Go ahead and Google the word “Investing” and you’ll get over 197,000,000 results in under a quarter second. Try “Stock Market” and you’ll see another 753,000,000. It’s enough to overwhelm even the most adventurous of investors.
No wonder the majority of people don’t know what to do or where to turn and end up throwing their hands in the air and turning over their hard-earned money to Mutual Funds and Wall Street.
But that’s a big mistake…
According to an independent study by John Bogle, the legendary founder of Vanguard, over 80% of actively managed mutual funds underperform the major indexes. And investors pay high fees even when their portfolios LOSE money.
He goes on to say, “there’s a profound conflict of interest between the managers who run the funds and the shareholders who own them… Time and time again investors have paid a staggering cost for the excessive expenses and excessive marketing focus of the mutual fund industry…”
And Charlie Munger, Warren Buffett’s long-time co-chairman at Berkshire Hathaway, says that, “the money management industry as a whole gives no value added to its customers… Yet they charge enormous fees and take profits out of the system.”
You see, the majority of mutual funds are a sucker’s game, where the only consistent winners are the Wall Street banks and the mutual fund companies.
They’ve set up the system so that average investors get average returns.
These investors lose money when the market goes down, and make just enough when it goes up to keep them interested and “in the game.”
Following their system is not the way for YOU to become wealthy investing in the stock market.
But it gets even worse…
With the heightened volatility of today’s market, it’s more important now, than ever before, to ensure that your investment strategy is one that has been proven and tested over long periods of time and in many different market conditions.
Now is not the time to experiment with investing techniques that may or may not work or that have hidden risks built into them.
As Warren Buffet likes to say, “it’s not necessary to do extraordinary things to get extraordinary results.”
If you’d like to invest using the same methods as Buffett (and thus significantly increase your chances of seeing the same results he gets), then you need to listen to the lessons he’s been teaching for the past 50 years…
Stock investing lessons…
Buffett has clearly stated exactly how he invests and what he looks for before investing in any company.
Unfortunately, amid the reams written about Buffett’s methods, not many people can find a step-by-step guide to investing like he does.
That’s why I put together this special report. I wanted to give you actual, actionable steps that you can take to seriously improve your returns and minimize your risks in the stock market.
So without further ado, here is the ultimate Warren Buffett step-by-step guide to investing.
The fact is, most “investors” don’t have a good understanding of stock investing basics. They don’t know how to invest successfully and, even worse, they don’t know that they don’t know (which is a bit strange because you’d think they’d figure something is amiss when they continually fail to beat the simple market indexes year after year).
And the major problem can be summed up in one word: Ignorance.
The financial industry takes advantage of this widespread investing ignorance to perpetuate the myths that investing is difficult and the “professional” money managers know how to get it right.
So tens of millions of individual investors continually throw lots of money into funds and portfolios that follow poor investing methods.
It doesn’t work.
If you want to invest successfully, you need an artfully designed investment strategy that’s been proven over decades.
Once you have that, it’s a simple matter to start adding money and watch your portfolio grow exponentially.
That’s how to invest successfully in the stock market.
Focusing on putting lots of money into a mediocre or poor strategy will cause you to underperform or lose money.
Here’s the lesson:
You grow your investments by having a top-notch investing system. Not by following unproven systems and hoping to get rich quickly.
How to select the best investing strategy…
So what you need to do is either test investment strategies yourself or piggyback off of what others have already done.
What you’ll find is that when you truly test most investing strategies, they don’t consistently work over the long term.
Sure, one might work in a bull market or another might work in a bear market or in a sideways market, but most won’t work in all types of markets.
And many will blow up and cause you to lose lots of money when conditions don’t go exactly their way.
This, unfortunately, is a lesson too many individual investors learn the hard way.
Think of all the people who lost 40 or 50% or more in the 2008 financial crisis.
They followed the so-called “experts'” advice and rode the bubble into the stratosphere only to blow up and crash.
But you know what’s interesting? There were a handful of investors who knew the crash was coming.
All of them were quietly laughing while T.V. and Internet investing “experts” pontificated about how it was “different this time.”
When the crisis struck, Wall Street seemed surprised, but these investors weren’t.
When stock markets around the world fell, indiscriminately taking down the good stocks with the bad, these investors quickly moved in and bought the cream of the crop at bargain basement prices.
As the markets began to recover, they made a killing…
But that’s not all…
As the world’s economies continue to improve over the next few years, these investors are poised to rake in outrageous returns with very little risk.
So who are they?
They have names such as Warren Buffett, Charlie Munger, Joel Greenblatt and Walter Schloss.
And the one thing they have in common is that they all follow Benjamin Graham’s Value Investing methods.
Anyways, the title of this special report is, “How to Invest Successfully: Stock Investing basics for anyone who wants to learn the correct way to invest in the stock market,” so let me tell you exactly how to do that.
A simple plan to invest successfully in the stock market…
If you want a dead-simple plan for investing successfully in the stock market and building your wealth with less risk, follow these steps.
- Find 7 good sector Exchange Traded Funds (ETFs) and 2 or 3 good foreign ETFs or index funds (if you’re not familiar with ETFs, just Google it).
- Purchase equal dollar amounts of each ETF.
- Spend a few hours each month monitoring your investments and rebalancing when necessary.
That’s it! You’ll have an investment plan that outperforms the vast majority of actively managed mutual funds, minimizes your risk in the markets and leaves you with plenty of time to pursue activities you enjoy.
Of course you can likely do even better if you follow Warren Buffett’s lead and learn how to find stocks that have excellent fundamentals and wide economic moats.
Once you find these stocks, you’ll need to know if they’re overpriced or under-priced.
Finally you’ll need to determine how much margin of safety you require and purchase them at a sufficiently low price to achieve that.
Keep reading to learn how to do this the right way.
The 7 important questions to ask before
investing your money in the stock market…
To start finding stocks with excellent fundamentals, you should first look at seven important questions to ask before investing in that stock.
Here are the questions:
- Is the company free to adjust prices to inflation?
- Is it likely that a new product or service will come along within the next 10 years and completely wipe out customers’ needs for this product or service?
- Does the company have a strong moat? A moat is one or more of brand, exclusivity, size or price (for example, does the company have a strong, trusted and recognizable brand, does it have an identifiable consumer monopoly in its region or globally, is it large enough to overcome competitors or can it compete effectively on price for long periods of time?). What does the company do or have that protects it from competition and keeps its customers coming back?
- If a new competitor came along with one year’s worth of unlimited funds to fight for the company’s customers, how vulnerable would the company’s future be?
- If the company had to quit advertising or expanding for the next year, how badly would it be hurt? Could it recover after that year and bring customers back?
- Does the company produce a product or service that has been used by its customers for at least the past 10 years?
- Will this company’s products be used for the next 10 years?
If the company you’re looking at can make it past these questions, chances are you’re looking at a great company that just might make a terrific investment.
On the other hand, if the company fails to pass through these questions, it’s probably best for you to ignore it and move on.
How to determine a company’s fundamental rating
to see if it is worth pursuing…
With the questions out of the way, let’s dive in and look at the important numbers and also take a look at what to do with those numbers.
There are 11 filters and each filter is given a rating of Excellent, Very Good, Good, Marginal or Bad.
Here are the filters:
- If Return On Equity (ROE) is greater than or equal to 30% then rate Excellent; If ROE is greater than 20% and less than 30% then rate Very Good; If ROE greater than 15% and less than or equal to 20% then rate Good; If ROE is greater than 12% and less than or equal to 15% then rate Marginal. Otherwise, rate Bad.
- The more times Net Income has grown in the past 5 years, the better. Rate Excellent if it has grown 4 times, Very Good if it has grown 3 times, Good if it has grown 2 times, Marginal if has grown 1 time or bad if it has not grown at all in the past 5 years.
- The more times Cash Flow has grown in the past 5 years, the better. Determine the rating in the same manner as for Net Income.
- If EPS / Long-term AAA Bond Yield is greater than the stock’s current share price, then rate Excellent; otherwise rate Bad.
- If the company’s current Profit Margin is greater than the company’s average industry Profit Margin, then rate Excellent; if it’s equal, rate Good. Otherwise rate Bad.
- If the company’s current Profit Margin is greater than its 5-year average, then rate Excellent.
- If the company’s current Long-term Debt / Net Income is less than 5 then rate Excellent; if it’s between 5 and 16 then rate Good. Otherwise rate Bad.
- If the company’s Gross Profit Margin is greater than or equal to 40% then rate Excellent; if it’s between 20% and 40% then rate Good; otherwise rate Bad.
- The more times Net Earnings has grown in the past 5 years, the better. Determine the rating in the same manner as for Net Income.
- If the company’s Net Earnings Margin is greater than 20% then rate Excellent; if it’s between 10% and 20% then rate Good; otherwise rate Bad.
- If the company has been buying back its shares in each of the past 5 years (Issuance (Retirement) of Stock, Net) and it has increased these buybacks in each of the past 5 years, then rate Excellent. If it has been buying back its shares, but not increasing the amount in each of the past 5 years, then rate Good. Otherwise rate Bad.
Once you have a rating for each filter, then assign a score to each rating as follows:
Excellent = 4, Very Good = 3, Good = 2, Marginal = 1 and Bad = 0.
Then add up the scores and divide by 11. This will give you the average overall rating for the company.
For example, if the stock we are evaluating rates Excellent for filter (1), Good for (2), Very Good for (3), Bad for (4), Good for (5), Good for (6), Excellent for (7), Good for (8), Marginal for (9), Good for (10) and Bad for (11), then our total score would be:
4 + 2 + 3 + 0 + 2 + 2 + 4 + 2 + 1 + 2 + 0 = 22
You would then divide the total score by 11 (i.e. 22 / 11) to get a rating of 2.
Going back to our ratings scale, we see that a rating of 2 equates to Good.
So from a fundamentals perspective, our stock would be rated as Good. You should generally only consider stocks that are rated Very Good or Excellent.
(Note: if you’re using the free online stock rating software, it will give you the rating as a percentage. 78% and above roughly translates into Very Good or better.)
Once you’ve selected your Very Good or Excellent stocks, the final piece is to determine the company’s Moat Strength.
How to determine if a company has a strong economic moat…
Earlier you saw the 7 important questions to ask. Question 3 dealt with a company’s moat.
According to Warren Buffett, a moat protects a company from competitors.
The stronger the moat, the harder it is for a competitor to hurt the company by stealing its customers.
If you answered question 3, you should have a good idea of how strong your company’s moat is, however it is necessary to back up that answer with some quantitative results.
With that in mind, we can use Pat Dorsey’s (he’s Morningstar’s Director of Stock Analysis) research to determine if a company’s moat is strong.
Dorsey uses 4 elements that, taken together, do a relatively good job of showing which companies have strong economic moats.
In fact he states, “the concept of economic moats is crucial to the way Morningstar analyzes stocks because a moat is the characteristic that helps great-performing companies to stay that way.”
He goes on to credit Warren Buffett and Harvard professor Michael Porter for the idea of an economic moat. In fact Buffett adds a fifth element, to Dorsey’s four, for determining moat strength.
Here are Dorsey and Buffett’s 5 Moat defining criteria:
- Free Cash Flow / Sales is 5 percent or better (you should go back 5 years and require that the company beat this mark in all 5 years). Give the company 1 point if it passes or 0 points if it doesn’t.
- Net Margins (Net Income / Sales) greater than 15 percent (again, the company should beat this mark in each of the past 5 years). Give the company 1 point if it passes or 0 points if it doesn’t.
- Return on Equity above 15 percent (in each of the past 5 years). Give the company 1 point if it passes or 0 points if it doesn’t.
- Return on Assets (Net Income / Total Assets) higher than 6 percent in each of the past 5 years. Give the company 1 point if it passes or 0 points if it doesn’t.
- Buffett also likes to use Depreciation / Gross Profit being less than 18% for a general pass and 8% or less for an A+. He’s found that companies with lower Depreciation tend to have a sustained durable competitive advantage (which translates into a strong economic moat). Give the company 2 points if it passes with 8% or less, 1 point if it is between 8% and 18% and 0 points if it is 18% or higher.
Then add up the final score to determine the company’s Moat strength.
Moats are rated on a 6-point scale. Moat Strengths of 5 or 6 are considered very strong. Moat Strengths below 5 are considered weak.
You should ensure that the quantitative result you just calculated agrees with your answer to question 3 of the 7 important questions we looked at earlier. If it doesn’t, you need to determine why.
So now you’ve found some fundamentally excellent stocks with strong economic moats. But don’t celebrate just yet. There’s one more step.