Starting anything new is scary, and investing is no different. We all have the same questions, where to start? It may seem overwhelming, but millions invest, and you can too.
As a newbie, you most likely have lots of questions, like:
- How much money do I need to start?
- Where do I start?
- What should I invest in to start?
Back in the day, okay, 2004, Geico ran a set of commercials using a caveman to help show how easy it was to buy insurance. We can take the same approach to investing. We can break it down into steps so easy a caveman can do it.
Luckily for all of us, Andrew created the perfect vehicle to help us achieve this goal. The 7 Steps to Understanding the Stock Market breaks all these questions down.
Today’s article will help you get your hands around some beginning topics and get you started on your investing journey.
- Why We Should Start Investing
- How to Buy Your First Stock
- What’s the Best Investing Strategy?
- The Best Metric for Beginners (P/E Ratio)
- Putting It All Together
Okay, let’s dive in and learn how to start investing.
Why We Should Start Investing
Andrew’s ebook offers the perfect place for us to start our journey. As we can see from the below list of chapters, we only have seven steps to understanding. It may look overwhelming, but each chapter is concise, to the point, and written in a language we can all understand, jargon-free.
Thirty minutes to set yourself up for investing and retirement sounds like a great trade to me.
In today’s article, we will focus on some of the topics I think are important to understand.
The first question is, why invest?
The answer is always simple, compound interest. As Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.”
But most ask, what is compound interest?
Simply put, if you have 10% interest on $1,000, we make $100. Easy, huh? But if you keep the $100 in the bank account and earn another 10%, then we make $110 because we started with $1,100 instead of the $1,000 we started with.
You might be thinking, big deal, $10. And yes is not a huge amount and hard to get excited about, but the $10 becomes a much bigger deal in the future.
So on the first day, we have one penny; on the second day, two pennies; and on the third day, we have four pennies, and so on until we reach 30 days.
At the end of the 30th day, we would have $536,870,912 in pennies!!
That is the power of compounding. Consider this, too, at:
Day 16 – $32,768
Day 21 – $1,048,576
All of this highlights the power of compounding, and as an investor, we must start the compounding as early as possible.
Another data point, Warren Buffett achieved the vast majority of his wealth after he turned 50.
How to Buy Your First Stock
When most consider starting in the stock market, they first think it is far too risky and like a casino.
The risky part we can debunk right away. I know over the last 20 years or so we have had some exciting events, such as:
- Dotcom bust in 2000
- Housing market crash in 2008
- Covid in 2020
But, despite those traumatic events, the stock market overall remains up over those periods. That’s right; it continued to grow despite the periods of chaos.
Chart courtesy of Officialdata.org
So, if you had continued to hold stocks through all the chaos, you would have grown your value over the past twenty-plus years. Yes, we will see volatility from time to time. But that is why we hold stocks for a long period, to overcome the volatility.
Andrew talks about some specific methods, such as not listening to the noise of the market and dollar cost averaging, but the most important thing that he says, in my mind, is to get your feet wet.
You see, when I was first starting investing, I kept getting paralysis by analysis. It was information overload. I kept getting so stressed thinking I was making a massive mistake by picking a company, and then it would inevitably go bankrupt, right?
You can sit there and read and study as much as you want, but it won’t stick until you have some skin in the game.
And now that so many brokers are $0 commission, you can easily buy just one share of a company, or even a fractional share, if you don’t want to buy an entire share of a more expensive company like Microsoft and pay $0 in fees!
That’s a huge reason to get in and get your feet wet.
It might sound silly, it might sound risky, it might sound not very smart, but it’s not. Buy a share (or partial share) of a company that you already know a little about the product. Maybe Chipotle because you love their food, Apple because you have an iPhone, Mac, and an iPad, or Ford because your family loves Ford vehicles.
It can be anything, but be something you’re familiar with.
Once you own some of that company and have some skin in the game, things will start to click. You will be naturally more interested in what you read and learn, and you can apply it.
What’s the Best Investing Strategy?
Andrew and I subscribe to the idea of value investing. In theory, with value investing, you buy something for less than its worth and then wait for it to grow in value.
Basically, you buy companies on sale.
Warren Buffett, the most famous practitioner of this strategy, once said, “I like to buy my stocks like my socks, on sale.”
The bottom line, there is no perfect investing strategy, and you must find one that works for you. In the investing world, there are tons of ways to make money. Your job, find one which works with your stomach.
Most people give up investing because they have had a bad experience or lost money on an investment. It is often our state of mind or our psychology that fails us, not the investment.
Value investing appeals to Andrew and me because it fits our nature, and we like to buy deals on sale. It is a simple theory but one that is difficult to master.
Warren Buffett and Charlie Munger present a four-step method for finding companies they want to buy. The four steps below, paraphrased, include:
- Companies I understand the business model and how they make money.
- Companies that have a moat or can withstand challenges from competitors. For example, Nokia didn’t have a moat, and Apple destroyed them with the iPhone.
- Companies sell for less than they are worth. Think of buying a Tesla for less than the sticker price.
- Management I can trust or leaders who will do the right thing.
These four rules offer simple ideas that anyone can implement; it’s just a matter of determining what will work for you.
I suggest buying your first stock and then determining how the company fits into those four buckets.
Most people make the mistake of buying companies for a high price and then selling for a lesser price. Value investing helps you buy for a lower price and then sell it for a higher price. Ensuring if you follow these guidelines, you will have a positive result over a long period.
You can choose which kind of investor you want to be and then follow that strategy. You have many tools to help you get started, from:
- Investment advisors
- ETFs/Index Funds
- Individual stocks
And best of all, you can mix and match these investments and blend the different styles. There is no right or wrong way; instead, finding what works for you is more important.
The Best Metric for Beginners (P/E Ratio)
Okay, now you are probably asking how I find a company selling for a deal. Or how can I find companies selling for a high price?
Now, we will enter the realm of numbers and the idea of valuation.
Valuation centers around the idea we can determine what something is worth. For example, when we look at buying or selling a home. We try to determine what the house is worth.
How do we do that?
We start by comparing the value of our home to others in the neighborhood or a similar style. In this process, we can determine what our home should be worth.
Valuing businesses uses the same method.
We use the P/E ratio as a great starting point for valuing companies.
Andrew explains the ins and outs of the P/E ratio using several companies as examples. We can use this ratio to find a company selling for an attractive price, and then we can compare the ratios to others in the same industry.
For example, we can compare the P/E ratios of Microsoft, Google, and Apple to find one selling for less than the others.
Putting It All Together
Regardless of your investing strategy, Andrew’s stock market basics PDF really breakdown the logic of different valuation ratios to teach you to buy low and sell high. As I mentioned, that’s just one thing I love about the PDF.
If you’re not sold at this point that you need to at least look at the PDF, then I don’t know what else I need to say. I mean, the PDF is completely free, lol. We remain invested in your future, and investing is one of the best ways to get you to financial freedom.
No lie – the PDF is one of the first things that got me investing. I had already started before reading it, but it helped me overcome some of that fear of the unknown.
Yes, it’s not a full, 100% comprehensive of everything you’ll ever need to know about investing because that would be impossible. Instead of 32 pages, that would require 32 million pages.
It’s a perfect introductory PDF that will start your investing journey. It’s what will get you to shift out of the park and put the car into drive.
Yes, you’re not going to know everything, but you’re going to understand compound interest, the importance of investing in the market, and some of the very basic fundamentals that will help you start to identify undervalued companies that you can invest in.
Maybe you don’t get 10% returns. Maybe you make some mistakes, and you only have 5% returns. But guess what – that’s 4.99% more than you’ll get in your savings account. And even more, in my case, I was earning .01% with my Fifth Third account, so I switched to Ally for a high-yield savings account!
Our goal at einvestingforbeginners.com is to get you started on your investing journey and get you to put down those initial building blocks that allow you to continue to build.
It all starts with the Stock Market Basics PDF, plain and simple.