Investing For Beginners 101: 7 Steps To Understanding The .

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketReality: Media Coversthe ExtremeAs you can see, the majority of investors aren’tin fact losing their shirts and the media ischoosing to cover extreme cases of peoplelosing money in the stock market, simplybecause they make for good stories and goodTV. Those who did lose all their money weren’tdiversified in their investments, bought stock incompanies that were over leveraged, borrowedmoney to purchase stocks, or a combination ofall three.For those investors who didn’t sell their stocksin 2008, which would’ve been the worst time tobail out of your stocks, the market recoveredand the “devastating losses” didn’t affect theirportfolio. Therein lies the importance of longterm investing and riding out the storms. Sinceits inception in 1957, the S&P 500 has returnedon average 10.83% annually, when dividendsare automatically reinvested.For those who need a reminder on howpowerful a compounding 10% return can be,recall my 2 million example. In 40 years, thisamount becomes 8,179,114!Smart Investors Don’tListen to NoisePlease don’t forget that a stock is meant to bea long-term investment. It will pay youdividends that over time will compound andmultiply, and if invested in a good company,the share price will appreciate substantially aswell.As financial guru Dave Ramsey put it, “The onlypeople who get hurt riding a roller coaster arethe ones that jump off.” Once you gainconviction in your investments - knowing thatthey will recover when hit badly - you will easilybe able to avoid selling your stocks at theworst possible time, when the market has atemporary crash and it seems like everyonearound you is selling too.www.einvestingforbeginners.com 10

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketBefore I introduce the more in-depth topics ofthis guide, I feel I must explain how I derivedthese categories and why they are relevant toyou. While the Value Trap Indicator I teach ismy own original invention, the fundamentalideas and ratios are all well-known and widelyused by millions of investors around the worldand countless investing experts and authors. Infact, if you get around to reading enoughinvesting and stock market books, you’ll realizethey are almost all the same, and many of thevarious ways institutional investors evaluate astock run parallel to other strategies.Step 3 will uncover the BEST stock strategyyou will ever learn and show you that buying astock is easy. The first step to swimming is firstgetting your feet wet.Once you climb that obstacle of learning how totransfer money into your investment accountand easily buy a stock, you will find theconfidence to continue educating yourselfabout investing to then make the rightdecisions with some real money.Recognizing this fact helps bring greaterunderstanding to the process and you can feelconfident in these metrics because a quickGoogle search will confirm their validity. I amnot reinventing the wheel; instead I amutilizing my obsessive passion for investingresearch and presenting the most importantconcepts in an easy to follow guide not yetfound on the web. For those who complete theguide and advance as investors, my Value TrapIndicator can be accurately implemented for avery profitable stock picking strategy.www.einvestingforbeginners.com 11

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketThe BEST Stock Strategyand Buying Your First StockFor Part 3 of this guide, I will show you theabsolute best strategy you should always usewhen investing and will help you overcome thebiggest hurdle beginning investors face: buyingyour first stock. Buying just 1 share of yourfavorite company helps you tackle theoverwhelming feelings of confusion when firststarting, by keeping it simple.I can’t stress enough how important buyingyour first stock is, as you can read and readuntil your eyes turn blue, but you won’t start tosee progress towards your results until youtake action. Trust me – a guy who has beenthere already – buying your first stock givesyou a sense of empowerment and excitementat being part of the stock market.Before going over buying your first stock, I amgoing to reveal the absolute best stock strategyyou can use and one that most wealthyinvestors use. It is called:Dollar Cost AveragingWhat do investing greats have to say aboutdollar cost averaging? The godfather of valueinvesting and Warren Buffett’s mentor,Benjamin Graham, wrote in his book TheIntelligent Investor that dollar cost averaging,“Enables you to put a fixed amount of moneyinto an investment at regular intervals Youbuy more – whether the markets have gone (orare about to go) up, down, or sideways.”Warren Buffett called this book “By far the bestbook on investing ever written,” and it is theresource many investors refer to for guidance.Dollar cost averaging is simply investing thesame amount of money every month, year, orweek into the stock market with the effect offorcing the investor to buy more when stockprices are lower and buy less when stock pricesare higher. By dollar cost averaging, theinvestor is always invested and will not bedevastated by the losses that come with tryingto time the market.www.einvestingforbeginners.com 12

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketStay Away from the “Psychics”In your investing life, beware the analysts whoclaim they know the exact time to buy low orsell high. In retrospect, everyone believes theywould’ve been able to predict the highs andlows of the market, but in reality, it isimpossible. Trying to profit from timing themarket will drive you nuts and always leaveyou regretting your decisions. Most investorswill sell too early and miss out on bigger gainsor will sell because stocks have fallensignificantly, which is the absolute worst timeto sell. Or, investors will often feel good abouttheir investments when they are doing well andwill, as a consequence, buy a lot more at thetime when stocks are very high already andthere is very little upside.Dollar cost averaging gives you the necessary,patient discipline you need to stay in themarket for the long term and through the upsand downs. How does this strategy help youbuy more when prices are low and buy lesswhen prices are high? Take this simplehypothetical example to explain how it works.Say a stock’s price is 10 today and you arebuying 500 of stock a month in a dollar costaveraging strategy. So, the first month you buy50 shares of this stock. Let’s say next monththe price has dropped to 5. Instead of gettingangry that the shares have fallen so much andcursing the world, the smart investor sees thisas an opportunity to buy more stock at adiscount. So, again you invest 500 in month 2knowing that you are in for the long term, andyou end up buying 100 shares. Let’s say inmonth 3 the price is still at 5 and you arebuying 100 more shares. Finally, in month 4,the price recovers and is now at a whopping 15.Compare where you’d be if you had or hadn’tdollar cost averaged. With dollar costaveraging, you have 250 shares of stock nowworth 15, and you are sitting pretty with somenice gains. Let’s say you didn’t use dollar costaveraging and you had invested all 1500 atonce. You’d have only 150 shares, and whenthe price dropped to 5, you might’ve sold atthe worst possible time, unable to stomachany more losses.www.einvestingforbeginners.com 13

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketRemember: Don’t Try toTime the MarketWhile this might seem like an extremeexample, you’d be surprised how often thishappens to investors, which is the reason whymany shun the market after being burned likethis. Little do they know that a simple strategysuch as dollar cost averaging reduces thepossible downside and keeps you disciplinedand invested long term.If the price had instead gone up initially insteadof down, yes, investing all of it at the beginningmight have been best in the short term for you,but over many trades and years of investing,you’d find you’re getting burned more oftenthan you are gaining. Plus, how would youknow when to sell? No one is able to predict thefuture no matter how much convincing talk youmay hear, and the true answer is no oneknows.That’s why it’s important to stay long terminvested and take some profits along the way,without getting greedy or attempting to sell atthe highs or buy at the lows. Market timing willlead you to despair, and those who claimotherwise have yet to be burned by it buteventually will.Time for Action: BuyingYour First StockNow that I’ve showed you why to invest, howthe stock market works, and the best investingstrategyyoucanuse,mynextrecommendation is getting your feet wet andtaking the first step towards obtaining controlof your future by buying your first stock.Long time fans of the podcast and blog knowthat I’ve recommended Tradeking for years forits low 4.95 commission fees. When Allyacquired Tradeking, I continued to use theirservice for the Roth IRA I used for the RealMoney Portfolio of my eLetter, and stillrecommended them. However, things havechanged. After several horrible customerservice experiences, I’ve changed my tune.www.einvestingforbeginners.com 14

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketI don’t want to waste your time here with thedetails, but you can look for our “Brokers toAvoid in 2020” episode on The Investing forBeginners Podcast if you’re curious about someof the ways Ally has not given the kind ofcustomer service one should expect.Fortunately, I have other accounts with otherbrokers that have been fantastic. My podcastco-host, Dave Ahern, recommends CharlesSchwab, and I like Fidelity and Merrill Edge.You really can’t go wrong with either of thosethree — they all offer free commission trades!Whichever brokerage you decide to go with,make sure that the company is SIPC protected(which is different from FDIC on checkingaccounts). That could protect your assetsduring the next financial crisis.These days, the process to sign up for abrokerage account is SO easy, that there’s noexcuse to not get started today. Let me gothrough some of the basic account types.Individual brokerage accountTaxable, not used for retirement. Deposit asmuch as you want, withdraw whenever.Traditional IRAContributions are pre-tax. Used forretirement, early withdrawals come with fees.Roth IRAYou can only contribute with post-tax money,but are never taxed on capital gains ordividend income. Early withdrawals also havefees but with some exceptions.Go Buy a Stock!I always say that the key to investing is justgetting started. You could over-analyze thesituation until your face gets blue, but youwon’t make any progress until you open anaccount and actually buy at least 1 share.There’s nothing like having skin in the game,so go buy a stock and see what it’s like. Youmight be surprised how easy it really is.www.einvestingforbeginners.com 15

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketStep 4/7: How to CalculateP/E Ratio: The Most WidelyUsed ValuationFor this step, I’m going to help beginninginvestors do their own research in stocks andshow how to calculate P/E (price to earnings)ratio from a company’s 10-k annual report. Thisguide will have pictures and links to make itvery easy to follow and learn the procedure.In order to research companies and evaluatewhether they are good stock buys, you reallydon’t need any special skills or education. Infact, if more people knew how to researchstocks and took the time to do a little analysison some companies, I think a lot of so-calledexperts and mutual fund managers would beout of work! Unfortunately, this hasn’t beenthe case and for whatever reason, individualstock picking has been frowned upon andregarded as reckless and risky. In reality,picking individual stocks leaves all theresponsibility of your money on yourself, as itshould be.Reality: Only You AreResponsibleIn a culture where it’s never your own fault andalways someone else’s, no wonder the averageinvestor flocks to mutual funds every year. Ifmore people took responsibility for their ownmoney and were willing to see their portfoliosdrop in value without selling at the worstpossible time, there’d be happier andincreasingly profitable investors. My hope is tosee more investors educating themselves andmaking smart, disciplined stock picks with thelong term in mind.Arguably the first thing you should learn aboutindividual stock picking is how to calculate P/Eratio from a company’s annual report. P/E ratiosimply measures how much you are paying fora company’s earnings. The higher the ratio, themore expensive the company.A higher P/E ratio generally means a companyis more popular and more people are buyingthis stock. P/E ratios vary based on industrywww.einvestingforbeginners.com 16

Investing for Beginners 101: 7 Steps to Understanding the Stock Marketand market conditions, and you can tell whenthe market is overvalued because the averageP/E ratio is high.An average P/E ratio is about 17, and I tend toconsider a P/E below 15 to be a pretty bigdiscount, depending on the industry. Mostfundamentalists that are value-oriented agreethat any P/E over 25 is generally too high,regardless of the industry or market condition.Stocks with high P/E ratios tend to have greatstories and the most optimistic of futures, butas the stock becomes more and moreovervalued, the bubble eventually pops andeveryone who bought in when the companyhad a high P/E ratio loses money. The thingwith buying these stocks with high P/E ratios isthat there is no way to tell when the price ofthe stock will catch up with its valuations,meaning when the stock prices crash to normallevels. While you can make some nice shortterm gains from buying stocks like this, usingthis strategy regularly is essentially gamblingand it is not an investment strategy I promote.I buy companies with relatively low P/E ratiosfor two very simple reasons:1. Low P/E company is potentiallyundervalued, trading at a low price2. Low P/E company most likely hashigh earningsIf you look at various studies, there has been aproven correlation between low P/E ratio andabove average returns. What Works on WallStreet by James O’ Shaughnessy showedmultiple back tests proving this with 1 yearreturns from buying low ranked P/E stocks andthen rebalancing your portfolio.How To Calculate P/E RatioTo calculate P/E, you take a company’s marketcap and divide by their earnings.P/E Price / Earningswww.einvestingforbeginners.com 17

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketTo look up a company’s earnings from theirannual report, go to sec.gov. Click “COMPANYFILINGS” and then type in the company’s tickerin the search bar. I’ll show how to calculate theP/E ratio for Ford ( F). Once the company isfound, type 10-k in the filing type box.Once you are in the 10-k, do a “Ctrl-F” tosearch, and search for “consolidated balance”.Click through until you are looking at thecompany’s consolidated balance sheet; it lookssomething like this:Find the latest filing date and click ondocuments for the 10-k. From there, click onthe .htm link for the 10-k, in this case the firstline, as can be seen on the right.Note: Sometimes the company doesn’t puttheir income statements on the “10-k” andinstead will file it under “exhibit 13”. You will beable to quickly tell if a company did this afterclicking on the 10-k .htm file.Now, we want to find the ConsolidatedStatement of Earnings. (Sometimes calledConsolidated Statement of Income, sometimescalled something completely different).www.einvestingforbeginners.com 18

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketMost of the time the Statement of Earnings isright above the Balance Sheet, occasionally it’sbelow. Scroll up until you see the income sheetand look for “Net Income attributable to FordMotor Company”. In this case for 2012, you cansee it’s 5,665 million. Now that we have theearnings, we want to calculate market cap.You can Google a company’s market cap, whichis updated regularly on most financial websites.If you want to be detail-oriented like me, or beable to look up a company’s market cap forprevious years, search the 10-k document for“shares outstanding”. Once you have thenumber of shares outstanding for 2012, simplymultiply this by the share price to get thecompany’s market capitalization.Note: You always want the Diluted number forshares outstanding, as it considers employeestock options and is, therefore, more accurate.So, once you have these values, simply takemarket cap/ earnings to calculate P/E ratio. ForFord, using today’s stock price of 13.36, weget a market capitalization of 53.6 Billion.Divide this by the earnings, 5.6 Billion, andthe P/E is 9.46. Auto makers tend to have alow P/E due to the industry, so compare to itscompetitors to see if the ratio is favorable.www.einvestingforbeginners.com 19

Investing for Beginners 101: 7 Steps to Understanding the Stock MarketKeep in mind that most P/E ratios you see onfinancial websites calculate using futureearnings, based on projected numbers. Thus,these numbers can fluctuate greatly, which isone reason I like to use past earnings tocalculate P/E ratio. I like averaging earnings forthe past 3 years to make my calculations lessdependent on any one year. Another great ideais to calculate the P/E ratio over an average of7 years of earnings, as Ben Graham did in hisbook The Intelligent Investor.The answer to the Rule of 72 exercise: 6.P/E Ratio DisclaimerPlease keep in mind that the P/E ratio, and anyof the ratios presented here, are not a panacea.Just because a ratio looks good doesn’t meanthe stock will be a great investment. Theseratios are tools to help you, as an investor, getperspective on how cheap a stock is based onnumerous factors, but you have to look at thewhole picture to get the best results.Step 5/7: The Single TwoFactors Most Correlated ToSuccess - P/B and P/SFrom the 1951-1994 time period, there havebeen two single ratios that have performedvery well in 1 year time periods. Ranking thelowest Price to Book and Price to Sale ratioshave done far better than any single oneparameter when ranked, bought, and thenrebalanced annually.As James O’Shaughnessy showed in his bookWhat Works on Wall Street, when these singleratios are implemented with various otherstrategies, downside risk can be gre

Investing for Beginners 101: 7 Steps to Understanding the Stock Market www.einvestingforbeginners.com 6 let me show you the same numbers but add investing into the equation. Again, let’s say you saved 1,400 a month for 26 years. BUT, this money wa