By Miles Goodwin
One of the experts that we study in class teaches us that everything you need to know to be a successful investor, you’ve learned by the 6th grade. Wall Street likes to mystify what it does so that you feel the need to ask them for advice. But the fact of the matter is that the rules are simple, easily understood, and you learn all of them in my class. Let’s start with the basics:
- Buy Companies, Not Stocks
Stocks are not poker chips. They are companies with thousands of employees all working to earn money. That’s what results in stock prices for those companies going up. So we evaluate stocks based on how we anticipate a company will perform in the future, not based on the daily fluctuations in price.
Don’t put all your eggs in one basket. It’s as simple as that. Diversification has several benefits and we’ll cover those in class. We’ll also get specific about how many stocks and what types you should buy.
- Earnings and Dividend Growth
If you buy a company that’s not earning money, it’s a little bit like trying to catch a falling knife. Nine times out of ten, it’s not going to go well for you. But if the company is earning money, there will be money to share with you, a shareholder, in the form of dividends. You want to buy a company whose earnings and dividends are both growing.
- Low Debt and High Return on Equity
If a company owes too much money, they won’t be able to pay your dividend. And if times get bad, like they have in the past year or two, the debt becomes a real problem. Return on equity means they are making money on the stock price that they received when they went public. So, if they’re doing well, you’ll have a high return on equity.
- Avoid a High P/E Ratio
A Price/Earnings Ratio is a little bit like a price per pound. The P stands for the market price of the company and the E is the Earnings per share for that company. If the stock’s price is $20 per share and the company is earning $2 per share, then the P/E ratio is 10. That is not unreasonable. When you find a stock that P/E Ratio is 100, I’d stay away from that because you’re definitely overpaying.
- Be Patient and Invest in Long Term
Lastly, if you’re a long-term investor, investing for retirement or possibly for a child’s education, be patient. Just like life, the stock market goes up and it goes down. But over decades, it has always been going up. If you’re trading on a short-term basis, chances are you’re gambling. In that case, you’d probably get better odds at the blackjack table at your local casino.
If you’d like to dive deeper into these concepts and more, while putting what you’ve learned into practice, I’d love to have you join us in class. It’s never too late to build your knowledge base and begin investing with confidence. I hope to see you in class!