5 Simple Rules for
Investing in the Stock Market
The Simple but Powerful Long Term Stock Investment Strategy That Works
Tracey Edwards
http://www.simplerulesbooks.com/
TABLE OF CONTENTS
Chapter 1 - Should You Even Invest in the Stock Market?
Chapter 2 - The 5 Simple Rules for Long Term Investing
Chapter 3 – Rule 1: Choosing Market Leaders
Chapter 4 – Rule 2: Return on Equity (ROE) Must Be 15% or Higher
Chapter 5 – Rule 3: Companies Should Show Positive Earnings Growth
Chapter 6 – Rule 4: Choose Companies with Low Debt
Chapter 7 – Rule 5: Share Price History Has Shown a Good Profit
Chapter 8 – Buying Those Great Stocks, But At What Price?
Chapter 9 - Investing for the Dividend Income
Chapter 10 - When to Sell Your Stocks (if at all)
Conclusion – Where To From Here?
Smashwords Edition
Copyright © 2011 Tracey Edwards. All rights reserved.
This book contains information regarding general personal finance that is the author’s own opinions and experiences. It is published for general reference and is not intended to be a substitute for independent verification by a professional financial planner or accountant. The publisher and author disclaim any personal liability, either directly or indirectly, for the information contained within. Although the author and publisher have made every effort to ensure the accuracy and completeness of the information contained within, we assume no responsibility for errors, inaccuracies, omissions, or inconsistencies.
INTRODUCTION
This book contains the stock picking strategy that I use to successfully make a profit in the stock market. It contains just five simple rules (and a few extra guidelines) that can be used by anyone to help them pick strong companies without having to know a lot about stocks to begin with.
I didn’t set out to be an expert in the stock market and I’m still definitely not an expert, nor am I a financial planner or economist. In fact I’m just a regular person like you that one day, after being fed up with working a boring nine to five temp job decided to dabble in the stock market in an effort to try and make some money.
Of course becoming profitable and finding a winning strategy didn’t happen immediately – it took a while before I was actually any good at the whole stock game. Over the course of five years I continued to work in crappy jobs while I read every book on the stock market I could and studied hundreds of different strategies. When I saved up my first thousand dollars I took the plunge and invested it into the stock market. It took another few years (and a few mistakes along the way) but eventually I had built up enough equity that I could leave full time employment and live on the proceeds of my investments.
My goal at the beginning was simply to build up a nice little portfolio and be able to support myself and while there have been both good and bad times when I have and haven’t been able to do that (and we are in a rather bad time right now) overall I’ve been fairly successful with the methods I use. So by writing this book my hope is that it can help you to become successful as well and perhaps be able to build up your own successful little portfolio of stocks.
I think this book will appeal to those people who want to become more involved in buying stocks, so that they can gain more control over their finances, without having to learn too many complicated formula’s and strategies.
It’s not for everyone however. If you are already seriously involved in investing in the stock market then you may find my strategies rather simplistic. It’s more for those everyday investors who are interested in learning more about what makes a good company and how to determine whether it would make a good investment.
Before I wrote this book, 5 Simple Rules for Investing in the Stock Market, I spent a lot of time reading other books in the market to see what was available. Most of the books I found were great on theory but not a lot of them had practical steps that you could take to choose your investments. So that’s what I’ve done in this book. It doesn’t contain much theory since you can already get that in many other wonderful stock market books but rather it contains practical ‘how to’ steps on what to look for. That’s what I believe differentiates it from other books in the market.
I get quite specific in this book about what I look for. I know that I have strong opinions on what constitutes a good investment and it’s likely that at times you may not agree with all of my rules.
If you have a different opinion – for example if you don’t think debt to equity is as important as I do – then by all means just take out of this book those rules you do agree with and adapt them to your own experiences. These rules work for me, and while I know they can also work for others, you need to make investment decisions that are right for you and your situation. That goes for any financial decisions that you make. You need to be in control and do what is right for you.
The stock market can be very subjective. That’s probably why there are so many different strategies and theories on which methods work. Even the experts can’t agree sometimes. Some methods work, some of them don’t. To be honest I think there are lots of different stock market investment strategies that can work, it just comes down to choosing a method that suits your style the best and sticking with it. But if you want to give my method a try, and I’m guessing that you do because you’ve purchased this book, then I’ll tell you exactly what works for me. Of course in this day and age, you know that I can’t guarantee that it will work for you. I sincerely hope it does of course, but alas I cannot guarantee it for fear of being sued. So use your own judgement.
If you’re cool with that and you are keen to jump right in and see what these five simple rules are all about then by all means welcome aboard and thanks for buying the book.
The book is set out rather simply and flows in a logical style of how I choose the companies that I do.
- The first chapter talks about whether you should even consider investing in the stock market at all, especially in the rocky economic climate that we are in right now.
- Chapter two outlines the five basic stock picking rules that I use and why I narrowed it down to just five.
The following chapters each cover one of the rules.
- Chapter three is about choosing the market leaders in the field. The blue-chip stocks if you will.
- Chapter four is what I consider to be the most important rule of all, and that is only choosing companies that have a Return on Equity figure of fifteen per cent or higher.
- Chapter five talks about the importance of the company having a positive earnings growth.
- Chapter six covers choosing companies that have low debt. You can potentially avoid many disasters by choosing companies that have not borrowed more than they can afford.
- Chapter seven looks back at the history of the stock price to see if it has a proven record of return for investors. While past performance is no guarantee of future performance it does tend to follow that if a company rises steadily each year that it will continue to do so.
- Chapter eight shows you how to determine whether the stock is trading at a fair price and how much you want to purchase it for.
- Chapter nine looks at investing for the dividend income. A sensible strategy for times when the market is rocky and you still want to make a good return from your investment.
- Chapter ten looks at the main reasons when you should sell your stocks and when to continue to hold.
- And finally I wrap things up in the conclusion.
Throughout each chapter I’ll show which of the stocks from the Dow Jones Industrial Average make the rules and at the end we’ll see which ones, if any, fit all of them and would be great companies to consider investing in.
So if you are ready, let’s get started.
Chapter 1 – Should You Even Invest in the Stock Market?
"Too much of a good thing can be wonderful" – Mae West
About two or three years after I first started investing in the stock market my friend started making fun of me claiming that investing in stocks is no better than betting on horses. She argued that it was simply pure luck if you made any money and that I must be lucky to have not lost my money so far. She figured that ‘gambling’ on stocks was a fool’s game and implied that I was a fool for even trying to learn it.
She had a point, because at that time I made as many mistakes as I did good decisions so while I was slightly ahead, I certainly wouldn’t be considered a successful investor then. It wasn’t until about the fourth of fifth year of investing in stocks (yes I’m stubborn to have lasted that long) that I really started to see a difference. And it was only after I stopped following many different complicated strategies (of my own devising) and simplified my approach that it all came together.
At first I started to wonder if my friend was correct and I was simply lucky. It’s hard to believe that simplifying my investment techniques could pay off, especially since investing in the stock market is always made out to be so difficult. But while the process of choosing companies using my new method was simple, it was extremely powerful.
So I’m here to tell my friend that she was wrong (sorry babe). Investing is nothing like gambling on a horse race. For starters there doesn’t have to be only one winner - I’ve already seen that more people than me are able to be successful in the market, so there is room for lots of people to make money at the same time. And secondly, who even said that it has to be a race? If you are investing for the long term then it makes no difference whether you jump now or in six months time. Invest when you are ready, both financially and mentally (yes it can be hard to put your money into the stock market – it can be scary – there is no rush).
And finally stocks are built on real businesses. Most companies really do want their business to succeed and make a profit – they are usually not fly by night operations (and if they are they wouldn’t fit my five rules). It’s not a gamble to want to invest in real companies and help them make a profit (and therefore see the stock price increase). It’s just good business sense.
Of course right now you are probably saying to yourself “that’s all well and good Tracey, but all I hear is that people lose money in the stock market”. “If you say it’s so good then what’s up with that?”
Fair Question.
Especially given the current global financial crisis that we’ve just come out of where thousands of people lost a lot of money. I can certainly understand why people are hesitant about putting their money back into the stock market. You might be nervous about putting your faith in investing into companies and financial markets in case it all goes bust again taking your money with it. Especially when the other option is to keep that money in a nice safe bank account earning a decent interest rate.
Except for the fact that there is no such thing as a nice safe bank account with a decent interest rate anymore. Even the larger banks don’t offer the high interest rates that they used to either. You are lucky if you find anything over 2% now. Keeping your money in a bank account – while might give you piece of mind – is not going to make you wealthy. In fact it could make you poorer as the rate of inflation overtakes the little interest that you may get.
So what are your other options? Property? – ok if you can afford it. Starting a business? – much riskier than the share market. Hoping that Grandma Betty leaves you her inheritance? – Let’s just hope Granny invested in Microsoft back in the day then.
When it comes to wealth creation you don’t have many options to get you started. And besides, is investing in the stock market really so bad? Could it be that if you have a proven and powerful plan for choosing great companies, a plan that will allow you to choose the best of the bunch, that it might be a good option for building wealth instead? Did those people that lost money have a good solid investment plan or did they leave their investments up to others and therefore didn’t know what to do during a market crash and panic sold when they shouldn’t have? Is it really possible that an everyday normal person can actually make money in the stock market if they know what they are doing?
Yes. Investing in the stock market CAN be really good for building wealth if you choose wisely.
And considering that the stock market has returned an average of 10% or more historically (even taking into account market crashes) then it’s definitely something that you should consider if you want to build some real wealth.
This is actually a really good time to get back into the stock market. We’ve just been through a market crash so guess what is next in the cycle? Well if history is anything to go by then after every crash is the recovery. Are we about to enter another boom period? Who knows? I don’t have a crystal ball to be able to say for certain, but I’m quietly optimistic. After every storm there is sunshine, so they say. But I can tell you that right now, everything is still quite cheap and moving up. Right now just might be a great time to think about investing back into the stock market. And once you have my rules down pat, you’ll know which stocks make good investment sense and which ones to keep clear of. I hope you are excited.
Which Stock Market Does This Book Cover?
This book deals with the US stock market.
We live in a global economy today and we can invest anywhere in the world. While I started with the Australian stock market (because I live in Australia) I gradually moved to invest in a few different markets around the world adjusting my strategies as needed.
The American stock market is one of the biggest in the world, and it makes sense that I would eventually want to invest here since when I was learning all about investing in stocks I read every book I could get my hands on. The majority of them were books from American investors. Some of my favorite finance books included authors such as William J O’Neil, Stan Weinstein, Lawrence A Cunningham, Nicholas Darvas and Suze Orman.
Oh and let’s not forget that my absolute hero is Warren Buffett (isn’t every investors?) I read as much about his techniques as I could. What an inspiring man he is, whether you are an investor or not. Many of my rules are actually combinations of strategies I picked up from great investors including Warren Buffett and Nicholas Darvas combined with my own experiences as to what worked and what didn’t. It’s probably of no surprise to you then that the majority of the quotes in this book are attributed to Warren Buffett.
While my strategies can be used for any stock market around the world (I’ve already used them both in Australia and the U.S.), the rules listed in this book are primarily recommended for the American market, and in particular those stocks listed in the Dow Jones index and S&P 500 index. They represent the most well known and largest companies of all American stocks, and one of my first rules is to stick with the biggest companies so that you have more information and history to base your decision on.
This Book Is About Long Term Investing. Is That Better Than Short Term Investing?
There are quite a few different strategies for investing in the stock market but generally they fall into two main camps: long term investing (a term I consider at least two years – but mostly is around five to ten years or even longer) and short term investing (which could be as short as one day or as long as several months).
Most investors are usually in one of the two camps and say that their method is the best and that you couldn’t possibly make the most money using anything else. You’ve probably heard it all before. “Only invest in penny stocks”, “Trading is losing money”, “Long term investing is the only way to invest”, “Come make $1K day trading”. Good grief, no wonder so many people are confused about investing.
Over the years I’ve tried a few different strategies and today I use both long and short term methods at different times and for different reasons. Since both methods can make you money I see no reason why I shouldn’t use both of them. I actually don’t think one is any better than the other; it’s just a matter for what method you like using the best.
Of course the rules for both are quite different as you would expect them to be, which is why you need to know up front which set of rules you will be using for the particular company that you are interested in. You can't purchase shares in a company based on short term rules if you then decide that you are going to keep it if the stock price falls because you might just hold them for the long term now.