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.




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…]

IFB61: Personal Finance 102: Building Assets in the Adult World

 

building assets

Welcome to Investing for Beginners podcast this is episode 61. We’re going to go ahead and talk a little bit about personal finance today. Andrew has a disclaimer he wanted to discuss before we get started so Andrew why don’t you go ahead and chat a little bit.

Andrew: sure so real quick I know there’s like varying degrees of experience level with people who listen to us so I would say we’re going like super into the basics for the next couple of weeks. I would say if it’s stuff that’s going to kind of bore you or if it’s stuff that you already know I go through our archives and we get in swarmed the nitty-gritty in into the stocks and individual stocks and accounting and stuff like that in those.

But Dave and I had a lot of fun last week talking about some of the basics and personal finance and figured we’d turn it into a little bit of a series. So we’re going to do we’re going to call last week’s personal finance 101, and we’ll call this one 102 and make a couple of episodes that way.

There was a lot of fanfare when we did the back to the basics part 1 through 5 series, so this is going to be kind of similar but for personal finance and we’ll try to throw in some more advanced things, but I would say go through the archives. I know when I check out podcasts and some of the other ones there was a big one that I remember I listened through every single episode in the archive, and that helped me out, and I’ve done that for investing entrepreneurship and whenever there’s like a skill I wanted to learn.

[click to continue…]

IFB60: Personal Finance 101: Money Lessons to Our 5 Year Olds

money lessons

 

Welcome to Investing for Beginners podcast this is episode 60. Tonight we’re going to talk about money lessons for our five-year-olds.

Andrew and I both have younger daughters and we’re going to talk a little bit about money and what we would teach our kids if we wanted to teach them more about money and I thought I would go ahead and start off and talk a little bit about some of my experiences with my little girlie and kind of go from there.

Just to kind of give you a little bit of background my daughter’s going to be six here very shortly and we go to Walmart a lot to go shopping and stuff and she always wants toys and she wants Toys Toys Toys more toys.

My wife and I have been discussing about whether we should give her an allowance, whether she should earn it and kind of going back and forth on what we should do. And so I thought that I should have her to help her learn the value of money that I should give her some air quote jobs to earn the money that we give her every week.

[click to continue…]

How to Source Earnings Yield and Return on Capital from a Stock’s 10-k

In Joel Greenblatt’s book The Little Book That Beats the Market, he taught a lesson about a magic formula that investors can use to chase higher market gains. That formula consisted of two distinct parts: earnings yield and return on capital.

This post will show you a practical example of how to find and calculate these metrics from a company’s annual report 10-k. There’s also a “2018 stock list” video at the bottom of this post where you can get an example of how to find stocks that fit Greenblatt’s magic formula criteria like this anytime you want in the future.

magic formula return on capital earnings yield

The place to find high ranking magic formula stocks is a website that Greenblatt owns himself called magic formula investing. One of the first stocks on that list is called Acuity Brands, since the list is curated in alphabetical order. We’ll use their 10-k financials as an example to teach you this valuable investing lesson.

Joel Greenblatt ran the hedge fund Gotham Capital from 1985 – 1995 for an annualized return of 50%. He wrote about this track record in his book, You Can Be ta Stock Market Genius, and shared his “magic formula” in his other book The Little Book that Beats the Market.

The basic premise of the magic formula is to combine a highly profitable and efficient company (and one that can quickly and easily grow), with a low valuation metric based on earnings. Picking only the best stocks that scored well in both areas, Greenblatt was able to produce outstanding returns for his investors and replicate similar results in numerous backtests.

More specifically, Greenblatt combined a high earnings yield with a high return on capital to pick only the stocks with seemingly the best chances for future success.

In addition to looking for stocks with a high earnings yield and return on capital, Greenblatt included the following criteria:

  • Market capitalization > $50 million
  • Avoid stocks from the utility and finance industry
  • Invest only in U.S. stocks
  • Buy 2- 3 of the highest scoring stocks each month, for 12 months
  • Sell all positions after a one year holding period (selling losers before 365 days to utilize short term tax harvesting, selling winners after 365 days to get long term capital gains instead of short term)

The way Greenblatt defined earnings yield and return on capital (which are somewhat subjective measures) was as follows:

Earnings yield = EBIT / Enterprise Value

Return on Capital = EBIT / (net fixed assets + working capital)

Looking out at today’s market, Acuity Brands (AYI) currently scores high in both of the required metrics and is qualified based on market capitalization and industry/ location.

In a recent podcast episode we talked about the strengths of using both financial metrics in depth, which you can listen to (now or later) here:

Taking a look at $AYI’s recent 10-k (released October 2017) shows how these metrics score for the company currently.  [click to continue…]

IFB59: Listener Q&A: DCA, Canadian DRIPs, Recent Negative Earnings

 

canadian drips

Welcome to Investing for Beginners podcast this is episode 59. Tonight Andrew and I are going to answer some reader questions, he’s gotten some emails and we wanted to go take a moment and read through those. We’re going to read some stories and we’re also going to answer some questions so I’m going to go ahead and start us off.

The first one I’m going to read is from Anthony the letter starts with:

Andrew,

I just wanted to express my gratitude for what you and Dave are doing with your podcast. One of the things you both preach frequently it’s patience and resisting the fear of missing out. This recently saved me a decent amount of money. There was a stock that I really liked because they were selling in a bargain I mean this stock would look great. I invested once a month in research during the time in between about two weeks before I would normally make a purchase I noticed the price kept going up and going up. I felt like I needed to buy in NOW or else I would lose potential gains it took all of my willpower to just hold off and wait until the month was up before buying in.

I’m sure you can guess what happened next they went back down to its original price the next week then I went down a little further by the time I bought it it was actually spent less than it would have been if I had bought it a month prior this just goes to show how little things like having a little patience can help you in your financial success.

Thank you for your time and hard work you put in your effort is truly helping others towards achieving financial freedom.

Thank You,

Anthony [click to continue…]

7 Reasons to Prioritize DRIP Investing in Your Portfolio

DRIP stands for “dividend reinvestment plan”, and is the action of buying more shares of a stock that an investor already owns with the dividends the investor has received. It is a fantastic way to earn compound interest, which is the key to long term investing success.

drip investing

There are many pieces of evidence that DRIP investing can result in serious returns for your portfolio. This blog post will examine 7 of them. Hopefully you will fully appreciate its power and implement with your own investing strategy.

  1. DRIP adds “Double Compounding” to Investors

Though not talked about much, DRIPs add an additional layer of compound interest to a stock investment.

Take the average stock, for example. Buying a stock means buying part ownership of the underlying business. That business earns a profit, then uses some of that profit to reinvest in the business. They do that by buying assets. This unlocks the ability to earn even greater amounts of profits in the future, which enable higher reinvestment. Like a snowball, the effect compounds.

But…

Businesses don’t only use profits to reinvest in the business for future growth. They also pay some of their excess cash back to shareholders, in the form of dividends or share buybacks. This allows the shareholder to experience a compound effect in addition the one from profits.

Just like the business reinvests for higher future profits, investors can reinvest into the stocks they already own for higher future gains.

The longer an investor “DRIPs”, the more shares that an investor accumulates over time. As the investor’s overall share count increases, more and more shares are able to be purchased for additional reinvestment– creating an explosive compounding effect.

Combine the two compounding forces and you have a sort of “double compounding”. Having more overall shares means an investor gets a higher return from a compounding/ increasing stock price than one if he never reinvested.

2. Dividend Growth Adds 3rd Power Compounding

There is a third part of all of this compounding talk that is unique to DRIP situations.

When a stock grows their dividend in addition to growing their earnings, the DRIP effect multiplies again.

Remember that each subsequent year of reinvestment means higher and higher levels of reinvestment. The dividend an investor receives in year 1 is going to be less if he only has 100 shares compared to a dividend in year 2 where he might have 103 shares.

The higher potential levels of reinvestment accelerate even faster if the stock dividend is growing. Say a stock pays a $2 dividend, then increases their dividend to $2.20 the very next year.

Well as a dividend investor, you don’t have to do anything to receive dividends. As long as you hold the stock, you’ll get paid a dividend.

What that means is that if the company continues to grow their dividend year after year after year, you’ll continue to get higher and higher levels of dividend payments every single year.

Again, that means higher and higher levels of reinvestment potential. So the investor sees compounding in the share price, in the actual dividend payment, and from the accumulation of additional shares through his DRIP plan.

Sounds great to me.

The massive potential of dividends and a “back to the basics” explanation of dividend paying stocks is covered in depth here:

3. DRIP = Major Portion of S&P 500 Returns

I got the cold, hard facts for this point after being prompted by a great question from a subscriber to The Sather Research eLetter.

Daniel: I think I understand the DRIP concept and how it compounds. Your holding slowly grows with each dividend and each dividend slowly grows based on your holding. But I did not think this would be a serious part of the expected 11% of the total, at least not yet. Am I wrong about that?

Most people don’t know actual contribution that reinvested dividends have towards overall investment returns, hence the poor public misconceptions that dividends are for old people.

There’s a great S&P 500 return calculator on dqydj.com. I ran a scenario investing in the S&P 500 for 40 years– from May 1978 to May 2018. Returns were as follows:

  • Without dividend reinvestment: 8.6% CAGR
  • With dividend reinvestment: 11.6% CAGR

That extra 3% is 25% of that 11.6% annualized return, which is a serious component of the overall performance.  [click to continue…]