Copyright 2016 Mario V. Farina
Shakespir Edition, License Notes
All Rights Reserved
No part of this book may be reproduced or transmitted in any form or by any means,
Electronic or mechanical, including photocopying, recording or by any information
Storage and retrieval system, without prior written permission of the author.
Correspondence may be directed to:
Mario V. Farina
Email: [email protected]
These are 14 articles about stock investing. This is not a complete manual about investing in stocks, but it should allow you to get started if you want to begin. At the back of the book, there are ten stocks that the author suggests as candidates for the first purchase for new stock investors.
The titles of the articles are as follows:
1 What Are Stocks
2 Fundamentals of Stock Investing
3 How Can You Gain With Stocks
4 Money Makes Money, The Power of Compounding
5 What Is The Stock Market
6 The Stock/Ticker Symbol
7 What Does A Company Do With Earnings
8 What Are Dividends
9 The Price/Earnings Ratio
10 The Bid And Asked Prices
11 What Is Your Goal
12 Where is the Money Coming From
13 What is a Stock’s Fundamental Worth
14 Your First Purchase
Some Stocks You Might Start With:
In order to invest in stocks, you need to have a clear idea of what stocks are. If you already know, you can skip this chapter.
First, you need to know what a corporation or a company is. (In this book I’ll use the terms corporation and company interchangeably.) A corporation is an organization devoted to the purpose of making money. When a corporation is formed, it is required that it have owners. A corporation could be owned by only one person or it could be owned by millions.
Those who start a new corporation or company may decide to allow persons and organizations to purchase part ownership in the company. The smallest part of a company that can be owned is a unit called a share, or a share of stock. Individuals and organizations can purchase more than one share if they wish. They can purchase fifty, one hundred, five hundred, one thousand shares, or more. After the shares have been issued and purchased, those who own shares are known as shareholders or stockholders of the company. The larger the number of shares that any one owner has, the larger that individual’s ownership of the company.
Stocks, therefore, represent ownership in a corporation or company. By law, a corporation is defined as an artificial person. The corporation must have a name and owners. Its major objective is to make money for its owners. There are millions of corporations in this country. You know some of their names very well: General Motors, IBM, Intel, Microsoft, Kodak, General Electric, Ford, Kellogg’s, and many more. These companies, and others, are owned by many thousands or millions of persons and/or organizations.
Many corporations are called public companies. This means that those companies can be owned by the general public. Not all corporations are public companies. What this means is that many corporations are owned by only a few people; members of a family, for example. These companies are said to be privately owned. The shares of privately owned companies are not available to the public. In this book, we’ll discuss the purchasing of stocks of public companies only.
As I’ve already said, the primary purpose of a corporation is to make money. It is intended that the money a company makes will be shared by its owners in the same proportion that they own the shares. At the end of a business year, the officers of corporations make determinations as to whether or not the companies were successful in making money. If yes, the money they made is called its profit or its earnings. The officials elected to run companies may or may not decide to share some of these earnings with their owners on a regular basis. I’ll have more to say on this option in a later document called, What Does A Company Do With Earnings? and in, What Are Dividends?
Often a company will not have earnings to report. It may have been unsuccessful in its endeavor to make a profit. It will, therefore, report a loss. Losses are not unusual. Not all companies report profits at the end of the year. In this book we will be primarily concerned with companies that report profits at year ends. We are not interested in corporations that report losses.
You, as an individual, can own stock in corporations. When you own stock in a corporation, you are part owner of the company. It may be a very small part; nevertheless, you are a part owner. You’ll be entitled to a portion of the good fortunes of the company if it does well. If it doesn’t do well, you stand to lose a portion of the money you invested in the company. (When a company reports a loss, the stock that the company issued, usually goes down.)
Let’s say that when a company was first formed, it issued 1,000 shares of stock, each share representing 1/1000 ownership of the company. Let’s assume, also, that all the shares were sold to twenty persons. Now, the more the shares that any one person owns, the greater is his or her ownership of the company. In real life, corporations issue a great many more than one thousand shares. They may issue several million or even several hundred million. Also, there would be far more than twenty owners. The number of owners could range into the millions. A new stock offering to the public is called an IPO, Initial Public Offering. IPO’s are very exciting with the investment public.
Stock can be owned by individuals, banks, other companies, pension managers, etc. The ownership of stock can be transferred from one person or organization to another. When
individuals or organizations want to purchase or sell stock, they do not deal directly with companies. They purchase or sell at a place called the stock market. At the stock market, the transfer of ownership of stock can be accomplished within seconds.
The companies that issued the stock will still be involved, however. The role they play after issuing the stock is in record keeping, paying dividends, conducting elections of officers, etc.
Companies issue various types of stock. The differences are technical and need not concern us at this time. The best known of the types is called common stocks. This is the only type of stock I discuss in this book. This is the type that everyone assumes is meant when the word, stocks, is used.
In the vernacular of the stock market, the safest stocks are called blue-chip stocks ; the worst are called dogs. In this book, I encourage investing in blue-chips only. (In this book, I use the terms, blue-chip and growth company interchangeably.)
How can you tell the difference between blue-chip stocks and dogs. I hope I give you enough information in this series of lessons that will enable you to learn, at least, a little of how to do this. At the back of the book, I give the names of, what I believe, are blue-chip stocks. These are not the only blue-chips. There are a thousands upon thousands of them. In this book I give you rules for how to spot them!
Most people in the United States do not own stocks. Yes, a good proportion of the population own Mutual Funds, but I’m talking about stocks of individual companies like General Mills, IBM, and Caterpillar. A good number of persons indirectly own stocks through IRAs and other retirement plans. It’s my opinion, as a stock investor of over sixty years, that when you own stocks in a form other than for individual companies, you’re not getting the full benefit of owning stocks!
Owning stocks as an investment should be, at least, one of the investment forms used by individuals and families. It’s my opinion that owning stocks is one of the first three best forms of investing for the long term, especially for major reasons like planning for retirement, purchasing a home, paying for a child’s college education, and similar purposes.
I suggest that you join the millions of stock investors in this country who already know and believe what I’m saying here, that you need to invest in stocks for the long term. Rich people own stocks! There are no barriers that keep you from doing the same thing.
This book will help you get started in a long-term investment program in stocks for your retirement and/or other major purposes. It’s not a big book. it doesn’t have to be. If you have never purchased stocks for investment, you’ll find that it’s much easier than you might have thought. The basics are very simple. You can read this Introductory book in only a few minutes. This may turn out to be the most important reading you’ve done in a long time. The plan of the book simple. Read each book carefully. You’ll find the material is easy to understand. Continue with the additional titles coming up until you have finished all of them. All the upcoming titles will be free. At that time you’ll be prepared to make our first and subsequent purchases.
A plus in this book is a short list of stocks in the Appendix that you might want to begin with. These are the very best, most solid, most likely to succeed, stocks that I can recommend at the time of this writing. I personally own several of the stocks in the list. These are not the only good stocks that exist! You can find many others that are just as good! But please read this book first!
A word about myself: I have been investing in the stock market for over 50 years and wrote my first book on this topic in 1968. I’d like to share with you what I have learned over the years about successful investing. (I’m 93, as I write this, a veteran of WWII. I’ve never been sorry for making stocks my major form of investment.)
There will be nothing in future titles that will suggest how to get rich quick. The advice I offer will be conservative and require long-term commitment. I am not and have never worked as a broker representative. I insist that before you take any suggestions I might make, you discuss this with a financial adviser of your own.
I believe that investing in stocks for the long term is the ideal way of investing for you’re the long term. But why stocks? Why not art, bonds, wine, gold, jewelry, antique cars, mutual funds, real-estate, etc? Aren’t there many ways that people can become financially secure besides investing in stocks? Yes, there are, but I believe that investing in stocks is the best means of building wealth over the long term. I offer these reasons:
1. It’s easy to begin. You don’t need to know a great deal about stocks in order to start. You must, however, understand that investing in stocks for retirement is not a game. It’s serious business. You need to know the absolute essentials so that you can develop a successful investment program.
2. Investing in stocks is like running a business, but it’s much easier. There is no inventory to worry about. When you open an account with a brokerage house, the brokerage will hold and safeguard your stock/s at no cost.
3. It’s easy to get in and out of stocks. If you make a mistake, you can change course quickly. Yes, there may be losses when you do this, but those losses are as nothing when compared to what they could be with other investments.
4. Stocks pay dividends. That is, while you’re waiting for your investments to grow in value, you can be receiving income in the form of dividend checks every three months. You can do whatever you please with this money. You can reinvest it, as I recommend, or you can spend it. Other forms of investment may not offer this benefit.
5. You always know how your investments are doing. You can get daily reports from radio, television, newspapers, and your personal computer. If everything is going as planned, there is nothing for you to do. If there are storm clouds on the horizon, you’ll be able to see them early and make the proper adjustments.
6. Investing in stocks is a tried and true form of successful investing. It has been used by individuals and organizations for hundreds of years. While the future is uncertain for many things we take for granted, we can depend on having stocks around as an investment vehicle for a very long time.
7. There is new money coming into the stock market every day from many sources. Some sources are financial institutions, pension funds, mutual funds, and the general public. This continuous influx of additional money tends to push stock values higher.
8. You enjoy the benefit of having excellent managers running the companies you invest in. These skilled professionals have powerful motivations to ensure that their companies prosper. When their companies prosper, you do too. You are part owner of those companies.
9. Stocks have a long history of having done well over the long term. While past performance is no guarantee of success, I believe in the old adage that nothing succeeds like success. People have been doing well in stocks for a very long time. You can too.
In summary, investing in stocks is simple and effective. Stocks work for you while you’re at your job, commuting to and from work, eating lunch, taking a walk, going to the movies, playing golf, watching TV, even while sleeping. There are no employees to manage; letters to write, forms to fill out. When you own stocks, you are part owner of one or more large companies. Talented people are running those businesses for you and you’re sharing in the profits. Yes, there are a few things you must do; for example, studying, researching, and being vigilant. I’m sure you wouldn’t mind doing a little of that.
When you own stock in a good company, you’ll usually receive
a periodic check called a dividend. The amount may be small
compared to what you paid for the stock. The amount may
represent only one or two percent of the cost of the stock. If
the company continued paying this amount indefinitely, the
value of your investment in its stock would not grow very fast.
Fortunately, the amounts that good companies pay out in
dividends tend to increase. You may have paid a relatively
high price for a good stock, and the dividend amount may, at
first, have been very small. However, with increases in
dividends over the years, you may find that the initial price you
paid for the stock was a bargain.
One way you gain by investing in the stock of a good
company, is that, over the years, its dividend grows. There
may actually be a future time when you’ll be receiving your
original investment back in full with each dividend payment!
There is another aspect to owning stock that can be even
more profitable for you. This is through appreciation.
Appreciation means that the price of the stock increases over
the long term. It is normal for the price of a good stock to
increase in value over the years. With increases in its
earnings, with increases in its dividend, the stock attracts
investors. When this happens, its price goes up. When the
price of the stock goes up, the value of your investment
increases. This is the second way you can gain with good stocks.
In summary, by investing in good stocks, you gain in two ways.
First, the dividends that the company pays tend to increase
Over the years. While the amounts may be small at first based
on what you paid for the stock, the amounts will tend to
increase significantly with the passage of time. Second, the
prices of good stocks tend to increase over the years. A stock
that doubles in value every few years increases its value
dramatically over that period of time.
This chapter is important because it tells you something that is not understood by many people. This has to do with the power of compounding. Compounding means that when you invest, you add any income from an investment to the amount you originally started with. By doing this, the value of your investment will grow faster because, not only will the original investment grow, but also the amounts you add. It may not sound like a big thing. It may not seem that compounding could make much difference. But it does! When you compound an investment for a long period of time, the results can be astonishing.
Ben Franklin wisely said : “Money makes money, and the money that money makes, makes more money. This is what compounding is all about!
Let’s consider an example. Let’s assume you have $1,000.00 that you’d like to invest. Perhaps you can find a safe place to put the money where you receive a six percent return. From this investment, you’ll receive a check for $60.00 at the end of the year. But what do you do with the money? Do you spend it, or do you invest it? If you spend the money, it will stop benefiting you, but if you add it to your original investment, that money will begin working for you. Now, you’ll have two amounts working for you; the original investment and the additional $60.00. That is, your investment for the second year will be $1060.00. Your check at the end of the year will be more than it was at the end of the first year. If you keep doing this with all the additional checks you receive, your total investment will grow significantly faster than if you merely let the original investment run. You can see that when you invest for retirement, your best strategy is to reinvest your yearly earnings; that is, to compound your investment.
How effective is compounding? With compounding at a rate of eight percent your investment will double in about nine years. It would take about twelve years without compounding. At a rate of twelve percent, your investment will double in about six years. It would take about eight years without compounding. At a rate of fifteen percent, your investment will double in about four years. It would take about seven years without compounding. These are impressive numbers. With a redoubling of your investment, and a redoubling after that, the figures are even more impressive. When you invest in stocks, compounding works the same way as cash does. Select stocks that grow in value each year and let them ride for the long term. Add any dividends you receive to your investment. Add additional amounts at regular intervals.
The three most important components of your investment plan for retirement are (1 ) invest only in the very best stocks that grow in value at a good rate, (2) hold on to those stocks for the long term allowing the power of compounding to work for you. And (3) add to your investment regularly.
The Stock Market is a place where people can buy and sell stocks. There are many stock markets in this country and throughout the world. The best known stock market in the world is the New York Stock Exchange on Wall Street in New York City.
The stock market provides a place where auctions are conducted concerning the sales and purchases of stocks. During the hours that the stock market is open, the prices of stocks change moment by moment. When someone offers shares for sale, individuals and organizations bid for them. When the prices at which owners are willing to sell match the prices at which others are willing to buy, the ownerships of stocks change hands; that is, stock trades take place. At one time, stock trading was done manually. Today, virtually all stock trading is done by computers. You can easily buy and sell stocks using your home computer!
When a company first issued stock, many people purchased the stock that was offered. Here are some of the reasons that various persons might have purchased the stock.
1. One individual hoped that the company’s stock price would rise quickly in the stock market. He or she hoped to sell the stock within a few days at a higher price. Buying stock with the hope or expectation of selling at a profit is called speculation. Unfortunately, what a speculator hopes and/or expects will happen, doesn’t always take place. Many times speculators lose money when they purchase stock with the hope of making a quick profit. My advice is never speculate. Half the time you’ll be right; the other half you’ll be wrong. Over time, you’ll lose because of the commissions you pay when you buy and sell stock.
2. Another individual wanted to purchase the stock for the long term. He or she felt that this company had a brilliant future, that it would prosper over the years, share its good fortune with its stockholders, have its stock increase in value over time, and become a source of substantial wealth for the shareholder during the long term. This method. of investing has indeed been the source of great wealth for millions of persons.
There are other reasons that people buy stocks. The two listed above are among the most common. The plan that the second individual followed is the plan I suggest you use. In this book, I’ll suggest you purchase stock’s of the best known and most respected companies that are listed on the New York Stock Exchange. I recommend that these stocks be purchased for the long term. I feel this is the plan that gives you the greatest opportunity for being successful with your investment plan.
Many stocks sold in the stock market are Blue-Chip stocks. Blue-Chip stocks are the ones that most people feel are the safest stocks in which to invest. They are the stocks of highly successful companies. These companies have been successful for a long time. They pay satisfactory dividends and have shown impressive growth over the years. Their stock prices go up year after year and the dividends they pay are increased frequently.
Blue-Chip stocks don’t come with labels identifying them as such. If they did, they would not be difficult to identify. It’s also a fact that many stocks which, at first, seem to be blue-chips turn out not to be. Some stocks may be blue-chips at some points in their history but lose this status later on. Identifying these excellent stocks is not easy. Your biggest problem in investing for retirement will be in identifying them. In subsequent books in this series, I give you guidelines that will help you find the stocks in which to invest. I also give you guidelines that will help you determine when you should make changes.
You may have heard about the bulls and the bears. Bulls are people who hope prices in the stock market will rise. Bears hope they will fall. When prices in the stock market have been rising for a long time, the market is referred to as a Bull Market; when prices have been falling, it is referred to as a Bear Market.
1When you know something about the stock market and about stocks, you may be getting the feeling that you are ready to purchase some stock but don’t know how to begin. And, you may not know what stock or stocks you should purchase.
If you follow this series of books, you’ll get the answers that you need, but I believe you’re not ready yet. You don’t know how to make a wise selection as your first purchase. You don’t know what are the steps you must take in making a purchase. You don’t know the exact procedure that needs to be taken after you’ve taken these preliminaries. You’ll see that the answers to these questions are easy to understand and easy to accomplish.
I’ve suggested that investing in stocks for the long term is a good idea. I’ve told you what stocks are and I’ve described the stock market. The next steps on the way to making your first purchase are to learn what is meant by the stock symbol (also known as the ticker symbol), how to open an account with a brokerage, how to make a wise stock selection, and finally, how to make your first trade.
In this book, we’ll discuss the Stock/Ticker Symbol.
Stocks sold on the major stock exchanges are associated with stock symbols, also called ticker symbols. You need to know the stock symbol of any stock you wish to purchase. For example, you need to know that the stock symbol for General Electric is GE. The stock symbol for Pepsi-Cola is PEP. The stock symbol for Hershey’s is HSY, etc. Stock symbols may consist of as few as one character or as many as five.
Stock symbols often suggest the name of the company whose stock is involved. Here some examples where the stock symbol suggests the name of the company:
GE, General Electric
GM, General Motors
IBM, IBM Corporation
JNJ, Johnson & Johnson
MMM, 3M Corporation
PG, Proctor & Gamble
Many symbols bear little or no resemblance to the names of the company with whom the stock is associated. Some examples are:
AXP, American Express
Some symbols are even more difficult to associate with a specific company and more difficult to memorize. Some examples are:
ABX, Barrick Gold
DSX, Diana Shipping
DEM, Wisdom Tree Emerging Markets
SEB, Seaboard Corp
NC, Nacco Industries
There are several symbols that consist of only one letter. Here are some
H Hyatt Hotels
Z Zillow Group
X U.S. Steel
D Dominion Resources
R Ryder System
When you are zeroing in on the stock you want to purchase, you’ll need to find out what is the stock symbol of this stock. If you have trouble with this task, simply ask Google for help. Type this: “What is the stock symbol for xxxx” where xxxx is the name of the company you’re interested in. Try this technique now with the stocks named Bristol-Myers, Bayer, Campbell Soup, and Danaher. Make four searches with these names.
Note: I have mentioned the names of several stocks above. There are some excellent stocks there that I will recommend later. I will not recommend all the stocks. It’s OK to begin your research now, but please understand, some of the names I showed above are for illustrations only.
A company is in business to make money. The money it makes is called its Profit, or its Earnings.
What does a company do with earnings? There are two major ways that a company deals with earnings. First, it may distribute a portion of its earnings to shareholders in the same proportion as the persons or organizations own stock in the company. That is, a person who has 1,000 shares invested in the company would get one thousand times as much of the distribution as the person who owns only one share. The amounts of money that a company distributes to its shareholders are called dividends.
Let us say you own 100 shares of a stock with the fictitious ticker symbol QQZZ. Suppose the company declares it will pay a dividend of seventy-five cents per share. The amount of the dividend you will receive will be seventy-five dollars. This is 100 times seventy-five cents.
Later in the year, the company may increase the dividend to eighty cents a share. Your next payment will be eighty-dollars.
It is possible that your company that pays a regular dividend four times a year. Regardless of whether the company is doing well or not so well, you will receive the same amount of dividend every time the company ones one. From time to time, a company increases its regular dividend. Over a long period of time, the regular dividend could move from a small amount to a substantial one, perhaps several times as much.
The second major way that a company deals with earnings is to hold back portions of them for the growth of the company. The portions it holds back are called Retained Earnings. These earnings allow a company to invest in research and development, upgrades to buildings and machinery, acquisitions of other companies, and for other purposes. There are times when a company may elect to pay its regular dividends from retained earnings during periods when the company’s earnings are not sufficient to pay the dividends.
A few blue-chip companies don’t pay any dividends at all despite the fact that they are highly profitable. The philosophy is that the company opts to retain all its earnings for the benefit of the company. The stockholder benefits because the more the retained earnings, the higher the price of the company’s stock.
There is nothing wrong with a company that does not pay a dividend at all. However, you need to accept that the company will invest earnings in a wise manner. Wise investments will enable the company to grow faster and for its stock to be worth more in the stock market.
A growth company that makes money during any one year would like to make more money the next year. In fact, a company might like to make more money every year than it did the year before. In addition, it would like to be able to declare a bigger dividend than it did the previous year. If it can do so, that’s very good for the company, its management, and its stockholders.
Companies are interested in happy stockholders. Therefore, they may pay a satisfactory dividend while, at the same time investing a part of their earnings into growth and wise investments. Many investors feel these are companies they like investing in.
A blue-chip company normally distributes only about one-quarter to one-half of its earnings in the form of dividends. It invests the rest for growth. Don’t fault a company for doing this. The value of the company’s retained earnings is reflected in its stock price. Yes, it’s nice to receive large dividends that you can spend, but, sometimes, it’s better to let the company do the spending.
Despite the above, I do not recommend that you invest in a company that does not pay any dividends at all. Investors enjoy receiving dividends even from blue-chip companies. There may be times when a company enters a period when its profitability wanes and it determines that it must skip a dividend or cut it in half. If you are an investor in this company, this is not good news! You should consider selling the stock and switching to a company that appears to have a better future. I cover this topic later in another book.
A blue-chip company normally distributes only about one-quarter to one-half of its earnings in the form of dividends. It invests the rest for growth. Don’t fault a company for doing this. The value of the company’s retained earnings is reflected in its stock price. Yes, it’s nice to receive large dividends that you can spend, but, sometimes, it’s better to let the company do the spending.
Despite the above, I do not recommend that you invest in a company that does not pay any dividends at all. Investors enjoy receiving dividends even from blue-chip companies.
There may be times when a company enters a period when its profitability wanes and it determines that it must skip a dividend or cut it in half. If you are an investor in this company, this is not good news! You should consider selling the stock and switching to a company that appears to have a better future. I cover this topic later in another book.
It’s important to note that what a company does with its earnings is entirely the decision of its management and board of directors. The mere fact that a company’s price is going up does not entitle stockholders to receive higher dividends. By the same token, companies may continue to pay regular dividends for a long period of time when their fortunes are at a low ebb.
In the last chapter you saw that when you own the stock of a company, you own part of the company. From time to time, the company will want to distribute an amount of money to persons who own shares of stock. For example, a company may decide to pay out thirty cents per share to its stockholders. If you owned twenty shares of the company’s stock, you would receive a check for $6.00. This amount of money is called a cash dividend, or, more simply, a dividend.
The money that a company pays out in dividends comes from the profits it has made in the current year or in previous years. It may elect to pay a dividend even in years during which it does not make a profit so long as it has the money saved up with which to do this.
Dividends are distributed by the elected leaders of companies. When a company decides to pay a dividend, it is said that the company declares a dividend. Companies are not obligated to declare dividends. They do this when they feel that it is in their best interest to do so. The amount declared as a dividend is arbitrary. It can be generous or not so generous. The dividend does not necessarily have a direct relationship with the current price of the stock.
Successful companies pay dividends on a regular basis. You may find that the company in which you are interested pays out thirty cents per share four times a year. This dividend is called the company’s regular quarterly dividend. It is said that this company pays a regular dividend. Companies that pay regular dividends are held in high esteem. These are the ones you want to invest in.
From time to time a company may elect to increase the amount of its regular dividend. This is good news for shareholders because it is an indication that the company is doing well. By the same token, it is bad news when a company decreases the amount of its regular dividend. Investors take this to be a warning that the company is experiencing financial difficulties.
As a long-term investor, you should be interested mostly in companies that have paid a regular dividend for a long time and have a history of increasing the amounts of their payouts frequently.
Good companies pay dividends four times a year. This would be the same amount each time. At times, the companies raise the amount of their regular dividend. At times, during bad times, the company may reduce the amount of its dividend. Company don’t like doing this and do it only when they feel they must. At times, a company will delete its dividend. They hate to do this! But it does happen! This is a major reason for insisting on purchasing only blue-chip stocks. They want to increase dividends, not reduce or eliminate them!
The Price to Earnings Ratio is one of the most important measurements of the value of your stock. It’s more important, for example, than the price of the stock!
This ratio, also referred to as the P/E, is the current price of a stock divided by the Earnings per Share. For example, if the price of ABC Stock is $40.00 today and the company reported Earnings per Share of $2.00 the last time it reported earnings, then the Price to Earnings Ratio of this stock is 20. That is, $40.00 divided by $2.00 gives 20. The P/Es of stocks are published daily in the Wall Street Journal and in the financial pages of your daily newspaper. You can also look it up in the web site of you online brokerage account when you are researching a stock.
The price to Earnings Ratio is only a number, but it’s an important number. It tells a great deal. The it tells whether the price of your stock is cheap or expensive. It tells how much you would need to pay for a dollar’s worth of earnings. It should be a number within a reasonable range, somewhere between 15 and 25. If it’s very low ; for example 5, the P/E could be telling you that the stock is very cheap and perhaps a good buy. But it could also tell you that there might be trouble on the horizon that has been recognized by investors. You should be suspicious of a P/E that is too low. The low number may mean that the company is about to omit or cut its dividend. Or, it might be signaling that the company is about to announce poor earnings or bad news of some kind. If a P/E is very low, be cautious!
A P/E may be very high ; for example 50. This could mean that the company is a highly respected growth company that demands a high price for its stock. It could be worth it’s price but be cautious. A high P/E could also mean that the company has become a hot stock, is in the minds of many persons and is being purchased for this reason alone. Never buy a stock because it’s hot! It may take a long time for a stock to justify a very high P/E. The price of the stock could be too high. If the P/E is very high, be cautious!
A reasonable P/E ; between 15and 25, could mean that the stock is reasonably priced. Use a stock’s P/E as part of your evaluation of good stocks but don’t rely on it alone to tell the whole story. You need to evaluate other factors. Reject the purchase of stocks where the P/Es are too low or too high.
In a Bull Market (a market where prices seem to be going up), P/E ratios tend to be higher than in a Bear Market (a market where prices seem to be going down). Do consider this when making your decision. A P/E ratio of 10 in a Bear Market might be explainable, while it would raise a warning flag in a Bull Market. Similarly, a P/E ratio of 30 in a Bull Market could be justified, while it would be difficult to justify it in a Bear Market.
Here are some rough guide lines : In a Bear Market, I’d expect a P/E of about 12 to be reasonable for a Blue-Chip company and, in a Bull Market, a P/E of about 25.
As I said before, if the P/E that you’re looking at is a little different from the numbers I’ve suggested, but you think, they’re justified, don’t rule out the stock. See if it meets other criteria satisfactorily.
You already know that the stock market is an auction market. There are persons and organizations who wish to sell stock. They offer quantities of their stock at definite prices. At the same time, there are persons and organizations who wish to purchase stock. They indicate at which prices they are willing to purchase.
When a prospective purchaser and a prospective seller of a stock are attempting to come to a meeting of the minds concerning a transaction, one party may be offering a quantity of stock to be sold at a certain amount. This amount is called the Asked Price. Thee other party may be willing to purchase at a definite price. This is called the Bid Price. If the Bid Price matches the Offer Price, there will be a transaction; otherwise, not. A sale and purchase of a stock is called a Trade.
At the New York Stock Exchange, there used to be an individual who dealt in the stock you are planning to sell or purchase. This person was called the Specialist for your stock. The Specialist knew who were making bids and what those prices were. The Specialist also knew who were making offers and at what prices. The Specialist matched Bid and Asked prices and allowed trades to be made when those prices matched. Sometimes, when the Bid and Asked prices were too far apart, the Specialist used his or her own account to allow trades to take place. It is said that in using his or her own account, the Specialist was helping maintain an Orderly Market.
With the advent of much higher volumes of trades, computers are being used by Specialists for assistance in keeping everything straight. Much of what Specialists do is now automated.
When a purchaser or seller wishes to purchase or sell stock, he or she can indicate he or she wants to execute a trade at the market. The term, at the market means the individual does not care what is the current price that the stock is trading at. The person feels the current price is an OK price.
On the other hand, the trader can stipulate that the stock must be traded at some stated price. This order is called a Limit Order.
I recommend that if you have decided to sell or purchase stock that you use Limit Orders. This will keep your purchase or sale within a predictable range. A Market Order may sometimes be at a much different price than you had expected and/or were willing to accept. If you wish to purchase or sell a given stock badly, you can make your offer close to the price of the last sale. With a Limit Order, the price at which you are willing to purchase or sell may not happen. You can easily change your Limit Order if it seems that you are losing your opportunity to purchase or sell.
If you place your order online ; that is, using a computer, and your order involves a large company, your order should be executed within seconds.
To summarize, when you are ready to buy or sell some stocks, the Bid and Offer prices are made known to you. This information gives you an idea of what you should do. If you don’t care about a buying or selling the stock at a special price, you can place a Market Order. Your trade will probably take place right away. The price of the trade may be close to the current Bid and Offer prices but it my be far from them. A Market Order will often occur at an unexpected price. However, if you wish to control the price of your trade, you an give a Limit Order. The trade will occur within the range you stipulate or not at all.
What Is Your Goal?
Being successful investing in stocks requires a logical,
cautious, conservative approach. It also requires patience.
I want you to believe that you can be successful by using the
techniques described in this book. Success is in your future.
But you must have a mind-set about how you’re going to
First, you need to define a goal. How much wealth do you
wish to accumulate for your retirement? You can achieve a
modest goal of $100,000, or a more-difficult-to-reach goal of
$1,000, 000. You need to decide which of these goals you
wish to achieve, or something in between.
Let us say your goal is $100,000. How can you achieve this
objective in 20 years? The following plan is only one way.
There are others.
1. Select a stock that you believe will grow in value at the
rate of 8% each year. I show you how to do this in a later
chapter of this Long-Term Investment Plan.
2. Make an initial investment of $2,000 in this stock.
That is, buy as many shares of stock as you can with this
amount of money. I explain what stocks are in, What Are
3. At the end of the year, add $2,000 to your investment.
Purchase shares in the same company or in another company
that you believe will do just as well as the first, or better.
4. Repeat Step 3 at the end of each year that follows.
Ordinary arithmetic will show that your investment will be
worth over $100,000 at the end of the twentieth
year. On the following page is information that
shows how the value of your investment may grow.
20 Year Plan with a Goal of $100,000
Additional amount each year
Rate of growth:
20 Year Plan with a Goal of $250,000
Additional amount each year
Rate of growth:
Additional amount each year
39 Year Plan with a Goal of $500,000
Additional amount each year
Rate of growth:
I must emphasize that the above are only a plans. Not all plans
work as expected. These plans may work as designed, they may
work better than designed, or they may fail.
Based on my experience with stocks, I offer these as
reasonable plans that have a good chance of succeeding.
Let’s say your goal is $250,000 in twenty years. Follow the same
plan as the above except begin with an initial investment of
$5, 000 and add $5, 000 at the end of each year. As before,
arithmetic will show that your stocks will be worth over $250, 000
at the end of the twentieth year.
Also, note that there is a thirty-nine year plan to achieve a goal of $500,000.
Yes, I agree that finding stocks that grow at the rate of 8% a
year, or more, is not easy to do. I cannot guarantee that you will
be able to do this. However, I can provide advice that will give
you the greatest chance of having these things happen.
Some plans may be easy for you to afford ; some not so easy.
Select the one/s you think you can best afford. If none of the
plans are good for you, you can devise your own. If you take the
trouble to write me requesting what is the mathematics of a plan
you’d like to start, I’ll be happy to respond at no cost to you!
Keep this in mind. When you invest, you’ll be most successful by
investing the largest amounts you can afford, for the longest periods of
time, at the highest rates of growth you can find.
Do understand I’m not a broker. I cannot buy stocks for you. All
I can do is give advice. I will never request money for anything I may
help you with. I will not accept any even if offered. You should always
check my advice with your personal advisor.
The title of this book is Where is the Money Coming From. Persons who might desire to take my advice and invest in stocks for the long term might think it’s a good idea but they have no money for this purpose. Obviously the topic of where is the money coming from needs to be addressed. I discussed this topic in a book I wrote in 1969, published by Investor’s Press in Chapter 12. This book was entitled A Beginners Guide to Successful Investing in the Stock Market. I also addressed this topic also in Chapter 7 of my book, Investing for Retirement, published in 2007.
Both discussion are reproduced below. (See the bold headings.) What I said in both books is still valid. As you read both discussions, you’ll note the quaint differences in the language being used. Though times have change over fifty years, the advice is still pertinent. Incidentally, you can get a copy of the original book in e-book form in Shakespir.
Where is the Money Coming From? (1965)
You’re reading this book because you want to make money. Since it takes money to make money, we hope you already have some-say $2,000. We’ll discuss what to do with that money soon.
But suppose you don’t have any money. What do you do? Obviously, you must get some.
Begin a savings program. When payday comes, take something from your pay and save it. Aim high, but if the best you can do is one dollar, then save that. Take this money from your pay before you use your pay for anything else. Treat this savings obligation as a debt to yourself. Every payday pay yourself first.
Some companies and banks make it relatively easy for you to save. If your company provides the service, have it deposit your entire pay in your checking account at the
If your bank provides the service, have it deduct a fixed amount monthly from your checking account and have that amount deposited into your savings account.
You will soon get used to the decrease in your earnings, and your savings account will begin to grow. As soon as you’re able-say when you get a raise, increase the amount that is automatically deposited to your savings account.
If you don’t have a checking account, by all means open one at your most convenient commercial bank. The service charges are low, and the amount you save by increasing your control of income pays for the service.
Let’s face it, while a savings of fifty-two dollars a year is better than no savings at all, your minimum savings goal per year should be five hundred dollars (about ten dollars a week). Five hundred dollars constitutes an economical stock-purchasing amount. (The commission would be about ten dollars.)
The investment plan described in this book calls for regular investments. Therefore, don’t stop saving when you’ve saved for one year. Persist in your plan, and whenever possible increase the amount that is automatically deposited into your savings account.
Should you keep some money in reserve when you save? In general, the answer is yes, but there are no definite rules here. Some people feel they can function with zero dollars in savings, while others don’t feel comfortable unless they have a three-month supply. Only you can decide how much of your funds you can commit to stocks.
One fact that you may not be aware of is that in emergencies you can borrow money using stocks as security. A commercial bank will lend fifty percent, sixty percent, even seventy percent of the value of the stocks you own. The interest you pay would be about half the interest you’d have to pay if you took out a personal loan.
Talk over the making of loans using stock as security with a bank officer. You’ll find that, at times, it’s beneficial to do this. The dividends you get on your stocks can help pay the interest charges. Yes, when you put up stocks as security for a loan, you still own the stocks, and you still get dividends.
When you need to borrow, you can use, not only stocks as security, but also life insurance, real-estate, bank accounts, etc. Be careful, though, don’t go overboard. Borrowing needlessly can get you into severe financial difficulty.
If at the time you read this book, you already have money-say $2,000, decide whether you want to hold this -amount in reserve or invest part of it. Whatever you decide, do not fail to begin a regular savings program. The success of your investment plan depends upon, not only making an original investment, but also adding to that investment on a regular basis.
In summary, if you don’t have a checking account, open one. Deposit all your earnings into it. Watch your disbursements closely. Live within your means and save. Use your bank’s automatic savings plan if your bank offers it.
Save only one dollar a week if this is all you can save, but aim for, at least, five hundred dollars per year. Do not resist the necessity to save by claiming every cent you earn is spent before you get it. Have you checked how much money you throw away each week; for example, on smokes, raffles, treating the boys, etc.
Where is the Money Coming From? (2007)
You may agree that starting a long-term investment program for your retirement is desirable. But you may object by saying that you don’t have any money right now! You may contend that your investment program will have to wait for another time. I reject this objection! Waiting is not an option. You can find money to invest and you can start at once! There is only one exception to starting at once. Before anything else, you need to get rid of any credit card debts you may have. When you pay off credit card debts, you’ll really be investing at relatively high rates since credit card companies charge a great deal for the money they loan you.
Do you have unpaid balances in your charge accounts? If so, this has to be remedied at once. One of the worst ways to throw away money is to pay interest on credit card debts. You may have charge account debts amounting to thousands of dollars. You may be maxed out in one or more accounts. Do whatever it takes to improve your credit card situation! This will give you extra money that you can invest.
To get rid of your charge account balances, pay more than the minimum amounts each month. When you pay only the minimum, you greatly extend the time that is required to pay for the purchases you make. You have seen the power of compounding. If you’re paying eighteen percent interest or more on your charge accounts, you are contributing to the wealth of credit card companies at remarkable rates.
Stop charging for things you don’t need or only minimally need. Charge only for purchases you can pay for in full by the due date when you receive your statements. Shop around for lower interest rates. Many companies will accept your balance at a lower interest rate, even a zero interest rate for a limited time. Your own company will probably say yes to a lower rate if you request it. It doesn’t hurt to ask. Go with a company that pays you back a certain percentage of your charges. The cash-back amounts may be only one percent, but that’s better than nothing.
Keep this ever in mind : Credit cards are a convenience. But, they can also be financial quicksand. If you are currently a victim of the credit-card quagmire ; do whatever it takes to free yourself.
With your investment or retirement plan, the main thing is to start. Even if you begin with a small amount of money, you’ll probably be able to increase this amount with the passage of time. I recommend that you begin with an initial investment of $2,000.00.
Yes, but where is the money coming from? To begin with, examine your purchases carefully. You can avoid the expenditures of large amounts of money by forgoing purchases that can be postponed. Are you thinking of purchasing a new car? Will your present car run well for another year without problems? If yes, why would you want to purchase another now? Are you willing to expend twenty thousand dollars or more for a new car when you understand that the same amount of money invested at eight percent will be worth twice that amount in nine years and eight times that amount in twenty-seven years?
Do you really need a big-screen TV? Can the worn furniture be refurbished? Is your computer serving your needs? Yes, it’s nice to have new things ; there is such a thing as enjoying life, but you also have to consider the longer term. You need to look at the relative enjoyment levels of what nice things will give you now versus what they will give you at retirement time. Think carefully before making major expenditures.
Are you spending too much for dinners out? Wouldn’t you enjoy them just as much at home? Don’t movies and popcorn at a theater cost too much these days? Movies can be enjoyed at home and popcorn can be made in the microwave. Have you made it a ritual of paying a couple of dollars every morning for a gourmet cup of coffee? Is it really possible for a cup of coffee to taste that good? Think! Every time you spend a dollar for something you don’t really need, you may be throwing away eight dollars of retirement funds.
Are you a good shopper? You can save with groceries by clipping coupons and studying the sales brochures of the supermarkets near you. Some super stores will honor the advertisements of competitors. Any amounts you save is like finding money. And those amounts invested for the long term can be worth many times their original values. Be careful, though! Don’t spend more money in the process of saving than what you actually save. It’s expensive to travel to different stores. Plan your shopping trips to minimize travel.
In summary, your first objective is to get rid of any credit card balances you may have. Any amounts you pay off will be like making investments at the same rate of the interest you’re being charged. Next, scrape enough money together to make an initial investment. Not all persons will find money for this purpose in the same ways. Find the ways that works best for you. Once the ice is broken, and you’ve made your first investment, you’ll discover that money for additional investments will come more easily.
You’ve already seen that, with the power of compounding, money invested at eight percent doubles in value every nine years. If you deny yourself something that costs a dollar and invest the money instead, that dollar could be worth eight dollars in twenty-seven years. Agreed. a dollar isn’t very much. But what about a new car? Do you really need a BMW at eighty thousand when a less expensive car costing twenty thousand will serve just as well? Invest the difference. Over the years, the money you save could be worth millions!
Do you think a time span of many years is too far into the future to worry about? It is a long time, but keep in mind that the years will pass anyhow! Years from now, it will make a great deal of difference whether or not you started an investment plan.
I’m not suggesting you become a miser! I am suggesting that you begin looking at the items you regularly purchase with a magnifying glass. When you purchase items that you will not enjoy or will not use, it’s like throwing money into a Dumpster.
A question might arise whether investing in a home is a good idea. Yes, I believe that purchasing a home is probably one of the best investments you can make in your life. You are the one who must decide whether to go all out with retirement or with a home. If, at all possible, you should do both!
What is a Stock’s Fundamental Worth? One answer, easy to understand, is: A stock is worth whatever people are willing to pay for it.
While the stock market is open, the price of a stock constantly moves up and down. There are many reasons for this. The reasons are easier to understand when one realizes that, at any given moment, there are many individuals and organizations buying and selling the stock for various reasons. Many hope that the price will go down so that they can buy at a lower price ; others hope that the price will go up so that they can sell stock they own at a higher price.. Speculators purchase stock hoping they will be able to sell it later at a higher price. Others borrow stock and sell it hoping that they will be able to buy it back at a lower price. They will then return the stock they borrowed. Many individuals, who are not speculators, desire to purchase stock as a long-term investment. Many need to sell stock they own to finance personal endeavors. These activities, and others, happen at random times. Each transaction affects the price of the stock, even if only in a small way. There are many factors involved in the moment-to-moment variations of stock prices. Some cause momentary rises in the price of a stock ; some momentary drops. There are emotional reasons also that cause the prices of stocks to rise and fall. It’s been said that fear and greed have a great effect on the prices of stock.
Some events that cause stock price movements are easier to detect. The stock market reacts to surprises. If a company suddenly reports that it has lost an important order, the price of its stock should drop. The opposite is true. If a company unexpectedly reports the receipt of an important order, its stock should rise. If it is discovered that a company has been illegally exaggerating its earnings, the price of its stock should fall. If a company should report a loss for the year when everyone had been expecting a profit, the price of its stock should go down. The reverse would, of course, be true. Unexpected news, good or bad, usually causes a definite reaction in the price of a company’s stock.
You should know that logic has little bearing on what the stock market does. What should happen and what actually happens with various scenarios is not always the same. If you act on what you believe should happen when an announcement is made, you might be disappointed to observe that the opposite actually happens. Some people make it a point to always do the opposite of what they believe everyone else is going to do.
There is no mathematical formula that tells you what a company’s stock is worth. You can consider historical data, the state of the economy, the political situation, the effect of the company’s com petition, etc., but find that the prices of stocks lead a life of their
own. Two companies, seemingly alike in many characteristics, may have different price reactions to various events. One may react strongly ; the other not be affected at all.
What does all this mean to you? Don’t try to figure out the market. Many people have tried to do this and have failed.
Over the years, you’ll hear a great deal of prognosticating about how the prices of certain stocks will behave. Or, about how the stock market, in general, will do so. Take these comments with a degree of skepticism. These people will be right half the time and wrong half the time. And being right half the time is not good enough when you invest in the stock market for your retirement. You have to be right far more than half the time. Stick to your plan. You are investing in the very best stocks for the long term because you believe this gives you the best chances for success.
Here is a bit of advice that may serve you well : when the stock market has been going in the right direction for you and has been doing this for a long time, and you may begin making charts showing how wealthy you will be at various times in the future, beware! This may be the exact time when the stock market will begin going the other way. And on the reverse side, if the stock market has been sinking like a rock and this has been happening day after day for a long time, and you’re feeling ultra-pessimistic, even wondering if stock investing was a good thing after all;, this is the time when things may be ready to turn around. What does all this mean to you? Understand that these emotions are normal. Resist taking hasty actions during times of ebullience and during times of pessimism. Stick to your plan.
You’ve done a lot of reading and much research; it’s time to make your first purchase. If you have decided to go with a Full-Service Broker, make an appointment with your Broker Representative and visit him or her at the appointed time. You can also make your purchase by phoning that person. If you’re making the purchase online, turn to your computer and take all the necessary steps yourself. In either case, read the remainder of this chapter. If you are using a Full-Service Broker, observe as your representative takes the necessary steps for you. Either way, the steps are the same.
Below are the qualities you should look for when selecting a stock. A web site on the Internet that can help you is www.stockmaven.com.
These are my recommendation: Look for a stock that:
1. Is listed on the New York Stock Exchange.
2. Is one of the 30 Industrial Stocks in the Dow-Jones Industrial Average.
3. Has a P/E Ratio between 15 and 25.
4. Pays a regular quarterly dividend.
5. Pays out less than half its earnings in dividends.
6. Has a good history of earnings growth over the years.
7. Has a good history of increasing dividends over the years.
8. Has a good history of stock splits.
Finding a stock with all these characteristics may be difficult. Don’t be adamant; yield a little on one or two of the characteristics mentioned above if you must. For example, a good stock with most of these characteristics may not be listed as one of the 30 Industrials in the Dow-Jones Industrial Average. Deviating from this requirement would be OK if the company is a large, well-known company that does business globally.
You may find that a stock of your choice has a P/E ratio that is a little more than 25. This could be all right if everything else is OK.
Don’t let your broker representative talk you out of your major requirements. Your representative may try to convince you to purchase something that he or she prefers. This may be OK but be sure you’re not being talked into something speculative or a stock you simply don’t like.
Make the purchase or have your representative make the purchase. In a few minutes you’ll know how much you paid for the stock per share and what is the cost of the commission. Congratulations, you have made your first purchase!
With your first purchase, you may find yourself constantly wondering how your stock is doing. You may call your Full Service Broker every hour on the hour or you may feel compelled to check with your computer many times during the day. This is perfectly normal for beginners. With time, you’ll take your purchases with more professionalism. It does not matter whether your stock goes up or down on any particular day. It’s the long term that is important to you.
The author suggests you learn to purchase and sell stock online. This will save you time and nuisance. Do follow your plan. It may seem that your plan is not working logically. Don’t try to outguess it. Trying to select the best day and time to purchase stock is no better than following a plan. If your ambition is to purchase stock at the day’s low and to sell at the day’s high, you’ll achieve these objectives as often by following a plan as by guessing.
This is important: stocks go up and down! You are in stocks for the long term. You need to believe that the long term is up! If you are bothered by times when stocks go down, you may not be a good candidate as an owner of stock. You’ll worry too much. At first up and down losses and gains will be a few cents or dollars a day. Later, hundreds of dollars, even later thousands! A lot of people can’t stand changes like this. If you are one, don’t invest. It will happen.
Another thing: some people marry a stock. They will stick with it even when it goes down for a long time. Over the years times change, picture taking changes from film to digital, fuel changes from oil to sun, computing changes from abacus to computers. Be aware of changes like this. Sell a stock what is involved in a bad change while you can. If you don’t, the stock’s value will drop to zero!
Another thing: Diversify! Invest in as many different companies as you can. If one of them begins to fail your expectations, the others may pick up the slack. (I currently own fifteen.)
Here are the names of some stocks you may consider when you’re making your first purchase. This information is being written in October, 2016. Do check out whether my suggestions are still valid. The stocks names are listed in no special order. (I currently own all of these.)
GE General Electric
JNJ Johnson and Johnson
GIS General Mills
PG Proctor and Gamble
PEP Pepsi Cola
KO Coca Cola
PM Philip Morris
T AT & T