Are You an Investor or Speculator?

If you buy and sell stocks, you may automatically classify yourself as an investor. But it is very important to differentiate between someone who invests in stocks versus someone who speculates in stocks. This distinction is discussed in Benjamin Graham’s book “The Intelligent Investor.”

An investor in stocks is someone whom thoroughly analyzes and understands a business before they choose to invest in a company’s stock. By analyzing a company’s stock, you help protect your principal against serious losses that could arise in bear markets. In addition, investors aspire for “adequate” returns on their investments. Note that investors do not aspire for extraordinary performance, but rather “any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence” according to Graham.

Graham also differentiates investors from speculators by their use of stock market prices. He identifies that investors base the market by established standards of values whereas speculators base their standards of value off the market price. Graham is basically saying that investors do not use the market price of a stock to influence their decisions whether to buy or sell. Investors first look at the company’s underlying business and decide what price they would be willing to buy the stock for. If the company has a market price above this value, investors do not buy into the stock. Speculators, on the other hand, look to the market price of a stock when deciding whether or not they should buy or sell. Simply put, Graham suggests you invest in a stock you would be comfortable owning even if you didn’t have information about its daily market value.

Speculation is tempting. Believe me, I have been guilty of speculating in the past because I believed that I could do well and make money quickly from the stock market. The truth is, I was only making money for my stock broker. Every time I bought or sold a stock I had to pay a transaction fee to my broker. This is why Wall Street hypes up speculators. At the end of the day, they are the ones making away with all of your money. This is another reason why you must shift your thinking from a speculator to that of an investor.

In summary, if you want to experience steady growth of your portfolio and don’t want to face a ton of risks, you must change your mind set to that of an investor from that of a speculator. Remember these three principals of investors: 1) Thoroughly analyze a company and the soundness of their business. 2) Protect yourself against losses. Do this by determining what market price you would buy for a stock, then decide if it is a buy (not the other way around). 3) Aspire for adequate performance. You’re not going to get rich quick by investing.


Invest Today! What You Need to Know Before Investing in Stocks

Are you interested in investing in the stock market? Of course you are! In this article I am going to give a brief overview on certain things you should understand before you jump in and start buying stocks.

First things first, if you are trying to make a quick buck off the stock market, you should probably stop right now. Many people do not immediately make a lot of money by investing in stocks. In fact, many beginners end up losing money because they don’t have the patience. It takes a while for your money to grow. Unless you are able to invest a huge amount of money, you aren’t going to be able to make a significant amount of cash in a short period of time. Playing the stock market requires patience, smarts, and a little bit of risk tolerance. As long as you remind yourself of this, you will be better off than most people out there.

Next, it important to understand the financial statements of a company. If you don’t understand how to read financial statement I would definitely recommend you start by reading my prior post, “A Quick Overview on How to Read Financial Statements”. It is vital that you know what revenues, expenses, assets, liabilities, and stockholder’s equity are. These are the backbone to every company’s financial statements. It is these items which ultimately determine how attractive a company is to you.

Financial ratios are also extremely important when you are trying to decide whether or not to invest in a company. There are a huge number of ratios out there that investors use to understand a company. Financial ratios are a fundamental part of the analysis of financial statement data. These ratios take the information found in financial statements and give meaning to the numbers. Examples of financial ratios that are used heavily in making investment decisions are the current ratio, debt ratio, and free cash flow.

If you are a beginner and you want to invest right now, I would suggest you look into stock indexes, ETFs, and Mutual Funds as a place to put you money. These funds and indexes are made up of a large number of companies, and allow you to diversify you holdings while keeping you risk low. You are not subject to the risk of losing everything if a company goes under because there are a huge number in these funds. Examples are the S&P 500 (.INX), SPDR S&P 500 (SPY), and T. Rowe Price Blue Chip Growth Fund (TRBCX). If you choose to go this route, you must once again keep in mind that you are in it for the long haul. I would suggest you choose your fund carefully and don’t even look at it for the first few weeks. It is very easy to panic and sell of your holdings early on, especially if the market is having a down day. I can’t stress this enough.

This was a quick overview of what you should understand before you jump into investing stocks. If you have a friend who is a beginner please feel free to share this article with them. Happy Investing!

A Quick Overview on How to Read Financial Statements

If you want to invest in stocks and understand companies, you need how to understand how to determine the financial health of a company. You see, companies are just like people. They pay taxes, some die young, and some seemingly live forever. By understanding how to read a financial statement, you are a doctor to the company. You will be able to understand how healthy that company is. By determining the financial health of a company, you will know if it is a smart idea to give them your money.

Let’s start off with the financial statements of a company.

The first thing you must understand is a company’s revenues. Revenues are the amount of money that a company receives for a certain time period. For example, when you go to Starbucks and buy a latte for $4, that money is revenue to Starbucks. This is money that a consumer (you, in this instance) exchange for a product or service. Revenues are at the very top of the income statement. It includes all the money that a company brought from their business activities. When a company is healthy, their revenues grow at a steady pace. A company who’s revenues grow at a rapid pace can be a great opportunity to make big returns, but there is also a risk that the fail to maintain such a steady revenue stream.

The next item is also on the income statement. Net income is the company’s total earnings after taking away expenses. Companies have a large number of expenses, so let’s go back to our Starbucks example above. We already established that when you spend $4 on a latte it is revenue to Starbucks. To arrive to net income you have to take away certain expenses. You must subtract out what it costs Starbucks for the espresso, milk, and syrup used to make that latte. You must also subtract out the cost you pay employees, and any other costs associated with running the company (such as taxes). After you remove these expenses, you arrive at net income. Net income can help you determine if the company is actually making money. If net income is a negative number that means the company is losing money after netting their revenues and expenses. Companies whom consistently have a negative net income are not good investment options. There may be times when a negative net income is not a bad thing, but I will explain that in a later post.

The next item you must consider is a company’s assets. Assets are things that a company owns which will benefit them in the future. Let’s once again consider the Starbucks example above. Starbucks has coffee makers. Those coffee makers are assets to Starbucks because they will allow Starbucks to create a product that will make them money (benefit them) in the future. Assets can be any number of items for a company. Cash, investments, and equipment are all assets that can benefit a company in the future. Assets are important to understand because they will be used in ratios and other metrics used to measure the financial health of a company.

The opposite of assets are liabilities. Liabilities include things, like debt, that you are obligated to pay back for past transactions. You may have friends who use credit cards to buy things, like a brand new TV. As you know they are obligated to pay back the credit card company for that past transaction in which they bought a TV. Companies work in a very similar manner. They borrow money to buy things (assets) which they must pay back at a later date. Liabilities are important to understand. While a liability is not necessarily a bad thing, it can be bad if a company has too much. Having too much debt can hurt a company just like they can hurt your friends. It can get them in hot water if they can’t afford to pay them back. You want to watch out for a company that has a large number of liabilities when compared to their total assets.

These four financial statement items are very important to understand when you first learn how to invest. In part two of this article I will explain some simple ratios you can use while making investment decisions.

(*Quick is a subjective term that I use very loosely here to describe how your money can multiply over a period of time of 25 or more years. I mean really, that’s pretty quick you consider just how old the Universe is.)

My Positions

Hello there!

If you don’t already know, this is my personal finance and investing blog! I periodically post my thoughts about finance and investing to try and help you out to create a better future for yourself. I also post some suggested stock picks every once in a while. Some people have actually asked me if I invested in the stocks I suggest. To which I say “Of course!” (when I have the money to do so). So that inspired me. Today, I have decided to post my portfolio for you to see. I believe that it is important to be as transparent as possible and I know this is a great way for all of you to see what I love to do.

Before I post my stock positions, I just want to give you some background information. I just recently started investing (real money) at the very beginning of August. During the months of August and part of September I tried my hand at buying and selling on a short time horizon. This didn’t work out quite as well as I hoped and I ended up breaking even. Since about mid September I have been investing and going long on many of my positions. For someone like me, this is the best thing that I can do given that I don’t have unlimited time and resources.

Also keep in mind that I started out with about $5,000 and have added a little bit every month. I currently have about $11,500 in principal invested which has a current fair market value of $12,000. Without further ado, here is my portfolio:


Hope you enjoy and Happy Investing!!

Quote of the Day for November 11, 2013

Sucessful men, in all callings, never stop acquiring specialized knowledge related to their major purpose, business, or profession. Those who are not successful usually make the mistake of believing that the knowledge acquiring period ends when one finishes school. The truth is schooling does but little more than to put one in the way of learning how to acquire practical knowledge.

-Napoleon Hill, “Think and Grow Rich”



Stock Pick for November 5, 2013

One stock that has interested me lately is Baidu. Baidu (BIDU) is currently trading at $151.92 at the mid point of today. Baidu is considered by many to be the Google of China. Baidu’s total revenues have nearly tripled over the past three years. In addition, Baidu’s quarterly profit rose 1.3% recently as they invested in expanding their mobile business. 

Stocks were recently up as much $169.75 following their quarterly earnings release. I believe that this is a great opportunity and could be a solid stock to buy and hold on to for the long haul.

Review of Rich Dad Poor Dad Part 2

This is my second part of a two part review of “Rich Dad Poor Dad”. In my prior post, I wrote about certain aspects that I did not like about the book. While that post may have sounded a bit critical, there were a number of things that I absolutely loved about the book.

The first thing that I really like was how simple he made investing by using accounting terminology. Basically every person has their assets and liabilities. Assets being things that you buy that will benefit you over the long run and liabilities being things that you buy that will cost you in the long run. He describes how many Americans don’t have any true assets. Assets will be things like those stocks and bonds and rental properties etc. On the flipside, many Americans have liabilities which they think are assets, the biggest one being a mortgage. Many people believe owning their own house is an asset but the truth is, many people can’t afford owning a house. As a result, they are forced to work in jobs they don’t enjoy to make money to pay for something they can’t afford. It may seem like a quirky concept, but I agree that owning your home can be a huge burden, especially if you are not adequately prepared.

Another thing that I enjoyed was the idea that you should mind you own business. When you receive you paycheck every week or two weeks, you really should be investing as much of it as you can. Don’t go out and spend every last dime you earned on a new TV or a car or other things that you don’t need. Invest in something that will generate long term cash flow for you so that you can get the most out of every dollar you earn.

I also agree with the idea that financial literacy  should be discussed in schools. High school kids really need at least one (or more) classes that teaches them about personal finance and how to invest their money. So many people these days are completely inept when it comes to saving money (a topic I will discuss in a later post). If people better understood how to save money and invest in themselves, we may not be in this financial crisis that we face today.

In addition, Kiyosaki says that they world is full of chicken little’s who believe that everything is going to crash down and the financial markets will collapse and never recover. I have encountered a number of people who have this belief and all I can do is shake my head. It is embarrassing that people are so naïve and really believe that putting cash under their mattress is better than investing it in the stock market. If you ever have any doubt about the stock market just remember, the average market return of stocks over the past two centuries has been 6.6%. Over those two centuries we have had two world wars, the civil war, a great depression and many other recessions to boot.

Overall I really enjoyed this book and would recommend it as a great book for those looking to learn about investing and personal finance. Robert Kiyosaki makes it seem very easy for anyone save up money, which it really is. It is not that hard to learn about investing. It is not that hard to save up a little bit here and there and invest it in assets.

Review of Rich Dad Poor Dad

As I stated in an earlier post, I wanted to give a little review of the book “Rich Dad Poor Dad”. I decided that I wanted to do a little two part review of the book. My two part review will cover things that I liked about the book and things that I did not like about the book.

My first review of the book will be things that I did not like about the book. These may be things that I did not necessarily agree with or things that may have rubbed me the wrong way. Without further ado, let’s jump right into it.

One of the first things I did not like about this book was that the author’s tone was a bit condescending and degrading to a majority of the population. I understand that he was using this tone to get a point across to readers. He was trying to drill home the idea that personal finance is vital and that the average American does not know too much about how to invest and make money. While the tone of the book put me off at times, I did not let it discourage me from the fundamental ideas he was preaching.

Another idea that I do not necessarily agree with is that you should pay yourself first. The idea is that you should pay yourself first, before you make payments to any creditors, tax collections agencies, etc. By paying yourself first and leaving those guys last you don’t cave into the pressures that these collectors put on you. This is supposed to serve as sort of motivation to find ways to come up with money to pay these collectors. The problem is that most individuals do not have the ability to just create extra cash flow out of nowhere. Maybe people reading this book are just starting out and if they choose to follow this advice they could end up in dire straits when it comes to their finances. In my opinion, people need to pay those critical bills first: rent, taxes, loans and credit card payments, and then after that focus on cutting expenses where they can so they can save up money to put into their asset column.

The author also gives off the impression that risk is nonexistent. He makes it seem like the population is full of “chicken littles” and that everyone is risk averse. He then suggests people take speculative positions that will make them a ton of money with very little risk. I believe that it is very important to consider what your risk profile is when deciding to invest. Some people would much rather take a five percent CD rather than a riskier option that could net them 16% because it would help them sleep better at night. It really is up to each and every individual. When you look at the financial crisis that occurred in the late 2000s, it was those institutional investors who did not even consider risk who were one of the primary causes of the recession. They all had the mentality of the author, which led us into a precarious position which we are still in the process of recovering from.

He also makes it seem like making money is really easy but that is pretty far from the truth. It takes years of reading and experience to make a lot of money. There is no way to get rich quick unless you win the lottery. You need to be disciplined and understand the markets and your own investing profile in order to maximize your wealth to the best of your ability.

While my post may sound critical, I really did enjoy this book. As a matter of fact, there are many great ideas that I want to discuss in my next post. Until then, happy investing!

What is your purpose?

Why do you want to learn about investing? What is your purpose for becoming financially independent? These are two important questions you need to ask yourself before you dive into personal finance. It is important to know what your purpose is and what your ultimate end goal is.

While reading “Rich Dad Poor Dad” I have reinforced the reasons why I want to invest and financially independent. I want to be free from the shackles of the work force and I want to escape this rat race as Robert Kiyosaki, the author of Rich Dad Poor Dad calls it. I want to be free to do what I want when I want. It may sound crazy and far-fetched, but I want to retire before I’m 40. Maybe even sooner if I could.

I always thought this idea was ridiculous and unreasonable, because that’s not what everyone else does. Everyone else works for 40 years, retires when their 65 and then lives out whatever little bit of their life that they have left. They work hard and long for 40 years, trying to make more money so they can spend more money on things they don’t need. That’s not for me. That’s not what I want to do.

My purpose is to retire early and spend time with my loved ones. I no longer want to worry about how I am going to pay the bills. I don’t want to work 40+ hours a week at a job that I don’t enjoy. I don’t want to feel obligated to wake up every morning a 6 am. I want to do what I want when I want, without having to second guess my decision. It is vital that you have deep-seated, emotional reasons for why you want financial freedom. These are my reasons, what are yours? 

Back in Action!

Hello there! I have been on a little hiatus lately due to my studying for the CPA exam. Luckily for you I took (and hopefully passed) my fourth and final section for the exam. It is so amazing having free time after work to do whatever I please. I have come to appreciate having free time to do anything I want, and I have chosen to utilize my time increasing my knowledge and taking better care of myself.

The first thing on my agenda is to get back into reading. I have started reading Rich Dad Poor Dad and I’m over halfway through it in about two days.

Rich Dad Poor Dad is extremely interesting to me. The ideas and concepts in the book really reiterate how I want to life my life financially. I always thought I was a little different than most people when it comes to finances, so it’s nice to see a book that I can actually connect with I want to share a lot of my thoughts and things that I learned with you once I finish up the book. In the meantime, happy investing!