I just finished reading an older book written by Charles Schwab called Guide to Financial Independence: Simple Solutions for Busy People.
While the book is a bit dated (2000), It does provide some basic tenets of personal finance and investing that many investors will still appreciate.
My favorite chapter in the book is Chapter 4 which discusses investment in individual stocks. In this chapter Schwab makes a remark that many of know all too well about becoming an investor. I know that since I began investing several years ago that I know see every store that I enter and every business that I visit in a slightly different light.
Instead of simply visiting a store to purchase an item that I need, I inherently find myself analyzing the store and wondering how it makes money! What are the profit margins? How many people are in the store? How does its location affect business? What are the primary products? Are the staff knowledgeable and do the provide good service?
Schwab indicates that a consumer’s shopping experience is changed in this way as soon as they become investors – I totally agree!
Throughout the chapter Schwab outlines about 12 pieces of sound advice for investing in individual stocks. Here they are in no particular order:
- Buy what you know
- Only buy stock in companies that you want to hold for many years
- Don’t invest more than 10% of your portfolio in one stock
- Don’t over-invest in the company you work for
- Do your research. Don’t bypass research just to get in quick.
- Investing on a “Hot Tip” isn’t investing, it’s gambling – pure and simple!
- When you’re ready to invest $2000.00 in stocks, invest an equal dollar amount in 4 stocks that look promising. (I would personally invest in a mutual fund until I had at least $10,000 to invest in a basket of individual stocks.)
- Don’t believe the hype about new issues (IPO’s). Do your due diligence.
- You can measure the quality of a stock by its earnings per share. (This is only one metric that should be considered).
- The chief yardstick of a company’s value is the price/earnings or P/E ratio. (one must also consider the growth rate of the company and you may want to consider the PEG ratio in your analysis).
- Penny stocks are the worst quality stocks you can buy. you get what you pay for!
- Impatience is your biggest enemy as an investor.
I agree with some of these points more than others, but you can see that Schwab is certainly schooled along the same lines as Warren Buffett and Peter Lynch.
We must remember that Schwab is the founder of a brokerage, so natually he is going to want you to start investing (and paying brokerage fees) as soon as you have the money to do so. However, I hardly think it is smart to split $2000.00 up into 4 different stock purchases costing $10.00 per purchase. That is the equivalent of paying $40.00 in mutual fund fees for the same $2000.00 investment – or a 2% management expense ratio (MER).