I often shy away from tougher topics because I feel like most people won’t read it since it’s so boring and complicated.

It’s understandable. I get it.

It’s tough to sit through and read through charts and graphs and formulas. I hated math so I get it. I still do, but I like “functional math.” Math that you use in investing and business.

So having said that, a lot of what I’m going to touch on in this blog post is going to get confusing for many of you. So I’m warning you in advance.

If it’s too much to read, then don’t close without at least bookmarking for the future, for when you do need it

Sometimes you just have to grit your teeth and just soldier through it. Just like your mom probably said when you were growing up (or maybe still now), you can’t can’t always pick and choose what you want to eat. You have to eat your vegetables as well, because they’re good for you.

And if you don’t have time to read through everything right now, or you’re just not feeling it at the moment, just read the conclusion and take-aways at the bottom of this post and bookmark this page for future consumption when you’re feeling a bit more ready to tackle the subject.

Before I launch into how I made so much money in value-oriented stocks, especially international markets

Before I talk about my stock portfolio and some of the strategies I’ve used in the past to amass wealth, I feel the need to first admit to those of you just tuning in, that I’m not perfect.

I make a ton of mistakes and lose a ton of money in the process.

My biggest mistake was recently when I lost $163,500 in cryptocurrencies (i.e. bitcoin, litecoin, BCH, eth, etc). My second biggest loss when I lost $20,000 back in, I think it was 2015, when I bet on coffee futures due to thinking I was smarter than I was. Both have been expensive lessons, with the crypto one being particularly difficult for my mental and emotional psyche.

Related: I Wanted to Kill Myself – Lost $163,500 in Bitcoin

Even billionaires make mistakes.

Here’s a good rule of thumb: the more money you make, the bigger the $ amounts of your mistakes are going to end up becoming. It’s just math.

They don’t teach this stuff in school, so only the wealthy know: it’s called the Value Premium

Without going into a boring explanation of what this means, I’ll try to give you a simplified version.

Basically the Value Premium is what experts say explains why stocks that are under-priced outperform more expensive stocks, when compared to some sort of measure of relative value, with probably the two most popular being price to earnings ratios and price to book ratio (simply stated that means the number of dollars one is willing to invest in a certain stock relative to the earnings they expect for that company to make per share purchased; and price of the stock compared to the book-value of the company).

I know all of that might still sound a bit complicated so to break it down further, just know that research has been done that proves the certain asset classes do better than other asset classes in the long haul (for example, value stocks outperform growth stocks).

And this phenomena exists across the entire market

The value premium exists both here in the USA, across market caps, and abroad in all international markets (both developed and emerging markets):

Source: “Migration” academic study done by Fama and French (data set: 1934 – 2006)

I’m going to break it down even more than that for those of you who are still confused

If you’re still confused, don’t think that you’re dumb because none of this stuff is making any sense and you’re hanging by a thread right now just reading another sentence.

I happen to enjoy reading money-related stuff so I have an advantage. Just like if you were into Fortnite or some sports team, you probably know literally everything there is to know about that subject. No one’s forcing you to know so much about that particular topic. You just do because you want to. And it’s easy because you enjoy it. The same applies here. People tend to become “smarter” in subjects that they enjoy. Simply because they enjoy it.

To simply this value premium thing, just think about it this way:

You always want to buy the cheap stuff; and not expensive stuff when it comes to stocks. Heck, the same applies to real estate if you think about it. Or any other asset.

People, especially the younger generation, tend to buy stocks in only brands that they know

Say you wanted to start dabbling in the stock market.

I have a feeling that the far majority of you would buy stocks in companies that you’re familiar with. Companies that pop into mind are the most popular and well-known brands such as Apple, Amazon, Nike, Adidas, Starbucks, and the like.

But what about the boring companies that no one except for your grandparents are buying stocks of? Are they not producing products that people are buying and making a ton of money doing so? Why wouldn’t you buy those? Many of these boring companies are undervalued because they’re just not the “flavor of the day.”

But just because you know that company and feel like that brand is doing well, doesn’t necessarily mean you will make big returns

Why do you think this is?

Companies that are typically the most “popular” don’t always maintain the biggest growth (there are exceptions of course, like as of late Netflix has been killing it, and so has Amazon). The reason is because their popularity is their biggest downfall. Because they’re so popular and everyone else thinks that the companies will be good ones to invest in, everyone and their uncle and aunts buy the stocks.

Now what does basic Supply and Demand and Economics 101 tell you?

Because so many people want to buy these “sexy” stocks, the price of the stocks are driven up higher and higher. It’s basic supply and demand. The less supply of something there is, due to high demand, it’ll drive the prices higher. The same is true in stocks, and all assets.

So by the time you buy into them, they’re already very high. So you’re buying them already at a premium, so you’re the one that will be missing out on the premium.

Does this make sense?

It doesn’t mean that these stocks haven’t done well or will not continue to do well

It’s just more of a timing thing.

By the time everyone knows about the company, many times it’s too late because future expectation of growth in that stock has already driven up the price.

The same goes for something like Bitcoin when it hit $20,000. Everyone went in because they expected it to go higher. The people who made the most money were the ones who bought bitcoin when it was less than $1. Now is it sinking in? It doesn’t necessarily mean that Bitcoin in 100 years won’t be at $1 million per bitcoin. That means the people who bought it at $20,000 will ultimately make money, but it was a far different journey than what the earlier investors had the luxury of going through.

Warren Buffet, the most famous investor of all time, has always focused on value-oriented stocks

Warren buffet, has been the richest billionaire many consecutive years in the past. As of late, he’s been donating billions of dollars worth of stocks in his company Berkshire Hathaway to the Bill and Melinda Gates Foundation, every single year, so his wealth has been slowly declining (although he’s been in the top 5 riches people in the world for probably many years now).

He’s been giving away his wealth because he’s currently 87 years old and has pledged to give away 90%+ of his money. I admire him quite a bit. He’s very frugal even though he’s so rich, and is a very generous person considering he’s so wealthy.

Warren Buffet is also famous for never buying what’s considered hot.

He never buys the hot technology stocks or any stocks that is the “flavor the of year” or what’s considered the most sexy. In other words, he’s boring. Super boring. The guy eats McDonalds breakfast on most days and he’s a billionaire multiple times over!

If everyone’s buying it, you shouldn’t be buying it

Why did I get burned by bitcoin?

Because everyone and their grandmas were getting in on it. It’s not that bitcoin wasn’t a solid investment. I still regard it as a decent investment. The timing was wrong though. It’s just that too many people, who don’t know what they’re doing, threw all their life savings into it and jacked up the market and it came crashing down when everyone started to panic.

In other words, the stuff that’s “sexy” doesn’t necessarily make it a bad investment. Often times, it just makes it a bad investment from a timing perspective. Like I mentioned above, if you bought Bitcoin at $1, it doesn’t matter if it went down to even $1000 per bitcoin. So it was a good investment!

How to calculate the P/E Ratio so that you can tell how cheap a stock or country is

That’s it! the P/E Ratio can be found out once you have the price per share and you divide that by the earnings per share.

Real Example: Comparing BOFA and Chase – which is a better buy?

Here’s an example of two companies in the same industry, and then those two compared to a benchmark like the S&P 500. If I lose you here, don’t worry. Just book mark this page and come back to it at a later date. Because I have other posts that I wrote previously that talk more about this stuff and am planning on breaking a lot of this down even further in future posts that I have in the pipeline.

Here was Bank of America’s stock price at the end of 2017

• Stock Price closed out the year at $29.52
• Earnings per Share (EPS) was then $1.56
• Price to earnings ratio, is then 18.92 (in other words $29.52 divided by $1.56)

So BOFA was trading at about 19x its earnings.

In other words: for every stock that you buy of Bank of America, you’re paying $19 for every $1 of earnings Bank of America is earning.

Let’s do the same for JP Morgan Chase, which is another bank

• Stock Price closed out the year at $106.94
• Earnings per Share (EPS) was then $6.31
• Price to earnings ratio, is then 17 (in other words $106.94 divided by $6.31)

What does this tell you, when comparing the two companies and what seems like a better purchase?

Even though Chase’ stock is much more higher priced, it’s a better value buy because you’re paying less for each $1 of earnings

When you compare BOFA’s P/E of 19 to Chase’s 17 you can gather than Chase is currently selling for cheaper when compared to Bank of America

The assumption that most people have that just because a stock’s price is higher, doesn’t necessarily mean it’s more expensive. Here in this instance, even if one share of Chase is priced at $106.94 and Bank of America is priced at only $29.52 per share, you might assume that Bank of America is a better buy because it’s cheaper. But no, if you look at the P/E ratio of these two companies, you’ll notice that because Chase has better earnings per share, you’re getting a better value (more bang for your buck).

That said, the S&P 500 is often at around a P/E of 15 and is a big basket of stocks of big companies

So from a risk-adjusted standpoint, you’ll probably fare better buying the entire basket of stocks at an average P/E of 15 than a single company that can go bankrupt in the future. Anything can happen, but there’s a lower chance of 500 huge mega corporations going bye bye at the same time. Does this make sense? This is where passive index funds shine, with their basket of companies, and the lowest expense ratios. I’m not a diehard “invest only in index funds” kind of guy, but I do strongly believe that the majority of your assets are in something safe like this. Because it’ll give you a lot of room to make mistakes with your riskier ventures.

So that’s it? It’s that easy? Just calculate the P/E ratio and I’m all set? I’ll make oodles of money?

Not so fast my young padawan.

Only if it were that easy right? Then everyone would be rich!

Keep in mind, that there is no single ratio that can tell you all you need to know about a stock. So before  you invest, you need to use common sense and a variety of financial tools to see what is and is not fairly priced. I personally really like the CAPE ratio (PE10) which was something developed by Dr. Robert Shiller of Yale University, who is a Nobel Laureate.

Emerging Markets have always been my favorite; because they’re always on discount!

Personally for me, I use the CAPE ratio which is also called the PE10. It’s pretty much the same thing as the P/E ratio but it looks back 10 years so that it stabilizes the results a bit more.

And for this reason, emerging market stocks have always been my favorite place to invest in stocks. For over a decade, I’ve been investing in countries like South Korea (I know, I know, I’m biased, lol), Brazil, Russia, China, Portugal, Spain, Italy, Turkey, Israel, etc; and they are all still super cheap countries to invest relative to companies/stocks in other countries.

That doesn’t necessarily mean I don’t buy stocks in the USA. Probably still more than half of my stocks are here in the USA, but like anything else, I like to diversify (lol wow, you dug up the cash giveaway answer – 8/4/18 My Hungarian name is Timóteus – this mustve taken you forever to find lol – I hope you were the first to stumble across this). And whenever I do, I typically go for riskier investments. It’s why I’ve always made a ton of money, and also lost a ton of money. It’s a double-edged sword.

Source: Polaris Capital Management, LLC

Diversify your portfolio with certain asset classes like emerging markets and small cap value stocks

Diversify, diversify diversify.

It’s what allows for wiggle room when disaster strikes. And trust me, if it hasn’t yet, disaster always strikes when you least expect it.

Like a lot of things in life, you don’t have to go with an all-or-nothing strategy. You should put a lot of different eggs in your basket. And just like emerging markets, small cap value stocks is one of them.

Conclusion and take-aways

• I know, I know, this stuff is confusing. I get it. It’s a tough read. All these ratios and talk of value premiums, and price to earnings ratios, price to book ratios, can give a person a migraine. But sometimes you need to learn the harder stuff in life if you want to make more money than the average person. The average person don’t read up on stuff like this! And that’s why they make average!

• Everyone makes mistakes. So I’m not coming from a place of perfection. Here’s a good rule of thumb: the more money you make, the bigger the $ amounts of your mistakes are going to end up becoming. It’s just math.

• Lots of people, especially Gen Y and Z typically buy stocks in companies that they’re familiar with. This is a huge mistake. And it’s not that those companies are bad companies. It’s just that everyone’s thinking the same thing as you, so they’re bidding up the price. So you end up buying a good company’s stocks, but at a price that’s too high. So what do you end up with? Lower future returns on that asset!

• So don’t overlook the boring companies. The ones that your grandparents have held onto, or have been buying since your parents wern’t even born. Are they not producing products that people are buying and making a ton of money doing so? Why wouldn’t you buy those? Many of these boring companies are undervalued because they’re just not the “flavor of the day.

• Warren Buffet is the most famous investor. He’s an ultra billionaire and has always been in the top 5 richest people in the world for a very long time.But he always buys value stocks. Not growth stocks. In other words, he never buys the hot technology stocks or any stocks that is the talk of the town. He buys the boring cheap stuff that everyone else doesn’t want to buy so all of these stocks are on heavy discounts. Those are the ones that he swoops in and buys all the stocks of.

• Read above where I talk about the example of how to calculate which stock is better value. I give a real life example between buying stocks in Bank of America versus buying stocks in Chase bank. You need to be able to figure out how much of a discount a company’s stock is currently at, not based on the stock share’s sticker price, but relative to its earnings. It’s important!

• If you’re in the USA, don’t overlook stocks overseas. If you don’t want to hand-pick specific companies (I highly advise most people not to) then buy ETF’s. Google ETF right now and look for some low expense ratio ETF’s that allow you to buy into big baskets of international companies at cheap prices, with very cheap fees (like Vanguard ETF’s). If you don’t know how to do this, you can YouTube it, or keep googling.

P.S. I’m planning on making an e-course in the future for anyone who wants more specific guidance on how to invest in the stock market. I’m not sure when this’ll happen though. But the more interest I get from readers like you, I’ll try to get working on it sooner. I’ve been getting asked for something like this for quite a while, but the requests have been very sporadic so I’ve been putting it off a bit and prioritizing other stuff instead. So let me know if this is you and I’ll put you on a waiting list.

P.S.S. The winner of yesterday’s cash giveaway is @namashya_rai from India! Congrats!

As I said in my last post and give-away: no worries if you didn’t win this round. Because I have another cash give-away I’m gonna do, probably today sometime, or tomorrow at the latest. So stay tuned! And given the fact that I’ve given away over $41,000, we’re just getting started and this party isn’t going to end any time soon. But I hope that as you’re participating in these cash give-aways, you’ll end up learning a few things from these educational blog posts and applying them to your life! I’m a strong believer in teaching a person how to fish so that they can fish for themselves. All of you are capable!

Additional Reading

INSEAD Academic Research Paper by Ludovic Phalippou – What Drives the Value Premium? / Institutional Investors and Valuation Ratios

University of Miami Academic Research Paper by Sandro C. Andrade and Vidhi Chhaochharia – Is there a Value Premium Among Large Stocks?

Investopedia – Investigating the Stock Premium Puzzle