THE INTERVEW On Investing: Once You Read It, It Will Make You More Intelligent About Investing Than 99% of People In The World
Richard and Rene: Sherwin, you keep saying it is very easy and lot safer to invest in stocks. That it’s easier than 95% of people think, and they are closer to getting a lot wealthier than they know. But, most people just do not know how and where to start. I think a lot of us are intimidated, I know I am. Do you sense that?
Sherwin Presley Brown: Yes, Richard, I can see that all the time with new investors. People are afraid of new things or the unknown. I know it seems that investing in individual companies is risky and difficult, but if you give me five minutes I can explain how easy this can be.
R: Okay, go-ahead.
SPB: Have you ever heard of the Dow?
R: Yes, it is an indicator of the economy, right? Like the New York Stock Exchange?
SPB: Correct! The Dow, or the correct name is the Dow Jones Industrial Average, is always in the news. Usually when things are bad or when it is at an all-time high.
R: But, what does have to do with me investing safer buying stocks?
SPB: Hold on I am getting there! The Dow measures how the mega stocks are doing each day.
R: Okay …
SPB: Even though there are over thirty-thousand publicly traded companies doing business in the US alone, guess how many companies make up the Dow?
R: A whole bunch?
SPB: Actually no, but here is a trick question; the S&P 500 is also another indicator so how may companies are in the S&P 500?
R: I’m guessing five-hundred?
SPB: Correct, so now how many companies are in the Dow?
R: Over five-thousand?
SPB: No, only thirty!
R: Thirty? The economic pulse of the nation is based on only thirty businesses?
SPB: Yes. It’s hard to believe all that worry and daily drama is over just thirty companies, isn’t it?
R: Yes! I also see the NASDAQ in the news, is that like the Dow?
SPB: Good question. Yes, the NASDAQ, Dow and The S&P 500 are the most watched stock market indicators. Just keep in mind that there a lot of other indicators, and while the NASDAQ has over 2,000 companies, they change daily.
R: Wow! I learn something new every day!
SPB: Richard, don’t feel bad. Less than five percent of Americans know that there are only 30 stocks that make up the Dow. Next time you are at a party or in friendly group, you can test this out.
R: I will definitely do that.
SPB: Here’s a bit of history: The Dow has been around since 1896 and started off with only 12 companies. Of those, only one is still around.
R: I am not going to guess which one.
SPB: General Electric. And what’s more, GE has been kicked out of the Dow four times because they were doing badly at the time. Okay, now that we have covered a bit of history, let’s get to your first question.
R: Alright. For starters, how does a person go about investing in individual company stocks?
SPB: Richard, let me put it this way; what happens if you don’t pay your light bill each month?
R: Xcel Energy would shut off my power.
SPB: So, you and millions of other people in the state you live in send this publicly traded company a check each month, right?
SPB: So, if you and over two-plus million people, plus all the businesses and the local and federal government in your state MUST pay them every month, right?
R: Yes …
SPB: So, what is the chance of them going out of business any time soon?
R: NEVER, if the Federal Government is involved with them. Seriously, everybody needs power in their home and at work.
SPB: Do you know that you can get your power company to send you a check every three months?
SPB: Yes! Most utility companies and all 30 stocks in the Dow pay dividends to anyone who invests in their stock. In other words, by buying shares in the companies, you are now a shareholder meaning you own parts of the companies. It may be a very, very small part, but now all those 45 thousand plus employees are working for you 24 hours a day, every day!
R: So it’s like, if I buy 10 Shares of Wal-Mart with my next paycheck, all of their employees are now working for me?
SPB: Essentially, yes. All two plus million of them, plus their suppliers and so on.
R: I am getting it, but do I take the cash each quarter or do I reinvest?
SPB: You’re a quick leaner my good man. No, you do not take it in cash; you buy more shares and the magic of compounding will work wonders for you over 20-plus years.
R: How does a new investor do that?
SPB: If you buy the share directly from the companies, you just ask them to enroll you in their Dividend Reinvestment Program, better known as DRIP. And if you buy the shares via an online broker, most of them will also enroll you in their DRIP. If these brokerage houses do not move your money to a DRIP, go elsewhere. Remember: Don’t take the cash, reinvest and let your investment compound.
R: So, that is how 1 share of Coca Cola that only cost $40 is now worth over $11 Million.
SPB: Yes, the very first stock Warren Buffet ever owned when he was just twelve.
SPB: I noticed you have an iPhone, who is you wireless carrier?
SPB: If you had chance to invest in Apple stock or AT&T, which one would you pick?
SPB: Really? How often do you buy an Apple iPhone, tablet or computer?
R: Every three or four years.
SPB: How often do you and over 30 million people pay AT&T?
R: Every month! Oh, I get it! Do they pay dividends?
SPB: Yes, they are one the highest yielding dividend-paying stocks in the Dow. Over 90% of the 30 stocks that makes up the Dow have their own, Direct Investment Plan/DRIP.
R: Is there an easy way to know how to pick a stock to hold for the next 25-plus years?
SPB: Yes. Find a company whose products you and tens of millions of people MUST every day. For example, water. You cannot live without water, food, medicine, petroleum for your automobile, railways to move these goods around the country.** (see my list must own stocks)
R: Like Microsoft?
SPB: Microsoft is currently on of the Dow stocks, but is it something you must use? No! Let’s get down to the very basics, no matter how bad the economy gets, we all have to go to the bathroom. Right?
R: So, differentiate between what you “like” and what you “need.” That’s a no-nonsense way to break things down. I’m guessing a good company in one that sells toilet paper, diapers and feminine products, like Proctor and Gamble?
SPB: YES. P&G is a great example. Now you’re catching on!
R: Invest in the companies who make products or services that millions of people must buy!
SPB: Richard, I love a good student like you!
R: Are there any guiding principles to follow when investing in these companies?
SPB: Yes, I will give you the four most important ones;
1) Never invest money in the stock market that you will need in five years or less. Keep this type of money and your emergency funds in cash.
2) Never, and I mean never, invest more than 70% of your money in the market in good times or bad, and keep 30% out for the unexpected events.
3) Never invest based on emotion. Investing and emotion is a deadly combination, this is why people panic and lose all their hard-earned money.
4) Never buy a stock, based on rumor or a tip from anyone, like your co-workers and relatives or because you see it on the news, or some mad TV show.
R: Should everyone invest in the stock market?
SPB: I will be very blunt on this question, NO!
SPB: If you only think stocks and other investments should only go one way; up, and you worry about your investments daily and do not see the stock market as 10-plus years investing vehicle, then you should NOT invest in the stock market. Period!
R: What about those analysts we see on TV and hear on radio?
SPB: Go online and order your own crystal ball, your guess will be just as good as theirs.
R: Or monkeys throwing darts at the quotes page?
SPB: Dart-throwing monkeys will do as well, or better, than TV “experts,” yes.
R: Thanks for the chat, Sherwin. You cleared up some questions I had.
SPB: No problem, my friend.