Real value stocks can be a fine investment, offering the investor both generous dividends and rising stock prices in the future. Some stock tips that look like bargains turn out to be losers, not value stocks.Here’s a simple example of a stock tip I was given by a broker years ago. He suggested that a stock, JKL, was a value stock, cheap. I’ll give you the numbers, the investment basics, then his reasoning. After that we look at some investing basics as I share some valuable stock tips with you.JKL was selling at $5, at the bottom of its 12-month trading range ($50 to $5). Dividend yield was 10%, and the P-E ratio was at 6 times earnings. According to the broker, JKL was a value stock, a real bargain if you look at the investment basics. His reasoning follows.The price of $5 is low, it sold for $50 less than a year ago. You want to buy low and sell high. JKL pays a dividend yield of 10% a year vs. 2% or so for stocks in general. The stock sells at only 6 times earning per share. Since the market in general was selling at 15 times earnings, JKL was a value stock and a bargain.As a new investor I decided to “wait and see”. A few months later all of JKL’s numbers changed. The stock was at $1, there was no dividend yield, and no P-E ratio. What happened?Investment basics like dividend yield and the P-E ratio do not lie, but you must understand what they really tell you. It is important to understand investing basics as well when investing in stocks. In the case of JKL obviously something went wrong in paradise. The to-good-to-be-true numbers would have served as a warning to those who understand investing basics.Here’s an explanation and some stock tips to help you avoid losers like JKL.A stock selling cheap near its one-year low might look tempting, but more than likely the company is in trouble. The investing basics are this: investors bid down a stock’s price when they (on balance) see problems. Investor tip: take a wait and see approach. If and when the stock starts to move up on heavy volume it might be a buying opportunity. Other investors are buying because they see value.Dividend yield is based on past dividend payments. In other words, you could enjoy a 10% yield in JKL at $5, if they pay the dividend indicated and paid previously. In our example JKL stopped paying dividends because they were having serious financial problems. Look before you leap.The P-E ratio is derived by simply dividing the stock price per share by the company’s earnings per share. It tells you how expensive or cheap a stock’s price is in relation to profits or earnings. A low P-E implies that a stock is selling cheap, a bargain. The problem is that earnings per share in the calculation are based on the past 12 months. Future earnings can improve, or they can turn to losses. When JKL was selling at $5, the last 12-month earnings were almost $1 per share.JKL had fallen to $5 because investors sold the stock in anticipation of poor future earnings. They continued to sell the stock off as JKL reported massive losses. With the stock at $1 there was no P-E ratio, because there was no E, earnings.Don’t get too excited when you see a real low P-E ratio. What looks like a value stock can in reality be a company in trouble. Once again, wait and see what happens to the stock price.As a final stock tip, don’t rush in to buy a stock when it is falling. Stocks fall for a reason. The smart investor pays attention to stock price movements. A stock on the way down is seldom a bargain. That’s investing basics.
If you’re new to investing and you’re looking for a simple way to get started quickly, consider these steps:Step 1. Write a basic investment planStep 2. Put your plan to workStep 3. Keep your plan up-to-dateAs a new investor, there is some good news for you. You have the great advantage of starting with a clean slate. You don’t have any bad habits to unlearn. You don’t have the usual baggage that more experienced investors carry around with them, like- stocks that are losing money- false assumptions about how the market works- overconfidence in your ability to ‘beat the market.’As a new investor, you can write your plan and build your portfolio from scratch, without having to worry about correcting old mistakes or fixing old problems. You can use the best practices of top investors, and customize them to fit your style, personality, and aptitude. You can design your plan any way you choose, and you can make it as automated as you want. Here are the basic elements of a simple but powerful investment plan.First, write down at least two goals you want to accomplish with your investments. For example, you might want to retire by age 55. Make this general goal more specific, and more useful by putting a number on it, like “I want to have $750,000 in my 401k account by December 31, 2032.” The more specific you can be with this part of the process, the better.Another example might be something like “I want to have $15,000 in my Schwab brokerage account by June 1, 2015. This will be used for launching my online cooking class website.” Be specific, be detailed, and be bold. These goals will change and develop over time, and you will be constantly monitoring you progress towards achieving them.After you finish writing down your goals, you’re ready to start building the portfolio structure. Since you’re a beginner, this part will be easy. As long as you have at least 20 years until you retire, you can put most of your money into stocks, as opposed to bonds or other kinds of investments. Here’s what I recommend:-If you have 20 or more years until retirement, put 80% of your money into stocks-If you have 15 – 20 years, put 65% into stocks-If you have 10 – 15 years, put 50% into stocks-If you have less than 10 years, put no more than 40% into stocksFor the rest of your money, you can either use bonds or money-market funds. I’ll cover that in a later section. For now, you should have an asset allocation strategy that is comprised of 80% stocks and 20% bonds, or whatever you time frame works out to be. Once you have this figured out, it’s time to pick the specific investments.For the specific investments in your portfolio, I recommend very broad-based mutual funds or ETFs. For example, you could choose Vanguard Total Stock Market Index Fund (ticker VTI) for U.S. stocks. For non-U.S. stocks you could use the Schwab International Equity Fund (SCHF). And for bonds you can use the Vanguard Total Bond Market ETF (BND).If you already have accounts set up to put your plan into action, you can get started right away. If you don’t, then take some time right now to figure out what kind of accounts you will need, and which brokerage service would be the best fit for your needs and circumstances.At the minimum, you’re going to need a taxable account and a tax-deferred account. I suggest that you contact your accountant, or if you don’t have one, then talk to your financial adviser. If you don’t have a financial adviser, talk to your peers and get someone to recommend a name to you.Once your accounts are open, and your trades are executed, all you have to do is stay on top of things. I recommend that you set up a schedule of regular reviews, perhaps on a quarterly basis at first, and annually after that. During these reviews, you’ll figure out how far your allocations have strayed from their original percentages due to changes in the market. If a fund that you own has changed in price by more than 10% it’s probably a good idea for you to rebalance that position by buying or selling shares.Once you get comfortable with the quarterly or annual rebalancing procedure, you can sit back and let your money, and the market, work for you.