How To Become A Successful Investor-Part Two

 

As a thirty-year veteran of the market I am astounded by the mystique that surrounds stock investing.  Many very smart people I meet believe that the stock market is too complicated for them to understand or, worse, entirely random.  Neither is true.

When an investor buys one share of a company’s stock he or she is buying the commensurate portion of that company’s earnings.  That is measured by the price-earnings ratio or the p/e.  The price-earnings ratio measures how much an investor is paying for company earnings.  Generally speaking the lower the p/e the cheaper the stock.  Over the long-term p/e is a meaningful and helpful determinate for investors to assess whether a stock is cheap or dear.  Investors are often willing to pay a higher p/e for companies with strong earnings growth and less for companies they believe will generate slower earnings growth.

Great companies demonstrate a persistent tendency to perform over the long-term. Take for example two tech powerhouse’s: Google (GOOG) and Apple (AAPL).  The hyperlink takes us to a chart comparing the two stocks over the most recent one-year period. GOOG sports a p/e of  22.9X trailing twelve month earnings; for AAPL the p/e is 9.6x.  Investors have rewarded GOOG for what they believe to be a stronger earnings future.  Consequently the p/e has risen as the stock has outperformed the market and AAPL.

Looking over a longer term period beginning in August of 2004 when GOOG became a public company we see that compared to AAPL, GOOG has performed well but underperformed AAPL.  Both are great companies.  The difference?  Wall Street expectations for earnings growth during the periods measured has changed.  Still you would have been well-served with either company.  Or both.

Buying great companies pays off over the long term but if that task seems too daunting consider buying an exchange traded fund (ETF) that tracks the S&P 500.  Over the last approximately fifty years, despite a number of devastating bear markets, simply owning the S&P 500 index would have generated a return of approximately 1600% .

But you don’t need fifty years to generate excess returns.  Remember the study I cited in my first post.  According to Wharton professor Jeremy Siegel since 1871 the stock market has generated an average return of 9.4% for every rolling twenty-year period.

Take a look at Vanguard’s VOO for a low cost ETF that tracks the S&P 500. That may just be a great place to start.  Provided you are willing to take a reasonably long-term view.

Patience is Perspective

 “Even if you’re on the right track, you’ll get run over if you just sit there.”

Will Rogers

 

One of the reasons individual investors abandon the stock market is because they fear they can’t compete with the Wall Street pros.  And, generally that is true.  We can’t compete with them on day to day or intraday trading.  They are setting up the game and driving the narrative.  They are in the middle of the action and we are home with a computer and a TV and dinner in the over.  I’ll happily concede the day trading to the pros.  I would rather follow a civilized and proven strategy of investing for the long term.

That is not to say that long-term investing is easy.  It is not.  Often we are buying in the face of market sell-offs and the talking heads are predicting that it is different this time.  That what’s worked in the past, will work no longer.

In my thirty-plus years of investing in and watching market trends, I have found that employing common sense and patient discipline are the primary factors to success as an investor.  Following the trends is a dangerous game–you must be incredibly agile or you may just get run over.

So, begin by watching the stocks you are interested in.  Observe how they perform in up and down markets.  And while you’re on the sidelines you’ll learn a great deal about how the game is played, be more likely to see the train coming.  Patience lends perspective and provides cover from the speculators.  By watching and learning you will become a better investor when you finally do decide to jump on the stock market locomotive.

 

 

 

Intelligent Woman’s Investing Rule #2: Know What You Know

The volatility of investor sentiment is one of the reasons people are afraid of the stock market.   I understand that.  Irrational behavior is scary.  That is why one of my tried and true investment tenets is:  Know What You Know and Know What You Don’t Know.

As you dip your toe into investing, you will learn that most people have an opinion on the stock market.   Almost everyone you meet will tell you they sold all their stocks before the last market crash or their broker got them into the latest growth darling at the ground floor.  I often wonder if that were so why their broker is the one driving the big Mercedes?  Investors like Dr. House’s patients often lie.

It would be folly to chase their tips or follow their advice.  You have no business buying companies you know nothing about.  That is irrational.

Know what you know.  And know what you don’t know.  Buy the companies you understand.  Not what your neighbor is buying.  Hold to that one tenet and you will keep yourself from zigging when you should zag.  And, from buying at the top or selling at the bottom.  Smart, long-term investing is about making informed decisions and then staying the course, not chasing the next great growth company.  It is about buying companies you know and understand at a good value and letting the company managements do all the heavy lifting of growing and managing the company while you tend to raising your kids or running your household.

Good investing means that when you are aware of what you don’t know, you steer clear.  And when you know what you know you have the courage to invest.  These are the topics we will discuss in THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING.  Stay tuned and follow my blog at  nancy.tengler.com/

Women and Finance

According to Wilmington Trust’s Kathryn Karlic (and reported in this week’s Barron’s Magazine, women direct consumer and business spending of $7 trillion and are ranked first in spending clout in the United States. Consider that $7 trillion is on par with the entire output of China. And yet, women still shy away from investing.

My upcoming book: THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING will provide strategy and build knowledge for women investors.

Investing for the Long Term in a Twitter World

No one is more seduced by instant gratification than I am. Perhaps, that is why I love the stock market. Each day I receive a report card. That said, after thirty something years of investing in and observing the market, I also understand and appreciate the necessity of the passage of time for the growth of my investments.

If investors keep in mind that over the long term (and by that I mean since the early 20th century) the stock market has returned between eight to nine percent per year–  including every bear market–then we stand a better chance of maintaining perspective.

Often at exactly the moment we should be committing capital to the stock market, the bad news is overwhelming. We want to sit on the sidelines until things settle down. BUT, if we can adjust our focus to the long-term–say ten to twenty years–then we will have the courage to step up and buy high-quality stocks when they are cheap.

I outline this proven strategy in great detail in my upcoming book, THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING.

Stay tuned.

More From Chapter One of THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING

In September, 1988 I made two noteworthy and illustrative investment decisions.  

When our first child was born I purchased one share of IBM stock.  It was a symbolic action really.  I thought it would be fun to hang the certificate on his wall and use it as an object lesson to teach him about things economic.  Before I could get the share framed, I misplaced it and so the lesson was, for the most, part lost.  But I correctly left the investment alone and each quarter the dividend paid by the company was reinvested in an incremental share of IBM stock.  Twenty-four years later, that approximately $100 investment has returned 1020% or 10.6% per year.   During that period there have been two colossally devastating bear markets that frightened investors mistakenly into cash all the while our little share of IBM plumped and expanded like bread dough.  Though market corrections punched down the dough a few times, fueled by the yeast of earnings (which produce stock price growth and dividend payments) our value has grown at a pace far exceeding the rate of inflation and the return on savings or money market accounts.  For all of you stock market skeptics, it is also important to note that the return on the S&P 500 over that same period is a respectable 797% or 9.9% per year.  Simply investing in the stock market index produces enviable returns as well.  The chart looks equally compelling over ten, twenty and twenty five years.  I chose the time period featured below because it represents my actual experience.  But, time matters to investors; even if your timing is not perfect and you purchase shares before a market correction or a prolonged period of unimpressive returns (as I did, note IBM’s modest appreciation for the first ten years) over an extended period you will be asking yourself only one question:  Why didn’t I buy more?  Today, that one hundred dollar share of IBM is worth over $1,300.00.

 

Contrast that investment to another I made at the same time.  Two weeks after my son was born I was scheduled to make a presentation to Federal Express at their offices in Memphis, Tennessee.   None of my business suits fit and I was not going to be caught dead in a maternity outfit after the fact.  Especially the maternity clothes available to working women in the late 1980’s (but that is a story for a different book).  I rushed to the mall  and bought almost the first thing I found: a knee-length cashmere sweater that draped discreetly over the extra pounds and looked remarkably professional.  I wasn’t looking for cashmere and had no idea of the expense or the impracticality.  All I cared about was that it fit. I signed the receipt without looking, dashed back home and packed for the trip.  Dressing for the big event the following afternoon,  when I removed the tag, I saw the price for the first time: $1099.00.  One thousand ninety-nine dollars!  I was due in the hotel lobby in fifteen minutes.  

I still have the sweater.  It is wrinkled and bally as only cashmere can be and sports a few moth holes.  I obviously don’t wear it anymore, but I keep it as a reminder.  Had I invested that $1,099.00 in, say, IBM stock as I did for my son,  my investment would be worth $11,430.00 today.  Instead of a ragged and useless old sweater I would have a nice little nest egg set aside.      

 

It is important to understand that there was a real cost a real and an opportunity cost of my perilous sweater purchase.  To calculate the true cost of that poor choice I would have to consider the dollar amount spent ($1099.00), plus tax of approximately $80.00 and credit card interest of close to $220.00–I didn’t have the heart nor the means to pay it off at once–and the opportunity cost.   Think of opportunity cost in dating parlance as the one who got away.  It is the cost of not doing something or at the very least not doing the right thing.  When compared to the investment in IBM I might have made, the opportunity cost of my decision to purchase the sweater was $11,430.00 in foregone appreciation, added to the real cost of the sweater for a total cost of $12, 829.00.  That foolish and impulsive decision still echos. 

 

Why Women Make Great Investors

FROM CHAPTER ONE OF THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING.

This book is for those of you who may just be embarking on a career and have the luxury of a long time horizon to build and nourish an investment portfolio; for those with young families and big dreams;  for women who are on their own and intend to keep it that way or are simply farther down the road with fewer years to save and invest for children and grandchildren.  This book is for those of you who are consumed by the pace of your very busy lives (and who isn’t?) yet know deep down that saving and investing is something you should be doing though the task seems so massively imposing that you quickly dismiss the idea (if you ever let it percolate into your consciousness in the first place).  Like Scarlett O’Hara you can worry about that tomorrow.  Except suddenly it is tomorrow and the kids are going off to college with a backpack full of loans and you are puzzling over how you are going to manage to retire, if at all.

Consider these pages as your antidote to the financial market mystique propagated by experts and pundits.  Think of this tome as your investing de-coder ring.  The strong cup of hot tea that clears the fog of an overcast and chilly morning.  My commitment to you is this:  by reading this book you will gain the knowledge necessary to navigate the noise of the market and select the stocks of high quality companies for long-term appreciation.  You will learn investing is a dynamic process of growth.  Like a garden, it requires only that we tend to it with care; that we water and fertilize the soil, that we pull the weeds and prune back the luscious growth to allow for new blossoms.  In short, the gardener must acquire and plant and oversee the garden, the natural environment and time provide the rest.

Investing is not without peril and I do not intend to paint a naive or too-rosy picture.  There will be storms and short-term losses.  It is an inevitable and necessary part of the process.  Just as a forest fire clears the clutter from the forest for the healthier growth to emerge, so market corrections ultimately stabilize and poise the stocks of great companies for further growth. Once weathered and understood, these concepts will provide muscle memory to your investment muscles; these trials will allow you to develop confidence.  You will instinctively know when to hold back and when to add to your holdings.  When to retreat and when to hold firm.

Together we will build knowledge, hone your skills, develop an investment strategy and execute it with discipline.