On our first ever edition of Finance Fridays, we’re going to tackle investing. You’ve probably heard over and over that you should start getting into the stock market. Most of you have some sort of 401k or mutual fund, and you let others do the stock picking for you.
But what if you want to get into the market yourself? Many of us, with technology and education at our fingertips, want to take a shot at investing and see if we can beat the market or at least build some wealth on your own.
But where to start? It’s difficult to know what the best strategy to follow is. I’ll admit, I have no idea what the best strategy is. I have my own ideas, but I’m no expert – and I need to make that clear. I am not an expert, I’m merely providing recommendations based on what I’ve seen and what true experts recommend. Take all of my advice with a grain of salt.
What Makes a Stock Good for Beginners?
The most important thing you’ll want for a beginning investor is a stock that can achieve consistent, sustainable growth, and will not collapse during the investment’s lifetime. Essentially, you want something with lasting power. If you’re looking for a children’s story metaphor – which, aren’t we all? – you want the tortoise and not the hare.
It’s always exciting to go after the flashy, newcomer stock that may explode or the innovators who are in the process of making major capital gains. But typically, these are so volatile that they either won’t stick around for long, and you’ll lose your investment, or they are already approaching the peak of their explosive growth, and you won’t receive the gains that made them so attractive in the first place.
There are a few things to look out for when investing initially. These factors typically mean a stock has staying power, even if it’s not making major leaps and bounds in stock price.
Network Adoption is essentially how more users protects a company against disruption. As a company such as, say, Coca Cola, gains more users, it maintains a strong market share and continues to profit consistently. Even with the introduction of competitive products, or market shifts towards different drinks, Coca Cola has a large network of adoption, which insulates the company from change.
Cost Advantages are areas where a company has a significantly better cost structure in one area than another company. For example, McDonald’s spread means that it can afford much better equipment at the same price than other companies, and Amazon has such a widespread distribution and logistics system that they have a competitive advantage for transportation.
Sometimes there are things that are difficult to quantify that make a company more competitive. A great example is Blackberry, which holds a lot of original patents on smart technology and cellular devices. While Blackberry devices are no longer the norm by a wide margin, the company maintains solid value because of these assets.
5 Stocks to Invest in as a Beginner
Like we mentioned before, Amazon has some serious competitive advantages. The company has diversified and incorporated itself into numerous marketplaces, and its distribution network gives it some serious cost benefits. If anyone thinks Amazon doesn’t have staying power, I’d be very surprised.
Berkshire Hathaway is Warren Buffett’s investment company. Many of the stocks in this company’s portfolio were hand selected by Buffett. I doubt I need to say any more, but it should be noted that it has consistently beat the market, and Buffet built the portfolio around companies with strong competitive advantages.
Coca-Cola is one of Warren Buffett’s most famous investments. He earns more annually from his stock in Coca-Cola than the CEO of the company himself earns in salary. Coca-Cola has been around for well over a century, and is one of the longest lasting stocks in most people’s portfolios.
AT&T is one of the major telecommunications giants, which already establishes it as one of the most solid investment choices. However, what has made AT&T more attractive to investors is its ability to diversify and maintain flexibility in the changing tides of the marketplace. AT&T increased its overall value with acquisitions of several media providers like DirecTV.
The medical sector is obviously one of the most vital sectors in the world. Health is always an important topic, and there will always be people in need of medical assistance. Robotics, on the other hand, is one of the new and burgeoning industries that will disrupt the world as we know it. Intuitive Surgical is the combination of both – being the sector leader in medical automation technology, making this stock one to buy and hold.
Numbers to Know When Investing
There are some important numbers to look at when you’re building your investment portfolio. These five companies are great benchmarks, and you can use them to compare against when inspecting other companies.
The Price to Earnings ratio is the most commonly used value in investing. It is the share price divided by the past 12-months earnings of a company. This is a great metric to compare similar companies. You want, typically, a lower P/E ratio.
The PEG Ratio is an extension of the P/E Ratio which takes into account the future projected growth of the company. Obviously, that number isn’t set in stone, but you can estimate it with past growth as well. This ratio is the P/E ratio divided by projected growth. You want this ratio to by low as well, because you want a low P/E ratio divided by a high projected growth rate.
The Payout Ratio is a value for dividend investors to understand the percentage of earnings that are paid out in dividends, which are scheduled payments to shareholders. It is found by dividing the dividend per share by the earnings per share.
There are so many things to consider when investing, it can get overwhelming. It’s best to have a plan in mind and a few stocks you can rely on to start your journey. As you get more involved in the investing process, you’ll learn more about the different numbers and types of stocks.
Be careful and wise in your selection process, but most importantly, remember that stock investing is a long term process, not a get rich quick scheme.