Intro to Investing

10 Nov 2025

The purpose of this document is to briefly explain what I understand about and how I think about Investing and the Stock Market. Please understand that I am not qualified to provide investment advice, and that this document is for educational purposes.

Some Links:

Yahoo Finance
Average SP500 Yield
Barrons (Stocks News)
The Richest man in Babylon
Historic Home Prices

What is in this Document?

This document is meant to introduce someone to investing and then focus on stocks as an investment. It will go over why someone should invest, some key concepts of investing, and then list some major asset classes. Then it will introduce stocks and dive deeper into investing in stocks.

Why would someone Invest?

The purpose of Investing is to take the excess money you have right now, and put it to work to make more money for a future date. There are various reasons why someone would want to grow the money they currently have. Saving for retirement is probably the most common reason that people will invest. They want to save money while working and invest it so that they do not have to work when they are old. Someone may invest to build up to buy a house. I invest because I want residual income and I want to become wealthy.

It is important to distinguish between investing and saving. Investing means putting your money to work. Saving might just be putting your cash under a mattress or holding it in an account. If the money is not allocated to some investment, the purchasing power of that money is likely being eroded. This is the result of inflation, which is generally present to some degree. This is where the value of a dollar decreases, or the cost of goods increases. Just hoarding money as savings can leave you with little purchasing power, but investing can help you maintain and grow purchasing power.

To drive home this point, let's look at the prices of houses. In January of 2000, the median home price in the US was $131,501. In August, 2024, it was $416,360. That is a 4.78% annual growth rate. Said another way, if you had $416,360 in 2000, you could have bought three houses and had some left over. If you put that money under a mattress for 25 years, you could only buy one house. This is what we are up against, and it is why investing is so important.

Let's go over some key concepts of investing.

What is Return and Risk?

Returns are when you make money off of an investment. This is the goal of investing. Money is allocated to a project or asset with the expectation that the investor will receive more back when the project finishes or the asset is sold.

Risk is the chance that returns do not meet expectation. There is a risk that the investment will under perform and that the choice to make that investment turns was a bad one. Volatility is a major component of risk. If an asset fluctuates wildly, like Bitcoin, it is volatile, and it is considered more risky. An investment in Bonds is more stable, and would be considered less risky than Bitcoin.

Risk and Return go hand-in-hand. If an investor is going to take a larger risk, he should require a larger return. There is no return without some risk, but betting the farm on a poker hand is obviously a bad idea. Different people will have different risk tolerances and return requirements, and their investment choices will reflect that.

What is Liquidity?

Liquidity is how quickly an asset can be converted into cash. Different assets are going to have different liquidity characteristics. Stocks and ETFs are actually quite liquid. If you own stocks, you can sell them and have the cash transferred out of your account within a few days. Real estate is an example of an asset that will be much less liquid. It could take months to sell a piece of real estate for its full value. Some people make a living by providing liquidity for real estate by paying cash and closing quickly, but they will only do this if they are given a deal. There are investments where your cash can be tied up for years at a time.

When investing, your upcoming expenses must be taken into account. If you are going to need the money soon, you should not tie it up in an illiquid asset.

Similarly, and going back to the discussion of risk, there is the risk that the value of the investment will go down (hopefully only temporarily), and then you need the money. I learned this early on. I invested after my first internship in college, but I did not plan ahead well enough. I had to sell stock at a loss about a month later to buy books for school. The point is that liquidity is something that needs to be managed. If you are going to need the money soon, it may be best not to expose it to significant risk.

How Much Money should I Invest?

This is an important question. I think you should invest as much as you possibly can. There are countless books on the subject of wealth and investing. A common thing you will hear is that you should invest/save at least 10% of your income. I really enjoyed The Richest Man in Babylon by George Clason, and it gives this advise. The amount of your income that you should invest will depend on your goals, but I think a 10% minimum would be a good start.

An important concept for investing is that, when you “buy” for example a stock, you are not “spending” money. You are storing your money in the asset, with the expectation of the asset increasing in value. If you took accounting, you can think of it as moving money around on the balance sheet. The money moves from cash to an asset further down. The game Monopoly actually helped me understand this. In Monopoly, early in the game, when you land on a square, you have the opportunity to buy it if no one else has already. I always buy the square if I have the cash. In Monopoly, you can always sell or mortgage the properties you have bought, and investing in many assets is the same way. If it is a liquid asset, you can quickly convert it back to cash if you need to, so the money is still yours, it is just stored in the investment, or Monopoly square.

With that said and deciding how much to invest, you must think about liquidity and risk as we just discussed. I periodically assess what my expenses and income will look like for the next few months. I figure out how much cash I will need to get through that time. I then invest everything I can outside of that amount. If you know you are going to buy an engagement ring, house, or have a child in the next few months, you may want to invest a smaller portion of your income or invest in lower risk, lower return assets until after that purchase/expense.

At this juncture, I want to say that getting started investing is easy. I use Charles Schwab. They would love to open an account for you, and it should be free to open. When I first started investing, there were $8 commissions for every trade I made. Now, trading stocks, bonds, and ETFs is generally commission free. In theory you can trade with very little money now too because there are fractional shares available on many platforms. I think anything over $100 is a good start!

What is Diversification?

Diversification is the classic “Don’t put all your eggs in one basket.” Fundamentally, if you own multiple different investments that are in different industries, it is unlikely that they will all fail at once.

When talking about diversification, risk is broken out as idiosyncratic risk vs systematic risk. Idiosyncratic risk is the risk associated with the specific company or industry in question. For example, oil and gas companies can be heavily affected by government regulations and moves by OPEC, but many other companies will not feel these effects. Idiosyncratic risk is the risk that can be “hedged” or reduced by diversification. If you own more than just oil and gas companies, then your portfolio will not see huge losses due to a move by OPEC, and perhaps some of them could see improvement.

Systematic risk is the risk that cannot be reduced by diversification. There are some elements of the market that can only be avoided by avoiding the market. You can think of this as what happens during big crashes, like 2008 and COVID-19. It did not matter so much what stocks you were invested in during those crashes, practically every company saw losses, even if this was only for a short time. This is unavoidable.

Some folks ask “what if all these stocks go to zero?” I say that if the market is really going to zero, your portfolio is not going to be what you need to worry about. That would be a societal collapse situation, so I encourage people that, as long as they are diversified and don’t buy anything silly, you do not need to worry about your portfolio going to zero. An underlying assumption here is that the US economy will continue to grow in the long term.

Diversification can be on a few different levels. You can diversify along asset classes, industries, and then individual stocks. Diversification along asset classes means holding stocks, bonds, gold, real estate, etc. The stock market could crash, and simultaneously gold and bonds could be going up. Holding a mix can provide diversification in that sense. We discussed previously how holding just Oil and Gas stocks could be risky, so you would want to also invest in other sectors. That will help if a certain industry gets disrupted. Finally, you can diversify within an industry. Say you want exposure within the Telecom industry. You could buy AT&T, Verizon, and others. It is possible one of them could run into issues, but holding a few will reduce your risk in that case.

What are Asset Classes?

The term Asset Class is used to describe a set of investment instruments that have similar characteristics. The “Cardinal” asset classes are Cash and Equivalents, Fixed Income, Equity, Commodities, Derivatives, and Alternative Asset Classes.

Cash and Equivalents means exactly that, cash and very low risk, highly liquid investments.

Fixed income means debt investments such as bonds. This is where the investor is making a loan with a contractual repayment schedule.

Equities refers to stocks. Stocks represent ownership, i.e. equity, in a company, and entitle the owner to a share in future profits in perpetuity.

Commodities are physical goods such as oil and gold that are useful to the economy. They derive their value from demand for their consumption or use.

Derivatives are contracts between two parties to exchange cash flows based on the performance of an underlying asset. Futures and options are two of the most common derivatives. The reader of this paper should stay away from derivatives unless they really understand them. Derivatives are highly speculative and complex. They can be used as insurance on an investment, but they are often primarily a contractual gamble between two parties with opposing views of an assets future prospects.

Alternative Assets is an umbrella term for lots of other investments. This includes Real Estate, but it also includes Hedge Funds, Private Equity, etc. Common theme in the Alternative Assets category are illiquidity, higher barriers to entry, and higher returns. Money is usually tied up for extended periods of time with assets in this category.

Each of these asset classes has very different characteristics, and that is the point of grouping investments as such. Diversifying across asset classes can be helpful because of the varying characteristics.

We will now focus on the Equities asset class in dept.

Stocks Discussion

What are Stocks?

Stocks represent partial ownership in a company. They entitle the shareholder to voting rights in company affairs and to a share in the profits of the company. I am usually less interested in voting rights. You receive a letter or email once a year inviting you to vote for board members or something, and I usually do not know the names of the people on the ballot. I am more interested in the share in the company’s profits, which comes in the form of dividends or increases in the value of the stock.

What is an Index?

You have probably seen headlines before such as “DOW up 400 points!”, “S&P 500 Had its Biggest Day Since 2011!”, or “Nasdaq falling in the afternoon.” The DOW, S&P 500, and Nasdaq are three major indices that are used to track the overall market. The DOW, or Dow Jones Industrial Average is a group of 30 prominent stocks that are supposed to help investors gauge the overall market. Similarly, the S&P 500 represents the 500 largest stocks in the US, and Nasdaq is more heavily weighted towards technology stocks. So an Index is a bundle of stocks or other assets that are being tracked together and are generally meant to represent a certain market or industry.

You will often hear about Index Funds as a great way to invest. Index Funds are Mutual Funds or ETFs that track an index.

What are Mutual Funds and ETFs?

Mutual funds and ETFs are bundles of stocks or other securities that you can buy often in the same or similar way as stocks. Mutual funds have been around for a long time. A manager will pool money and buy a bundle of stocks, and then sell shares in the pool. The manager collects a fee for his services that comes out of the total value of the pool. These are often small, but they need to be checked. Mutual funds trade similarly to stocks, but there are some caveats and they may have investment minimums.

ETFs are a more modern way to invest, and they offer many of the benefits of mutual funds. ETFs are bundles of stocks that trade on the exchange with stocks; ETF stands for “Exchange Traded Fund”. This makes them easier to trade, more efficient for most purposes, including tax purposes, and their design allows them to have lower fees than most equivalent mutual funds. ETFs are considered the most efficient means for average people to get broad market exposure, and this is why the providers of ETFs are so prominent now, such as Blackrock.

The reason to buy a mutual fund or ETF is to more conveniently achieve diversification and exposure to many stocks. Say you want to buy based on an Index like the S&P 500. The S&P 500 tracks the 500 largest stocks by market cap. Instead of purchasing 500 individual stocks, there are mutual funds and ETFs that have already done this, and you can buy into the fund. The fund manager collects a manager’s fee for this service, but these are often low and it makes sense to do this for broad diversification.

How can your Money Grow with Stocks?

There are two ways shareholders make money through stocks. Profits are mode through either dividends or appreciation of the price of the stock.

Dividends are cash payments given to shareholders usually on a quarterly basis. For example, AT&T (T) right now gives $1.11 per share annually, and their stock price at the time of writing is $17.50. So when you look up AT&T stock, you will see the “Dividend Yield” as 6.35%, which is 1.11/17.5. This is a pretty high dividend for a “normal” stock. Many stocks offer no dividend, and the average dividend of the S&P 500 was 1.78% in 2022. We will talk about some stocks with very high dividends later when we go over the high dividend strategy.

Profit from stock price appreciation happens when the value of the stock goes up after buying it. If you bought AT&T for $17.50 today and it goes up to $20 per share, you made $2.50 per share if you sell at that time. This is a capital gain.

So with only two ways to make money from stocks, there are two main options. One option is to buy stocks for the dividend, and the other option is to buy stocks that are expected to grow in value.

What are the Risks of Stocks?

This will be a brief rehash of the broad investing discussion above, but in short, the biggest risk with stocks is that the investment decreases in value and then something comes up and the money is needed.

It is possible that “XYZ” company will fail tomorrow. Any given investment could see losses. With diversification, it is unlikely that all of the stocks you own will fail together, and as said above, if they do all fail at once, you have bigger problems than your 401K.

That said, you could put your money into a bundle of stocks, they go down on average, and then you need to use that money. The stocks are very liquid, so it is easy to get them back into cash, but the cash pile could be smaller than what you put in or what you need. This is something you need to understand before investing. Plan out your expenses and such before exposing your resources to risk. Do not put up more than you are willing to see decay or disappear.

What is Passive Investing and Day Trading?

There is a spectrum of investing strategies that range from Passive Investing to Active Investing. Before defining passive and active investing, let’s introduce Market Efficiency. Market Efficiency is the idea that the market price represents the actual value of stocks. The validity of this is debated. The “Strong” efficiency belief would say that every stock on the market is priced correctly and that there is nothing to be gained by trying to beat the market. There are “Weaker” forms of market efficiency that would say that only public information is reflected by prices, etc. Both forms assume that investors make rational decisions and that they are informed. I am an efficient market skeptic. I would say that most stocks probably trade close to their intrinsic value, but I personally have bought a stock with the ticker “MARA” because I was dating a girl named “Mara”. I then sold it when we broke up. I am certainly not the only person making such silly, irrational decisions, and people make mistakes. Also, the existence of highly successful investors like Warren Buffet shows that some people can beat the market in the long run.

Passive investors seek to put their money into the market and leave it there for the foreseeable future. The most passive strategy of all will be to just buy an index fund representing the entire market and leaving it there until you need it for retirement or some other reason. Many a retirement has been funded by such strategies, and the ETF and mutual fund industry exists largely for this reason. A fundamental assumption underlying passive investment is that markets are efficient and that a normal person will not be able to beat the market.

Active investors seek to trade actively in an attempt to beat the market. The most active investor would be someone day trading, buying and selling stocks within the same day to capture gains. Here, a fundamental assumption is that markets are inefficient and that people can beat the market.

There is a huge variety of strategies along this spectrum. It is common to buy ETFs and mutual funds that reflect specific industries to get specific exposure. Buy and hold strategies are passive in that they do not seek to time the market, but they can be active in the sense that there could be significant research into finding stocks that are going to be winners. Swing trading trades on a weekly basis, seeking to buy and sell based on medium term trends. The possibilities are endless.

I think that most people should not do any form of day trading. Most people are not going to do very well, and it is not worth the time and stress. I am suspicious of the “Technical Analysis” you can read about to time the ups and downs of the market. That said, I think fully passive investing is boring. I would recommend for most people to just buy stocks or ETFs with every paycheck or every few paychecks. If you do not know what to buy, buying an index is great, but if you think a stock will do well for some reason, go ahead and buy some of it. Just keep diversification in mind, and do not get too caught up with timing of when to buy or sell. I rarely buy stocks with the intention to hold them for less than a year.

How Often Should I Check on my Portfolio?

This goes back to everyone’s risk tolerance. Some people should not check their portfolio very often. Stocks move up and down every day. There are good days and bad, and this can really stress out some folks. The market is full of people that sell out right away, and that is not going to be good for them in the long run. I check my stocks every day, but if it upsets you, check it less often. You will make irrational decisions if you let it stress you out.

When checking your portfolio, it is essential that you think in terms of percentages instead of dollars. If you have $50,000 in a portfolio, it could fall $500 in a day, and many people freak out. “I just lost $500! That’s almost as much as I make in a week!” This is not the right way to think. $500 is 1% of $50,000. Thinking “I lost 1% today” puts the decrease in the perspective of your portfolio, and you see that it really did not move that much. The bigger the portfolio, the more it will move in dollars, but in reality the percentage change is usually small. In fact, a 1% move in your portfolio in one day would be a pretty big day if you are diversified.

Should I buy Individual Stocks or Stick with ETFs and Mutual Funds?

I started investing buying individual stocks, and I have very rarely bought ETFs or Mutual Funds. I have been talking to people about investing and they are surprised that I buy individual stocks. It surprises me how many people do not buy individual stocks and are scared to.

Buying into funds is a great approach. This is in line with a lot of the best advise out there. If you do not want to research companies or do not feel comfortable doing so, then this is great.

Let’s go back to some principles talked about earlier. Idiosyncratic risk is the risk associated with the stock or investment in question, as opposed to Systematic risk, the risk associated with the market in general. By buying individual stocks, you are increasing your idiosyncratic risk. Your fortunes are going to be highly correlated with the fortunes of the company you are investing in. If you are convicted that a company will do well, then tying your fortunes to it should be exciting. If you are not convinced about a certain company, investing in the market or an industry as a whole will be best.

What are some of the key metrics when looking at stocks?

If you look up a stock on Yahoo Finance, Barron’s, or whatever, you will see a lot of data about the company. It can be overwhelming. Here are a few of the most important metrics.

The Price is obviously one of the biggest metrics. This is the latest price the stock has traded for. You will see quite a few metrics related to price as well. Close price is the price at the end of the trading day. Open price is the price at the beginning of the trading day. The Bid price is the current offer to buy, and the Ask is the current offer to sell. The range of the price over the last year or so will also likely be shown.

The Market Cap is an important value. This is the sum value of all the shares of the company’s stock. This is the market value of the company’s equity. It can be calculated as the number of shares outstanding times the current price per share.

Earnings per Share is often quoted. This is the Net Income (bottom line profit) of the company divided by their number of shares. This is often compared to the price per share as the P/E Ratio, price divided by earnings. This indicates how much the market is valuing the earnings that this company is receiving. P/E is an important metric when comparing companies.

The trading volume of the stock is another common value shown. This is how many shares of the stock have been traded throughout the day.

The dividend yield was discussed above, but this is a very important metric comparing the dividends paid by the company to their price. A higher dividend yield means more cash paid out per share.

Again, if you search a stock, a plethora of information will be presented. Do not let this overwhelm you. Just focus on the things you understand at first and start to educate yourself about the other available metrics.

How do I Pick Stocks to Buy and When Should I Sell?

Guys that can answer this question well get paid millions or billions to do so. I will go over this with anecdotes on successes and failures I have had, and I will highlight the ideas behind why I made those decisions.

To reiterate, there are two ways that profit is made with stocks. Either dividends are paid or the value of the stock goes up. Three broad strategies will be presented. First will be a strategy focusing on dividends. Next two strategies will be presented targeting stock price appreciation, Growth strategies and Value strategies. While both are seeking to make money through stock price appreciation, Growth strategies will target companies with strong future prospects whereas Value strategies target companies that are discounted.

Let’s Discuss a Dividend Stock Strategy

When I first started buying stocks, my grandfather, Papaw was my advisor. He told me what to buy with the money I had made in a summer internship. Papaw, for as long as he and I have talked about investing, has focused on high dividend energy stocks. Specifically, Papaw invests in Midstream Limited Partnerships (LP), which own and operate oil and gas pipelines and have a special tax structure due to their status as LPs. We will discuss the specifics of LPs, but let’s first discuss high dividend stocks.

A high dividend stock strategy is going to prioritize income from dividends. Instead of looking for stocks that will appreciate in value, this strategy will look for high dividend stocks in healthy companies to hold for long periods of time. When you are looking for high dividend stocks, you will be looking at the Dividend Yield. The dividend yield is the annual dividend divided by the current stock price. For an example of a high dividend stock, let's talk about Altria (MO), the maker of Marlboro Cigarettes. Right now, MO sells for $45.95 per share and pays $3.92 annually per share as a dividend. Their Dividend Yield is therefore 8.51%. This would be a good candidate for a high dividend stock. I would say anything above about 6% is a high dividend.

It is important to make sure that the big dividend is backed by a strong business. This is not something I can teach you to do in this paper, but you should read up on any company you consider buying. Is this a company that will continue to pay the dividend you seek? I am always shocked when I am talking with someone about a company they bought, and they cannot even tell me what the company does.

You may wonder, “Why do some companies pay such a high dividend relative to others?” The usual and valid reason that a company pays a high dividend is that they do not have strong growth prospects, but they have a profitable business. When the company makes profits, it can only do a handful of things with the excess cash. The primary options are to either reinvest that cash in the company to grow their operations or to pay the cash out to shareholders as dividends. Let's take Altria as an example. They own Marlboro Cigarettes. Cigarette consumption is still pretty strong in the US, but it is on a slow decline. Regulations and public sentiment will keep there from being any boom in that industry even though it is still quite profitable. As a result, Altria has no need to expand their operations heavily, and therefore profits are best served being paid out to shareholders. Many oil and gas companies are in a similar situation.

During the COVID-19 Pandemic, Papaw and I learned an interesting lesson about the resilience of a high dividend strategy in a downturn. During COVID, there was a big slump for all companies, but the oil industry felt these effects more heavily. There was a “Triple Whammy” of: the market as a whole was down, oil demand was down because of quarantines, and OPEC had made moves to undercut American oil companies right before the downturn. My portfolio was down almost 70%, but I was prepared to weather the storm. An interesting fact is that many of these high dividend companies will try very hard to avoid lowering their dividends. Let’s return to the dividend yield formula. Dividend yield is the dividend divided by the price per share. Let’s assume that the dividend yield is initially 10% and that the dividend is $1. This means that the stock price is $10. If the stock price falls by 70% to $3 and the $1 dividend stays the same, the dividend yield is now 33%. The point here is that while my stock was down, I was able to reinvest my dividends at really high yields. About six months or a year later when the market had recovered, my portfolio had grown much faster than it would have in normal times. Buying quality companies with a high dividend, and then holding on in the hard times, had led to outsized gains. I wish I had cash on hand at the time to buy more of those stocks while they were low.

Two interesting types of companies that often have high dividends are REITs and Energy LPs. A quick note is that some would say that REITs and LPs are not stocks, they are REITs and LPs. This is true, they are structured differently than most companies, but they are bought and sold in the same way as stocks and still represent equity ownership in a company. REIT stands for Real Estate Investment Trust, and this is a company that derives at least 75% of its income from real estate investments and pays out at least 90% of its income as dividends. There are special tax implications for REITs, but for the purpose of this paper, they offer high dividends and exposure to real estate, which can provide diversification. REITs are usually involved in owning and operating real estate, rentals, commercial properties, etc, or they are involved in providing loans and mortgages. Annaly Capital Management (NLY) is an REIT I own, they are involved in writing mortgages, and they provide a 13.68% dividend at the time of writing this paper.

Energy LPs are Limited Partnerships that operate in the oil and gas industry. These companies are usually American or Canadian companies performing a variety of tasks along the energy supply chain. They may own mineral rights, operate drilling equipment, own or operate pipelines, etc. The Limited Partnership structure has special tax implications that we will not discuss fully, but LPs are tax deferring and have special rules that lead them to provide large dividends. As an example, Black Stone Minerals L.P. (BSM) owns mineral rights and pays a 9.72% dividend at the time of writing this paper. One quick note about LPs is that if you own them, you will get the K-1 tax document to include in your tax returns. This is something you can put in with turbo tax or other services, but they are annoying and confusing to input. The returns are worth it, but I want to warn you in advance.

REITs and LPs are two types of companies that can provide higher dividends than average. They can provide diversification with exposure to real estate or oil and gas, and they are tax efficient. My first investments were in LPs, and I still hold many of them. A special note I have is to not let the really high dividends of REITs and LPs bias you toward them too much. It is easy to see the high dividends and over allocate your portfolio to them. Remember why companies pay high dividends. It is usually because they do not have strong growth prospects, and that is often the case with REITs and LPs.

Let’s Discuss a Growth Stock Strategy:

Two strategies that target returns from stock price appreciation are going to be discussed. These two strategies are Growth and Value. A Growth stock strategy is going to target companies that have a large potential for future growth of their operations or profitability. Often times, these stocks will not pay a dividend. For the last decade or more, tech stocks have been the primary growth stocks. Amazon, Facebook, NVIDIA, Google, etc. are big names that have made many people wealthy. I have not personally invested in many tech stocks, but I probably should have.

AI stocks are the hot growth stocks as of the writing of this paper, with NVIDIA as the leader. With these AI stocks and growth stocks in general, the public thinks that the technology that these companies are developing will be highly profitable in the future, even if they are not very profitable today. These companies will usually have a very high P/E (price/earnings) ratio, meaning that their price relative to their earnings is much higher than most companies. A big part of this high P/E is that their earnings are usually low while the company is young or developing.

My only true move into a Growth stock was with Dish Network. I learned that Dish Network was going to try and break into the cell service industry. I looked at their stock and saw that it had appreciated 60% in six months. I bought in, thinking that if they broke into the cell service industry, the stock could take off even further with a new market to grow into. I swear, the day I bought it, the stock dove and continued to decline for months. Sometimes it feels like that. This did not work out for me, and something to keep in mind is that upward trends do not last forever. I had missed the opportunity for Dish Network by the time I bought it, but of course I did not know that at the time.

A note made just now was that upward trends do not last forever. With that said, sometimes they can last much longer than expected. For example, Tesla started 2020 at about $30/share, and finished 2020 at almost $300/share. While this was happening, many people, including myself, said “It cannot go up forever” and similar things. While it did not go up forever, it went up very quickly for a year, and the nay-sayers missed out, including myself.

Let’s Discuss a Value Stock Strategy:

I have had a lot more experience with Value stocks than Growth stocks. The idea for Value Investing is to identify companies that are selling at a discount, buy them, and hold on. Value stocks are usually mature companies, and many of them will pay some dividend.

There are books about how to identify Value stocks, but here are a few basic strategies for picking them out. The P/E ratios of a group of companies working in the same industry can be compared to identify any companies that are lagging the group. A stock’s price can be compared to its historic prices to see if it is in a slump. The market value of the stock can be compared to the book value of its assets. These could indicate that the stock is selling at a discount. If the company is strong, buying now at the discount will be profitable when the company recovers from their current slump.

Here is a success story of mine. In the fall of 2021, COVID was starting to wind down, and I was still in grad school. In a finance class, I was on a team doing a project on Halliburton, and after learning a little about Halliburton, I decided that the Oilfield Services (OFS) industry they work in was one I wanted to be invested in. After a little research, I saw that Halliburton and their competitors were low relative to historic prices. I bought even amounts of Halliburton, Baker-Hughes, and Schlumberger (pronounced “Slumber-Jay,” they are French...), the big three in OFS. About a year later, I sold Halliburton and Schlumberger for double what I paid, and I made about 50% on Baker-Hughes.

So with these OFS companies, the assumption of the trade was that these stocks were simply depressed and that they would recover to prices similar to the historic price ranges. Companies go through hard times, so this can work out well. It is important to keep in mind that they may not come back up, and they could even continue to decline. Some research is required. In the case of the OFS companies, they are strong companies, so I felt comfortable with their future prospects.

The next section is a more focused version of Value investing, targeting Value companies that pay sizable dividends.

“They will pay you to wait”

I read this in a Barron’s article one time. The article was about Gold Mining stocks in 2022. The price of Gold had not increased as much as many thought that it should after the heavy inflation following COVID, and the Gold Mining Stocks were seemingly depressed relative to their historic prices. These stocks were paying dividends of 2%-4%, which is pretty high for “normal” stocks. The article was saying that Gold prices were bound to go up, therefore Gold Mining stocks would break out of their slump, and in the meantime, the companies would pay you to wait with their dividend.

I love this idea, but my personal results with it have been mixed. The idea is to buy stocks that are in a moderate slump with good future prospects and that are currently paying an above average dividend. Another way this strategy could be thought of is buying a dividend at a discount. As stated previously, companies often will not lower their dividend payout, even in harder times, resulting in a higher dividend yield when the share price is depressed.

I bought these gold mining stocks and did very well. I bought Barrick Gold (GOLD) and Newmont (NEM) in September 2022. I reinvested dividends and bought more periodically until I sold it all in September 2024. Over that time, I made 20.79% (9.78% annually) on GOLD and 21.37% (10.04% annually) on NEM. This was pretty good. It beat the historic average market return of 8.5%, but it did not beat the market return over the same period, which rose about 53%. In April 2024, I doubled down on my Gold bet with an investment in Kinross Gold (KGC) and a few others. I also sold these in September 2024, and did very well on them. I made 40.34% on KGC over about five months, which comes out to 115.62% annually.

With a similar thought process, I bought AT&T and Verizon. In January 2022, I was looking at AT&T, and I saw that it was at historic lows and that its dividend was pretty high, about 8% if I remember correctly. My thought process was that AT&T was having hard times, but it was not going anywhere. Their stock price was bound to increase eventually, I just had to wait it out, and the high dividend would make it worth my while until then. I bought it, reinvesting dividends and buying more periodically. I doubled down on the bet in January 2023 with an investment in Verizon, which was performing similarly. I sold both of them in September 2024. These did not play out as I had hoped. My return on AT&T was 17.84% over almost three years, so 6.38% annually. My investments in Verizon did better, returning 21.22% in almost two years, averaging 12.16% annually. The AT&T investment did not beat the historic market average of 8.5%, and neither investment beat the market performance over the same period. What did not materialize during my holding period was the expected price increase. The prices continued to fall for a while and were starting to surge upward by the time I sold. Maybe if I had held on another year or more, this would have been a success story, but time will tell.

In conclusion, I really like the idea here. It seems like the best of both worlds between a dividend and a value strategy. My results have been mixed, but I will continue to look for these opportunities.

Conclusion

Above details a lot of my experience with investing and stocks. Remember that without some level of risk, there will be no returns, but risk can be managed with diversification and due diligence. Whenever you are investing, make sure that you will not need the money in the near future. Plan for your liquidity needs.

Remember that stocks represent an ownership stake in a company and entitle the owner to a share in future profits. ETFs and Mutual funds are bundles of stocks sold together, and ETFs are the most efficient way for average people to get broad market exposure. Some ETFs and Mutual funds replicate an Index and are called Index Funds, representing a broad investment in the market.

There are two ways that you make money with stocks. Either the price of the stock goes up, or you are paid a dividend.

We discussed a dividend strategies, value strategies, and growth strategies. Dividend strategies target companies with large dividends. LPs and REITs can offer very large dividends and some tax advantages. I talked about times where I successfully and unsuccessfully chose stocks for a growth or value strategy. Finally, I really like the idea of buying depressed stocks with strong dividends as the best of value and dividend focuses, but I have had mixed results with this strategy.