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Dear Daily Crux reader, Our friend and colleague, Dr. David "Doc" Eifrig, recently shared some powerful insights with hisRetirement Millionaire subscribers. In short, Doc revealed four simple rules he uses to help him find some of the best, low-risk investments in the world… and showed readers how to do the same. We thought this information was so useful and important, we asked Doc to share it with Cruxreaders today. Read on to learn exactly what he explained to his subscribers, absolutely free of charge… Regards, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com |
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Doc Eifrig: Four simple rules The Daily Crux: Doc, in a recent issue of Retirement Millionaire, you shared an idea that's likely to surprise many readers… You've relied on four basic "rules of thumb" to help you earn safe, double-digit annualized returns for your readers every single year since Retirement Millionaire was launched, including during the 2008-2009 financial crisis. As a former trader for one of the world's top investment banks, you're familiar with some of the most sophisticated strategies out there. Why do you still use these simple rules? Dr. David Eifrig: That's a great question… let me start my answer with an example I gave my readers. We've all heard advice like "eat your vegetables" and "an apple a day keeps the doctor away." Some folks might say these ideas are too simplistic… but the fact is, these simple rules are two of the best health guidelines out there. So good rules of thumb can be very powerful… They can present complex ideas in clear, easy-to-follow ways. This is important. It doesn't matter how great an idea is on paper… If it's too complicated or difficult to use consistently, it's not likely to help you. And this applies to investing as well… A few simple rules of thumb can help almost anyone become a much better investor. They can make it far less likely you'll lose money in stocks… and even help you know when a particular stock is a great buy, or if it might be time to sell. ----------Advertisement--------- "The End for Obama?" Could Barack Obama's entire presidency be ruined by a single upcoming event? One of the most widely read journalists in America thinks so. And you can see his fascinating take on the subject – including when it's likely to occur and what it would mean for U.S. citizens… The full story is posted, free of charge, here. --------------------------------- Crux: That sounds great, Doc. Let's get right to it then… What's Rule No. 1? Eifrig: Rule No. 1 is to look for stocks with P/E ratios below the long-term average of the S&P 500, which is about 17x. Most readers are probably familiar with the P/E, or price-to-earnings ratio… It's simply the stock's price per share divided by its earnings per share. It's often the first thing professional investors will look at when figuring out how cheap or expensive a particular stock is. The lower the P/E ratio, the better the price. Another way to think of it is to imagine you're buying a rental property. Suppose you find a house that will provide you with $10,000 a year in rental income after maintenance and taxes. If you could buy that house for $80,000, you'd be getting a great deal. That would be like a P/E ratio of 8x in the stock market. But if the house cost you $200,000 – a P/E of 20x – most folks would understand that's a terrible deal. As I mentioned, the S&P 500 – an index comprised of the 500 biggest stocks trading in the U.S. – on average has traded at a price of 17 times earnings. In general, when you can find a quality company trading with a P/E below 17, you're getting a good deal. Crux: What's Rule No. 2? Eifrig: My second rule of thumb is to look for stocks trading with a P/B ratio below 1x. This is like the P/E ratio, but instead of comparing price to earnings, you're comparing price to what's known as "book" value per share. Book value is found by subtracting a company's liabilities from its total assets. It's essentially like calculating a company's "net worth." To get book value per share, you simply divide that number by the total number of shares outstanding. To calculate the P/B ratio, you then just divide the stock price by the book value per share. The P/B ratio gives you a rough idea of how much value you're getting for your investment dollar. When you buy a stock at a P/B of less than 1x, it's like buying assets for cents on the dollar. When you buy at a P/B of more than 1x, it's like spending more than a dollar for every dollar's worth of assets. So a low P/B ratio suggests the company is undervalued, and you could be looking at a great company at a discount. Crux: That makes great sense… What's your next rule? Eifrig: Rule No. 3 is to avoid paying more than 3x P/S – that's price-to-sales – for the stock of a solid, reliable business. Again, this is a ratio based on the stock price. In this case, you're simply comparing price to the company's sales per share. This measures how many dollars of sales you're buying with each dollar of stock. In private markets, businesses usually get bought and sold at prices between 1x and 2x sales… so it usually makes sense to apply those same standards to the stocks you buy, as a general rule. Crux: And your final rule of thumb? Eifrig: My final rule relates to dividends… specifically a stock's dividend yield and payout ratio. Dividends are important to us for a couple reasons. First, a consistent, growing dividend is almost always a sign of a healthy company that treats shareholders well. The company earns consistent cash flow and wants to reward its shareholders. Second, growing dividends also help protect stock prices during market downturns. So, Rule No. 4 is to look for stocks with a history of dividend growth that pay a current yield of at least 2%, while maintaining a payout ratio of less than 50%. The payout ratio is the percent of a company's earnings that are needed to pay the dividend. At a payout ratio of 50% or less, the company's earnings could potentially fall in half and they could still cover the dividend. Of course, that's unlikely to happen in a quality company, but it gives you an extra measure of protection and peace of mind. I should mention that I also prefer companies with dividends that are greater than the yield of the five-year Treasury note… but this isn't a worry today. Thanks to the Federal Reserve, five-year Treasurys yield less than 1%. And that's really all there is to it. These rules aren't complicated, but our safe, consistent returns in Retirement Millionaire are proof of their effectiveness. Crux: Any parting thoughts on the subject? Eifrig: Again, I know these ideas might seem too simplistic, but I urge everyone to consider adding them to your investing toolbox. You'll make your investing life much easier, avoid some of the biggest potential risks, and dramatically improve your long-term returns. Crux: Thanks so much for talking with us. Eifrig: You're welcome. |
Editor's Note: Many Americans are shocked to learn just how high taxes could soar in the next few years. In fact, there are many new tax rates that are set to increase by more than 100% in the next year alone. If this concerns you, you must see Doc Eifrig's latest report. In it, Doc reveals the 100% legal ways you can protect thousands and thousands of dollars of income and assets from the government. And don't worry… they have absolutely nothing to do with offshore bank accounts, complicated investments, or fancy retirement accounts. Click here to learn more. |
Sunday, 24 March 2013
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