Stock Market Investing Strategies For Personal Finance

Introduction to Investing in the Stock Market. 7 lectures 28:59 Introduction to Investing Developing an Investor's Mindset Ask yourself this question; why are you watching this video innovation series and what are you hoping to get out of it?The most common reason is because you have a desire to make and grow your money. I must caution that it is rare for someone to make a living just by trading in the stock market; rather the markets are a tool that provides the opportunity for turning the money you have already earned at your day-job into earning even more money.Fear is another common motivator for watching this video innovation series. Everyone has heard of the stock market and the stories of how it can make or break your bank account. It is normal to fear the potential losses but all the while desire the lucrative gains. I’m here to ease your market anxiety.Others might have tried their hand at investing but found little to no success. With this course I offer up to you the chance to view the markets from my own perspective and what I have found to be successful.Hi, my name is Matt Bernstein from Low Cost Hustle and there are three main ideas you’re going to learn throughout the course of watching.First, an introduction to the market. Whether you’re completely unfamiliar with market terminology or not, there is a lot of material to cover here. If you’re confident in your understanding of the market concepts and terminology, you may skip to the second section on thinking rationally. But keep in mind that you had to learn all the letters of the alphabet before you write full sentences.Second, I’d like to help you get the proper mindset that is necessary for success in the stock market, and that is overcoming your emotions to think in a rational way. I can’t even begin to tell you how many stories there are of people who let their emotions get the best of them and lost out for it. We’ll go through real-life scenarios that will steer you in the direction of a favorable mindset and also provide some history on the markets.Third, I’d like to take you through the process of how I research stocks for my own portfolio, as well as how I maintain a portfolio to meet my own personal goals. I will explain how I have earned double-digit returns year in and year out.With this video course, I intend to impart the knowledge and way of thinking that I have developed over the years. I promise that by the end of this series you will walk away with the tools and know-how necessary to outperform well-known benchmarks like the DOW and S&P 500.So with that, I invite you to learn everything I know about the market and what it takes to outperform it. What is the Stock Market? The Stock Market You’re watching this video series with the intention of learning a lot about the stock market, how to make money from it and so on. Well what is the stock market? The stock market in its current form is an electronic exchange where investors can buy or sell shares of stock in a company; kind of like a giant marketplace where the only thing for sale are shares of stock. When you buy a share in a company you are actually buying a piece of the company. So now that you own a share, you are counting on the company to make lots of money so that your shares of stock increase in value. Similarly, if the company makes no money or even loses money, the value of your share will decrease. And so the stock market consists of a great deal of investors who are looking to buy shares of companies that will perform well into the future, and sell the shares of companies that will perform poorly. If you happen to be good at forecasting the future, you can make a great deal of money in the stock market. In section three I will talk about some of the common strategies that myself and others use to try to predict which stocks will go up and down.Its important to have a firm understanding of what determines the share price of stock. We’ll get into ways of calculating value in section 3 but for now all you need to know is that the market determines the share price. That is, the price is determined by what investors are WILLING to pay for a particular share. As of this writing a single share of Google (GOOG) is valued at over $1,100 whereas a single share of Microsoft (MSFT) is hovering around $36. I want to be clear that these prices DO NOT say anything about the value of the company itself, rather these prices are merely a function of what the investors in the market are willing to pay. And so the fact that shares of Google (GOOG) are trading over $1,100 means that collectively, investors in the market think that one share of Google (GOOG) is worth over $1,100. Human emotion and psychology play a significant role in the pricing of stocks. This is a very important concept that I’d like you to always remember because people can and do have poor judgment from time to time and end up paying too much or too little for any particular stock. Note: There is a lot of money to be made if you can figure out when a stock is over or underpriced.In addition to stocks, there are other financial instruments I’d like to mention here. I won’t go into great detail in this series because I personally only trade stocks. But I think its important to be aware of what else is out there. I’m sure you’ve all heard of bonds before and possibly options, derivatives and money market instruments.Bonds are fundamentally different from stocks in that they are a debt instrument. Whereas stock is equity. In the most general sense, debt, in this case a bond, guarantees the bond owner a claim on the value of that bond. For example, if you own a bond with a face value of $1000, you would expect to be paid back $1000 by the company that issued the bond. On the other hand, owning equity, in this case common stock, does not entitle the owner to anything. In other words, purchasing a share of Google (GOOG) for $1000 does not mean the company owes you $1000. It’s a strange concept to understand but ties hand-in-hand with what I was speaking of earlier. That is, the value of stock lies only in what other people are willing to pay for it. Now you might be wondering why anyone would ever buy stock if they weren’t guaranteed the amount they paid for it. Well the answer lies in the methods that people have developed for valuing the worth of a stock; a topic we will discuss later.Options and derivatives can be confusing to talk about at first so I won’t dive in here. All you have to know for now is they are complicated ways of trading the stock markets that don’t require an investor to actually purchase stock in the common sense of the word. If you are new to the markets, do not; I repeat do not try to trade options. You can end up losing a lot of money if you don’t know what you are doing.There are two terms you should be familiar with to understand money markets and those are liquidity and maturity. In finance, the liquidity of something represents how quickly and easily it can be converted into cash, with the basic assumption that cash itself is the most liquid asset of all and that a $1 dollar bill can always be traded for another $1 dollar bill. Whereas a house for example is not very liquid because it can take a great deal of time to sell for cash and the price is usually negotiable; that is a house valued at $500,000 might actually be sold for $480,000.When we talk about the maturity of something in finance we are referring to the length of time the instrument is outstanding. The U.S. government regularly issues Treasury Bills, commonly referred to as T-Bills with varying maturities ranging from 1 month to 6 months. As a new investor the only two money market instruments you need concern yourself with now are T-Bills and Certificates of Deposit. Certificates of Deposit, or CDs are generally issued by a bank and have varying maturities. The basic premise is you hand over $1000 today, and the bank agrees to give you you’re $1000 back plus interest at the end of maturity.Lets quickly recap what you’ve just learned:The stock market is an electronic exchange that allows you to trade shares of a company with other investors. By “buying low and selling high” as they say it is possible to profit off these transactions.The price a stock is bought or sold for is constantly changing second by second and is determined by how much money an investor is willing to pay to own a share. This is the idea of supply and demand.There are a number of other tradable financial instruments such as bonds, options, and derivatives, that are good to be aware of but we won’t discuss frequently in this course.Money market instruments are very liquid, that is they can easily be traded for cash, and have short maturities. The two to be familiar with for now are T-Bills and CD’s. Learn Stock Market History Historical Market Returns: What to Expect Hi, Matt Bernstein here to talk about the historical performance of the market. There are numerous sites out there offering free historical price data on the markets, and if you’re willing to pay there are some that offer even more in-depth data. I like to use Yahoo! Finance because it is free, simple to use, and meets most of my needs. There is also the convenient option to download any set of data right onto a spreadsheet for you to do with what you like.When measuring the performance of the stocks we own it’s useful to have a benchmark to compare with so we know how well we are doing. From 1926 to 2009 the average rate of inflation was about 3%. This means that each and every year, the cost of goods rose by about 3%. And so if you pay $10 for a watermelon today, you can expect an identical watermelon to cost $10.30 a year from now. And in 10 years that same watermelon now costs $13.44. What this really tells us is that the money under our mattress loses value over time. And so to keep our money from degrading in value, it’s a good idea to invest it in things that grow faster than the inflation rate of 3%.Money markets typically have the lowest earnings potential of the investment classes with a historical return rate of about 3.7%. If you invested your $10 in money market instruments, then in 10 years you could expect to now have $14.38. Enough to buy a $13.44 watermelon and have some change left over. As you can see, we have successfully beaten the rate of inflation but only barely.Bonds fared a little better over the same time period (1926 – 2009), averaging a return rate of 5.5%. The same $10 investment in bonds will be worth $17.08 in 10 years. We made some money but as you can guess there are better alternatives out there.If you wish to grow your money faster than this, you must find other investment avenues. The truly great thing about the stock market is that it offers the opportunity for much quicker growth than either bonds or money markets.Large-Cap stocks, those that represent the largest companies in the world, (i.e. the Coca-Cola’s, Exxon Mobil’s, & Microsoft’s of the world) have a 9.8% return rate over the same time period (1926 – 2009). And after 10 years our $10 dollars is now worth $25.48.Small-Cap stocks, those that represent comparatively smaller companies, have an even more impressive 11.9% return rate over the same time period. In just 10 years our $10 has more than tripled to $30.78. You can now buy 2 watermelons for $13.44 and still have money left over.It gets better: the large-cap and small-cap average rates of returns are calculated using every stock that meets those size qualifications over that time period. And so these averages also include the stocks of companies that floundered or even went bankrupt. So think of it this way: if you picked 100 small-cap stocks completely at random – meaning some will do great, some will do okay, and some will go bankrupt, you could expect to receive an average return rate of 11.9%. Which means if you had a knack for picking small-cap stocks that didn’t go bankrupt, you could expect a higher than 12% return rate. So when we talk about beating the market we literally mean achieving a higher rate of return than the market averages on its own.For comparison, my brokerage account lists my average rate of return at a little over 44% each year since its inception. Over that same time period (a little over 5 years) the S&P 500 has averaged returns of just over 17%. And so you can see that I was able to earn 27% more than the market over this 5-year period. In finance, the returns we generate above and beyond the benchmark are known as Alpha, meaning I was able to generate +27% alpha.Set a goal for yourself: and that is to strive to beat the average market return of 12% each and every year, because otherwise, you might as well just pick stocks at random. Should You Use Financial Advisors? How Good Are Financial Advisors? Last video we talked about the average performance of different categories of investments, and we learned that an investor that picks stocks at random could expect average gains of about 12% each year. Which must mean that if we are selective in what stocks we purchase, we could expect greater than 12% returns.Hi, Matt Bernstein from Low Cost Hustle and this video will give you an idea of how well professional money managers do.Lets begin by looking at the performance of mutual funds. For those of you unfamiliar with the term, mutual funds allow a large group of investors to pool their money together to buy any number of stocks. Run by one or more money managers, mutual funds provide investors with access to a professionally managed portfolio of stocks. They aren’t free and some of them have very high expenses and fees. Investors invest in mutual funds with the belief that the money manager knows how to generate high returns – it is after all their job. Surprisingly, studies show more often than not that mutual funds fail to beat the performance of the broader market. Although professional money managers often have advanced degrees in Economics and Finance from some of the best business schools, studies consistently show that only 1 in 4 mutual funds outperform the market. This is a shocking result that shows three-quarters of funds performing worse than an individual picking stocks at random.But the truth is more complicated. Just like you and me, professional money managers want to make as much money as possible, and often that comes at the expense (literally) of their investors. It turns out that high fees and expenses are one of the main reasons for this trend of underperformance. Although many of these fund managers are quite good at stock picking, the fees and expenses they charge can end up eating a large chunk of the gains passed onto the investor. And so a fund that earns a 14% return on its investments but charges 3% in expenses actually ends up underperforming the market average of 12%.Does this mean we should avoid mutual funds? Well that depends on a number of factors including and not limited to:how old you arehow much money you have to investDo you have enough time to do research on your own?I would argue that if you aren’t:elderly or already retireddon’t have more than $10 million dollarsor aren’t too busy during the day to research stocks on your own.Then the benefits of investing on your own versus in mutual funds outweigh the negatives.Before we go further I’d like to explain two terms you should be familiar with: and those are “sectors” and “indices”. When we talk about indices the Dow Jones, NASDAQ, and S&P 500 are the most frequently mentioned. And the purpose of these indices is to track the performance of a group of stocks. So for instance, the S&P 500 tracks the performance of the 500 largest companies in the United States. When we say that the S&P 500 is up by 10 points today, we mean that the average increase in stock price of all 500 of those stocks was 10 dollars. Some of those stocks will have risen higher, some lower, and some will have even lost value, but on average the index was up 10 points. The Dow Jones, also known as the Dow 30, the Dow Jones Industrial Average, or simply the Dow, is an index that tracks 30 very large companies in the United States. And the NASDAQ Composite is an index that tracks the performance of about 3000 stocks, most of which are technology companies. There are many more indices but these three are the most commonly mentioned.Sectors describe a particular sub-group of the economy. Technology, Finance, Energy, and Utilities are examples of different sectors and they all have very different behaviors due to the different markets they represent. It is common, for example, to use the NASDAQ Composite as a gauge for how well the Technology sector is doing, and the Dow and S&P 500 are gauges for the overall economy.In recent years Exchange Traded Funds known simply as ETF’s have been gaining in popularity. ETF’s are like mutual funds in that they hold any number of stocks. However, unlike mutual funds, a money manager does not choose the stocks an ETF holds. Rather an ETF is typically used to mimic as closely as possible a particular index or sector. For example, if you wanted to match the performance of the S&P 500, then rather buying into all 500 stocks one-by-one, you could by an S&P 500 ETF, the most famous of which is the Spider SPY. Whereas if you wanted to match the performance of financial companies only, you might invest in a financial ETF, the most popular being the Spider XLF. The advantage of ETF’s is that they allow investors to trade entire indices and sectors as if they were single stocks.ETF’s do have fees and expenses but they are usually lower than those of mutual funds. And it turns out that for the same reasons as with mutual funds, the average ETF fails to beat the market because of said fees and expenses. Does this mean you should avoid ETFs? For the passive investor without time to do research on his or her own, I would argue ETF’s are a better option than mutual funds, due largely to the smaller fees and expenses. But for the active investor looking to beat the market, individual stock selection is the way to go. If someone else is doing the heavy lifting for you, then you can be sure they are taking a cut for themselves.So I hope this video has given you an idea of the advantages of investing on your own versus entrusting your money to someone else to achieve a much higher return than what most money managers can...