ABW’s Tips On Investing In Stocks & Bonds (Part 1)

HOW TO INVEST IN STOCKS (AND BONDS) PROPERLY

Author: Shawn Christopher & Company

HOW TO INVEST IN STOCKS (AND BONDS) PROPERLY

Its been a long time coming but ppl have been hitting me up to post this for some time now. This thread is dedicated to the art of investing & will teach u HOW TO INVEST (properly). This isnt gonna be some b/s technical pseudo science – this thread is about investing. Most of the sh*t u see or hear about is speculating but what im gonna show u is how to take the craft & develop the knowledge and skills to be able to obtain successful returns.

I tried to simplify this to the best of my abilities so i hope yall can comprehend the format & criteria. All of this was taken from Ben Graham’s masterpiece The Intelligent Investor & his disciple Christopher H. Brown’s “Little Book of Value Investing” & oversimplified where applicable. I hope u all pay attention to these principles….. because you gotta understand… millions & billions of people invest their money & most aren’t successful at it but on WallStreet they pay A LOOOT of money to cats who can successfully allocate capital. The highest paid fund managers do NOT even beat the S&P500 index & get paid well… now imagine a dude who can beat the market ? This is an important trait to learn. You can read a ton of books on what stocks, bonds & other financial instruments are but it means fu*k all if you can’t apply it successfully.

Below are the topics I will touch on & expand upon. After reading this you should be somewhat of an amateur – and you can go pro if you read Ben Graham’s The Intelligent Investor book.

Table of Contents Value Investing 101:
1 – What is Value Investing

2. What to Look for ( buy Stocks on the cheap , look past bad news – that is the time to buy )

3. How does one find a bargain ?

4. Mr.Market

5. Investing vs. Speculation

4. P/E Ratio – buying Earnings on the Cheap

5. Buy a dollar for 15 cents (same as Section 3)

6. Wall Street Jargon & Common Mistakes (IPOs, mutual funds, technical analysis/beta , trends, past performance, terrible investments/hot

stocks)

7. Start thinking Globally Now (the US only makes up for half of the total stocks in the world but elsewhere there are bargains too,

many co.s even in america have to grow internationally in order to grow at fast paces)

8. When execs start buying shares – u should too

9. Questions to ask yourself after making an investment

10. Other alternatives (Bonds, Preferred Stock, gold, real estate, index funds, ETFs, mutual funds etc.)

11. Criteria to Use & The Margin Of Safety

12. Its Not a Sprint its a Marathon – Invest for the long term (inconsistencies over the lost decade & more)

13. Discipline

1 – What is Value Investing

Value investing is the practice of analyzing a stock (im going to say Company instead of stock) for its underlying qualities. The price of the stock is to judged by the underlying business. Value investing is very common b/c of its practicality BUT 90% of managers arent doing it properly or don’t do it at all. For example, the main objective is to analyze Stocks by their businesses so lets look at say… Ford. A traditional money manager may say well Ford is a growing business b/c its main competitors have fallen & it has the opportunity to take over and invest in global territory. Now there is nothing wrong w/ this however, one thing that wasnt looked at was its price, financial statements & if it really is a value. Throughout this thread Im going to explain it to yall in a way that makes sense.

Essentially value investing is buying something that is worth more than it is, for less. So its the true art of buying low & selling high.

2. What to Look for ( buy Stocks on the cheap , look past bad news – that is the time to buy )

Everybody suscribes to the idea of buying stocks when their low and then selling when their high. THing is most ppl dont even get this right. How many ppl were buying stocks in 2007-2008 when they were at excessive prices only to sell off in 2009 when everything tanked ? A very important thing with value investing is to buy reasonably priced companies when there are swings. That means u have to look past bad news. The BP oil spill was a great ACCIDENT, however ppl were quick to chastize the heads of the co. for “purposely” spilling 30 billion dollars worth of oil in the ocean only to have to pay back 38 billion dollars (Crazy I know LOL but common sense goes out the window when crisis strikes). Ppl dont think clearly when conflict hits. Now if the level headed investor had bought BP shares after the news hit the media then today they wouldve realized a 43% return just off that one stock alone (its worth much more today). Did ppl really think the largest oil co. in Europe would go bust over an oil spill ? SMH. Lets look at Goldman-Sachs… same thing here wen news about the “fraud” hit the media the stock dropped from 150$ to 128$ a share… shortly after IT TOO CAME BACK to 149-151 (this was last year & in that same year it rose back to about 161) & is currently at about 116$ after news hit about the US credit rating drop !!!! u see that ? dont be a punk u want to buy stocks on the cheap. Look past the bad news & BUY BUY BUY. Today has brought us sooo many good opportunities that most will miss out on b/c their terrified of the markets at this point. If Warren Buffett, Ken Fisher & Donald Trump know to start buying stocks in these times then that should tell u something…. NOW is the time to buy.

If bad news strikes whether its in the economy or scandal or whatever BE OBJECTIVE look at the companies financial report (the balance sheet & income statement) & let that tell the story. A profitable co. like BP will remain profitable in the long term they might miss a quarter or year b/c of the scandal or w/e but they will make that money back & more in the future b/c they are that dayum nice. The Balance Sheet & Income statement aren’t hard to read either. With a balance sheet just take the total assets & subtract it by the total liabilities & thats what ur left with. If the liabilities are too excessive that means ur company is over-leveraged or has too much debt.

A general rule of thumb is that u should have double in assets versus liabilities or a ratio of 2 to 1.

Here’s a sample of a balance sheet

Its not hard to read – you just want to make sure the total assets are much higher than total liabilities (also u should look to see how much cash the business has versus how much short & long term debt the business has. A business with lots of cash to pay short term debt immediately is good. Cuz if things get hard it has the liquid cash on hand to pay it all off.
If your using the example then make sure the cash is higher than current borrowings & long term liabilities but more so current borrowings.

Also I made mention of “WORKING CAPITAL” – if you look at the balance sheet example all that is is Current Assets subtracted from Current Liabilities. The result of that will tell you how much the company has on hand to expand its business. If your lucky you can find companies whose market cap is less than the amount of working capital a firm has on hand. That’s another way to find a bargain too.

3. How does one find a bargain, how do I judge if the co. will survive the controversy ? – look at book value, discrepencies in balance sheet to market price, working capital, criteria

More often than not I get hit up on the PMs from ppl asking me “yo Sion ? how do I find a bargain ? what do I look at when im looking at stocks ? is it price to book (book value) , P/E ratio (price to earnings ratio) , is it the trend , or is it the trading volume ??” I often laugh at how much ppl like to complicate investing & surprise surprise u dont have to look at all those things or track them. I mean u can but the MOST IMPORTANT thing to look at is the book value. That is the indicator of how much the stock really is worth. The book value or P/B (price to book) is calculated after all the total assets & total liabilities are deducted and all is left is the Equity (exactly the same way u find ur net worth by subtracting your liabilities by your assets). The equity is then divided by the total number of shares (or market cap) to give u a per share amount of the book value. Now there may be some confusion b/c then one would ask “ok so wats the market cap then ?” — the market cap is HOW MUCH THE STOCK IS SELLING FOR. u see u have to understand – the stock market is not a game its merely a place where corporations & individuals sell businessses to raise cash – thats it. The market capitalization (market cap) is how much the stock is priced to sell & the daily fluctuations are how much ppl are selling them for. Book value is to be contrasted to the market cap, if the market cap is selling below the book value then u have a bargain. Why is it a bargain ? b/c if the price of the stock is selling for less than the companies net worth (book value) then ur buying it for less than it is worth – which is a bargain.

When controversy strikes & u want to gauge a company u want to look at the balance sheet (peep picture example above) – the financial statements. & its not complex (sites like bloomberg, the tmx, google finance & reuters simplify it tremendously), u want to look at total liabilites to total assets, the total liabilities should NEVER exceed the total assets otherwise ur co. is in debt. Typically u should find co.s whose current assets exceed current liabilities by at least double (which is common btw) and co.s who have NO deficits in earnings. Earnings are important its how much ur co. is making if a co.’s stock price is growing but earnings are still in the red get away from that – its only a matter of time b4 the ignorant public gets burned. Look at it like how a businessman looks at things – does.

There’s also other areas to look at too… sometimes you can find companies selling close to the amount of cash or less on their balance sheets, you can even find some selling for less than the amount of money they make in annual profits, less than revenue or less than their working capital and not just the equity.

Part 2 Coming Soon

Leave a Reply