Andrew Sather is our friend from Investing for Beginners who specializes in avoiding value traps and risky stocks. His model portfolio, which is posted monthly on his website, has earned an average return of 16.3% on every position. Andrew is a self-taught investor who draws from Benjamin Graham and Warren Buffet. He emphasizes the importance of just getting started.
My name is Andrew Sather from Investing for Beginners and I’m on a mission to decode Wall Street for beginners. I can’t do this on my own, so I reached out to top experts in the field, and picked their brains for 20 minutes each.
The results are fantastic. I took each interview and organized them into one convenient place. The latest post features your very own Ryan Hops from Wall Street Survivor. The concepts we discuss and the ideas we share are extremely useful for the average investor. I hope this Wall Street for dummies guide helps you decode Wall Street so you can profit from your investments.
Here’s a recap of each and every interview, highlighting the best lessons and ideas.
Lower Risk by Avoiding Bubble Stocks
The market ebbs and flows like the tide. It can be up some years, and down others. But sometimes, the market is known to form bubbles that inevitably crash. A good investor knows how to avoid bubble stocks, as those tend to lose the most money in a crisis.
Ken Faulkenberry from Arbor Investment Planner talks about how to avoid bubble stocks in our interview. He gives a fantastic example of buying shares of Microsoft during the market peak of 2007. At the time, the software giant’s stock blew up from insane valuations and reached a market capitalization of $500 billion. Since then, the stock plummeted and has never recovered. That’s the danger of bubble stocks; they eventually pop.
An essential lesson for beginners is to minimize how much money you lose rather than maximize how much money you gain. Warren Buffett put it perfectly when he said, “Rule number one is to not lose money. Rule number two is don’t forget rule number one.”
The more you can minimize your downside risk, the greater your chances will be to build wealth. A low risk and long term strategy is superior to a short-term strategy that relies on hot streaks. It’s like the tortoise and the hare.
With that being said, you can also minimize risk with diversification. As I discussed with David Thomas from Shares and Stock Markets, the positive effects of diversification mostly diminish after 25 stocks or more. David elaborates on the importance of diversification, along with his own investment strategy, in an extraordinary way.
Valuing Companies and Long Term Investing
Once these potential dangers are out of the way, when you are properly diversified and avoiding bubble stocks, it’s important to learn how to value a company. Because when you learn the value of a business, you can learn whether you are paying the right price.
However, a mistake that investors make is focusing heavily on price, which leads them into buying bad companies that are cheap.
Buying value stocks instead of cheap stocks is a concept that I discuss with Jae Jun from Old School Value. Jae has plenty of stock market experience and annualized returns of around 20%, and has spent a lot of time thinking about his strategy for Wall Street. He’s mastered the balance between the art and science of investing, and our conversation was truly fascinating.
The importance of a long-term mindset cannot be overstated. In a world filled with up to the minute tickers and stock market updates, it can be easy to be caught up in the game of Wall Street.
However, prudent investors know better. They understand basic concepts like long term investing and compound interest. Miranda Marquit from Planting Money Seeds and I talk about it extensively in our interview together. She shares a few interesting examples of how investors can combine a little bit of money and a lot of time to make a spectacular result.
You might have heard the expression “cash is king”, and it’s especially true on Wall Street. The best stocks are companies who continue to ooze gobs of cash every single year. These companies have more cash to return to shareholders in the form of dividends, and also reinvest for the growing of the business.
A fantastic way to find these kinds of companies is by using the discounted cash flow model, or DCF. Basically this model calculates the intrinsic value of a business, and by comparing this value with the market capitalization of a company, you can determine whether the stock is trading at a favorable price. The better the price, the more cash you have available to you as a shareholder.
This type of model is widely used, from determining the valuation of a start-up company, to assessing real estate investments, to picking stocks. My interview with Nick Kraakman from Value Spreadsheet dives into the specifics of DCF and how you can use it to be successful.
Advice from the Financial Planner Community
As important as stock market strategies are, none of it becomes helpful if you don’t have extra income to invest. I discovered through my interviews with Eric Roberge from Beyond Your Hammock, Kate Holmes from Belmore Financial, and Matt Becker from Mom and Dad Money some unique techniques and ideas about creating personal wealth.
Eric shares his ideas for looking at retirement differently and making financial decisions to both enjoy the present and plan for the future. For example, instead of rushing to buy a home and following the expected career path, Eric advocates discovering what you love and doing that now.
Kate has unique and interesting advice for Millenials, as many of her clients are in that age group and she sees them more as friends than clients. Kate recommends choosing a Roth 401k over a Traditional 401k to save on taxes for decades and stresses the importance of focusing on only the intersection of what you can control and what matters. Instead of fretting about what the market is going to do, just focus on controlling your expenses and making smart investments. An approach like this would allow you more freedom to concentrate on things that will create more success in your life.
Matt shares his powerful technique to unlocking more cash flow by using the un-budgeting technique, where he puts money towards his saving goals first and then pays bills later. This can be a fantastic way to invest in yourself while putting your finances on autopilot.
The Importance of Fundamental Analysis
Finally, we have the fascinating interview with Ryan Hops from Wall Street Survivor. Our topics range from the mindset of buying stocks as part ownership in a business to the advantage of investing in what you know and industries you understand. I really enjoyed our back and forth, and people can get value from our conversation.
Mastering fundamental analysis is crucial to learning about investing because it provides you a greater likelihood of finding the best performing stocks in the market. Once you can discover the difference between great companies in thriving industries and poorer, underachieving companies, you stand a better chance at beating the market and earning superior returns.
Both Ryan and I talk about this in our conversation and on our websites. We found that to achieve the best result, you must research as much as you can. Even if you can’t master fundamental analysis right away, you learn quicker the more you research. Like Ryan’s negative experience where he lost all of his money on naked options, a mistake can teach you a valuable lesson and make you a better investor overall. You will improve and grow even more when you are actively researching and educating yourself.
I hope this extensive Wall Street for dummies guide provides you a ton of value. A big thank you to Ryan and the rest of the Wall Street Survivor team for giving me the opportunity to share this guide with you. For an even deeper look at how to formulate your investment strategy, check out my free eBook: 7 Steps to Understanding the Stock Market.
Now it’s your turn
What did you think of this investment advice? Are you going to be trying any of these techniques? Let us know in the comments.