Understanding Investing for The Beginner: Part 2

*photo courtesy of https://www.flickr.com/photos/76657755@N04/
*photo courtesy of https://www.flickr.com/photos/76657755@N04/

OK, we’re back for Part 2. If you haven’t read Part 1, go back here and have a quick read. Then join us for Part 2.

Let’s start by giving my personal explanation of what those fancy words “Yield” and “Capital Gain” mean.

To me, a Capital Gain is simply when the value of something you own goes up. You buy property and it goes up in value over time. You just made a capital gain. You buy an old car for $3000, fix it up and sell it for $10,000. You just made a capital gain. I know economists and others may be freaking out, and wanting to give a more complex explanation here, but for our purposes, this is good.

Let’s take a shot at explaining “Yield.” When a company pays out a dividend, it is expressed in a dollar amount. Let’s say $1.50 for each share you own. But if we want to compare that to our savings account which is paying 1.5%, how do we do it? Easy. Simple division. Divide the amount of the dividend (in this case $1.50) by the amount you paid for each share (let’s just say you paid $35 per share). So $1.50 divided by $35 = 0.0428 or about 4%. Usually you can find out what the yield is online without doing this simple math but this helps you know what they are talking about when they use the word yield.

Ok, moving along.

So now I have a foundation for how to pick a stock. Over time I aim to have about ten stocks like this. Too many stocks and it gets hard to manage. To few and you aren’t practicing diversification. Diversification just means not having all your eggs in one basket. It’s a fundamental safety practice.

Now we need to know a little about timing. You may have heard people say, “timing is everything.” Well, it isn’t everything but it is important. First, as I’ve said before, don’t rush. If you try to time the market in the short term then all I have to say is good luck. If you want to be a day trader, you’re in the wrong place. However, in the longer term, you need to exercise a little good judgement.

For those of you who might not know, a “Bull” market is when the overall value of the stock market has been in an upward trend. A “Bear” market is when it is in an overall downward trend. You can experience as much financial success, just by staying out or getting out of the market at the right time. Don’t be greedy. As they say, “Leave a little money on the table for the next guy.”

It’s a good idea to set a goal for what kind of return you would like to earn over time. Let’s say you aim for 7% to 10% average. If the market has been in a upward trend for awhile you can be averaging much better than that. If you’ve just made a short term average of 16% over 12 months, and the market has been a Bull, maybe it’s time to move to cash, or at least some cash. There’s a couple of reasons this can be a good idea.

The first reason is that it’s generally a bad idea to get greedy. People have a tendency to fear loss. They are worried that the market will continue to climb and that they will miss out. If you’ve made better than your 7-10% already, maybe it’s time to sit on the sideline and wait for the next buying opportunity. Which brings me to my final point.

There’s an old saying in investing, “Buy when there’s blood on the streets.” It’s crude but there is a lesson in it. Some would refer to it as contrarian investing.

When the value of stocks drop, they tend to do so in two ways.[Tweet “I tend to buy strong companies, paying good, regular dividends, who have done so for a long time…”]

One is when the value of a single stock drops. Probably because something is wrong with the company.

The second way is when the stock market drops as a whole. An interesting thing happens then. The stock price of great companies gets pulled down with everything else. It’s a case of “Throwing the baby out with the bath water.”

This can be an excellent buying opportunity. If you sold some or all of your stocks when they were doing well and moved to the sideline, you now have cash to buy good companies cheap.

So to review, I tend to buy strong companies, paying good, regular dividends, who have done so for a long time. I like to see a dividend yield of between 3% and 5%. More than 5% is, to me, a sign of danger. Something is wrong with the company. (If you would like more on this, leave a comment.)

I don’t buy and sell frequently, but if the market has been in a strong Bull trend for a long while and I’ve done well, I pull out and sit on the sidelines and wait for a good buying opportunity.

Another good link for you is How T. Johnson made $70 Million

It should go without saying that you are responsible for your life in all dimensions. Take what I have written here only as my non-professional opinion. You must decide what is right for you and seek professional assistance as you feel necessary. Thanks and all the best!


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