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 10,300+ 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.




The Best Position Size Strategy for the Long Term Investor

Position sizing is something that’s discussed more in the trading world, but it’s just as important for the long term investor. Investors like to talk about diversification, and how holding 15- 20 stocks seems to be optimal for outperformance. However, an investor using a dollar cost averaging strategy may run into issues if they don’t know how to combine this with a prudent position size strategy.

In this blog post I’ll describe some of the issues that can arise when you combine dollar cost averaging with a position size strategy that both keeps you in stocks that are undervalued and allow you to capitalize on better opportunities– which aren’t always available depending on how a stock price (or prices) has moved.

First, let’s define position sizes as it relates to diversification.

The way you define position sizing is usually in percentages. A portfolio starts at 100%. From there, you want to allocate your capital to various investments.

position size

Like the adage “don’t put all of your eggs in one basket”, you want to allocate your capital in a way where you don’t have “unsystematic risk”. Unsystematic risk is the risk of a stock you are holding crashing to a level where you lose a lot of money.

The fact is, you can’t prevent any one stock from losing a lot. It’s part of investing in the market. What you can do is prevent any one big loser from hurting your overall portfolio performance in a major way. The way to do this is through diversification, but proper diversification requires a good position size approach.

How to Calculate Position Size

Going back to allocating individual investments, say that you have $1,000. If you buy $AAPL with $500 and $GOOGL with your other $500, you now have 50% of your portfolio in $AAPL and 50% in $GOOGL. Those are your position sizes. If you put $250 into 4 stocks, you have a 25% position size in each of the 4 stocks. The specific way to calculate position sizing is:

Position size = $$ invested / $$ of Total Portfolio

So again if you have $250 in $AAPL with a $1,000 portfolio, your position size for $AAPL is $250 / $1,000 = 25%.

Now, as a long term investor, you want to shoot for a position size of around 5-10% for each of your stocks. The reason why these numbers tend to be the preferred range is because historically, 15- 20 stocks have been proven to be one of the most optimal ways to diversify a long term, buy and hold portfolio. If you use the math above to calculate 15- 20 stocks over a full portfolio, you get about 5- 6.7%.  [click to continue…]

IFB67:Are These Record Share Buybacks Good or Bad?

share buybacks

Welcome to Investing for Beginners podcast this is episode 67. tonight Andrew and I are going to talk about share buybacks, this has been a hot topic on Wall Street lately and Andrew and I wanted to do a little deep dive into share buybacks and talk a little 101 about how they work what they are and how they can benefit the company and you.

Without any further ado I’m going to turn over to my friend Andrew and he’s going to start us off.

Andrew: yeah love it. I feel like it was meant to be right well media talking all about buybacks obviously a big impact from the tax cuts that Trump did. So it’s very timely and it’s also good segue from last week’s topic. so if you remember last week we talked about owners earnings and how that can be a better way to kind of calculate how a company is using not only what’s the company earning from the core business whether its profits.

But also how is it allocating those profits once it has once the company has that earnings so owners earnings is a way to do that and one way that companies allocate cash once they receive those profits is through share buybacks and so that’s what we’re going to cover today.

You’ll hear called several different things share repurchases stock buybacks share buybacks it’s all referring to the same thing. So if we really get down to like the base route of what share buybacks is it’s simply the company taking cash and buying back shares.

[click to continue…]

How Just 1% Outperformance in the Stock Market Can Mean $100,000s

For investors looking to put money to work for them, there’s few places better to make a return than the stock market. When combined with compound interest, an average return can build significant wealth, while outperformance can mean even great amounts– even for investors who start with small amounts.

This blog post will look at the impact that outperformance in the stock market can make, even something as small as 1% more per year.

While this might not be obvious to beginners who are just starting in their investing journey, the truth is that an extra 1% return can add up to hundreds of thousands of dollars in the long term.

outperformance

When you take into account that investing should be a lifetime habit, it’s very reasonable for investors to examine their performance over a matter of decades rather than over a single 1 year period. A 1% outperformance probably won’t move the needle much over 1 year, but it can have significant implications over 20, or 30, or 40+ years.

To understand how different returns can build great wealth, it’s important to understand compound interest. Famously known as the “8th wonder of the world”, compound interest creates an exponential effect to the capital you invest, multiplying over time and accelerating its progress the longer you do it.

The way that compound interest is created in the stock market is through two separate forces: the ability of companies to reinvest their earnings into the business to spurn additional growth, and the ability of shareholders to reinvest their dividends into stocks they already own to grow their own holdings.

When you combine these two forces of compound interest together, you essentially double the compounding rate– almost in the same way you’d take a pile of dollars and square it (multiply it on itself).

Examples of Compound Interest

For example, say a business is able to earn $225 a year on $1,500 of assets. If the business takes its $225 of profits in year 1 and buys more assets with it, the business will have $1,725 of assets in year two. Now instead of earning $225 on $1,500 it can potentially earn $258 on $1,725. This grows the earnings stream, which can then allow the business to buy more and more assets and grow profits exponentially.

Expanding this example out, by year 3 the business could have $1,983 in assets and be earning $297 on those assets. As you can see, the amount of earnings growth increases– because more earnings creates more earnings and it increases faster and faster as time goes on. It’s akin to a snowball rolling down a hill– which piles on more and more snow the longer it rolls. [click to continue…]

What is a Good P/E Ratio?

The Price to Earnings, or P/E ratio, is one of the most basic ways to try and figure out if a stock is generally cheap.

The logic behind the P/E ratio is quite simple. The equation for the P/E ratio is simply Price / Earnings. A low P/E is generally considered better than a high P/E. A low P/E can happen one of two ways: either a low price, high earnings, or both.

Because the main goal of a business is to turn a profit (earnings is just another word for profits), Wall Street likes when a company has good earnings. Investors should also like lots of earnings, and earnings growth.

what is a good p/e ratio

The problem is that Wall Street can overvalue earnings to the point where a price of a stock will go so high that future gains would require continued exceptional earnings performance from the company. It’s safe to say that businesses can’t maintain top tiers of performance forever, we haven’t seen one so far.

That’s where the P/E ratio comes into play. A good P/E ratio combined with great growth numbers indicates a stock that hasn’t run up irrationally in price– yet.

As investors starting out in individual stocks, the Price to Earnings ratio can be a fantastic starting point. What’s not immediately clear is what makes a good P/E ratio. While there are general rules of thumb, the ratio itself does require some context. You absolutely do NOT want to buy a stock simply because of one ratio. But it is very helpful to understand when you see a good P/E ratio vs. when you don’t.

That’s what this blog post will attempt to achieve. A definition to the common question: what is a good P/E ratio. But first, a quick overview of intrinsic value— which is what the P/E ratio is ultimately trying to determine (and its relation to current market price). [click to continue…]

IFB66: Should You Research Owners Earnings or Options?

owners earnings

Welcome to Investing for Beginners podcast, this is episode 66. Today we’re going to talk about several different topics, we’re going to talk a little bit about owners earnings. Which is one of Warren Buffett’s favorite formulas, if you will, or thoughts and ideas on how he looks at a business. And we’re also going to talk a little bit about options and before we start talking about those I’d like to tell you about a book I just read recently.

Just a quick note, there are several affiliate links sprinkled throughout the transcript.

It’s called F Wall Street and it was a fantastic book it was very easy to read and it is not full of jargon if you will. There’s not lots of technical terms in there.

He’s very good at explaining and breaking down different ideas like owners earnings. For example, he also talks a little bit about intrinsic value. He also talks about certain types of cash flows.

[click to continue…]

How Diluting Shares Affect the Average Investor

There are a lot of decisions made at the company level that affect shareholders and their long term returns. A major one is when management decides to start diluting shares.

This can cause multiple problems for the average investor– a big one being a lack of awareness that share dilution is even happening. And even with this awareness, the lack of understanding on the true impact that the dilution of shares has on shareholders of a stock.

diluting shares

In this blog post I’ll take the two following basic concepts and examine their reaching impact on shareholders:

  1. Share buybacks
  2. Share dilution

Like I often try to do, I’ll use easy and simple examples and metaphors to try and explain a complex topic. It’s my hope that investors will read this material and equip it in their toolkit to better understand a company’s financials, and identify when management might be making decisions that are unfriendly to shareholders.

Back in December/ January, Dave Ahern and I did a 5-part podcast series getting “Back to the Basics” of the stock market and investing. It started on episode 43 and introduced share buybacks and dilution, which you can listen to here:
https://einvestingforbeginners.com/stocks-and-shares/

In that very first episode of the series, we discussed why and how the stock market works. In any basic lesson about stocks, you’ll learn that companies issue shares to get capital to help grow their business faster.

You see this function at a much greater scale in the private equity world. Think like “Shark Tank” companies. Start-ups.

Once a company goes public (IPO) it’s a bit different. The original founders usually lose majority control of their company, or give up a significant portion of it for a LARGE payout.

But at that huge level of IPO, where there’s now hundreds of millions or billions of dollars being sloshed around, that basic concept of selling shares so the company gets more cash kinda loses its effect.

It isn’t such a direct shares-for-cash trade anymore.

Let me explain it here because it’ll help you understand.  [click to continue…]

IFB65: Listener Q&A: Stop Loss, Fractional Shares & Tesla

stop loss

Welcome to Investing for Beginners podcast this is episode 65. Tonight Andrew and I are going to answer some readers’ questions, we’ve gotten some fantastic questions over the last few weeks and Andrew and I wanted to take a few minutes to go ahead and answer those.

I’m going to go ahead and start off with the first one so bear with me reading this so I have.

Hi Andrew,

I stumbled across yours and Dave’s podcast of the search for the ultimate truth and knowledge of investing. I have dabbled in investing, more gambling with Forex and options with a couple of stocks not good ones just losers.

The thing I’m finding is there is so much info out there or leading you this way in that so the question I have for you is now that you’ve been investing for a while I’m probably still learning along the way if you had to start again or start your daughter if she was of age for investing of her own like fill town and his daughter where would you start and what steps would you suggest?

I understand the concepts of Valle investing I believe by a good company for less than what it’s worth for a margin of safety and look for good businesses that I can understand.

I’ve just finished listening to the value investor from Graham but the issue I seem to run into is it valuation of businesses or should I start looking somewhere else.

I know you’ve both put out good info for stocks but how do you go about finding those I forgot to say thank you for both of you from probably every new investor for trying to help people realize that there is a way to have money for retirement.

Tom

Well Tom you’re welcome this is why we do what we do we love helping people and that’s a lot of fun to talk about this and Andrew and I get to geek out on air.

Let’s see let me take some of these questions for you. so if I had to start we’ve talked a little bit about this but I’ll go back and talk a little bit about this again if I had to start again or start my daughter when she was of age oh I feel town on his daughter if you guys have not checked out that’s Invested fill town and his daughter Danielle talked a lot about investing Daniella is a newbie and fill town is a value investor and of the like that we talked about and it’s kind of a great interplay between he and his daughter is their he’s trying to teach her all about Wall Street and everything. so it’s kind of a it’s a cool podcast if you want to check it out.

[click to continue…]

IFB64: Personal Finance 105: Maximizing Passive Income

 

maximizing passive income

Welcome to Investing for Beginners podcast this is episode 64. Tonight we’re going to conclude our series on personal finance, this is episode 105 of our little series here. Andrew’s going to start us off we’re going to talk a little bit of passive income so Andrew go ahead and take it away.

Andrew: so I really wanted to talk about this because I feel like a discussion on personal finance isn’t complete especially in my own situation if we don’t talk about creating passive income.

By far creating a passive income stream has been the most if not influential is not the right word but it has had the greatest impact on my own trajectory my own path to financial freedom and that’s something that we definitely need to cover because I think it can be that way for a lot of people too if they’re willing to put in the work.

I understand like I have a very entrepreneurial mindset kind of like a workaholic type a type person so I understand that maybe this episode isn’t going to apply for everyone and that’s fine and if that’s the case for you and you want to just focus on the investing side and that’s 100% okay and we’ll get back to it like we normally do.

[click to continue…]

IFB63: Personal Finance 104: Designing Your Investment Lifestyle

 

investment lifestyle

Welcome to investing for beginners podcast. this is episode 63 tonight we’re going to continue our discussion on personal finance, this is personal finance 104 and tonight we’re going to talk about designing your investment lifestyle.

We’re going to talk a little about picking an investment strategy and different areas of that and I know Andrew had some things you wanted to start off with so when I turn it over to him.

Andrew: yes so last week we talked about budgeting the next natural step is figuring out what to do once you have that extra money. so like they have mentioned you’re going to want to have to pick an investment strategy you want to look around and really try to understand you not just pick a strategy just off the onset just because it sounds good.

But try to understand what’s going to fit so that might that might entail looking at a couple different things before you really make a decision and I’ll kind of explain why.

But there’s a lot of different ways you can invest money we covered this in our back to the basics part 3 or we talked about stocks versus other investments we’ve talked in the past about how we’re both adamant value investors and why we kind of why we tilt that way and why we recommend that investors try to model portfolio a base approach trying to buy low trying to buy businesses that are trading at a discount to their intrinsic value.

[click to continue…]

IFB62: Personal Finance 103: Managing Personal Cash Flow

personal cash flow

 

Welcome to Investing for Beginners podcast this is episode 62. Tonight Andrew and I are going to continue our series on personal finance. Tonight we’re going to talk about managing personal cash flow.

Andrew why don’t you go ahead and start us off and we’ll chat a little bit between each other.

Andrew: all right let me get some wild and crazy ideas out there cool. how am I put this nicely so there is a term in the fitness world that is called F around itis and it’s made popular by a guy who runs Lean Gains site his name’s Martin Berkman and basically the whole it’s like a great blog post went viral that all those sorts of things and basically his big thing with the reason why so many people aren’t finding progress in the gym is because they’re they have this condition called F around itis.

And it’s basically because when you’re going through the gym you’re trying to do everything you can but if you don’t sit down and write things down and track it and measure and see where your progress is going. Then you don’t actually make any progress and you end up just kind of spinning your wheels.

Another business management guy’s name is Peter Drucker he has a quote and he says if you can’t measure it you can’t improve it. And so I think when we talk about personal finances and you really try to get to the bottom of figuring out how to improve how your personal finances are working because it’s all like kind of a chaotic mess.

[click to continue…]