Investing is not an easy task, and it can take years of effort and experimentation before you feel comfortable doing it. That's why new investors shouldn't jump in with both feet. Instead, take it slowly while you learn by doing (and hopefully by reading a few investment classics along the way, like Benjamin Graham's The Intelligent Investor).
A good starting place is to buy the stocks of companies you know because you regularly use their products and services, such as Costco Wholesale (COST 1.01%) and Procter & Gamble (PG -0.78%).
Don't get in over your head
It can be very easy to get caught up in the emotional side of Wall Street. That might have you chasing dangerous fads, like the meme stocks that blew up not too long ago. Or maybe today you'll be attracted to anything with an artificial intelligence angle even though there's no way to tell who the real winners will be just yet.
The point is, humans are fallible and particularly prone to greed and fear. If you are just starting out as an investor, you want to limit the risk you pose to yourself.
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A great book to get your feet wet on the topic of the emotional mistakes you will likely make is The Little Book of Behavioral Investing. It's a quick read that covers a lot of ground, but you are almost certain to see your own mistakes reflected in many of the chapters.
Another good way to limit potential risk is to stick with a small number of stocks from companies you know. Some of the best options are probably sitting in plain sight, like retailers and consumer staples companies. In this way, you will have a better handle on the company's business, and you can keep tabs on it simply by living your daily life.
Costco and P&G are two stocks you might want to consider since they both have a growth bias to them. (To get a bit of background on growth investing, consider Philip Fisher's iconic book Common Stocks and Uncommon Profits). Here is a quick look at these two companies.
Costco's all about the membership fees
As a club store, Costco is a bit different from most retailers because its customers pay a fee for the privilege of shopping there. This is a huge point of differentiation. Essentially, the membership fees provide a revenue source that supports Costco's profits and allows it to be more aggressive with its low-price ethos. That, in turn, keeps customers happily coming back and paying the annual dues each year. The more stores it opens, the more membership fees it collects, so store growth is also really important for the global retailer.
Some numbers will help. In the first quarter of its fiscal 2024, Costco posted revenue of $57.8 billion. The products it sold cost the company $50.5 billion, and selling, general, and administrative expenses tallied up to roughly $5.4 billion. In the end, the company's gross profit was a touch under $2 billion. But here's the interesting thing: Membership fees made up $1.1 billion of the company's revenue line and, thus, more than half of the gross profit. That's how important membership fees are to the company and why it works so hard to keep customer costs low.
Costco's stock is very rarely cheap. And it isn't cheap today. But it has a great track record of success behind it and is a wonderful way to learn while you invest. Given enough time, and new store openings (nine new stores were opened in Q1 alone), even paying a high price for the stock has historically worked out well for long-term growth investors.
Procter & Gamble is big on innovation
While shopping at Costco, you might buy one of Procter & Gamble's products, sold under iconic name brands like Bounty, Crest, and Swiffer. That last brand is important because the product category that it dominates didn't even exist until P&G created it. It is an example of how the company uses research and development to create innovative new products and product advances. Nothing gets customers' blood flowing like the words "new" and "improved." And that's exactly what P&G tries to offer again and again.
That's important because most of the products it sells are cash cows that have been around for a very long time (like toothpaste). The only way to differentiate a brand is by offering more value in some way. Many companies compete on price (selling products as cheaply as possible). P&G competes at the other end of the spectrum, charging premium prices for demonstrably better products.
Add in the industry giant's marketing and distribution strength, and it is a favorite of both retailers and end consumers. It isn't likely to grow as quickly as Costco, but slow and steady has been the long-term trend for decades.
Unlike Costco, however, P&G appears reasonably priced right now given that key valuation metrics, like price to sales and price to earnings, are below their five-year averages. But the extra attraction here for a new investor is that you can own a well-run growth company that is easy to understand and track.
Start small and build from there
Costco and P&G aren't perfect by any means. Note that neither is trading at bargain prices. It wouldn't be wise to "bet the farm" on either of them. But as a new investor, you'll want to stick with companies you know as you learn. These two industry bellwethers fit that bill, and they are historically well-run, too.
Once you build a little knowledge, hopefully by using the lessons of investors who have come before you (such as in the three books mentioned above), you can reach beyond this easy-to-understand-and-track pair and start swimming in the deeper end of the pool.
