Ever wondered what separates Warren Buffett-worthy investors from mere speculators? Ready to unravel the mysteries of successful investing and learn the rules you need to follow? Get all the answers in our latest episode, where we discuss the fundamental differences between investing and speculating, as taught by Benjamin Graham, Buffett's personal mentor. Learn the importance of doing your own research before investing, the art of spotting quality companies priced low, and how to tune out media hype that often distracts with flashy new trends.
With insights from this episode, you'll shift from speculator to responsible investor, ready to make sound decisions for your financial future.
I cover the following topics in this episode:
- Who is Warren Buffett and Benjamin Graham?
- The number one value investing book
- Investing vs speculating
- Are you speculating?
- Are you investing?
- How can you become a smart investor?
Watch till the end to get 10% off coupon code for Simply Investing.
Learn more at: https://www.simplyinvesting.com/
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In this episode, i'm going to explain the difference between investing and speculating, and I'll answer the following questions Do you think you're investing when, in fact, you're actually speculating? Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we're going to cover four topics. We're going to start at the very beginning, then we are going to answer the question are you speculating? Then we'll take a look at are you investing, and then the last topic will be how you can become an investor. Let's start at the beginning. So you may or may not recognize this person on the screen in front of you. This is a picture of Warren Buffett. Warren Buffett was born on August 30th in 1930. He is a self-made billionaire, a legendary value investor, and has a net worth of over $117 billion. Now, warren Buffett did not start out being rich. His parents weren't rich and he didn't win the lottery. He became a self-made billionaire by investing in stocks. Now, before we get deeper into investing versus speculating, we need to go back even further and start at the very beginning. So let's take a look at this image on the screen here. A lot of you may not recognize who this person is. This is Benjamin Graham. Benjamin Graham was born on May 9th in 1894. He is also a self-made millionaire and is known as the father of value investing, especially when it comes to investing in stocks. Now, benjamin Graham was Warren Buffett's mentor and teacher at Columbia University, and he taught a lot of investing, a lot of topics that made Warren Buffett who he is today. So Benjamin Graham is extremely important, especially when it comes to the world of investing in stocks. And value investing We're going to get to that a little later is looking at quality stocks when they're undervalued, right. So we're going to look at stocks when they're priced low. And who better to start off with than with Benjamin Graham, who is known as the father of value investing? Now, benjamin Graham wrote a very important book in 1949, and it still holds true today And the book is called The Intelligent Investor. So this is a highly recommended book for anybody looking to learn about investing in stocks using the value investing approach. So in 1949, benjamin Graham talked about investing versus speculating in chapter one. He felt that this topic was so important And he wanted to get everybody on the same page and to understand the difference between speculation and investing. Are you gambling your money when you put it in the stock market, or are you investing it responsibly as an investor? So right at the beginning, in chapter one, benjamin Graham talks about investments in versus speculation. Okay, so let's get right to it. His quote I'm going to share with you today is coming straight from his book that he wrote in 1949, the Intelligent Investor. So I'm going to read this quote for you as it is in the book. So Benjamin Graham says an investment operation is one which, upon through analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. Now there's a couple of key, important words here He talks about through analysis. Only then can you start looking at safety of principle. This is safety of the amount of money that you're investing in the stocks, your capital investment. How safe is it going to be? And we're looking for an adequate return. So if you're not doing those three things, then you're just speculating. So, in other words, what he's telling us is that investing is when you do your research or homework before you invest in any stock. Now, on the other hand, speculating is not doing your research or not doing your homework. So this is a quick way to sort of split the difference here between what is investing and what is speculating. Now we're going to dig a little bit deeper. So let's move on to topic number two, which is called are you speculating? Are you a speculator when you're investing? You may not know it, or you may know it. You may or may not know that when you're investing money into a stock, when you're purchasing a stock, are you actually in fact investing responsibly or just gambling your money away? And a lot of people fall within those two categories. But let's take a look at it a little bit deeper. So here's a couple of questions I want you to ask yourself. So do you buy stocks or shares in a company because a friend or a coworker gave you a hot tip? Or do you buy stocks or have you bought stocks because you read somewhere online that the stock was going to skyrocket? The price was just going to go up. Next question do you buy stocks without doing any research? So be honest with yourself. Think about some of the stocks you've purchased in the past. Think about some of the stocks you might be thinking about buying or investing in, and are you doing that with research or without any research? Are you buying them without any knowledge of the company that you're buying, do you have any sort of basic understanding of what that company is doing? How about this question do you buy stocks because you think you can get lucky, or do you buy stocks because you have a feeling that the stock will go up? And what about the last one here? Do you buy stocks because everyone else is buying stocks, and your friend, your coworker, your neighbors are making a lot of money every week and they're bragging about it, and you think you're going to be missing out on those types of investments, and then you jump into buying stocks. Now, this normally happens when the stock market is going up, when it continually goes up, week after week, month after month, year after year. Everybody just jumps in. They read about it online, they hear from their friends, they hear it from family and hear it from people at work, and then they get caught up in thinking that they could buy a stock for $20 on a Monday and sell it for $45 on a Friday, right, so you kind of get caught up on those things, okay? so I've given you a whole bunch of questions to think about. If you have ever bought a stock because of one of those questions, then you were in fact, speculating, which is, in my mind, that's the equivalent of just your gambling. So you want to be very careful. We don't want to gamble with your hard earned cash. Now let's take a look at our next topic Are you investing? So maybe those questions don't apply to you. So now let's take a look at what is the difference here between speculation and investing. So I'm going to go back to Benjamin Graham's quote that I showed you at the start of this podcast, and the same quote right. So that is key for us. So an investor is somebody who understands how a company is making money. Now, you don't need to be a genius or an expert at how the company is making money. Just a general understanding of how a company is making money is good enough. An investor is also somebody who protects themselves from losses by investing in quality companies not just any company, but high quality companies. Not just any high quality company, but also when they are priced low, because the price you pay for a stock is going to make a huge difference in what your future returns are going to be in that investment. Okay, and lastly, an investor is somebody who also ignores the media noise That's always touting the latest, next big thing, and that's always. We've seen this before. It was crypto for a long time, then it was EV electric car companies, then it was any car company involved with anything to do with EVs, such as battery technology and all that, and now the big thing is AI. So everything is AI. So there's companies that are involved in AI And there's a lot of talk about the stocks going up and the technology Right, so I'm not going to get into the technology itself. We're not debating that at all. What I'm saying is, as an investor, you have to step back a little bit and ignore the noise online and in the media, especially when they're always pushing the next big thing. So then, how can you become an investor and stop being a speculator? How do we get you from here to hear where you become an investor? so, number one Everything starts with knowledge, knowledge, education. You need to educate yourself on how to invest and what to invest in. Why? Because no one cares more about your money than you. This is your hard-earned money that you work very hard for, and you don't want to spend it Carelessly or speculate carelessly with that money. So this is one thing that you should not be outsourcing to anyone else. Why? because no one cares more about your money than you. So you have to take that responsibility for yourself and Get that knowledge before you invest even one dollar in In stocks or in shares. Now, this same. This applies to mutual funds, index funds, etfs, income funds all of that Right. I can extend it even further. It applies to real estate, investing in businesses or anything else. You always have to start with Understanding and get the knowledge first before you invest a single dollar. So I'm gonna help you today, in this episode here. I'm going to cover with you right now some investing guidelines. Now, i've been investing for over 25 years. I'm a dividend value investor, so I've seen a lot of changes in the market over the last 25 years. I've seen the market go up. I've seen the market come down, had market crashes myself. They've experienced the stock market crashes. So now I'm able to provide you with some investing guidelines That are going to take you from being a speculator to an investor. So let's get started right away. We are going to start with number one. Do you understand how the company is making money? Again, you don't need to be an expert in how the company is making money, but you have to have a good general idea should be able to explain it to a 12 year old or To your grandmother of how a company is making money, right? for example, how does Walmart make money? They buy products at wholesale and then they put them in the store and they sell them at retail prices, and The retail prices are higher than what Walmart paid for those items. And that's how they're making the money They're. Their profit is right there the difference between the retail price and the wholesale price. Okay, if you don't understand how the company is making money, if you look at Their website, you look at the company's Annual reports or a description of what the company is doing. If it doesn't make sense to you, skip it. Move on to another company, another stock to look at. Okay, guideline number two 20 years from now, will people still need its products and services? Remember, you're investing your hard-earned money. You want to make sure the company is going to be around for the long run, so we don't want to invest in companies that are going to be gone in two years or in three years. So think about what are the products and services that the company is producing and will those still be in demand 20 years from now, and those are the kind of companies you want to look at when it comes to making long-term investments. Now again, we are I'm a dividend value investor. I'm a long-term investor. I'm not going to be doing any day trading. I'm not looking at growth stocks. I'm not looking at high-risk investments. I'm looking at how to invest safely and reliably. Okay, number three does the company have a low-cost competitive advantage? So this is extremely important. I've talked about it before, but I'm happy to share the story with you again. I'm going to use Warren Buffett's example And we saw Warren's Buffett's picture in the beginning of the presentation here And this is how he describes a low-cost competitive advantage. He says to think about a company as a castle. So the corporation is the castle And around the castle there is a moat. The wider the moat, the deeper the moat, the harder it is for competitors to come in and attack the castle or the corporation. Or, in the case of business, harder it is for competitors to come in and take over the business for the corporation itself. So a really good example is Coca-Cola. Coca-cola has been around for over 115 years. They operate in over 125 countries. They have an extremely low-cost competitive advantage. You can take that Coca-Cola logo anywhere in the world and show it to people and they'll know exactly what you're talking about. And think about. If you were to start a company today to compete with Coca-Cola, you would have to spend billions and billions of dollars in marketing and in advertising and product development And you still wouldn't get close to where Coca-Cola is today. Let's take a look at McDonald's, another large corporation, a large brand loyalty. People will cross the street to get a Big Mac because that's what they want to eat, even though there's a burger joint closer to them. There's only one company in the world that can give you a Big Mac and that's McDonald's. So these companies, even though they spend a lot of money on marketing and advertising, generally, compared to everyone else, they have a low-cost competitive advantage. So that brand recognition, the brand loyalty, is super important. Let's take a look at the next one, number four Is the company recession-proof? Right, and I've used this example before and I'll say it again because it's such an important example. If there's a recession or there's a chance you may lose your job, are you going to go out and buy a new car? Of course not. You're not going to do that If there's a recession or there's a chance you may lose your job, are you going to go out and buy an expensive vacation overseas? Of course not. You're not going to do that either. This is why we don't invest in car companies or in airlines, right So? or in aircraft manufacturers, for example, look at what happened with Boeing, which is one of the largest commercial aircraft manufacturers in the world. Look at what happened to General Motors in March of 2020. As soon as COVID hit, boeing and General Motors cut their dividend to zero, and the dividend is what we get paid to hold on to the shares in dividend companies. So, for example, if I, if you own a thousand shares in a company that's paying a dividend of $1 per share, you will earn $1,000 every year for as long as the company continues to pay the dividend and as long as you own the shares. But if the company cuts the dividend to zero, your income goes from $1,000 a year to zero, and so we don't want that, right? So we don't want companies cutting their dividends, and so we want companies that are recession proof. So, car companies not not so good. Airlines not so good. But even if you lose your job and even if there's a market crash, you still need to eat. When you come home at night, you still need to turn the lights on, and if you live in a Northern climate and you were in Canada and the upper states in the winter, you are still going to have to come home and heat your home. Whether it's a condo, an apartment or a house doesn't matter. So those the kind of services, products and services that you will need even if there's a recession, and so the companies providing those product and services will continue to earn money, and as they earn money, they can afford to pay a dividend to the shareholders, and the dividend is your return on your investment while you're holding on to the shares, regardless of the stock price. If the dividend, if the company is paying a dividend of $1 per share, they're going to pay you $1 per share, regardless of the share price. The share price changes every single day, but the dividend will remain consistent. So look for companies that are recession proof. Let's go to number five. Is the company profitable? So we want to look at companies. The last 20 year history of at least 8% average annual growth In their earnings. So if you were to put it on a graph, we would want to see the earnings going up like this over time. If they're going down, skip it, don't invest in the company. If the earnings are doing this up and down, up and down, up and down That's also completely random. I have no confidence as to what the earnings are going to be next year. But when I see a graph that does this and it goes straight up, then I have some confidence that next year the company is going to make more money And as long as the company is profitable, then the dividend will be paid to you, the shareholder Number six. Does the company grow the dividend? And this is also important. Again, we're looking for 8% average annual growth over the last 20 years. Why do we look back at last 20 years? Because we want to see a solid track record. No one can predict the future. I don't know what's going to happen next week, next month or next year. I don't know what's going to happen with dividends, stock prices, the stock market We don't know. But when we look at a company that has a 20 year track record of growing their dividend year after year after year for example, coca-cola has had over 54 years of consecutive dividend increases Think about how many market crashes we've had in the last 54 years, how many recessions we've had. But Coca-Cola has managed to increase its dividend year after year after year. So I'm going to go back to the example of the company that was paying, for example, paying you a dividend of $1 per share. So it'll start off with $1 and then next year the dividend could grow to $1.10, maybe $1.15, maybe $1.20. And over time, that dividend, every time it gets increased, that's more money in your pocket. So we want to look for companies that have a history of growing their dividend. Okay, number seven can the company afford to pay the dividend? So this is where we look at the payout ratio. We want to look at companies with a payout ratio of 75% or less. If it's over that, if it's 200%, 300%, skip it, move on to another company. Number eight is the debt less than 70%. So we don't want to invest in companies that have a debt of 3, 4, 5, 6, 800%, because when there's a recession or when interest rates go up, those companies are going to have a very hard time paying off their debt And they're going to have a very hard time surviving a market downturn. So we want our money to be safe. We're going to invest it in companies that are financially strong. So stick with companies with debt of less than 70%. Number nine we're going to avoid any company with a recent dividend cut. So if the company reduced its dividend from the year before, well that's a yellow flag. That doesn't give me any confidence. What's going to happen next year? Are they going to lower the dividend even more? Are they going to eliminate the dividend? We don't know. So, to be safe, if there's a dividend cut, we don't look at the company right. I'm going to go back to guideline number six, which is making sure the dividend is going up consistently, year after year after year. Number 10, does the company buy back its own shares? So, generally, share buybacks are a good thing, as they buy those back in the open market. It reduces the number of shares that are outstanding, thereby increasing the value of the existing shares. And if you happen to own those shares, then over time the share price is going to come up. Number 11, this is where we look to make sure that the stock is priced low. So there's three things we're going to look at here. We're going to look at the PE ratio, so make sure it's 25% or less. The PB ratio price to book value. Make sure it's three or less. And then we compare the current yield to the 20 year average yield, and so the current yield has to be higher than the company's 20 year average dividend yield. So we're going to compare the average current dividend yield to the average dividend yield And then we know if a company passes all these three parameters in guideline number 11, then this stock is historically priced low. And the last one, very important, they're all important. We want to make sure, before you invest in any stock, that the company passes all of these guidelines that I've shown you here. So number 12 says keep your emotions out of investing. Okay, it's very easy to get caught up with all the noise online, on Twitter, on any of the social networks, on media, and people got caught up with crypto back in 99 2000,. They got caught up with all the tech stocks. Now they're getting caught up with AI. Then it was. Even we had the same thing with EVs. Just ignore all that noise. I've given you the guidelines here. Follow the guidelines. This is going to be your checklist. Make sure the company passes all of these before you invest in it. Okay, so I'm going to leave you with a few words of wisdom from Jason Sweg. He is a financial journalist, a financial author, has worked on Wall Street for many, many, many years, and these are important words and I'm going to share those with you. So Jason says people who invest make money for themselves. People who speculate make money for their brokers, and that, in turn, is why Wall Street downplays the virtues of investing and hypes the appeal of speculation. So think about that before you invest any dollar into any company, any stock, any share, any mutual fund, etf or index fund. So our approach, as I said before, is to invest safely and reliably for the long term. So we don't think in terms of weeks, months or years. We think in terms of decades. So I have stocks that I've owned for over 20, over 25 years, and so we always take the long term perspective. And so what I teach is how to invest in quality dividend stocks when they're priced low. Not just any stock has to be a quality stock, and it can't be a quality stock at any price. It has to be priced low. Why would you pay $200 a share for a company when it's priced low at $75 a share? So how do you know when you're looking at a quality stock and how do you know when it's priced low? Well, for that, i've created what I call the 12 rules of simply investing, and I've already covered them. It was the 12 guidelines that we went through in this episode. So those are your call it rules, call it a guideline guidelines or call it a checklist, doesn't matter. What you call it, you have to make sure a company passes all of these rules before you invest in it. Even if a company fails one rule, skip it, move on to something else. So if you're interested in learning more about these rules, i cover all of them in the Simply Investing course. It's an online course, you can take it at your own pace And it's got all of my 25 plus years of experience As a dividend investor. I've put all that knowledge and experience in that course. It's gonna help you. Like I said, knowledge is key before you invest your first dollar. So the course is gonna give you that knowledge. It's like I said it's an online course consists of 10 modules. We start with the investing basics, then we get into the 12 rules. We give you real life examples, then I show you how to apply the 12 rules. I even give you a Google sheet. You can fill it out. You can use the 12 rules and apply them against any stock anywhere in the world And we have clients who have done that in over 35 countries. Then I show you how to use the Simply Investing platform. Then we take a look at placing your first stock order. Step by step, i'm gonna show you how to build and track your portfolio. I'm gonna show you when to sell. It's important to know when to buy, but it's equally important to know when to sell, so we cover that in the course. Then we talk about reducing your fees and risk. I'm gonna give you an action plan to get started right away, and then I answer some of your frequently asked questions in the course. Now, for those of you that are interested, i've spent two years. I built the Simply Investing platform. It's a web application, it's a subscription-based service, and what we do in the platform is we apply these rules to over 6,000 companies in the US and in Canada every single day. So when you log into the web application, the website, when you log in there, it'll show you immediately which companies pass all the rules, which ones fail, which rules, which ones which companies are price low and which ones are priced high. So then you know which companies to avoid as well. So take a look at that. If you're interested, write this down. We have a special coupon code for everybody listening to this podcast today. The coupon code is SAVE10, s-a-v-e-1-0. Save10 is gonna give you 10% off of all of our products and services. So 10% off the course, 10% off the platform. I also do one-on-one coaching calls, personal assessments, so you can get 10% off that as well. If you enjoyed today's episode, be sure to click on the subscribe button, hit the like button as well, and for more information, take a look at my website at simplyinvestingcom. Thanks for watching.