Dear DTA,
Hi. Thanks for the content. I’m trying to learn how to value stocks. Any tips for a novice investor? Thanks.
-Paul D.
Hi, Paul.
Appreciate your readership. Thanks for taking the time to write in.
First, I just want to commend you for the question.
A lot of people want to jump right into trading or investing without thinking first.
Stocks aren’t just pieces of paper. They’re not baseball cards.
A stock is a sliver of a real business.
That’s something to approach very seriously.
Now, the question of valuation is very important.
As Warren Buffett once said:
“Price is what you pay. Value is what you get.”
Price is only what something costs. Value is what that something is actually worth. Having a clear idea of both, and separating the former from the latter, can make an investor very wealthy over time.
Every stock has a price to it. And every corresponding business has a value to it.
But determining that value with some degree of accuracy is easier said than done.
It’s far from impossible, though.
In fact, we provide our readers with a number of resources that can make this easier than ever before.
These resources are coming from real investors with successful track records of investing and building wealth.
Take yours truly, for example.
I didn’t start investing until I was in my late 20s.
Better late than never. And I made up for lost time by approaching investing with earnest steadfastness.
As a result, I was able to build a significant amount of wealth in a very short period of time.
My FIRE Fund, which is my real-money stock portfolio, was mostly built in only six years – on a middle-class income, no less.
I even retired in my early 30s, as I lay out in my Early Retirement Blueprint.
I’m able to live my life without need of a job because my portfolio generates enough five-figure passive dividend income to cover my essential expenses in life.
I’ve used the investing strategy of dividend growth investing to achieve my success.
This strategy basically involves buying shares in world-class enterprises that are sending their shareholders reliable and growing cash dividend payments, funded by the reliable and growing profit the businesses produce.
More than 800 US-listed stocks that have raised dividends each year for at least the last five consecutive years can be found on the Dividend Champions, Contenders, and Challengers list.
Fellow contributor Dave Van Knapp put together a fantastic series of articles that can teach you this strategy from scratch.
He calls these his Dividend Growth Investing Lessons.
A major aspect of that series is valuation, of course.
Lesson 11: Valuation, specifically, does a deep dive into valuation.
A dividend growth investor should aim to buy a high-quality dividend growth stock when it’s “on sale”. That would mean it’s priced less than it’s estimated to be worth.
This can lead to far, far better results over the long run than buying poor stocks that are overpriced.
After all, a great business is a better bet than a terrible business over the long run.
And paying less is obviously better than paying more.
I point out how advantageous this is every single Sunday.
I do that via the Undervalued Dividend Growth Stock of the Week series.
Not only do I discuss valuation, but I also highlight a compelling long-term dividend growth stock idea in every article.
These are stocks that have been filtered down into some of the best ideas, even factoring in valuations from professional equity analysts.
In addition to the resources here at DTA, which are extensive, there are numerous books out there that can further help you build out your knowledge base.
The best book of all is probably The Intelligent Investor, by Benjamin Graham.
Warren Buffett is arguably the greatest investor of all time, building up a personal fortune that’s approached $100 billion.
He built that from scratch. With investing.
Well, Benjamin Graham taught Buffett investing.
And his book can teach you, too.
The resources are out there.
But it’s up to you, Paul, to absorb the knowledge from these resources and then go out there and use that knowledge to your advantage.
Regardless, I can tell you one thing for sure.
The best time to start is today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.