3 Simple Rules How to Buy Stocks
Note: Post may contain affiliate links.
Three investing rules to get started buying stocks and beat your goals
Three simple rules how to buy stocks for beginners.
That's all it takes. You don't need complicated trading strategies or stock-picking schemes. Just some basic investing rules on how to buy stocks and how to get started investing.
By the end of this video, you’ll have the foundation to start investing, how to pick stocks and how to know when to sell. In fact, I’m revealing my favorite strategy that will limit your risk and boost portfolio returns.
A Basic Strategy to Get Started Investing
I’m excited about this video, it’s one of the most requested topics from the community and we’ve got some really valuable information planned. I’m going to start with the basics of how to buy stocks and what you need to do to be a successful investor.
That part is going to be a little more basic but even advanced investors are going to want to stick around because after that, I’ll be revealing the three simple steps I use to pick stocks.
I worked as an equity analyst for more than a decade, worked for institutional money managers and venture capital, and these three rules are all you need to produce double-digit returns with limited risk.
Starting Investing isn't about Chasing Returns
I see so many investors get started, they turn on the TV to CNBC or they look for their favorite investing blog, and they start writing down stocks they want to buy.
They end up getting lousy returns, you know the average investor made just 2.6% annually in the decade to 2013 according to DALBAR. Their portfolio goes nowhere and they never reach their goals.
I see a lot of investors like this and they ask me, why isn’t my portfolio growing, why haven’t I been able to stick with an investing plan, and it’s because they didn’t start with a solid foundation of financial planning.
Before you can start even thinking about investing, you have to first think about your goals. And I’m not talking about saying, well I want a million dollars before I retire. I’m talking about really thinking about what retirement means to you, really creating a mental picture around your goals.
It’s this mental picture that is going to motivate you to keep saving, to keep investing even when your budget gets tight. Every time you think, I can’t afford that $100 in my investing account this month, you’re going to pull out that mental picture of your goals and it’s going to motivate you to push your budget a little and save that money.
That’s the first thing, making those financial goals real. Next is making sure life doesn’t get in the way of reaching those goals.
You know, Life is what happens while you’re busy making other plans. It’s a great quote by John Lennon and means so much for your financial goals.
It’s great that you’ve got a plan to invest. I’m going to show you three ways to buy stock and share my favorite investing strategy in a little bit. But what happens when you lose your job? What happens when the kids need braces or when you just can’t hide the car’s check engine light with tape anymore?
This is when life happens, when you have an emergency expense that sets you back a couple of grand and it’s the number one destroyer of investing plans.
Pretty soon, you’re taking money out of your investments. Your portfolio goes nowhere because you feel like you’re taking one step forward and two steps back, so you just give up.
The Financial Foundation to Start Investing
That second part of our financial foundation is having the insurance you need and an emergency fund to get you through…life. That means life, health and car insurance at a minimum and deductibles no more than $3,000 and an emergency fund that can cover some of these expenses.
Now I’m not going to tell you to have three to six months of expenses saved for an emergency fund. That’s just not going to happen for most people.
Two-in-five households say they don’t have enough saved to cover a $400 emergency, I don’t know how personal finance experts think people can just save twenty grand for an emergency fund.
But you do need to save something to cover these emergencies so we’re going to aim for at least $3,000 – that’s going to cover just about any unexpected car repair, it’ll cover your deductible on health insurance.
It’s not going to save you from a serious loss of income but it’s a start at building that financial foundation that will keep you on your investing plan.
The First Thing to do Before Starting Investing
Finally here before I show you the three ways to invest in stocks and my favorite investing strategy is to pay off that high-rate debt.
I am not a debt hater. I am not going to tell you that you have to pay off all your debt or you’re going to be a failure. I had over $60,000 in student loan debt at one point and was in no rush to pay it off because I refinanced it at 2.75% in 2003.
I have a mortgage on a rental property that I was able to lock in at four and a quarter percent because I lived in the house for a year. I make 15% cash returns on that house and use the money to make other investments.
Using low-rate debt is a financial tool that every fortune 500 company does. Apple, a trillion-dollar company with $74 billion in cash, owes over $97 billion in debt. Why? Because it’s able to use debt as a financial tool.
But Apple isn’t sitting around paying 18% on its credit cards. When I met new clients as an advisor, I’d say bring me your financial docs, let’s see where we’re starting from.
They’d show me a portfolio maybe making seven or eight percent return. Then I’d tell them I could guarantee them a 20% return on their money and their faces would just light up.
And they would ask me how and it was like a forehead slap, PAY OFF THOSE CREDIT CARDS! You’ve got 24% on your credit cards, 20% or so on personal loans, putting your money to those is a guaranteed return.
Now you don’t have to pay off all your debt before you get started investing. Starting on that plan is going to get you in the habit of saving and seeing your money grow, but if you have debt at more than 14% interest then you need to pay that off or all that money your making is just going to your creditors.
I want you to make money, not your creditors.
What Type of Investor Are You?
So we’ve got this solid financial foundation and understand that it might take the better part of a year to get there but this is where you need to start. Set your investing plan in concrete so that a little financial earthquake isn’t going to shake it loose.
When you’re ready to start investing, now we can decide on what type of investor you are. This is hugely important and most people have no idea. It really does matter what type of investor you are, how your personality fits with investing.
Are you someone that wants to follow stocks and make your investing decisions? I know this might sound like a pointless question for someone watching a video on how to buy stocks but it’s one you absolutely need to get right.
There are two types of investors. First is the person that enjoys controlling their financial future, that wants to pick stocks and follow an investing plan.
Then there’s the person that just wants that financial future they deserve but doesn’t really care how they get there. They don’t want the added stress or involvement of picking their own investments.
There is nothing wrong with either of these two paths. Both can lead to the same destination but the path you choose has to be right for you.
If you’re someone that wants the stress-free route, the do-it-for-me route, but you get on that picking stocks path, you’re going to freak out during a crash and you’re going to be miserable trying to manage your money.
Conversely, if you want that engagement with your money but you set on that other path, you’re not going to be motivated to save.
Traditional Investing vs Robo-Advisor
So you’re going to pick a path and go one of two routes for how to buy stocks, either an online platform like Ally Invest where you can pick stocks and make your own decisions, or you’re going to open an account with a robo-advisor that’s going to do everything for you.
I’m going to explain each of these, some of the pros and cons of each, and then show you how to open an account and buy stock on the online investing site I use.
Now if you’ve already got an investing account or know how you want to invest then jump ahead and I’ll share my favorite investing strategy along with those three simple rules for picking stocks.
For someone that wanted to buy individual stocks, it used to be that you had to go through an advisor that was going to sell you on their experience or that you couldn’t manage your own investments.
For this, they’d charge you about 1% on your money each year or about $100 for every $10,000 invested.
A hundred bucks a year doesn’t sound bad until you start adding it all up, every year’s fee and an increasing amount as your nest egg grows.
If you had $10,000 to invest and then added $500 monthly to your account, earning 7% a year, you could have over $640,000 by the end of 30 years. Have an advisor do it and those fees are going to shave off $118,000 off your nest egg.
You’ll pay over $60,000 in fees and won’t be earning money on those fees. Let me ask you, is spending a few hours a year on your investments worth $118,000?
You bet it is.
The most difficult part of opening an online investing account is choosing which website to go with. Seriously, opening an account on any of the online sites takes less than five minutes and is super easy. Your only real decision is which one to choose.
There’s nothing wrong with opening accounts on multiple investing sites but you probably don’t need more than a couple. I have accounts on five websites but that’s because I want access to different research provided on different sites and I like to try out different sites to know what features are available.
With your own online account, you get to pick your own investments and fees will be a fraction of what you’d pay to an advisor. The downside to this is that you need that investing strategy we’ll talk about in a bit, you have to make those decisions yourself.
But this is all super-easy and I’m going to walk you through how to set up an investing account and how to buy stock. I’m going to use Ally Invest here but most of the online platforms are similar. I like Ally for a couple of reasons.
First, it’s more than just an online investing platform. It’s part of Ally Bank, a massive financial company that offers some of the best rates around by cutting costs being an online bank. Ally offers 24/7 customer service and everything a traditional bank has including credit cards, auto and home loans.
Ally is a large, all-inclusive investing platform with one of the lowest trading fees in the industry. Buying a stock or fund is just $4.95 per trade and you can even get this down to $3.95 per trade for accounts over $100,000.
If you decide to go with a different investing site, ask a few questions to pick the right one:
- What is the per trade fee? This is probably the most important because it’s going to have the biggest impact on your long-term goal.
- Are there any other fees? Most sites don’t have annual fees but may charge a fee if you don’t make a minimum number of trades every three months. You shouldn’t have to worry about returned check fees or stuff like that.
- Does the site offer other services like banking or lending?
Let’s walk through how to open an investing account and how to buy stock. Again, I’ll be using the Ally platform as an example and I’ll leave a link in the video description below but the process is going to be almost identical on any site.
Watch the video for a step-by-step on how to get started and buy stocks on Ally Invest. Click here to join Ally and get up to $1,000 in free trades.
The alternative to managing your own investments but still keeping those fees low is to go with a robo-advisor like WealthSimple or Betterment. Robo-advisors put your plan on auto-pilot with smart technology and low-cost funds.
Now I know a lot of people are still a little hesitant to put their money in the hands of a machine but robo-advisors really are a great way to reach your financial goals without worrying about what stocks to buy.
Robo-investors use a computer program to take your financial goals and answers to an investor profile and design an automated investing plan around that. You’ll start by answering a few questions about your goals and needs, then the platform is going to spread your money across different types of stocks and bonds in funds for instant diversification.
Anytime you invest money, it’s going to be automatically invested in these funds. Besides that do-it-for-me process, another one of the benefits to robo-advisors is you never pay a commission to put your money to work.
Instead of paying that $5 every time you buy a stock like with online investing sites, the robo-advisor is going to charge a flat half a percent to make all your investments.
WealthSimple charges 0.5% on accounts under $100,000 and 0.4% for larger accounts. That means your total investing expense is going to be $50 for an account with $10,000 invested. By comparison, if you were to invest in five funds and put new money in every three months on an online platform, that would be over $100 in commissions a year.
As with all robo-investing services, WealthSimple rebalances your account automatically so your investments are never far from the plan that’s going to best fit your goals. That computer program is going to change your investments as you age to make sure you’re getting the right return to meet those goals but without too much risk.
Why I like WealthSimple from some of the other robo-advisors is that it understands sometimes you still want to talk to a real person about your investments so the platform has a team of investment advisors to answer questions through phone, text or email. It’s a completely free service and really a way to bridge that gap between traditional advisors and robo-advisors.
Special promotion: Use this link for a $100 bonus on WealthSimple
Those are your two investing options depending on what type of investor you want to be and again, there’s nothing better about either one. It really depends on how much engagement you want in your investments.
My Favorite Investing Strategy for Beginners
Now before we get to those three simple rules I use to buy stocks, I want to share my favorite investing strategy. And this is really for those of you that want to pick stocks, that want to use those three steps to finding investments.
The core-satellite strategy is one that most money managers follow because it’s so effective at limiting your risk but still getting you those higher returns. So here the idea is that you might have 65% to 75% of your money in broad funds.
These can be in a market fund or one that invests in dividend stocks, international companies or in the different sectors. This core of your portfolio is going to diversify your investments so no one company or sector can destroy your wealth.
That diversification is going to give you market returns and keep you from freaking out when all the executives at your favorite company get indicted for fraud.
But you want to pick those individual stocks, you want that control of your investments and the potential to earn a higher return so that’s why you have this satellite portion of your portfolio. The rest of your money, that 25% to 35%, you use to pick individual stocks with these three rules we’ll talk about next.
Since it’s only about a third of your money, those individual stock picks are going to give you the opportunity for higher returns but aren’t going to weigh on your overall portfolio if you can’t pick stocks like the Oracle of Omaha.
Understand that the core-satellite won't save you in a stock market crash. For that, you need to be diversified in these seven investment assets.
3 Rules for Investing for Beginners
We’re finally to those three simple rules I use to buy stocks, the three-step process that’s going to help you be a better investor. Thank you for sticking with me and understand that all those basics we talked about and that favorite investing strategy was time very well spent.
Honestly, that how you invest and the foundation we built is way more important than the what you invest in so make sure you start with those basics.
My first step to pick stocks is to always start with a top-down look at sectors and industries.
Very few people, maybe a handful of professional investors like Buffett or Peter Lynch, have every been able to just pick great companies but you can start with an advantage by looking at the bigger picture first.
This means looking at the economy and stock sectors like utilities, financials and energy, understanding which are going to do well over the next few years. You’re looking for the trends in the economy and in business. It’s much easier to spot these bigger trends that are going to boost certain stock sectors than to just start off trying to pick stocks.
In fact, as good as he is at picking stocks, Warren Buffett uses this approach and you can see it in his portfolio. Buffett has invested almost $60 billion, that’s nearly a third of his portfolio, in banking stocks.
He looked at rising interest rates which are good for banks, he looked at de-regulation in the industry and technological progress and saw that these all came together for a great outlook on the group.
That table was actually part of a Warren Buffett investing series we did here on the channel, looking at his investments and how Buffett picks stocks. Check out the series and this video looking at Warren Buffett's favorite investment.
When you do this, start from this top-down approach, you don’t have to be a genius at picking individual stocks. Those bigger trends are going to lift all the companies within that group so even if you don’t pick the best performers, you’re going to get solid returns.
So between the 11 stock sectors, start by picking three or four that are going to be driven by these larger forces.
Our next step to picking stocks is going to be comparing the stocks within those sectors. This doesn’t mean you have to pick just one stock. You see from that table of Warren Buffett investments before that he owns seven stocks within the banking group. All the stocks in that group are going to get a boost but then you pick out the leaders for higher returns.
So when I’m comparing stocks within a sector, I’m first looking at some fundamentals like profitability and growth.
First you can compare revenue and earnings growth from the income statement. One thing you want to be careful of is revenue growth that’s driven mostly by acquisitions.
So if a company is just buying a lot of other companies and piling on debt but isn’t growing by itself then that’s not better than say another company that is growing revenue more slowly but doing it organically.
You can also compare cash flow from operations on the Statement of Cash Flows. This is a cleaner measure of growth because management can’t manipulate actual cash flow like it can earnings.
Finally, I’m also comparing the operating margin of companies. This is the business profitability and one of the most important measures of a leading company.
It’s pretty easy to find on the Income Statement, you just divide the operating income by the revenue. So that tells you how much profit the company is making after expenses.
You can also look at analyst reports available on investing platforms or read some of the news around the different companies. What you’re looking for is what sets a company apart, are there any advantages like a strong brand or customer service that makes it a leader. Are there any catalysts in the outlook that could mean higher sales or profits?
With just this, these first two rules to picking stocks, you’ve got a solid portfolio of leaders in a group that will benefit from those broader trends. That alone will drive higher returns on your money.
The Real Secret to Investing Success
But the real secret to investing, and this is something I had to learn over a decade as an analyst and advisor, is that it’s not making money but not losing it that makes you successful. Not losing money on bad investments is how you’re really going to grow your wealth.
Watch this video for my three warning signs that a dividend stock is in trouble.
So for that, there are a few things to watch for to know when to sell a stock. These won’t keep you from losing any money ever but they will protect you from the biggest losses that destroy portfolios.
First is a company producing all its growth from debt and acquisitions. A lot of companies think making a big acquisition is going to fix their sales problem. They might even be losing sales but they think that tying another boat on to their sinking ship, that’s suddenly going to get them both to float.
Teva had seen sales flat for two years and even fell by $620 million in 2015. That $40 billion acquisition helped them make another $2 billion in 2016…but at a huge cost in extra expenses and interest payments.
It doesn’t take a financial nerd like myself to understand that buying another company isn’t going to fix your broken one. If you own shares in a company that is losing sales and management can’t do anything about it, the last thing you want them to do is try covering it up by acquiring other companies.
They couldn’t manage the one company, how the hell are they going to manage it plus the acquisition?
So this is really two warning signs, first that sales and earnings aren’t growing. Second is that the company is taking on billions in debt to acquire other companies.
Another thing that can tip you off as to when you need to sell a stock is management departures and specifically when the chief executive officer or the chief financial officer leaves.
This not only might signal that things aren’t working right but bringing on new management means time to get them on board and develop a strategy. That’s time that competitors are going to be eating their lunch and taking market share.
Notice I didn’t say anything about a falling stock price. That alone isn’t a reason to sell a stock if it’s still a good company so use those simple steps we talked about to analyze the stock and decide if you want to hold on or if there’s a good reason to sell.
Part of knowing how to buy stocks and being a successful investor is seeing through the lies Wall Street tells investors. I was a part of the machine, I’ve seen how it works and can tell you that the investment industry isn’t about making you money anymore.
It’s about getting those commissions, about getting those advertising dollars and about making the army of analysts and brokers rich.
These rules to buy stocks for beginners might seem overly-simple but I guarantee you they are 99% of what investing is about. Don't complicate investing and stop losing money. Use these simple steps to investing no matter what level you're at and you WILL beat your goals!
Leave a Reply