Saving to Invest
To help you build a better mindset for money, In previous posts, I have referred to many who promote saving for emergencies to help you avoid using credit. Though getting the suggested $1,000 to $3,000 accumulated in savings sounds difficult to accomplish, especially when you seem to have little left at the end of the month. However, a delay here and a sacrifice there and you can manage to accumulate that amount over a reasonable time. It must be a conscious effort!
While you are building a cushion for difficulties, make a serious review of your spending habits. Your plan should include getting beyond a safety savings to build a pool for investing.
Learn How Not to Sink in Your Investing Pool
If you can start contributing to a 401k Plan for retirement, you should do so until you can max out on contributions. This is assuming you have reduced your debt load to make the contributions easier to do. After all your financial future is at stake!
After you have maxed out your contribution level into your retirement account, you can start saving to prepare for other kinds of investments.
At this point, seeking advice on various forms of investment will be very important. Seek out those with investing experience not those who just read and advise. Make sure they have money at risk and understand the elements of the business cycle.
Be sure to talk about your tolerance for risk. And never put all your money in just one investment. If it is stocks, be sure to allocate across different industries and different sizes of companies. An advisor should be able to explain what a good blend or diversity should look like.
Some investments can be small, like buying stocks. They are more liquid than buying property, which has a large buy-in and is slow to get out of. That is a commitment over time.
Some investments can be more labor and time intensive, like buying a business. Be sure to do your research, known as “due diligence”.
There are many other forms, sometimes called “vehicles” for investing. They could be as simple as bidding on real estate tax bonds, or as complicated as buying foreclosed property with its legal hoops to crawl through.
Vehicle Options
With stocks, you must be aware of some key measures and how the market works and how emotions related to current events and government reports can affect the markets.
The stock market, of course, has more than stocks. There are corporate bonds, U.S. government bills, notes, and bonds, along with state issues and municipality bonds, puts, calls, and options, etc.
Then, there are mutual funds, where fund managers, skilled in trading strategies, invest in a variety of stocks and bonds. Many of those funds are focused on certain industries and company sizes and growth potential.
Tips and Insights
I will preface my remarks with the fact that stock trading without a commission is a recent development. That is if you consider thirty years ago as recent, I know I do. One of the best-known promoters of this concept was Charles Schwab, who published a book, How to Be Your Own Stockbroker, in 1984. He suggested that you could learn enough about how the market works to protect your level of risk and find resources to measure the value and performance of various stocks and bonds.
Charles Schwab offered the following eight steps in Chapter 9,” The Best Little Stock Market School in the World”:
Step 1: Read the financial pages of your local newspaper every day. Of course, most of that information is online, today. Use paper money over a short period of time to follow a few stocks to get the feel of the market.
Step 2: Put your money on the line. Get your feet wet! Pool some money and set up an account with a brokerage service to buy actual stocks, starting with one or two. The number of shares will depend on the stock price and your pool of money to invest. Per Charles Schwab, “Play with optimism. Start modestly…Consider any small loss as a “tuition fee” in the good old S.O.H.K. (School of Hard Knocks).” So, invest with an amount you can afford to lose as your “tuition fee”!
Step3: Do even more financial reading of a national newspaper. He recommends The Wall Street Journal. He suggests reading the major events noted in the left-hand column on page one. Then, go to the last pages for charts and the previous day’s stock prices. Although, there is, now, an app for that.
Step 4: Do still more reading of select magazines. His favorites were Forbes and Money. However, Fortune, Business Week, and Barron’s are all good, as well. You should at least look for news articles related to the companies you chose to invest in and their industry news. These are all available for free in your local library.
Step 5: Yes, more reading of the key books on the market. He notes there are several older books that review the mindset you need to have when investing in the market. As of 1984, he recommended the following: Battle for Investment Survival, by George Loeb; The Dow Jones-Irwin Guide to Using the Wall Street Journal, by Michael J. Lehman; and Words of Wall Street: 2,000 Investment Terms Defined, by Allan H. Pessin and Joseph A. Ross. He advises reading books by actual traders, not just educators. There are, of course, many more recent books. Read the reviews and ask your research librarian how to access them.
Step 6: Now you may be ready to try a formal course somewhere. He suggests you do the reading and study on your own before taking a course or seeking an advisor. You want to be able to ask intelligent questions to avoid misguided advise. Don’t just read, get out and invest! He also suggests joining an investment club to get more experienced feedback.
Step 7: Consider subscribing to an investment advisory service. He says “consider” because he considers this step as “optional”. They can be expensive. My own experience included Motley Fool and Stansberry Research. You can gain some valuable insight when investing a lot of money. However, you may conclude that with less than $10,000 in the market your “School of Hard Knocks” may be less expensive.
Step 8: Take all advice with a grain of salt. Per Mr. Schwab, “In the final analysis, if you are going to be an independent investor, the decision has to be yours.” Especially be wary of stockbrokers who make money when you buy and sell. The market cycles with ups and downs. No one knows the real top or bottom expectations. Individual stocks are affected by industry events, like product launches, competition, and management. You can read about those related to your investments and come to your own conclusion about good or bad, to cause you to buy or sell.
Get Your MBA
I have a master’s in business administration. To be clear, that does not make me an expert. It did give me the tools to be able to research for answers and do some analysis with business data. However, with a lot of reading and personal study, you can learn to be able to do your own analysis to make better decisions than most when investing.
I will refer to this as your own MBA, Major in Business Acumen. Businesses are run by managers who make decisions to hopefully turn a profit. Another aspect to this, in publicly traded companies is that some decisions are made to drive the stock price up. One such decision is to “buy back stock”. That refers to reducing the number of shares being traded, to make them scarcer, which can make the value go up on the earnings-per-share.
I will review a few key ratios and calculations, which should be available when you look at your potential stock analysis:
Current Ratio: This is current assets over current debt, as in due in less than a year. A good asset position is 2 to 1, or higher, which means twice as many current assets (Cash, Accounts Receivable, Inventory, etc.) that can turn to cash to settle current debts. You want to invest in a company that can pay its bills on time!
Cashflow: This is very important. Look for how many sales days outstanding in their Accounts Receivable collection average. Some industries, like heavy machinery, have high prices and infrequent collections. Others are more liquid, meaning they are quick to collect on sales.
Debt to Equity: Equity is the accumulation of earnings, along with the initial investment to start the company. If a company is young and growing, the ratio may be high. An older established company that is profitable should have a much lower number, a fraction.
Sometimes you want to take a risk on a young and fast-growing company, like a tech company. However, that kind of investment needs a lot of information to reinforce your confidence. Management decisions, pending contracts, etc. can have a big impact in the future of the company and the stock price.
Earning per Share: This is a popular measure, but as I alluded to earlier, this can be manipulated by the board of directors with a stock buy-back. That said, it is a meaningful ratio for considering how profitable a company is and how likely it is to give a dividend.
Dividends per Share: Not all companies commit to a dividend, especially young companies with faster growth potential. They want to reinvest their profits to help produce products and increase sales. Older profitable companies can afford to issue dividends. It depends on how long you intend to hold the stock and how valuable you view the dividends to reinvest.
Volatility: This is a measure of how the stock price varies with changes in the market. It is a vote of confidence by the market. This can work in your favor if you are confident that the market is going up and the stock has good reviews. The higher the volatility the more you can make over a short period or the more you can lose if things go bad. Just a word of caution as this should be a low number if you are not a risk taker!
Take My Advice with a Grain of Salt
As I have said and Mr. Schwab has said, gather information and tips and insights. Then, think about it and make your own decisions with what you know. You will make mistakes. Learn from them. Go through the School of Hard Knocks to get your MBA, Major in Business Acumen!