Tuesday, May 7, 2013

Stock Investing for the Non Investor

If you have any money stashed away, invest it in the stock market.

I've been following for as long as I remember. As a ten-year old, I'd take The Daily News, flip to the sports section, then just as any normal kid would do (not!), turn to the stock pages. I'd look at companies which I knew (Nike, McDonald's) and see their current stock prices as well as what they did the day before. My dad turned me onto his favorite stock, Philip Morris (now known as Altria). Almost two decades later, I still learn each and every day.

There are plenty of people out there who couldn't tell what a dividend is. But I'm going to do my best to help give some basic tips to get you started on your investing journey. If you stick to these notes, you'll be well on your way.

Keep It Simple

My fiance is a huuuuuuuuuuge fan of Costco. She'll come home from shopping and comment on how amazingly juicy the Costco fruit is. Her, her mom, and my parents have been avid Costco shoppers since last year. And since Mr. Costco has come into our lives, the stock has jumped from $80 to $110.

Point is, companies that are a big part of your life are usually good places to start investing in. Don't worry about random companies you've never heard of. I'll bet you have not a clue what Baidu does (Just for fun, they are the Chinese equivalent to Google). But they were an extremely popular stock pick in the last few years. Had you bought Baidu in July of 2011, you would have lost half of your investment today.

For every Baidu, there are stocks that I'm sure would've given some big gains. But it is not worth the risk. Stick to the companies that you know and love. My advice would be to track stores and products you buy on a daily basis. Assuming you follow public companies (companies can also be private, but you cannot publicly invest in them as a stock), I bet they would be far valuable five years from now then they are now.

Simple Investments: Nike, Disney, eBay.


A lot of stocks payout a dividend. A dividend is a portion of a company's earnings that are handed right to it's shareholders.

Not every company pays a dividend, but usually strong companies not only pay out dividends, but also raise their dividends every year.

Let's take Johnson and Johnson for example. Back in 2003, JNJ (their ticker symbol) paid our a 24-cent quarterly dividend. Today, they payout a 61-cent quarterly dividend. Combine that with the fact that JNJ was $51/share in 2003 and now over $80/share, and you have yourself a very nice return.

You'll probably hear the term "Dividend Reinvestment". Some people choose to take their dividend and just keep the money. But the shrewd investor will reinvest that dividend into the company and buy more shares of the stock. Imagine taking that JNJ dividend and buying more stock each quarter?

Dividends can come in all shapes and sizes. My rule of thumb is to look for stocks which have a track record of raising dividends each year and yield anywhere from 2.5% to 5.5% (Yield is the yearly dividend divided by it's stock price). What's better a stock paying that to you every year, or the money that makes less than 0.75% in your savings account?

Dividend-paying stocks aren't going to net you crazy gains, but the long-term investor will be rewarded nicely.

Safe Companies: Verizon, Coca-Cola, General Mills, Pfizer

Read, Read, Read

The ten-year-old me picked up on this early. But try to get a hold of as much information as humanly possible. The beauty of public companies is that they have to disclose all of their quarterly and yearly finances. If Nike lost $300 million last year, the information is right there.

I'd say the service that has helped accelerate my knowledge is Twitter. Most of the stock gurus are not just posting every hour, but some will even give their own trades.

The one drawback to Twitter is it seems like no one ever loses money. People will gloat about their victories, but never even hint at a defeat. My rule of thumb is to trust A) People I have heard of or B) People with over 10,000 followers.

But I guarantee you that the more you read, the better grasp you'll get on the stock market. It's all free (well not all, but most of it is) and just a click away.

Free Information: TheStreet.com, Motley Fool, CNBC, CNNMoney, Forbes, AOL Finance

Earning Power

One of my favorite indicators to look at is P/E, which stands for Price-to-Earnings. A company's P/E is the stock price divided by their yearly earnings. So if the stock price is $200 and a company made $20/share, their P/E is 10 (people refer to this as their Trailing P/E for their past earnings). There's Forward P/E as well, which is the stock price divided by it's future earnings. So if that same company has future earnings of $25/share in 2013, their Forward P/E is 8.

My general rule is to focus on companies that has a P/E in the 12-18 range. That range is considered valued to undervalued, but there's plenty of other factors.

You might find a company like Dell with a lower P/E than most and think it's undervalued. The problem is if a company's earnings are shrinking, then the P/E can be deceptive, because they are not growing. On the opposite end, a company like Netflix has a P/E of 500, but because they have extremely high growth potential, they are valued much higher.

Every stock and sector utilizes a much different baseline P/E. There a current cycle where technology has a lower average P/E (Figure the 10 to 13 range) because people fear those companies are lagging in growth. Those fears are probably overblown, but it's something to keep in mind when evaluating a stock.

Overall though, if you focus on P/E's in the highlighted range for growing companies, you'll end up finding value.

Undervalued P/Es: Apple, Chevron, IBM, Wells Fargo

Penny Stocks For Dummies

Just stay away from penny stocks. Far away. I'm sure you've seen or heard proclamations that a stock can make you 10000% if you buy it.

There's a reason why a penny stock is a penny stock. They are nothing more than a sucker bet. Sure, a penny stock could get you short-term gains. But in the long run, those stocks are $0.

The ONLY time I'd recommend taking a chance is on a company you know. Kodak is currently in penny stock land, but the possibility exists that another company buys them out or they make a grand comeback. Pier One was heading to it's death in 2009 but made some huge changes. Now, the stock is $24/share. It's a small possibility that these type of companies make a comeback, so you have to tread with caution.

Penny Stocks to Avoid: Companies with "Q" in it's name, Stocks on the OTCBB exchange (When these two things happen, it's considered the equivalent of stock death)

Other Tips

-Don't chase stocks: Stocks don't go up forever. If there's a company you like, be patient and buy it at a price you feel comfortable at. Remember, there's thousands of stocks to choose from, so if you miss out on a move in a stock, there are plenty of others.
-Taxes: If you sell a stock you've held for less than a year, any gains are taxed at whatever tax bracket you are in (usually 25% to 30%). Stock gains from ones you have held over a year are taxed at 15%. You are only taxed when you sell.
-Write-Offs: If you lose money, you can write off those losses on your taxes up to $3,000. Any losses over $3,000 can be carried over into following years.
-Be Patient: Don't refresh your screen every five seconds hoping for your stock to go up. The very best stock investors still have stocks that go down. If experts can't find the very bottom price, how do you expect to?
-Diversify: Don't put all of your eggs in one stock. Spread it around to 5-10 stocks in different sectors.

1 comment:

  1. Best resource I've come across is the dividend growth investment community at seekingalpha.com

    If people in their early 20s spent an hour or two a week reading articles by those who publish on DGI, we would have a lot less people in debt and more people on the path to long-term financial independence.