Lately, I’ve been asked by a lot of people on how to get started with investing and I’ve seen a lot of confusion around this. Especially, on how to make money on money.
Many folks believe that you need some guy in a fancy $3k suit in order for you to see a decent investment return. Another alternative I’ve heard is to stash the money in a savings account, yielding them 2% per year at best. Very few actually believe that they have the capability to invest it themselves. For me that answer is simple, just try it! Start playing around with a stock market simulator, read an article or two about investing each week. Soon you’ll be confident and literate enough to start investing for real. Of course it’s important to save responsibly for the future, but it’s equally important to have what I like to call a financial buffer. A place where you put money in that you would have spent on stupid stuff anyways. This is where you can create some serious wealth without feeding some expensive banker.
Save and Wait 42 Years, or Invest and Reap the Benefits in 6 Months.
Let me show you an example of how I found some of my investments that gave me a return of +50% which would have taken me 42 years to receive on my savings account. Remember, this is in my financial buffer where I can play around with my investments. For all you SprinkleBit members, you can see my full portfolio here.
In November I made a large overhaul on my portfolio, among my new investments were Yahoo! and Western Digital Corporation. These two investments have given me 44% and 62% unrealized gain thus far (unrealized is the suits’ way of saying that your investment has increased in value but you need to sell it to benefit from it, i.e., realized). I say unrealized as I’m holding on to these investments for a little while longer. Let me show you how easily I found these golden nuggets.
What Was My Intuition Behind these Purchases?
The beauty of SprinkleBit is that I can go back and see my motivation behind my orders and see if my intuition was right or not. On my Yahoo! order, I had noted “One word, Marissa!”, a neat little note for myself. I knew that Yahoo! was about to update a lot of their business procedures due to their new appointment of Marissa Mayer as their CEO. She was formerly Vice President at Google.
Fun fact: Mayer joined Google in 1999 as employee number 20 and was the company’s first female engineer.
Appointing Marissa would lead to a strategy similar to Google’s which lead to my first conclusion: their operating metrics (the Suits’ word for profit margins, growth, etc.) would come closer to Google as well. How was Yahoo! stacking up against them? Yahoo!’s PE was 5.24 and Google’s PE was 20.64 almost 4 times higher than Yahoo! (PE could be explained as the market’s sentiment for the value of each dollar earned by a company). Even more reassuring was the fact that Yahoo!’s PE was at the lowest levels it had been in 5 years.
Why do I Look at the PE Ratio?
The PE ratio shows two things that could move the price of that stock.
- The value per dollar earned can go up. The [P] in PE (which in this case the industry average was 4 times higher)
- The actual dollar earned can go up. The [E] in PE (The net income of the company increases)
In the case of Yahoo!, both of these factors where prominent which made me decide to invest.
Western Digital Corporation
Regarding Western Digital Corporation I had a similar approach but a different background. I found WDC through searching after the lowest PE ratios in the tech industry. My SprinkleBit Motivation was “Great numbers: Low PE, high growth, great return on equity. “ Or as the Suits would have said; “The operating metrics were stellar but the market wasn’t hungry for it.” I looked in to their market and what WDC actually did.
Their enterprise storage solution looked like a great business. Here was my assumption; with everyone moving to the cloud, the demand for data storage should be growing exponentially. WDC’s PE was 4.65 and the industry average was 13.66 which, together with the expected growth was a clear indicator for me to invest, which I did.
Today, I’ve made 44% and 62% unrealized gain, respectively, on these investments and much of my simple assumptions turned out to be true. In a statement by Marissa Mayer we can see that she’s been working hard on the new reforms and improving their long-term growth ;
“I’m pleased with Yahoo!’s performance in the first quarter. We saw continued stability in our business, strengthened our team, and started the year with fast execution against our products and partnerships… We are moving quickly to roll out beautifully designed, more intuitive experiences for our users. I’m confident that the improvements we’re making to our products will set up the Company for long-term growth.”
Yahoo!’s PE is now at 7.2, but it has still a little growth left considering that the industry average is 21.48. Not to forget that Marissa is only in the beginning of her reforms, there are a lot of interesting products that are about to be delivered by Yahoo!.
For Western Digital Corporation the internet storage solution play really paid out “The demand for storage is growing at the rate of 30 percent annually.” Also, as seen in the article, their revenues are up 24% compared to last year. WDC also has a little more growth left in them given that their current PE is 6.95 and the industry average is stable at 13.66.
How to Make Money on Money – Conclusion
If you had put $1,000 in each of these investments you would have made about $1,030 in less than 6 months and only paid about $30 in fees. The guys in suits would have charged you anywhere from $200 – $1000 for this. If you had placed this in a savings account (with 2% interest) it would have taken you 42 years to reach the same result. My answer to how to make money on money? Stop feeding the bankers and spend that on educating yourself. This is why I like my little financial buffer, where I’m the boss of my financial future.