Start investing in 2020 and start your money working for you.
The stock market has nearly quadrupled since the lows of 2009 but many people are still not making their money work for them!
Market pundits will tell you the best returns are in the past or you should try timing the markets. The truth is much simpler. Using just a few basic investing measures, you can learn how to pick great stocks in any market.
And that's exactly what I'm going to show you in this video.
In fact, I’m using the same investing strategy I developed as a professional equity analyst to reveal my three favorite stocks for next year.
Basic Rules for Beginning Investors
For this video, I want to take a step back from our usual videos on investing and that analysis we do in individual investments. Instead, this one is going to be more basic, a stock market for beginners video.
I’m going to give you everything you need to start investing in stocks from how to get everything set up to how I research stocks for my own portfolio. I’m also going to reveal my favorite 2020 stock picks so make sure you stick around to see where I’m putting my money this next year.
Now getting started investing isn’t something you just take fifty bucks out of your savings and buy some shares of the hot stock. Your investing plan is based on your life goals and your own personality around money, that’s not something you can get in 30 minutes watching CNBC .
But don’t neglect this part of investing. I know it’s not as sexy as picking stocks and talking double-digit returns but give me fifteen minutes and I’m going to show you how to make investing stress-free and how to beat your goals.
Questions Every Beginner Investor Needs to Ask
We’re going to start off with two questions every beginner investor needs to ask. Two questions that are going to tell you a lot about yourself and how your personality is going to fit with your investments.
Based off just those two questions, I’ll show you two ways to get started investing in the stock market. I’ll then give you a simple three-step process I use to pick stocks, something I developed over a decade as an equity analyst and working in private wealth management.
I’ll then apply that three-step process to the stock market and show you the three stocks I think could produce the highest returns in 2020.
Now on to those two questions and these are going to seem vague and maybe even a little unnecessary for some of you. You want to jump in to picking stocks and getting that process for stock market research but don’t neglect these investing basics.
They’re going to lay that foundation that will show you how to be a better investor, a smarter investor, and protect you from all the bad investing decisions that destroy wealth.
What's Your Investing Risk Tolerance?
Our first question here is, “Are you comfortable with risk and losing money?” This might seem like an easy yes or no but really think about it from past experience. What are some times when you’ve lost money maybe say from gambling or from investing?
This doesn’t mean you have to be ok with losing money, that would be psychotic. The question is, how much stress do you feel with the idea of losing money or investing risk?
What's Your Investor Type?
Our second question is, “what kind of an investor do you think you might be?” Do you want to be actively involved on a monthly basis picking stocks, reading the financial statements, or do you just want a stress-free way to make your money work for you?
I’ll be honest, I enjoy reading the markets, learning about different investments and taking that active part in my planning. Everyone’s not like that. There are a lot of people that either don’t have time to devote to doing their own investing or just don’t want to be a part of it.
There’s nothing wrong with that, nothing wrong with wanting a hands-off investing strategy. You do you, make your money and let the market do its thing to make your returns.
Your answers to these two questions are going to determine whether you want to invest through an online broker or a robo-advisor. Now I’m going to go into each of these, show you the difference between the two, pros and cons of each, and how to get started before we get into that process I use to pick stocks.
Two Ways to Invest for Beginners
But I want to get back to that idea of getting started investing and those two ways to invest, through an online investing site or a robo-advisor.
Both of these are going to meet your financial goals, the only difference is how active you want to be as an investor.
First we have the online sites like Ally Invest, ETrade and TD Ameritrade. These websites give you all the access you need to buy stocks, bonds and anything else that’s going to help you grow your money. You’ll get all the stock research you need, financial calculators and a lot of them will even provide some time with an advisor.
I like Ally Invest because it’s not just an investing site but part of a bigger financial company that includes a bank and lending. That means you can have all your savings and investing in one place plus mortgage and car loans at great rates.
It takes less than five minutes to set up an investing account. Watch the video on how to set up an account or use the link below for a special offer.
On the other hand, if you answer those two investing questions and find out you just don’t want that investing stress. If you just want to have your money working for you but don’t want to pick stocks or deal with the ups-and-downs of the stock market then you’d be better off using a free robo-advisor.
Robo-advisors are just a computer doing what a financial advisor is going to charge you thousands to do . Robo-advisors like WealthSimple and Betterment take your age and answers to an investor questionnaire and then customize an investing plan that meets your financial goals.
Since it’s all done by a computer, the costs are a fraction of what an advisor would charge. Some sites like WealthSimple even have advisors available to answer questions so it’s really the best of both worlds.
A Big Picture Strategy to Pick Stocks
So you’re set up with an online investing site like Ally and ready to invest but what stocks do you pick? How do you find those stocks that are going to outperform and beat your goals?
I want to share the investing strategy I used while working for portfolio managers and private wealth funds.
Understand that this isn’t going to apply to you if you’ve got your money in that robo-advisor. Robo-advisors are going to put you in a group of funds depending on your plan and you won’t be investing in individual stocks.
This three-step process is the one 80% of equity analysts use on Wall Street. It’s a tested and proven way to find stocks that are going to outperform and a way to position your money to take advantage of themes in the market.
The reason why this investing strategy works so well is because it doesn’t depend on picking individual stocks. Instead of trying to pick winners from the 2,800 stocks on the New York Stock Exchange, this process starts at a higher level with the sectors and industries that are going to outperform.
It’s called top-down investing, looking at the bigger picture and those broader themes in the stock market before you try to pick stocks . And you don’t have to be an economist or a numbers nerd like me to do it.
We’ll go into finding those big picture themes but what you’re doing is narrowing your list of stocks to the sectors that are going to benefit.
Instead of trying to find one stock out of 2,800 to invest, you’re saying, “Ok, energy stocks have some great advantages in this market what are the best two or three stocks out of 100 companies?”
The best part about this strategy is that by finding these bigger themes, you don’t even have to be right on the best stocks. Let’s say you find that deregulation, energy demand and political risks are going to really boost the energy sector over the next few years.
I’m going to show you how to find the best-of-breed companies in the sector next but honestly with these big picture themes you could throw a dart and hit a winner.
By looking at these larger, powerful forces driving an entire sector, all the companies within the sector are going to be boosted higher. Picking a few of the best stocks will help squeeze out that extra return but it’s going to be hard to go wrong and impossible to lose money.
So looking for these broad market themes, you want to look for a few clues.
- How do the different sectors react to higher prices?
- Are interest rates increasing and how do sectors react to a stronger dollar?
- Are there international trade problems and what percentage of sales come from overseas customers for the sectors?
- What are the demographics of the customers for a sector? Are their customers better off or facing a weaker financial future?
- Is technology changing the sector or are their opportunities for change that might increase profits?
Now you don’t have to always be watching for these big picture investing themes. Another advantage of this strategy is that these themes play out over years so all you have to do is find a theme or two and then ride it for as long as you can. Your stocks within those one or two sectors are going to benefit for years.
Picking the Best Companies for Investing
Once you’ve got your broad themes and sectors then you start looking within the sectors to find those best of breed companies that really lead the way. This is where you narrow your list to two or three stocks that are going to outperform.
The first place I go to compare companies is the Statement of Cash Flows. This is by far the most important of the three financial statements because it shows that cash generating power of the company.
Management loves to manipulate the income statement to make earnings look higher but it’s much harder to change actual cash flows so you get a pure view of the company’s performance.
You don’t have to be a professional analyst to look at these financial statements. Once you have a list of stocks within a sector from your bigger picture themes, there are a few things you want to compare on the cash flow statement.
- First is to compare the growth in cash flow from operations. This is how much cash generation from the business so the best place to look and what you want to do is look at it over the last five years. How much has cash flow increased over that longer period compared to other companies in the sector.
- Another place to look here is the free cash flow and the change over that same period. Free cash flow is that operational cash minus the spending the company did to keep the company going so you get a feel for how much cash is actually available.
- On the cash flow statement, you can also look at how much the company is returning to investors through a dividend or buying back its own shares. You also want to look at whether it’s paying back debt or borrowing money.
Comparing the cash flow statements of companies is going to help you narrow your list down even further. So you’ve found a few sectors that are really going to benefit from these broad themes, that’s step one. Then you find the companies within those sectors that are able to generate cash for investors at a faster pace and that are using cash responsibly.
Finally, you’re going to be looking for catalysts or roadblocks to growth for each company. This means looking in the financial news, reading analyst reports and management presentations. By this time in the process, maybe you’re only looking at four to six companies in a sector so this level of deep research won’t take more than a couple of hours.
You’ve already got that big picture view of the sector, now you’re looking for company-specific plans that play into that view. You’re looking for companies that have a defined plan to take advantage of those big trends and how they’re going to do it.
3 Best Stock Investments for 2020
Now I want to take these three steps and use them to highlight three stocks, why I think these are the best stocks for 2020.
Understand that even if you’re investing in these three stocks, they shouldn’t be your entire portfolio. Use that stock market process above to find at least six or seven other names in a few sectors. This is going to spread your risk out to limit that downside and maximize your return.
My first 2020 stock is Wells Fargo, ticker WFC. This was an easy one despite all the bad press the bank has gotten over the last couple of years.
Few sectors have as much going for them as financials with deregulation and rising interest rates that will drive profitability. This is actually something we talked about in our Warren Buffett investing series because Buffett has more of his money in banks than anything else right now, almost $40 billion.
Wells Fargo is the largest deposit gatherer in the country and a leader in the mortgage market, meaning it’s going to win big when those long-term rates head higher.
Return on assets has slumped to 1.1-times this year from 1.4 in 2013, leaving room for stronger profitability on management’s turnaround plan . Non-performing assets have shrunk for four consecutive quarters and the bank has been able to grow deposits consistently.
I’ll admit that it may take time to rebuild the company’s reputation after the scandals but Wells Fargo always had some of the highest marks for customer satisfaction among banks and I think it can get there again.
Our next stock for 2020 is CVS Health, ticker CVS. Now the company has seen its shares gradually melt 45% lower since July 2015 on weakness in drug pricing and fears around competition but this is a company with a huge advantage and some great drivers .
The Aetna merger will create a vertically-integrated health care company like no other, able to control pricing and patients at every step in the process.
This idea started with that giant shift to an older population and growth in healthcare spending. Being able to control drug pricing and insurance could boost profits significantly and the shares now trade for just 10.4-times trailing earnings.
Even if Amazon is able to carve out a share with its acquisition of PillPack, the market is underestimating the healthcare market advantage controlled by nation’s largest drug retailer.
My last 2020 stock pick, and I’m going to get sooo many comments from this, but General Electric, ticker GE. For nearly a decade, we’ve been under easy money but no growth so all companies have been doing is buying back shares. There’s been no capital investment.
That’s slowly changing with tax reform, stronger growth and the move from low rates. Companies are going to be investing in new capital and that’s going to benefit the industrials and especially GE.
Now I know GE has been a dog for the last couple of years, shares are down 60% since the 2016 high. But management has made the tough decisions, selling off some assets and spinning off others. Cash flow is protected and I don’t think the market is giving the company credit for it yet. I think a solid turnaround in stock price could start in 2020 with even more gains over the next five years.
That’s a crash course on the stock market for beginners and some of the best stocks for 2020. We’ve got a lot of great videos on getting started investing on the channel. So be sure to click through and join the Let's Talk Money community for everything you need to start investing.