Stock picking tools of modern investing for dummies
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This is Episode Tonight, Andrew and I are going to talk about stock picking for dummies. So, Andrew, would you like to talk first, or would you like me to talk first? Andrew : I think your story is the better one.
So tell your story first. Dave : Okay. All right. And he was telling a story on one of his lectures the other day that I thought was kind of fascinating. So what the professor related to all of us was that he had a student that part of their project is to do a valuation of a company at the end of the semester.
And so one of his students presented his findings at the end of the semester, and everything was really good except for one small detail. So he called the student in and had him come in and talk to him about his, his work and everything. Dave : And the professor went over everything and said, there was a lot of great stuff in there. And he asked him why he chose the company, and the company he chose was Tesla.
And so without talking about any of our biases about the stock, the young man said told the professor that he liked Tesla. I thought it was a great company, really like the Elon Musk, and had a lot of respect for him and, and those kinds of things. But the professor was like, you know, okay, great. And he talked about his numbers and all the things. And he asked him if he ever really checked himself for the numbers that he was relaying and his spreadsheets and the students said no why?
And he said, well, he said, the valuation you came up with is probably not a horrible one. And he said a lot of the numbers are great. Dave : The growth rates are great. The discount rates are great. And he said, and the students said, why? And the students just kind of blinked. And he said in the third year earth, after 30 years, the growth rate is going to make it larger than the GDP of the entire world.
If you want, car insurance is going to come from Tesla. You said Tesla would govern everything. And he said he looked at the student. He said so the growth rate that you assigned to the company is unrealistic. And I said, I think you meet, I want to go back and check your numbers. And the student was, of course, appropriately chagrin and went back and adjusted his numbers. So I thought that was kind of interesting.
And Andrew and I thought that that would be a perfect way for us to start. So, Peter Lynch, we mentioned him last week. And one of the concepts that he talks about frequently is the peg ratio. So he relates this PE ratio to the growth rate. Andrew : And so basically he tries to look for a company that has a peg greater than one.
So just to give an example here, I pulled up a spreadsheet. So that would be a price, a peg of around, or, in this case, it would be one. And if the earnings were at a hundred, that would be a price to earnings of By the time you get to the ninth year, earnings will be at about three Oh five, which is three times more than where they started nine years ago.
Our company, its user needs to grow the business and, and make those profits grow for shareholders. Andrew : And they do things like share buybacks and things like that, but it kind of illustrates. So as a typical example, if a stock has a PE and their growth rates about the same, it still takes nine years until that investment, that price you paid for, it pays off in earnings over the life of that investment.
To me, that sounds like a long time; nine years sounds pretty long. Andrew : And, and, you know, you, you do see the price, earnings ratios stay very high for very long periods. So my kind of example of trying to take some common sense and use that in a stock-picking approach.
So they have their area of the Northeast in the United States where they sell an overwhelming majority of their, of their products, you know, that snowbell up there. The price of books, reasonable prices, sales, decent things look good, and they have a lot of free cash flow.
However, if you think about what the future of the Northeast holds, and then you look at some other interesting data. So something that I wanted to look at was population trends. So I went and, you know, Wikipedia has a great little chart where they bring to the States, and they showed the percentage of growth and everything.
Andrew : And so they took from , Most mutual funds have higher fund expenses than similar ETFs. Index Funds Oftentimes, these may be your only investment option in a k plan. Index funds are one form of mutual funds. They track a broad market index. This means they try to match the market performance with passive investing. As a result, they have lower fund expenses than active funds. It invests in 3, of the largest publicly-traded companies.
To save you money, many online brokers now offer index ETFs and you invest by the share. And, it only has an expense ratio of 0. You might decide to go with the ETF because of the lower fund expenses. With a 0. Many experts believe ETFs will soon completely phase out mutual funds including a financial advisor with over years experience interviewed on the Money Peach podcast.
Money Tip: If you have a k, a great free tool to see what fees you are paying is Blooom. Target Date Funds Another mutual fund option is target retirement date funds. If you want to retire in , you choose a fund. But, you should still make sure their investment goal matches your goals. And, that the actual performance meets your expectations.
These funds invest in a basket of stocks and bonds. They also hold index funds to keep fund expenses low. As you near retirement, the fund swaps stocks for bonds. These funds are a low-maintenance way to invest. However, more effort goes into managing these funds than an index fund, therefore you can expect to pay a higher expense ratio for them.
Therefore, your bond is now more desirable which means the price of that bond went up. Similar to how a stock goes up in value, same holds true for a bond. The easiest way to remember how bonds work is this: As interest rates go up, bond prices go down.
As interest rates go down, bond prices go up. Breaking Down the Dividends Earlier we mentioned dividends, which were profits of the company distributed back to the shareholders. Many dividends are distributed at least once a year, but they can be paid out monthly, quarterly, etc. Interestingly enough, most index funds pay them in December. In a nutshell, compound interest is literally where your money makes money for you.
As you can see, your money is working for you by earning interest on the original amount AND the interest earned from the year before. As this plays out year-after-year, the amount begins to compound…. One amazing way to further increase compound interest in your favor is by reinvesting your dividends.
I would start with M1 Finance for a few reasons: You can invest in partial or fractional shares. The reason why I like this concept is purchasing a single stock can be expensive! With M1 Finance, you can purchase Amazon with even just a few dollars. These goals can range from beginner investing, retirement planning, or even a more tailored responsible investing approach. In fact, M1 Finance does not charge any commissions or markups on trades you place. Your Employer k Plan The most well-known place to invest is inside your k plan.
The main reason why is for matching k contributions from your employer. If your employer offers a match, maximize it! After you meet the match, you might decide to invest more. But, not all k plans are the same and some have some terribly high fees and very lousy investment choices.
A great tool I personally use to check for k ,b, a fees is Blooom. You must pay taxes every year on your non-retirement account investments. With a pre-tax k, you will reduce your taxable income. Are There k Tax Disadvantages?
Financial expert Rebecca Walser was on the Money Peach podcast with a completely different point of view about the k. You can listen to the interview below, but in a nutshell she explains: How we are in the lowest tax environment in U. Therefore, her debate is whether or not the k is a good plan right now.
If taxes do increase, then we would actually be avoiding the lower taxes now to pay higher taxes later. Instead of paying taxes when you withdraw the money, you pay taxes today and then invest into the ROTH k.
Just like the k, your growth is also tax-deferred. You fund Traditional IRAs with pre-tax income. And, Roth IRAs receive your post-tax income. No k Plan Available? There are so many very simple platforms which are perfect for someone getting started or even a seasoned pro. One of the most well-known and trusted investing platforms is Betterment. In my opinion, Betterment hits the nail on the head when it comes to simplifying the investment process. They only use stock and bond ETFs and they help you choose your investments based on what your goals are.
Also, Betterment is flat out affordable. Whereas a financial advisor will usually charge between 0. Below are three additional reasons why you might invest with Betterment. Tax-Loss Harvesting Betterment uses tax loss harvesting to reduce your annual tax bill. When Betterment rebalances your portfolio, they will sell some assets for a loss. Doing so can minimize your tax bill too.
This strategy helps you pay less in taxes too. That means more money in your pocket! Automatic Portfolio Rebalancing Many people like Betterment because they handle the day-to-day portfolio tasks. If your portfolio is unbalanced, you might not reach your goals.
With each contribution, Betterment handles this task for you.
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