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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:                  00:34                                    All right folks, Welcome to the Investing for  Beginners podcast. This is episode 80 tonight. We’re going to do something kind of different. A lot of fun. I think this is good. That’d be really interesting. So Andrew took a deep dive into where the 10 percent of returns of the s and p over the last 80 years comes from. And tonight we’re going to talk about the individual components that make up that 10 percent and kind of where it comes from.

Dave:                                  01:00                     I thought this was really kind of fascinating and Andrew, a lot of great work getting this together. So I’m going to go ahead and turn it over to him and we’re going to chat a little bit about it.

Andrew:                              01:10                     Yeah, thanks Dave. I guess that’s a good disclaimer, right? That A. I did a lot of work and be speculation on my part. Right. Fair enough. Idea and running with it. Yeah. Fair enough. So there’s no academic sources for this other than Google, so don’t come at me with their pitch forks, but I was always, you know, I’m curious.

Andrew:                              01:34                     It’s something you hear all the time, right? People talk about what’s the average return I can expect from the stock market and it’s been around 10 percent a year for over 80 years, like they’ve mentioned. And you know, you hear a 10 percent, you hear seven percent and seven percent is just the return with inflation taken out because inflation is also been pretty constant, pretty consistent around three percent a year. So it makes for a good kind of estimation, right? If you’re thinking about where are my finances going to go in the future, how am I going to plan and what’s like a reasonable, what are reasonable expectations? You know, I think to think that you could be an average person and become more rich than Jeff Bezos just because you’re going to be a stock market genius. I think that’s obviously absurd, but at the same time it’s not absurd to think that over a long enough time period with consistent deposits and even decent or just average returns from the stock market that you can make a quite a bit of a fortune where it can change your life over the very long term.

[continue reading…]

There are many reasons why long term focused, patient investing earns better results than short term greedy strategies. These reasons are due to the nature of the stock market– the realities many smart people have observed for many decades.

Patient investing makes for an easy catch phrase: “slow and steady wins the race; the tortoise beats the hare”.

But being truly patient when it comes to the stock market is much harder than it seems. Really applying it to achieve better shareholder returns requires mastering the understanding behind exactly how this patience contributes to higher returns.

In this blog post I’ll argue that there’s more than 1 element to this patience required with investing (there’s actually 3), and I’ll show why each element contributes to better returns and how you can implement it.

Element #1: Long Term Stock Market Returns

There’s few certainties when it comes to investing your money in the stock market, and quite a bunch of uncertainties.

The very definition of an investment means putting your money at risk and exposing it to uncertainty. Investments can be unprofitable as businesses can go bankrupt and stock markets can crash. This reality of uncertainty can be scary, as there are plenty of stories that circulate of investors and professionals “losing it all”.

But along with all of the uncertainty come some easily observable realities of the stock market…

(1) There are boom and bust cycles of the economy which reflect into the stock market as bull and bear markets. (2) The stock market tends to move upwards over time. The bull markets tend to run much longer than the bear markets, and crashes are followed by recoveries.

(3) Many professionals have observed that over the very long term, the stock market averages a 10% return per year. (4) The stock market is comprised of businesses, and the business world has been able to grow over time through innovation, productivity, and population growth

Perhaps the most applicable part of these observable realities is (3).  [continue reading…]

Many of us wonder how we are doing when it comes to retirement savings. It can make us money hungry, not because we are greedy but because we just want a comfortable, average retirement.

Well, is an average retirement possible for the average person?

We need to understand that this is a numbers problem, and so we need to answer it with numbers.

Money can be a cruel mistress in the sense that it’s very definite, you either have enough or you don’t. But, money can grow in fantastic ways through investing and compound interest– and the amount you need to save and invest to enjoy an average retirement might be much less than you think.

With so much worry around saving enough for retirement, there isn’t much discussion on how much an average person actually needs for retirement.

Let’s run some numbers and try to figure out the average retirement. I’m going to use numbers like average income, average mortgage, etc.

According to the 2017 Retirement Confidence Survey, only 41% of people have calculated how much they’d need for retirement. After this blog post, you’ll be on the other side of that statistic– and have a much better idea on what to do next.

A Basic Average Retirement Calculation

Take the median income in U.S. right now: $64k (take home pay of $52,344). If we can live off that kind of income now, we should be able to live off that much in retirement.

Now, hopefully by the time you retire you’ve paid off your mortgage. So if we take off the mortgage payment (which is now around $1,030 per month), then our “income for average retirement” would be $52,344 – (12 x 1,030) = $39,984.

You also should get social security, which would drop how much you need to save for a comfortable retirement. In June 2018, the average social security benefit was $1,413 per month, dropping our required income for average retirement to $39,984 – (12 x 1,413) = $23,028. Let’s call it $23k per year.

The most ideal retirement situation would be one that could continue indefinitely. It’d be like receiving golden eggs without killing the goose– one where you make withdrawals from your nest egg while it maintains an adequate size over time.

To do this, you need to keep some money invested so that it can grow while you take out some money to spend. [continue reading…]

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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 to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom begins now.

Dave:                                    00:36                     Welcome to Investing for Beginners podcast. This is episode 79 tonight. Andrew and I back by popular demand are going to talk about dollar cost averaging. Talked a lot about this before, but we have gotten a lot of questions about it recently and we thought maybe we would dedicate an episode to it so we could help you guys a little learn bit more about this wonderful strategy that you could use to help with your investing. So Andrew, why don’t you talk a little bit about this and we’ll just kind of go back and forth.

Dave:                                    01:06                     Yeah, sure. So most basic definition of dollar cost averaging as you set aside a certain amount each month and you’re going to put that into the stock market. So why you want to do that? A, it builds a habit B. It’s something that happens kind of in the background and so you’re structuring not only your investing but your personal finances to, to work in the background without any sort of input needed from you, especially if you can do like an auto auto draft or an auto transfer from, from a checking account or something and you can just be making progress with your investing no matter what happens with the market and no mother, no matter what you’re doing with your personal situation. The rich dad poor. That mantra was always pay yourself first. And so by having a dollar cost averaging strategy in place, that’s a way you can do it.

[continue reading…]

2018 has been a year full of scary headlines and big drops down in the stock market. If you’ve been an investor during this time, I’m sure you’ve seen multiple days where your stock drops in value much more than you would’ve liked.

Of course the invention of the internet has proliferated the potential for overreaction on every day of big stock drops.

Twitter can be especially bad. A 1% drop in stock prices can set the Twitterverse ablaze, with people and articles popping out of the woodwork to give their bad opinions. But if you follow the right people, you can get good perspective that helps you think in a more profitable mindset.

For example, instead of over dramatizing the 1% drop and creating worry and dread like the media, the Twitter accounts I follow were sarcastic, funny, and making comments like @michaelbatnick:

“S&P 500 tumbles at the open to +5.9% for January.”

Wow.. good point… the market has been crushing it since 2009. Compare that what happens when you Google “S&P 500”:

“What’s behind the stock market’s biggest one day drop since August”

With a picture of a guy in a suit (looks like he works on the trading floor) with his balding head buried into his hand in tired frustration.

Glass half full vs. not, right?

Anyways, let’s talk about the big picture instead of little picture. When a stock you own sees a price drop, it can be very good or very bad. But you have to be thinking long term.

The difference is in the impact of long term business results.

When a stock drops, a lot of the time it’s because something happened that was less favorable. Like with Apple earlier in the year, iPhone X demand dropped (according to headlines) “because of lower demand because of the $1,000 price point”.

It’s not necessarily bad for the long term. If it’s a temporary hiccup, but Apple continues steady growth, then that looks like a chance to bargain buy.

But say people are straying away from Apple because Androids are now the “cool” phone. In that case the demand is a symptom of lower revenues and earnings to come. That’s where it’s bad.

You can never tell with certainty which of the two cases it’d be for every (or any) company. It may get harder with industrial stocks or b2b businesses.

That’s why we need to differentiate from a numbers standpoint. It’s the only way to be able to analyze any big stock drops– which is how to increase chances that we’ll be more right than wrong.

I’ll give you a couple more examples.  [continue reading…]

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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, 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:                                    00:35                     All right, folks, welcome to investing for beginners episode 79 tonight. Andrew and I are going to talk about moats, competitive, both business advantages, all the things you look for in a great business, and we’re going to talk a little bit about some of the ins and outs of those as well as some things to look out for and how you can find great companies with moats. So Andrew, why don’t you go ahead and start us off and talk a little bit about moats.

Andrew:                              01:00                     Yeah, let’s do it. Shout out to Warren Buffett, right? He kind of came up with this idea. What’s a moat, other than the margin of safety. I don’t know if they use that for the margin of safety metaphor also, but you know, uh, I’m assuming most of you don’t have castles and don’t have a moat. So we’ll explain that real quick. Uh, if you had a castle, your try the defendant against attackers who might be pounding at your walls. So if you build a moat and you fill it with water, they’re going to have to, although I guess swim across and you can pick them off.

[continue reading…]

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Dave:                                    00:35                     Welcome to episode 77 tonight. Andrew and I are going to talk about a stock selling theory. Three strikes. You’re out. Andrew has some thoughts on selling a stock and you wanted to share them with you, so we’re going to go ahead and start us off. Andrew, why don’t you tell us your ideas.

Andrew:                              00:53                     Should I really? Does anybody want to hear them? I think they do. Okay. I will. I’m God this cold email today. I want us to share it because it’s inspiring. A email from Renee says,

Dave:                                    01:08                     I just got into investing maybe 10 days ago and they’re already listened to around 10 podcast. Keep up the good work.

Dave:                                    01:14                     Those are the kinds of things I love to hear. It fires me up a 10 day brand new investor. That might be. That might break our record as far as recorded record of being public. I don’t know if some of these beaten that. That’s pretty cool. It is. So keep those coming. Uh, that fires me up to get me a recording on an episode like today.

Andrew:                              01:40                     But you know, we want to talk about selling a. We talked previously in episode 65 a. If you go back and listen to the archives, I talked about how my approach evolved a bit. When I went back, I looked back at the history of some of the buys and sells I made through the Eli, their portfolio and Ivy. I used to break up the portfolio into two portions. I had the regular portion and the dividend fortress portion. I still have those two sections kinda a segregated off, but I had trailing stops on the regular portion. And in episode 65 I talked about why I no longer use trailing stops.

Andrew:                              02:33                     Kind of a cliff notes on that was I found that because the way I picked stocks is very, very conservative, very, very much so. Margin of safety, emphasis on the safety. A lot of these companies with strong balance sheets, maybe not explosive growth that leads the market, but Kinda just plugs along slowly but surely and quietly creating profits and with them is that grow over time and trading at prices that make them not popular. Right? So already by that, by that kind of definition, they’re not going to have momentum at least a start. And so what I found, looking back at some of the stock picks I had, I had several where if I would have not, you know, if I would have not applied the trailing stop if I were the let the stock run, than I would have actually had much higher performance. And that was a pretty consistent trend I noticed through several years of data. So, uh, coming up on, oh, I just hit the four year anniversary for the leather. So it was about three and a half years of data when I looked at that. So I kind of wanted it to look at that again. [continue reading…]

A big part of learning how to evaluate a stock is determining whether the stock is trading at a good price or not. You could buy a stock with the best business in the world but still get a terrible return on your investment if you pay too much.

This is something that unfortunately gets forgotten by many investors who buy individual stocks.

The mindset needs to shift from “buying now and selling to someone else later” to “buying a business at a reasonable price and holding for the long term”. The former requires impeccable timing while the latter provides much more room for error.

When buying stocks, it’s imperative to utilize a system that predicates its success on the general principles behind it rather than the investor’s skills. After all, Warren Buffett was quoted as saying “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential.”.

To figure out what makes up a great price, and how we can use that to evaluate a stock, it’s important to first consider what sets prices in the marketplace as a whole, and then clarify it inside of the marketplace known as Wall Street’s stock market.

The Economics of Price (101)

What makes the price of something?

Last I checked, there’s no book somewhere that definitely sets the price for any one item. There’s no Kelly Blue Book for a loaf of bread, or a dozen eggs, or a gallon of milk.

Even the Kelly Blue Book for a car can be wildly inaccurate and depend on many other factors like the condition of the car and the used car market.

The price of something depends on supply vs. demand. It’s the sweet spot where two people (or a person and a business) can agree to swap goods or services.

Demand plays a huge role. What happens when a store goes out of business? and why? [continue reading…]

Today’s investor has a lot of options for investing money. Index funds vs. stocks vs. bonds vs. alternative currencies. The list goes on.

With lots of research confirming the superiority of stocks over dividends for the very long term, many investors are approaching the stock market but in very different ways.

Many books, experts, and financial advisors recommend buying index funds (through ETFs) rather than trying to pick individual stocks. However, the behavior of the average investor has suggested a different view– with the many resources and services available out there to support an investor trying to pick stocks.

Both methods have pros and cons.

Indexing is relatively new to the world of investing while the ability to buy individual stocks has been around since the before the 1900s.

In this blog post about index funds vs. stocks, I’ll briefly introduce what an index fund/ ETF is, and talk about what makes it distinct from individual stocks. I’ll talk about why indexing is a common recommendation for the average investor.

I’ll highlight some of the emails I’ve received from readers, who know I advocate picking stocks and challenge that viewpoint. Finally, I’ll get to the crux of the issue and take a deep dive to consider which approach can give the most optimal returns and if it is feasible for the average investor.

What’s an Index Fund?

Much like a mutual fund, an index fund is a basket of stocks grouped together that an investor can purchase outright. This is commonly done through an ETF.

The most common index fund is a market index ETF like ticker symbol $SPY, which holds a basket of all of the stocks in the market (commonly defined as the S&P 500). Instead of an investor having to buy all 500 stocks of the market individually, the investor can purchase an index fund comprised of all 500 stocks.

This has multiple benefits.  [continue reading…]