Archive for April, 2013

Welcome back for part 2 of our 4-Part investing tips blog series. Hopefully you got a lot out of the 1st Part and have a little bit better idea about how you should go about getting started in the investment game. Part 2 will give you more of the same great advice, tips and information that you need in order to invest intelligently and build an excellent, diversified portfolio.  So without further ado let’s get started.  Enjoy.

  • Anchors away?  There is a concept in behavioral finance called ‘anchoring’  which refers to the practice of clinging to a specific reference point in your mind. This can be troublesome as there are many people that ‘anchor’ to the specific price that they paid for a specific stock and thereafter gauge that stock’s performance relative to this initial price. The reason that you should avoid this is simply that stocks, over the long run, will be valued based on the estimated future cash flow and value of the business that offered them. Focusing on this fact rather than the actual price that you paid for the stock will keep you from focusing on data that will eventually become irrelevant and could cause you to make errors in your investing strategy.
  • Trust economics rather than management. What we are referring to here is simply that even the best managed business will sometimes fail and, conversely, a business that is managed poorly but still is wide-moat and a cash cow can sometimes perform incredibly well. Base your stock choices not on the management team but rather on the overall performance of the business and you will usually come out ahead.
  • Take the high road.  Many times you will be faced with a decision to purchase stocks from the company that  engages in business or management practices that are not exactly what one would call ‘morally sound’. Our advice; skip these companies even if the returns might look favorable and find a business that treats people (and the planet) well. Even if you don’t make as much money you’ll still sleep better at night.
  • Past trends can be an indicator of future results. No doubt you have heard it said a number of times, even if you’re just getting started in investing, that past performance is no guarantee of any future results. We agree with this statement to a point. Simply put, past performance shouldn’t be banked on like it was a certainty but it can be a really good indicator of how well a company will do in the future. Frankly, if you find a winning manager don’t be afraid to stick with them when they find new business opportunities as their strong record is a good indicator that they are future record will be strong also.
  • Going south? It’s surprising how fast a business can deteriorate.  Keep that in mind and be wary of companies that look like they have great stock prices but are generating little economic value. That being said, a strong business with solid competitive advantages can sometimes exceed what you expected. When you encounter a troubled business make sure to increase your margin of safety  and when you find a business that has a shareholder friendly management team don’t be afraid to decrease that same margin.
  • Surprises can be positive and negative. If you’re looking at a stock that has just had a huge surge you can bet that it will probably have more of those. On the other hand, a business that has just taken a big dive will probably continue to do so.  Keep this in mind when you’re looking at any specific stock and purchase accordingly.

What did you think of Part 2?  We hope that you are saying in your head “it was excellent” and that not only did you get a lot of great advice out of it but that you were looking forward to coming back for more. We’ll be back soon with Part 3 of course and more advice for the new-ish investor. We hope to see you then and, for now, take care.

Many of our readers have asked for investment advice and tips over the years and indeed we have given a lot of advice back as well as great tips and other useful information. What we’ve now done is taken all of those tips and put them together in a 4-part blog that should give anyone the tools they need to start investing intelligently.  With that in mind would like to present Part 1 of our 4-Part blog series on Investing Tips for the New Investor. We hope that you not only enjoy it but that it gives you the information you need to get started investing on your own and using the stock market to build a healthy, wealthy portfolio.  Enjoy.

  • Simple is smart. When it comes to investing the new investor would do well to keep things as simple as possible. Don’t trade too often don’t focus on irrelevant data and certainly don’t try to predict the market. If you can focus on companies that are sound, use your common sense and invest with the idea that you’re going to make money in thelong-run (and thus not in the short-run or at least not very often)  your odds of success will increase substantially.
  • Don’t set your expectations too high. If you’re getting into the stock market because you want to get rich quick then you’d do well to not start at all. The only real way to make quick money in the stock market is to already have a lot of money and also have a good bit of luck on your side. If you don’t have either one of these two necessities (and luck certainly isn’t quantifiable) you’d be better off putting your money in a savings account. That being said, if you go in expecting to make a moderate return over many years then you should do just fine.
  • Long term investing is your friend. Stocks can be extremely volatile. That’s a fact that you should definitely get used to. In the short run your stocks may bounce all over the place but, in the long run, if they are constantly paying you dividends and interest then holding on to them will make you look like a genius. Many people make the mistake of dumping a stock because it’s not increasing in value but it’s possible that the business that issued the stocks may still have a sound business plan and just be growing, in which case the stocks will definitely rise in the future. If you can grasp this fact and deal with it without getting too antsy or nervous you’ll do better than the vast majority of investors.
  • Pay attention to the market but don’t over analyze. Simply put, there are so many investment media outlets screaming for your attention that trying to listen to all of them is going to make you crazy as well as second guess yourself regularly. While we don’t espouse ignoring them completely what we do recommend is to tune out the noise a bit and focus on things that are more important like the actual performance of the company whose stocks you own.
  • Research, research, research. Whatever business that you are looking to buy stocks from make sure that you do your due diligence and research them completely. Take a look at where they started, where they are now and what has happened between those two time periods. The more you know about a specific company the better choices that you can make with your stock investments.
  • By your stocks when they are priced low and sell them when they are priced high. As simple as this sounds and as many times as we have heard it said you would be surprised to know how many people simply don’t take this basic advice to heart. With that in mind will say it again; when stocks fall and are low you should buy them and if those that you own have suddenly skyrocketed and are extremely high you should sell. Other than those 2 situations don’t let your greed or your fear cause you to make poor financial decisions.

Those 6 excellent bits of advice should get you started on your investing adventure. We strongly urge you to take them to heart, refer back to them often and use them in every facet of your investing strategy and plan. Of course we also invite you to come back for the remaining three parts and we hope to see you very soon. Best of luck with your investments.

 

When it comes to investing in stocks many people assume that they can just jump right in and start trading without ever having done anything with stocks before. This is a very dangerous assumption and can lead to what can only be described as a financial disaster. (We don’t know about you but we hate those.) Like anything in this life it is best to start something new by taking baby steps, keeping your eyes and ears wide open and learning as you go, little by little. This is especially true when it comes to your financial health. With that in mind we put together a blog with the 10 best stock investing tips for beginners that we know of.  Now I’m not saying that you need to take out payday loans online to start investing, but if you have the extra income this is a good palce to put it. While you may not be an expert when you’re done with our blog you will certainly no more than you do right now as you read this. Enjoy.

  1. Remember that, when you buy a share of any stock you are actually an owner of the company, albeit in a small fashion. Any company being traded is owned by the shareholders and each share represents your claim on any assets and earnings that that company has.
  2. Another vital piece of information that you need to know is that there are many different kinds of stocks. Company size, sectors, types of growth patterns and so forth all determine what type of stock that a company has. There are also large vs. small-cap stocks,  growth vs. value stocks and energy versus technology stocks, to name just a few. Be aware of this before you start investing.
  3. Look at a stock’s short-term earnings to determine what’s going on with it now but look at its long-term earnings to get a better idea of what it will do in the future. Simply put, short-term behavior is based on many different factors but long-term is based on one thing;  the actual facts  about how your stock performed.
  4. If you’re looking to beat inflation, stocks are more than likely your best bet. It’s a known fact that, since the  end of World War II,  there has been approximately a 10% return yearly on stocks which is much better than inflation or the return on bonds, real estate and most other savings and investment vehicles. With that in mind we recommend stocks for taking care of your long-term goals like setting up your retirement fund.
  5. While the market tends to rise and fall together there are always stocks that will buck whatever trend is actually occurring. Even if the market is going down you may find an excellent stock that is increasing as well as a lousy stock the decreases while the rest of the market is booming.
  6. Remember that an excellent track record, while it bodes well for the future, is not a guarantee that your stock will increase in value. The fact is, even stocks and companies that have done well for years can sometimes slip.
  7. Looking only at the price of a specific stock is a bad way to tell if it is ‘expensive’ or not. For example, if you find a company that has excellent earning prospects their $100 per stock price can be seen as a bargain while a $2.00 per stock price can actually be expensive if the company that issued the stock is poorly run and eventually fails.
  8. A good investor must learn to compare stocks by not only their prices but by their value as far as revenues, earnings, cash flow and other vital criteria go. Comparing a company’s performance to other companies in the same industry before you purchase their stock is also an excellent idea, keeping in mind that you will sometimes find slow growth industries and need to judge them differently than a company in an industry that has strong growth.
  9. The smartest  investors know that having a portfolio that is diversified is the best way to protect their investments. The reason for this is simple; if you put all your eggs in one basket and that basket drops, you’re going to lose a lot of eggs. However, if you have many baskets and only one basket drops, you will only lose one or two eggs. We recommend more baskets so that, when the time comes, you’ll have a lot more eggs. (Our apologies to chickens everywhere  for the analogy.)
  10. Investors who hold onto their stocks for the long term usually make out much better than those who buy and sell too often.  While the fact is that the cost of trading has dropped dramatically there are other trading costs that can easily eat up your profits if you’re not careful. Unless you are a full-time trader you probably don’t have the time to play as close enough attention to the market as you should if you’re going to buy and sell regularly. It’s for that reason that we recommend that you don’t but rather hold on to your stocks for the long term, especially if they are showing gains every year.

And there you have them; 10 excellent tips that should help you to get  started trading and putting together an excellent, diversified portfolio that will pay high dividends down the road.  Again, you don’t necessarily need to take out cash loans to start investing, but if you have the necessary funds then don’t hesitate, because inflation will get you everytime. We hope you enjoyed this rather wordy blog and that these tips were valuable for you. Best of luck with your investing plans and please come back soon for more investing, financial and general tips for saving money. See you then!

 

The Value and Power of Compound Interest

When you’ve been giving financial advice as long as we have you tend to overlook some of the more basic and fundamental principles of finance. One of those basic principles is the concept that $1.00 saved today is going to be more valuable than the same $1.00 saved a year from now or never saved at all.

There are two reasons that this is excellent advice. The first is that a dollar today will buy more goods and services than a year from now because of inflation. The second is that a dollar invested today will earn a return in the form of compound interest tomorrow and thus is going to be more valuable in the future.

The lesson here is that the value of time, when it comes to money, is very high as well as the fact that a big key to financial prosperity is realizing the true potential of every dollar that you make.

Let us give you an easy example to illustrate our point. Let’s say that you have $20 and you’re considering using it to purchase dinner but also considering investing in in your tax-free retirement accounts. While it’s obvious that we all need to eat the $20 that you spend for dinner today, if you invest it for 30 years, can turn into approximately $140 in the future evenafter adjustments for inflation.

That’s a return of sevenfold on your $20 investment. If you multiply that same investment by 10, 20 or 30 you can quickly see that investing your money now is going to give you a huge return in the future. Using time and the power of compound interest you can turn a relatively small amount of money today into a relatively large amount of money in the future.

While we will be the first to admit that there’s no way to invest every single dollar that you make the point we’re trying to pound home is that every single dollar that you do invest is going to make a big difference in the amount of money that you end up with come retirement time.

With that in mind you should make as much effort as you can to save as many dollars today as you can. Many of the tips that we give out regularly here on our blog will save you a dollar here and a few dollars there and, frankly, we get lots of emails asking us what the point is to saving only a few measly dollars.

The point is that compound interest can take those ‘few measly dollars’, if dutifully saved day in and day out, and turn them into a nice little retirement nest egg when you’re ready to quit the rat race.  The power of compound interest is extremely strong and if you take those dollars that you’re saving from our tips and advice and put them to work for you we guarantee that your ‘future self’ will be happy that your ‘present self’ took our advice.

Of course we also urge your present self to come back and take advantage of all of the excellent financial advice that will be giving out every day here on our blog. We hope this little one was educational and we hope to see you sometime very soon.

Social Widgets powered by AB-WebLog.com.