The American consumer is bombarded with a bag of mixed messages about the U.S. economy. Experts from Reuters, Cramer, Fox News, MSNBC, and the like are tossing around bear markets, bull markets, economic upturn, market estimates, and bubbles (oh my!) making it a confusing place at best for the beginning online investor like you and me to really understand what is going on.
Regardless of all this interference, sticking to the basics of stock market investing and following Five Core Tenants, as outlined in my last article, even the most green of value investors can expect to retain more earning and take control of their investments.
As a beginning value investor, learning to ignore this noise and sticking with finding undervalued companies will be difficult and somewhat confusing.
The key factor to understand at this point, and as you continue to grow in your investing knowledge, is that as a beginning value investor is that you don’t have to beat the market. In fact, even those experts you hear on the television, or read on the internet, can’t even beat the market.
The truth is that the investing basics and the five tenants we discussed last article are all you really need to be successful in the market.
This blog is dedicated to those basics and Five Tenants, and are here to help your investments and retirements grow.
The Four Investing Basics Every Value Investor Should Know
Before we get into the four investing basics, let’s talk about some simple concept all investors should get to understand, and become friends with, – compounding. Albert Einstein said this about compound interest’ “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Understanding how compound interest can help you as an investor cannot be overstated. You need to take advantage of this concept in order to develop sustainable and continuing growth with your investments, which is a key factor in taking control of your retirement.
It is key that you start invest monthly into your investments. Everyone has bills and obligations, but most value investors can find as little as $50 a month to add to their investments.
Let’s take a look at how that $50 a month can benefit you as you invest. I have added multiple age groups to illustrate how powerful compound interest can be.
As you can see, if you start investing just $50 per month when you turn 20 will benefit you greatly! Even starting a mere ten years later can reduce your earnings by over 50 percent. Why leave that money on the table?
Value Investing Basics #1: Start Early
Everyone likes to spend money. Simple fact of a capitalist society like ours. I know from my own experience that when I get extra-money in, whether through coaching stipends or professional development checks, I have a strong urge to spend it on things that I have either been putting off until I have the money, or things I really want. Yet to be a true value investor, fighting that urge to spend everything you get is a key to investing for long term growth.
Just like we do with value investing and looking at Warren Buffett’s first two rules – the company must have vigilant leadership and the company must have long term prospects – the beginning value investor needs to do the same thing.
A vigilant value investor takes care of their debts by using the extra monies they get to pay down what we call as bad debt. Bad debt is any debt that might have high interest or restricts the value investor’s ability to contribute to their investments.
Not all debt is bad. There is good debt – things like low interest mortgage rates and the like. These actually help add to your overall assets and help build your credit as well.
I do caution those that spend all their monies paying down every debt to become completely debt free. Being debt free without having contributed to your investments is really just the same as having bad debt.
Value Investing Basics #2: Investing is about YOUR investment goals
As a value investor you need to understand that the vast majority of what you hear about the market is not designed to make you money. Instead, it is designed to get you to keep watching, subscribing, or spending your money on their services.
Most investing advice is about getting you to come back, day after day, to the television program or internet site. Why? The main reason is that your attention is worth billions in advertising. The prolonged exposure to their own advertisers and products allow them to continue doing what they do. If that means pitching new get rich schemes or a new hot stock they will do that…even if it loses you money over the long-run.
This is the part where too many investors fail to lay the proper foundation and groundwork for their investments. Being successful at investing should be all about YOU and what YOUR goals are. This is where you make your plan – and then stick to it.
That means to be successful you will need to have a financial plan, which will evolve over time, understanding risk tolerance, and which types of investments are best for your plan.
Value investors tend to focus on finding undervalued companies – great companies at a fair value. This means having to play by YOUR rules and not what someone else says you should do.
This all starts with creating a personal investment plan, laying out your short term (1 year), medium (5 year) and long term (over 10 years) goals and what it’s going to take to get A personal investment plan will be your map of the path to your goals by understanding the amount of risk you need to take along with the necessary amount of investments you need to take on.
Value Investing Basics #3: Stick to the Five Tenets
The key to being a solid and successful value investor is adhering to the Five Tenets, that we spoke of in the article, Investing or Speculating: The Education of a Beginning Online Investor.
The first key tenant, investing in companies that you understand, is the foundation for all value investing. It is difficult, at best, to invest in something you do not understand, and even harder to invest in something that you lack conviction for. Investing is hard work at times, and investing in the new hot tip or in a company that you don’t fully understand makes it even harder.
Value investing is based upon this core principle of understanding what you own, which then supports the process of valuing a company’s leadership, long-term investing prospects, and finding a company that is truly undervalued.
There are many investing tools out there for investors, but value investors need to focus on making sure that the company they are purchasing has an intrinsic value, or a value where the assets and true value are in alignment with each other. I know that sounds difficult, but grasping this idea firmly and using it to help guide your valuing process will pay off greatly in the future.
This final tenant is only calculated after all three of the previous tenants have been met. Intrinsic value is how and why value investing helps generate long term growth of their portfolio. This ability to value companies makes all the hard work worth it to a value investor.
A value investor only purchase ownership of a company after all four of these tenants have been met. Only then would they apply the fifth tenant.
The true test of a value investor is finding and holding companies that are not only undervalued, but also have the track record of producing progressive dividends as well. What this means for the value investor is that even in bear markets these companies may reduce their dividends temporarily, but rarely cut their dividends completely.
True progressive dividend companies have a history of many years with at least twelve to fifteen years as the bare minimum. The stronger progressive growth dividend companies will usually have shown consistent growing dividend payouts over a 25 years or more, so even have over 120 years.
The value of this approach cannot be underestimated. Having the discipline to reinvest the dividends (aka DRIP) only accelerates the growth potential for your portfolio.
A great place to locate information on this process is through the Sure Dividends website. On the Sure Dividends website, Ben Reynolds has an excellent resource to help value investors to locate companies that have had at least 25 years of progressive dividend growth, which the call the Dividend Aristocrats, or a minimum of 50 years of progressive dividends, which is referred to as the Dividend Kings.
Like any source of information, they value investor will still need to do their due diligence on these companies to see if they meet all four of Warren Buffett’s Four Tenants.
Value Investing Basics #4: Don’t borrow money to play the market
This goes without saying, but to borrow money to play the stock market, even for a sure bet, is not what value investors do. In fact, it runs contrary to the values of a value investor.
The goals behind building a strong portfolio is to help the value investor withstand economic or financial setbacks in the future, as well as help them have enough in their retirement years to live comfortably.
Also, looking back on history (I teach US History), the Great Depression was set up by too many people speculating on the stock market and buying on margin – basically borrowing money to play the market. We all know how that went.
How Value Investing Helps Your Retirement Savings
Each value investor needs to take stock of their own situation, since each value investor has their own circumstances, income, risk tolerance, and education levels to consider. The value investing approach is not for everyone, but everyone can learn from this approach.
As an educator, the benefits of value investing far outweigh the downsides. Most states have severe issues with their state pensions, and those that are doing well (and that is but a small handful) are under stress as their teaching force starts to retire. It is not enough to just hope that your state is doing enough for you and your retirement funds. It is up to you to take control of your finances, and retirement, and look to find paths to help strengthen your retirement income. Value investing is that way to do that.
Value investing will help you minimize your potential losses will increase your return on your investment through finding great companies at a fair value. When coupled with the concept of progressive dividend growth, you have a winning combination.
I am not a broker, a certified financial planner, an investment adviser or the like. I am just an educator that is self-educating himself in the world of value investing and is willing to share some insight, tools, and information on different ideas about investing and retirement. The information here is purely educational and is but one way of looking at investing.
My opinions are based on sources and information I consider reliable, but I do not warrant their completeness or accuracy, and it should not be relied upon as such. The statements and opinions on this site are subject to change without notice.