Starting The Journey

Photo by Patrick Weissenberger on Unsplash

 

In November 2020, I sat down to lunch with a close friend in a socially distanced restaurant and we began to talk about what we had been up to. Within what felt like moments, we had caught up on family and the preciously few adventures people could have during a global pandemic and then we started talking investments. Admittedly, I knew little to nothing about investing because my 401K was on autopilot and I thought the stock market was for people much smarter than me. As he shared some inspirational reading, I came home and downloaded An Intelligent Investor by Benjamin Graham on Audible. Thus the journey into investing began.

Here I sit, five months later and a whole lot of lessons learned and some half way decent returns on my investments. In the past 5 months, I've seen a return of over 16% on my investment and expect to hold all of my shares for years to come. Alright, that said, let's get to those lessons:

Lesson 1: Do The Research

Asking someone to do the research is probably the least sexy thing about investing but without it, you are just speculating. Peter Lynch, one of the most successful mutual fund managers of our time, has noted that you should invest in what you know but the caveat here is: that is just the start. If you ever read One Up on Wall Street, Peter's famous book on the topic, you will find that he himself has lost money investing in businesses he liked because he failed to do the research. 

Doing the research means reading the 10-Qs and 10-Ks, 8-Ks and the prospectus. If you are putting your money in it, make sure you know and understand what you are investing in. If you cannot tell me why this is a great company in two sentences, you probably shouldn't be buying it. 

How do I read these 10-Qs and 8-Ks? They are so confusing!

Boy, you aren't kidding. You should start with learning from those that came before you and they can help you begin to break down the numbers. Ben Graham might say start at the back because that is where they hide what they don't want you to know. Peter Lynch might say the lower the quality of the paper they print it on, the more important the information. I say get it digital and do a ctrl+f to find what you need. Blow past all of the adjectives telling you how great a company that is hemorrhaging money on their balance sheet is.

While I had to learn through a finance class in university, you don't have to. A Youtuber by the name of Anderson Fuller has created some excellent instructional videos on breaking down Balance Sheets and Income Statements. This guy really walks the fundamental details and breaks down the most important components of the financials.

If you can get it on sale, I would also recommend Tom Vilord's A Beginner's Guide to Investing in the Stock Market. Tom's teaching is fantastic and he really is behind the scenes, there to help you out if you have any questions or concerns. I very much enjoyed the class and was able to pick it up for less than $20.

Lesson 2: Don't Diversify Too Early

I originally thought having a diversified portfolio was the key to successful investing and so I owned a few of a lot of different stocks (nearly twenty) before I even knew how to read the financials. All of my investing was based off of Tom's advice and some key information I would pick up from reading An Intelligent Investor. Really, I was lucky to have gotten out in the black. I joined a Discord server for people interested in investing and they recommended I sell off many of these positions, keeping a few of my luckiest picks, and then do more homework before buying back in. I took this advice to heart, picked up One Up on Wall Street and put all of my money into one stock that I fully understood. I did my homework and it took a long time on one company. I read through lots of 8-Ks, the last six 10-Qs and the last 2 10-Ks. I looked up the long term performance on ValueLine. I calculated the Tangible Book Value (TBV) of the stock and I looked at industry competitors P/E ratios. When you are new, this all can take you days, if not weeks. Maintain focus and document what you've learned so that you don't regress the next time you have to come back to it. When you feel confident, buy that one stock and track it's performance, press releases, and if the market undervalues you... buy more!

You want me to buy more when the stock market goes down? Are you sure you know what you are doing?

Well, I am not saying unequivocally that you should buy when it goes down but you read the releases; you read their financials. You know this company has their debt under control and doesn't have debt due on call (can be due anytime the lender asks for it). As the price dropped, you checked the press release and you checked for market news. You see nothing. Call their investor hotline or email them and ask them if there is a reason for the drop. If you see no reason and hear of no reason, there is a good chance there is no reason. The market is just a fickle mistress.

Lesson 3: Build Screens To Reduce Your Scope

On TD Ameritrade, I can see over seven thousand different stocks, ETFs, and funds traded. It is enough to make you loopy. How are you supposed to find the winners in all of that mess? Should you entrust your money to the analysts who are saying buy, buy, buy? Probably not. If they are wrong, it isn't their money that is forfeit. Start by building your first screen with whatever stock/ETF screening tool you like to use. Everyone looks for different things that matter to them but you can get a idea of what is important by looking at what your broker shows you on their main tabs for the stock. Here is what I like to sort my stocks by:

• Return on Equity > 14% (I like a company that gives their investors a return on their money. This is an indicator of good fiscal responsibility, in my opinion.)
• Volume Range > 500,000 shares (I like 500,000 because it ensures their is market for a stock when you sell it and it helps keep the bid/ask prices close together.)
• Debt to Capital Ratio < 25% (I am looking for a company which doesn't carry a lot of debt and thus can weather hard times... like a global pandemic).
• Price to Book Ratio <= 2% (I don't want to pay a crazy high amount for a stock which could be liquidated and I end up with nothing. Here, we know the book ratio and the stock price are fairly close together. This is more concerning in small cap and mid cap stocks.)
• Price to Sales Ratio <= 3% (I want to make sure that the price of the stock is in line with the sales over the last 12 months. If these numbers are too far off, it could be the market is overvaluing a stock or is just not looking at the relatively poor performance of the stock price.)

To read more on key performance metrics, check out Investopedia. They will help you get a better idea of each metric and how it can be used to assess any given stock.

I hope this gets you started down the right path. Please feel free to leave a comment or a question if you have any questions about something you read here.

Disclaimer: This blog is intended for educational purposes only. The authors are not liable for any gains/losses incurred for readers that acted upon this information. The authors are not financial advisors and they strongly recommend you seek professional advice before investing your money in any market. We recommend you are disciplined with your own trading, and if you decide to follow any recommendations made by authors, you are accepting the fact that you may risk all your capital you put into a certain trade. Results are NOT guaranteed. Past experiences are not indicative of future results. Trade with an amount that you are comfortable with losing and that will NOT jeopardize yours or someone else’s financial well-being.