Ever wondered what separates Warren Buffett-worthy investors from mere speculators? Ready to unravel the mysteries of successful investing and learn the rules you need to follow? Get all the answers in our latest episode, where we discuss the fundamental differences between investing and speculating, as taught by Benjamin Graham, Buffett’s personal mentor. Learn the importance of doing your own research before investing, the art of spotting quality companies priced low, and how to tune out media hype that often distracts with flashy new trends.
With insights from this episode, you’ll shift from speculator to responsible investor, ready to make sound decisions for your financial future.
I cover the following topics in this episode:
– Who is Warren Buffett and Benjamin Graham?
– The number one value investing book
– Investing vs speculating
– Are you speculating?
– Are you investing?
– How can you become a smart investor?
00:00
In this episode, i’m going to explain the difference between investing and speculating, and I’ll answer the following questions Do you think you’re investing when,in fact, you’re actually speculating? Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we’re going to cover fourtopics. We’re going to start at the very beginning, then we are going to answer the question are you speculating? Then we’ll take a look at are you investing, andthen the last topic will be how you can become an investor. Let’s start at the beginning. So you may or may not recognize this person on the screen in front of you.This is a picture of Warren Buffett.
00:58
Warren Buffett was born on August 30th in 1930. He is a self-made billionaire, a legendary value investor, and has a net worth of over $117 billion. Now, warrenBuffett did not start out being rich. His parents weren’t rich and he didn’t win the lottery. He became a self-made billionaire by investing in stocks. Now, beforewe get deeper into investing versus speculating, we need to go back even further and start at the very beginning. So let’s take a look at this image on the screenhere.
01:44
A lot of you may not recognize who this person is. This is Benjamin Graham. Benjamin Graham was born on May 9th in 1894. He is also a self-made millionaireand is known as the father of value investing, especially when it comes to investing in stocks. Now, benjamin Graham was Warren Buffett’s mentor and teacherat Columbia University, and he taught a lot of investing, a lot of topics that made Warren Buffett who he is today. So Benjamin Graham is extremely important,especially when it comes to the world of investing in stocks. And value investing We’re going to get to that a little later is looking at quality stocks when they’reundervalued, right. So we’re going to look at stocks when they’re priced low. And who better to start off with than with Benjamin Graham, who is known as thefather of value investing?
02:47
Now, benjamin Graham wrote a very important book in 1949, and it still holds true today And the book is called The Intelligent Investor. So this is a highlyrecommended book for anybody looking to learn about investing in stocks using the value investing approach. So in 1949, benjamin Graham talked aboutinvesting versus speculating in chapter one. He felt that this topic was so important And he wanted to get everybody on the same page and to understand thedifference between speculation and investing. Are you gambling your money when you put it in the stock market, or are you investing it responsibly as aninvestor? So right at the beginning, in chapter one, benjamin Graham talks about investments in versus speculation. Okay, so let’s get right to it. His quote I’mgoing to share with you today is coming straight from his book that he wrote in 1949, the Intelligent Investor. So I’m going to read this quote for you as it is in thebook.
04:01
So Benjamin Graham says an investment operation is one which, upon through analysis, promises safety of principal and an adequate return. Operations notmeeting these requirements are speculative. Now there’s a couple of key, important words here He talks about through analysis. Only then can you start lookingat safety of principle. This is safety of the amount of money that you’re investing in the stocks, your capital investment. How safe is it going to be? And we’relooking for an adequate return. So if you’re not doing those three things, then you’re just speculating. So, in other words, what he’s telling us is that investing iswhen you do your research or homework before you invest in any stock. Now, on the other hand, speculating is not doing your research or not doing yourhomework. So this is a quick way to sort of split the difference here between what is investing and what is speculating. Now we’re going to dig a little bit deeper.
05:20
So let’s move on to topic number two, which is called are you speculating? Are you a speculator when you’re investing? You may not know it, or you may know it.You may or may not know that when you’re investing money into a stock, when you’re purchasing a stock, are you actually in fact investing responsibly or justgambling your money away? And a lot of people fall within those two categories. But let’s take a look at it a little bit deeper.
05:52
So here’s a couple of questions I want you to ask yourself. So do you buy stocks or shares in a company because a friend or a coworker gave you a hot tip? Or doyou buy stocks or have you bought stocks because you read somewhere online that the stock was going to skyrocket? The price was just going to go up. Nextquestion do you buy stocks without doing any research? So be honest with yourself. Think about some of the stocks you’ve purchased in the past. Think aboutsome of the stocks you might be thinking about buying or investing in, and are you doing that with research or without any research? Are you buying themwithout any knowledge of the company that you’re buying, do you have any sort of basic understanding of what that company is doing? How about this questiondo you buy stocks because you think you can get lucky, or do you buy stocks because you have a feeling that the stock will go up? And what about the last onehere?
06:55
Do you buy stocks because everyone else is buying stocks, and your friend, your coworker, your neighbors are making a lot of money every week and they’rebragging about it, and you think you’re going to be missing out on those types of investments, and then you jump into buying stocks. Now, this normally happenswhen the stock market is going up, when it continually goes up, week after week, month after month, year after year. Everybody just jumps in. They read about itonline, they hear from their friends, they hear it from family and hear it from people at work, and then they get caught up in thinking that they could buy a stockfor $20 on a Monday and sell it for $45 on a Friday, right, so you kind of get caught up on those things, okay? so I’ve given you a whole bunch of questions to thinkabout. If you have ever bought a stock because of one of those questions, then you were in fact, speculating, which is, in my mind, that’s the equivalent of justyour gambling. So you want to be very careful. We don’t want to gamble with your hard earned cash.
08:06
Now let’s take a look at our next topic Are you investing? So maybe those questions don’t apply to you. So now let’s take a look at what is the difference herebetween speculation and investing. So I’m going to go back to Benjamin Graham’s quote that I showed you at the start of this podcast, and the same quote right.So that is key for us.
08:43
So an investor is somebody who understands how a company is making money. Now, you don’t need to be a genius or an expert at how the company is makingmoney. Just a general understanding of how a company is making money is good enough. An investor is also somebody who protects themselves from losses byinvesting in quality companies not just any company, but high quality companies. Not just any high quality company, but also when they are priced low, becausethe price you pay for a stock is going to make a huge difference in what your future returns are going to be in that investment.
09:30
Okay, and lastly, an investor is somebody who also ignores the media noise That’s always touting the latest, next big thing, and that’s always. We’ve seen thisbefore. It was crypto for a long time, then it was EV electric car companies, then it was any car company involved with anything to do with EVs, such as batterytechnology and all that, and now the big thing is AI. So everything is AI. So there’s companies that are involved in AI And there’s a lot of talk about the stocksgoing up and the technology Right, so I’m not going to get into the technology itself. We’re not debating that at all.
10:13
What I’m saying is, as an investor, you have to step back a little bit and ignore the noise online and in the media, especially when they’re always pushing the nextbig thing. So then, how can you become an investor and stop being a speculator? How do we get you from here to hear where you become an investor? so,number one Everything starts with knowledge, knowledge, education. You need to educate yourself on how to invest and what to invest in. Why? Because no onecares more about your money than you. This is your hard-earned money that you work very hard for, and you don’t want to spend it Carelessly or speculatecarelessly with that money. So this is one thing that you should not be outsourcing to anyone else. Why? because no one cares more about your money than you.So you have to take that responsibility for yourself and Get that knowledge before you invest even one dollar in In stocks or in shares. Now, this same. Thisapplies to mutual funds, index funds, etfs, income funds all of that Right. I can extend it even further. It applies to real estate, investing in businesses or anythingelse. You always have to start with Understanding and get the knowledge first before you invest a single dollar.
11:53
So I’m gonna help you today, in this episode here. I’m going to cover with you right now some investing guidelines. Now, i’ve been investing for over 25 years. I’ma dividend value investor, so I’ve seen a lot of changes in the market over the last 25 years. I’ve seen the market go up. I’ve seen the market come down, hadmarket crashes myself. They’ve experienced the stock market crashes. So now I’m able to provide you with some investing guidelines That are going to take youfrom being a speculator to an investor.
12:33
So let’s get started right away. We are going to start with number one. Do you understand how the company is making money? Again, you don’t need to be anexpert in how the company is making money, but you have to have a good general idea should be able to explain it to a 12 year old or To your grandmother ofhow a company is making money, right? for example, how does Walmart make money? They buy products at wholesale and then they put them in the store andthey sell them at retail prices, and The retail prices are higher than what Walmart paid for those items. And that’s how they’re making the money They’re. Theirprofit is right there the difference between the retail price and the wholesale price. Okay, if you don’t understand how the company is making money, if you lookat Their website, you look at the company’s Annual reports or a description of what the company is doing. If it doesn’t make sense to you, skip it.
13:36
Move on to another company, another stock to look at. Okay, guideline number two 20 years from now, will people still need its products and services?Remember, you’re investing your hard-earned money. You want to make sure the company is going to be around for the long run, so we don’t want to invest incompanies that are going to be gone in two years or in three years. So think about what are the products and services that the company is producing and willthose still be in demand 20 years from now, and those are the kind of companies you want to look at when it comes to making long-term investments.
14:19
Now again, we are I’m a dividend value investor. I’m a long-term investor. I’m not going to be doing any day trading. I’m not looking at growth stocks. I’m notlooking at high-risk investments. I’m looking at how to invest safely and reliably.
14:35
Okay, number three does the company have a low-cost competitive advantage? So this is extremely important. I’ve talked about it before, but I’m happy to sharethe story with you again. I’m going to use Warren Buffett’s example And we saw Warren’s Buffett’s picture in the beginning of the presentation here And this ishow he describes a low-cost competitive advantage. He says to think about a company as a castle. So the corporation is the castle And around the castle there isa moat. The wider the moat, the deeper the moat, the harder it is for competitors to come in and attack the castle or the corporation. Or, in the case of business,harder it is for competitors to come in and take over the business for the corporation itself. So a really good example is Coca-Cola. Coca-cola has been around forover 115 years. They operate in over 125 countries. They have an extremely low-cost competitive advantage. You can take that Coca-Cola logo anywhere in theworld and show it to people and they’ll know exactly what you’re talking about. And think about. If you were to start a company today to compete with Coca-Cola, you would have to spend billions and billions of dollars in marketing and in advertising and product development And you still wouldn’t get close to whereCoca-Cola is today.
16:10
Let’s take a look at McDonald’s, another large corporation, a large brand loyalty. People will cross the street to get a Big Mac because that’s what they want toeat, even though there’s a burger joint closer to them. There’s only one company in the world that can give you a Big Mac and that’s McDonald’s. So thesecompanies, even though they spend a lot of money on marketing and advertising, generally, compared to everyone else, they have a low-cost competitiveadvantage. So that brand recognition, the brand loyalty, is super important.
16:46
Let’s take a look at the next one, number four Is the company recession-proof? Right, and I’ve used this example before and I’ll say it again because it’s such animportant example. If there’s a recession or there’s a chance you may lose your job, are you going to go out and buy a new car? Of course not. You’re not going todo that If there’s a recession or there’s a chance you may lose your job, are you going to go out and buy an expensive vacation overseas? Of course not. You’re notgoing to do that either. This is why we don’t invest in car companies or in airlines, right So? or in aircraft manufacturers, for example, look at what happened withBoeing, which is one of the largest commercial aircraft manufacturers in the world. Look at what happened to General Motors in March of 2020.
17:39
As soon as COVID hit, boeing and General Motors cut their dividend to zero, and the dividend is what we get paid to hold on to the shares in dividend companies.So, for example, if I, if you own a thousand shares in a company that’s paying a dividend of $1 per share, you will earn $1,000 every year for as long as thecompany continues to pay the dividend and as long as you own the shares. But if the company cuts the dividend to zero, your income goes from $1,000 a year tozero, and so we don’t want that, right? So we don’t want companies cutting their dividends, and so we want companies that are recession proof. So, carcompanies not not so good. Airlines not so good. But even if you lose your job and even if there’s a market crash, you still need to eat. When you come home atnight, you still need to turn the lights on, and if you live in a Northern climate and you were in Canada and the upper states in the winter, you are still going tohave to come home and heat your home. Whether it’s a condo, an apartment or a house doesn’t matter. So those the kind of services, products and services thatyou will need even if there’s a recession, and so the companies providing those product and services will continue to earn money, and as they earn money, theycan afford to pay a dividend to the shareholders, and the dividend is your return on your investment while you’re holding on to the shares, regardless of the stockprice. If the dividend, if the company is paying a dividend of $1 per share, they’re going to pay you $1 per share, regardless of the share price. The share pricechanges every single day, but the dividend will remain consistent. So look for companies that are recession proof.
19:33
Let’s go to number five. Is the company profitable? So we want to look at companies. The last 20 year history of at least 8% average annual growth In theirearnings. So if you were to put it on a graph, we would want to see the earnings going up like this over time. If they’re going down, skip it, don’t invest in thecompany. If the earnings are doing this up and down, up and down, up and down That’s also completely random. I have no confidence as to what the earnings aregoing to be next year. But when I see a graph that does this and it goes straight up, then I have some confidence that next year the company is going to makemore money And as long as the company is profitable, then the dividend will be paid to you, the shareholder Number six.
20:23
Does the company grow the dividend?
20:25
And this is also important. Again, we’re looking for 8% average annual growth over the last 20 years. Why do we look back at last 20 years? Because we want tosee a solid track record. No one can predict the future. I don’t know what’s going to happen next week, next month or next year. I don’t know what’s going tohappen with dividends, stock prices, the stock market We don’t know. But when we look at a company that has a 20 year track record of growing their dividendyear after year after year for example, coca-cola has had over 54 years of consecutive dividend increases Think about how many market crashes we’ve had in thelast 54 years, how many recessions we’ve had. But Coca-Cola has managed to increase its dividend year after year after year. So I’m going to go back to theexample of the company that was paying, for example, paying you a dividend of $1 per share. So it’ll start off with $1 and then next year the dividend could growto $1.10, maybe $1.15, maybe $1.20. And over time, that dividend, every time it gets increased, that’s more money in your pocket. So we want to look forcompanies that have a history of growing their dividend.
21:40
Okay, number seven can the company afford to pay the dividend? So this is where we look at the payout ratio. We want to look at companies with a payout ratioof 75% or less. If it’s over that, if it’s 200%, 300%, skip it, move on to another company. Number eight is the debt less than 70%. So we don’t want to invest incompanies that have a debt of 3, 4, 5, 6, 800%, because when there’s a recession or when interest rates go up, those companies are going to have a very hard timepaying off their debt And they’re going to have a very hard time surviving a market downturn. So we want our money to be safe. We’re going to invest it incompanies that are financially strong. So stick with companies with debt of less than 70%. Number nine we’re going to avoid any company with a recent dividendcut. So if the company reduced its dividend from the year before, well that’s a yellow flag. That doesn’t give me any confidence. What’s going to happen nextyear? Are they going to lower the dividend even more? Are they going to eliminate the dividend? We don’t know. So, to be safe, if there’s a dividend cut, we don’tlook at the company right.
23:02
I’m going to go back to guideline number six, which is making sure the dividend is going up consistently, year after year after year. Number 10, does the companybuy back its own shares? So, generally, share buybacks are a good thing, as they buy those back in the open market. It reduces the number of shares that areoutstanding, thereby increasing the value of the existing shares. And if you happen to own those shares, then over time the share price is going to come up.
23:31
Number 11, this is where we look to make sure that the stock is priced low. So there’s three things we’re going to look at here. We’re going to look at the PE ratio,so make sure it’s 25% or less. The PB ratio price to book value. Make sure it’s three or less. And then we compare the current yield to the 20 year average yield,and so the current yield has to be higher than the company’s 20 year average dividend yield. So we’re going to compare the average current dividend yield to theaverage dividend yield And then we know if a company passes all these three parameters in guideline number 11, then this stock is historically priced low. Andthe last one, very important, they’re all important. We want to make sure, before you invest in any stock, that the company passes all of these guidelines that I’veshown you here. So number 12 says keep your emotions out of investing.
24:34
Okay, it’s very easy to get caught up with all the noise online, on Twitter, on any of the social networks, on media, and people got caught up with crypto back in 992000,. They got caught up with all the tech stocks. Now they’re getting caught up with AI. Then it was. Even we had the same thing with EVs. Just ignore all thatnoise. I’ve given you the guidelines here. Follow the guidelines. This is going to be your checklist. Make sure the company passes all of these before you invest init.
25:14
Okay, so I’m going to leave you with a few words of wisdom from Jason Sweg. He is a financial journalist, a financial author, has worked on Wall Street for many,many, many years, and these are important words and I’m going to share those with you. So Jason says people who invest make money for themselves. Peoplewho speculate make money for their brokers, and that, in turn, is why Wall Street downplays the virtues of investing and hypes the appeal of speculation. Sothink about that before you invest any dollar into any company, any stock, any share, any mutual fund, etf or index fund.
26:09
So our approach, as I said before, is to invest safely and reliably for the long term. So we don’t think in terms of weeks, months or years. We think in terms ofdecades. So I have stocks that I’ve owned for over 20, over 25 years, and so we always take the long term perspective. And so what I teach is how to invest inquality dividend stocks when they’re priced low. Not just any stock has to be a quality stock, and it can’t be a quality stock at any price. It has to be priced low.Why would you pay $200 a share for a company when it’s priced low at $75 a share? So how do you know when you’re looking at a quality stock and how do youknow when it’s priced low?
26:55
Well, for that, i’ve created what I call the 12 rules of simply investing, and I’ve already covered them. It was the 12 guidelines that we went through in thisepisode. So those are your call it rules, call it a guideline guidelines or call it a checklist, doesn’t matter. What you call it, you have to make sure a company passesall of these rules before you invest in it. Even if a company fails one rule, skip it, move on to something else. So if you’re interested in learning more about theserules, i cover all of them in the Simply Investing course.
27:33
It’s an online course, you can take it at your own pace And it’s got all of my 25 plus years of experience As a dividend investor. I’ve put all that knowledge andexperience in that course. It’s gonna help you. Like I said, knowledge is key before you invest your first dollar. So the course is gonna give you that knowledge. It’slike I said it’s an online course consists of 10 modules.
27:59
We start with the investing basics, then we get into the 12 rules. We give you real life examples, then I show you how to apply the 12 rules. I even give you aGoogle sheet. You can fill it out. You can use the 12 rules and apply them against any stock anywhere in the world And we have clients who have done that inover 35 countries. Then I show you how to use the Simply Investing platform. Then we take a look at placing your first stock order. Step by step, i’m gonna showyou how to build and track your portfolio. I’m gonna show you when to sell. It’s important to know when to buy, but it’s equally important to know when to sell, sowe cover that in the course. Then we talk about reducing your fees and risk. I’m gonna give you an action plan to get started right away, and then I answer someof your frequently asked questions in the course. Now, for those of you that are interested, i’ve spent two years.
28:57
I built the Simply Investing platform. It’s a web application, it’s a subscription-based service, and what we do in the platform is we apply these rules to over 6,000companies in the US and in Canada every single day. So when you log into the web application, the website, when you log in there, it’ll show you immediatelywhich companies pass all the rules, which ones fail, which rules, which ones which companies are price low and which ones are priced high. So then you knowwhich companies to avoid as well. So take a look at that. If you’re interested, write this down. We have a special coupon code for everybody listening to thispodcast today. The coupon code is SAVE10, s-a-v-e-1-0. Save10 is gonna give you 10% off of all of our products and services. So 10% off the course, 10% off theplatform. I also do one-on-one coaching calls, personal assessments, so you can get 10% off that as well. If you enjoyed today’s episode, be sure to click on thesubscribe button, hit the like button as well, and for more information, take a look at my website at simplyinvestingcom. Thanks for watching.
