donate to charity a certain amount of their profits.

Andrew:                              12:50                     And Berkshire definitely does that too. And so they had a program where they were letting, instead of having Warren Buffet decided, hey, this is where our money’s going to go for this charity. He said, hey, let’s, let’s let all the shareholders decide where this money is going to go for charity. So, you know, it sounds like kind of the perfect ideal situation and he thought it was going to be great. But then it ended up turning out where because some shareholders pick some controversial charities to donate to now buffet himself and Buffett and Berkshire and all of their businesses inside of the Berkshire. Now we’re all associated with these charities that were very controversial. And so people started boycotting everything buffet because of these donations to these charities. And so he, he realized that, you know, it was, it was adversely affecting his number one responsibility to shareholders by, by, you know, trying to kind of take the higher ground in this case.

Andrew:                              13:52                     So it’s something that he, you know, ended up straying from. As far as my personal thing with, with stocks, I tried to recommend stocks. I try to buy, I’m looking to, to gain capital first. And then, you know, if I come across a situation where I think something is so terribly wrong, where I wouldn’t want to be a part of it, then that’s something that I might change a policy in the future. But as it stands right now with the stocks I have recommended in the past and the ones that I’ve been looking at, it’s, I try not to to put my morals into other people, to put my values and impress on other people and instead just try to make money for shareholders and kind of do my part in making the community a better place in other ways, if that makes sense. I didn’t mean to go on a really long rant on something else. Such a small part of the, um, do you, what about you Dave? Like are you, are you where, where do you stand on this?

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Dave:                                    15:13                     I would, I’m exactly the same. I, I’m, I’m investing for a flat out capital gain and I don’t want to, you know, I have different morals and, and personal interests than you do and I would not feel right about imposing that on you or anybody else. Just like, I would not want somebody to pulls upon me. And again, like you said, very eloquently, if I come across a company that I’m investing in and they’re doing something that maybe I don’t feel as right then I will probably not invest in that company anymore. I’ve been lucky that I haven’t had that happen yet, but if I did come across that I would definitely cut it loose. Uh, just for the fact that I don’t want to be associated with that. That’s not part of, you know, my moral values and I know that there are people out there that, that work for the moral values to the company first and then look at the capital gain.

Dave:                                    16:12                     And there I am not saying there’s anything wrong with that. That’s just personally not how I choose to go about doing it. And you know, like you were saying, you know, I look at my own life and the way it can try to conduct myself out in the world with my daughter and with my work that the, how I carry myself there, I feel like I have more of an impact than I will on whatever money I invest in a company that’s worth hundreds of billions of dollars. You know, my measly contribution to that is not gonna make much difference. But you, I feel like I can make more of an impact on society with the way I carry myself and how I handle situations and the things I choose to do are going to have far more impact than anything that invest in. So I guess that would be my thought. That’s very well said.

Andrew:                              17:07                     So I guess the next part would be to figure out, okay, how do you know he has some companies on his watch list? So how, I guess what, what’s the shore there? A process of elimination as far as narrowing down. So that’s something we kind of covered recently a couple episodes ago. I say it, it doesn’t sound like he, he’s using the stock screener. And I would say that’s a great place to start using the p formula. That’s great too. Um, but there’s, there’s more to learning about the financials of a stock than just the PE ratio. So I would recommend learning as you know, I don’t want to say as many as you can because that’s, you don’t want to like overload yourself, but, uh, try to get a more complete picture of a company’s finances. So not just the earnings, but let’s also understand what is a company’s debt, where does that place, and it’s in the balance sheet by the way.

Andrew:                              18:07                     And you know, uh, something basic like price to sales. So you, so you have kind of like a, like a tripod to stand on rather than just one PE rate PE ratio, which, uh, there’s no one magic formula. You’re going to have to look at the whole picture and try to understand in that way. And then once you do that and, and you know, being subscribed to my daily emails, I, I do try that kind of piece. Mail that out as you go along. So that’s, that’s a good way to kind of learn that over time. And then I would also say get yourself and try to start using the stock screener. I think it’s a much better way. It’s definitely fun to like look around the world and look at the things that you like to buy and the things that you’re interested in and look at those stocks in those companies and kind of watch those.

Andrew:                              18:58                     But you have to understand that any one person’s viewpoint is so limited and the, and the world as a whole is so big. And uh, sometimes the only ways that you can quantify like how popular something is or how profitable something is or you know, how much of an impact it’s having on the economy is just straight up with the numbers. And so that’s why we recommend learning about those ratios because the numbers are going to tell you that story. You know, there’s, there’s so many sub cultures and communities and, and just different groups that are so far removed from anything I experienced. Anything you experienced and it’s just, it’s a big world. So learn the big picture of things, learn, you know, go up, move, move outside of your personal interests and, and try to, you know, take it over time to you. You can be slow with it.

Andrew:                              19:52                     I mean, I remember starting out, I, one of my first big discoveries was a Procter and gamble and Johnson and Johnson, you know like these, when you start to learn the brands that these huge corporations all own and like proctor and gamble as so many, you go to the grocery store, it’s like half Procter and gamble. That was something very exciting for me. And it’s something like as you kind of progressed as an investor, over time you start to get exposure to these new products, these new industries, these new stocks. He’s new companies, but you look at it in a different light because now you can look in, into the numbers and you can see, uh, wow. Actually, I thought this company was doing great, but we’ll look at all their debt, you know, the, they’re like a ticking time bomb or look at this company, I didn’t know they did this, this and this. And, and you know, the numbers look great. It like a great investment. I love the company. Uh, and, and so you, you’ll have dialogues with yourself as you kind of learn more.

Andrew:                              20:58                     Don’t be frustrated at trying to find like a shorter process of elimination, uh, as you, as you put it on. Because I think it’s, it’s a big learning process and as you research stocks, certain industries will become undervalued at certain times and that can be great learning opportunities. Like Dave, when you mentioned trinity industries a couple episodes ago, and this was a stock that we’ve been talking about for awhile. The first time you mentioned that to me, I just, I saw a ticker symbol and I looked at the numbers first and I saw some really great numbers. I have no idea that there was these stocks or are these railroad, these railroad stocks that are transporting goods, you know, across the United States and you can invest in them and something today with all the technology we have with, it’s such a backbone, kind of a mover and driver of the economy, right with with the way that they, they move things in such a great way.

Andrew:                              22:07                     So I guess what I’m trying to say is don’t worry too much about like narrowing the process. Try to try to like expand the process if you can, but focus on the big picture things instead of the little picture things. And then you won’t have to worry about like competitors and things like that. Because when you, when you understand the basics of, of the finances, then you can quickly compare. You know, you can look at an industry and you can compare, well the stock I like has pretty decent earnings that has low debt and it’s got great sales. Their competitor might be a little bit bigger, but wow, they have a lot of debt. Here’s a third competitor. It’s smaller and it, you know, and it doesn’t, it’s not very profitable. So then maybe in that situation you feel good about the competition. That’s something you can do quickly. When you understand the numbers, when you don’t understand the numbers, you’re going to be like a dog chasing its tail and it’s like, it’s going to be a never ending cycle of trying to learn. You know, you’re, you’re trying to pick up these articles here and there and trying to learn different things about the industry and what the analysts are saying and what’s going on with the economy. And it’s just a backwards way to do it. You know, go for the numbers first. And then once you have that solid foundation, then you can kind of start to learn about the industries. But understanding that that’s not the most important thing. And when you do that, I think it makes the learning part a lot more fun.

Dave:                                    23:36                     Yeah, that was great advice. I think, uh, one of the things that I would like to say is the stock screener is a great, great way to help parse down what you’re looking at. And you can simply just use the metrics to Andrew Talks about the book that you got when you subscribe to these daily emails and that’s what I did and I still use it to this day because it’s a great way to kind of sort through what you’re looking at to get you an idea of is this company at a place where it’s something that I want to investigate more to invest in because all those metrics that Andrew provides in his ebook are metrics that you can use to help you try to find a company that’s undervalued because that’s really what we’re trying to find. It’s not necessarily just trying to find a company that we really like and we want to invest in. We also want to find one that’s on sale and because that’s going to give us an opportunity to grow our investment.

Dave:                                    24:40                     If you buy it when it’s expensive, it has a choice of either going either more expensive or going down and if you find something that’s on sale and you get a great deal on it, then you know that’s just a double whammy because you’re going to be making even more money as the market adjust to the underpricing of that particular company as well as the dividends. If you’re investing in a dividend stock, which Andrew and I both highly recommend. If you’re doing that, then that’s just a double compounding effect. Then that’s, that’s how you grow the wealth and I guess to point blank, be somewhat blunt, there is no real shorter shortcut to do this just by doing this stock screener you get it can help you narrow what you’re looking at quite a bit. I guess another thing that I would like to add is when you’re looking at these different industries and these multiple companies, how much do you really know about these companies?

Dave:                                    25:36                     Because that’s one of the other things that we, we want to think about is trying to invest in things that are going to fall into our circle circle of competence and things that we understand. And you know, I for example, working in the restaurant business, I worked in the banking industry. So those are two places that I feel comfortable with investing in because I understand them and I understand how they work, where their money comes from, everything that’s involved in that. And it doesn’t mean I have to buy publications and go to the library and study everything I want to know about a restaurant business. I’ve already working in it. So think about what it is you do for a living and how maybe some of these companies were related to that. Or if they’re completely off the track. And let’s say that you, you know, are an accountant and you’re looking at investing in companies that are in biochem.

Dave:                                    26:28                     Well what do you really know about those? And so I guess that’s another way you can help kind of parse down as you’re looking at investing in things, is try to try to find things that are a interested in and you want to learn more about or are things that you feel comfortable, like you understand where what they do, what they sell, what they buy, how they sell, what they sell, what it is that they do, and all the things that go wrapped up and around that. Those are all things that can help you make better choices when you’re making those investments and as you get more comfortable, like Andrew was saying, as you get more comfortable with this whole process, it becomes faster and faster and faster. The first time you do anything, it’s always going to be slow, but the more that you do things, the better you’re going to get at it.

Dave:                                    27:16                     And I mean, I can remember when I first started trying to plug all these metrics into a stock screener, I had to keep looking back at it as the Ebook, you know, which one was that? Which one was this? Which one was that? Then eventually it just got to the point where I was doing it so much. The repetition that it just became second nature. I didn’t have to think about it anymore and that’s what’s going to happen to you. The more that you do this, just like anything else with your, it’s playing guitar, playing piano, shooting baskets, playing pool, whatever it is, any of those things, the more you do it, the better you’re going to get at it. And so as you first start out with this, yes, it may feel like it’s taken forever and it’s really slow and it’s just because it’s, it’s a, it’s a new process for you.

Dave:                                    27:58                     It’s a new thing for you to learn and you’ll just get better and better at it and it will get quicker. But there are no shortcuts to success. And if you don’t believe me, ask Michael Jordan because he didn’t have it either. So I guess that’s kind of my thought on that.

Andrew:                              28:16                     I love that. That’s perfect.

Dave:                                    28:19                     So that is going to wrap up our discussion for tonight. I hope you enjoyed the questions that we read and the answers that we gave and when I wanted to take a few minutes to answer those questions because there were some great questions and they kind of brought back to the forefront some of the beginner things that we’ve talked about and we wanted to make sure that we touched on some subjects and topics that maybe people feel like maybe they haven’t gotten to, they haven’t gone back into the archives and listen some of those things and they’ve kind of come in later in the podcast or people that are coming new to the podcast might give them a little bit more encouragement to not feel like they’re in over. Their heads are overwhelmed. So without any further ado, I’m going to sign us off. You guys go out there and it, that’s what the margin of safety, emphasis on the safety and have a great week. Talk to y’all later.

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