Investing can sure look difficult. Gaze at a newsstand, for example, and The Wall Street Journal certainly looks more intimidating than, say, Newsweek. Tune in to CBNC for a few minutes, and your head can quickly be spinning as you hear one unfamiliar term after another -- and all those numbers! Then think about all those unfortunate people who lost so much money in Enron stock. And what about poor Martha Stewart, who ended up going to jail because of her investments? Yikes! I'm beginning to scare myself!
Appearances can be deceiving, though. Truth be told, you can master investing. Or, at least, you can master all the investing that you need to master. For example, there's one simple investment that will serve just about any long-term investor quite well -- the broad-market index fund, such as the Vanguard S&P 500 Index (FUND:VFINX). Plunk your money into this one, and you'll instantly be diversified across 500 companies. Your returns will closely track the overall return of the S&P 500 and even the entire U.S. stock market, which has gained an annual average of 10% over many decades. See? Easy.
Be better than average
An index fund will give you average results -- and in this case, average is pretty darn good. It's better than the majority of mutual funds do, oddly enough. (See, when you have smart people with MBAs in charge of managing money, they often make mistakes as they aim for quick profits.)
Still, you don't have to settle for average. There are excellent mutual funds out there, ones with solid long-term track records and attractive prospects, and with managers whose philosophies you respect. You can learn about some of them via our Motley Fool Champion Funds newsletter. Try it for free and see which funds our analyst Shannon Zimmerman is recommending and has recommended.
This newsletter's total average return is 13% vs. 5% for benchmark indexes. Last time I checked, more than half of his 40 picks were up more than 15%, and 16 were up more than 20%, which is darn impressive for mutual funds.
Be much better than average
If you have the time and interest to learn more about investing, you may be able to outpace many of the best mutual funds by seeking out and carefully evaluating stocks in outstanding companies. (You can get a head start by trying one of our market-beating investing newsletters -- they'll point you to some very promising stocks each month.)
You can learn how to evaluate companies via books such as The Motley Fool Investment Workbook by David and Tom Gardner and The Five Rules for Successful Stock Investing by Pat Dorsey. The more you learn, the better you're likely to do. Don't avoid it all because you think it's too difficult, though. Broken into manageable bites, the business of evaluating businesses is quite accessible. Here -- let me quickly teach you a thing or two.
Market cap
One concept that serious investors should be familiar with is market capitalization, or market cap. It's essentially a kind of price tag -- the current value placed on the firm by investors in the stock market. Calculating it is simple: Just take the current stock price and multiply it by the number of shares outstanding. (Most online stock quote providers include shares outstanding and often the market cap, too.)
Consider Newell Rubbermaid (NYSE:NWL), for example. It has roughly 275 million shares outstanding and a recent share price around $25. Multiply those together and you get a market cap of about $6.9 billion. That's the current market value of the company. If you wanted to buy the whole company, you'd have to fork over $6.9 billion -- or more, as buyouts generally occur above market prices.
Checking out the market cap of a company you're interested in can be enlightening. For example, Google's (NASDAQ:GOOG) market cap was recently around $127 billion. That might not mean too much to you, but compare that with Procter & Gamble's $185 billion, Intel's $108 billion, Amazon.com's $15 billion, Verizon's $95 billion, Yahoo!'s $46 billion, and eBay's $38 billion. Does Google's value seem reasonable in comparison? It depends on your assessment of its potential.
Companies are often classified by size according to market cap. There's no one exact definition, and guidelines change over time, but here's one rough take: If a company's capitalization is $5 billion or higher, call it a large cap; between $1 billion and $5 billion, a mid cap; $250 million to $1 billion, a small cap; and less than $250 million, a micro cap. Starbucks, GE, and Apple are large caps, while 1-800-Flowers.com and La-Z-Boy are small caps.
See? You just learned about market capitalization. That wasn't too painful, right? And maybe it was even a little bit interesting?
Here are links to additional lessons:
- Stocks
- Bonds
- Crack the Accounting Code
- The Balance Sheet
- The Income Statement
- The Cash Flow Statement
- Margins
- Return on Invested Capital (ROIC)
- Inventory
- Cash Conversion Cycle
- Free Cash Flow
- GAAP
- Valuation
- Enterprise Value
- Understanding Ratios
- Get Inside Management's Head
- Identifying Great Management
Back to funds
If you enjoy learning about how to study companies, delve into it further. If it bores you, or you haven't the time, stick with mutual funds. You can do very, very well investing just in some carefully selected mutual funds. You don't have to become a hot-shot stock analyst to prosper.
Learn more about mutual funds in these Shannon Zimmerman articles:
Here's to a happier portfolio!
Intel is a Motley Fool Inside Value pick, Amazon and Starbucks are Motley Fool Stock Advisor picks, and La-Z-Boy is a Motley Fool Income Investor pick.
Selena owns shares of Amazon.com and eBay. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
