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The absolute first thing that a new investor should do before investing a single penny is too build up an emergency savings account. This account should be equal to 6 months of after-tax income. I spoke of this in a previous article and you may want to jump back and read it.

The Simple Dollar recently posted an article that gives a key technique in building up a savings account. Simply go to a different bank then the one that you currently patronize and open a new savings account. Then, have your employer take 10% (or more) of your after-tax income and automatically deposit that money in your new savings account. You will be far less likely to spend this saved money if it is in a separate account in a separate bank.

As I have said before on this site and in my book, The Confident Investor, if you do not have an emergency fund to fall back on in hard times, you will always be nervous about your investment decisions. Eliminate this nervousness and you start to become a Confident Investor.

Check out the Simple Dollar article – it is worth your time.

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I was really happy to see this article in the Wall Street Journal.  I think it is much more efficient and profitable for investors to forego managed mutual funds and invest in index funds.

I think that most people should only have 20-40% of their portfolio in funds and the balance should be in high quality growth stocks like those on my Watch List and that I describe in my book, The Confident Investor.

Below are the first few paragraphs of the WSJ article.  I encourage you to jump over and read the entire article by Kirsten Grind.

Investors are jumping out of mutual funds managed by professional stock pickers and shifting massive amounts of money into lower-cost funds that echo the broader market.

Through November, investors pulled $119.3 billion from so-called actively managed U.S. stock funds in 2012, the biggest yearly outflow since 2008, according to the latest data from research firm Morningstar Inc.

At the same time, they poured $30.4 billion into U.S. stock exchange-traded funds. When combined with bond ETFs, total inflows to such funds were $154 billion, the largest since 2008.

The move shows growing investor distaste for volatility, as the dot-com crash in the early 2000s, the financial crisis in 2008 and recent botched episodes such as last May’s Facebook Inc. initial public offering have shaken investor confidence.

It also reflects the fact that many money managers of stock funds, which charge fees but also dangle the prospect of higher returns, have underperformed the benchmark stock indexes. As a result, more investors are choosing simply to invest in funds tracking the indexes, which carry lower fees and are perceived as having less risk.

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Company name Marriott International, Inc.
Stock ticker MAR
Live stock price [stckqut]MAR[/stckqut]
P/E compared to competitors Fair

MANAGEMENT EXECUTION

Employee productivity Poor
Sales growth Poor
EPS growth Poor
P/E growth Good
EBIT growth Poor

ANALYSIS

Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $36.92
Target stock price (averages with growth) $50.9
Target stock price (averages with no growth) $42.03
Target stock price (manual assumptions) $36.11

The following company description is from Google Finance: http://www.google.com/finance?q=mar

Marriott International, Inc. is a diversified hospitality company. It is a lodging company with more than 3,700 properties in 73 countries and territories. It operates and franchises hotels, including Marriott, The Ritz-Carlton, JW Marriott, Bulgari, EDITION, Renaissance, Autograph Collection, AC Hotels by Marriott, Courtyard, Fairfield Inn & Suites, SpringHill Suites, Residence Inn, TownePlace Suites, ExecuStay, and Marriott Executive Apartments brand names. It operates in four segments: North American Full-Service Lodging, which includes the Marriott Hotels & Resorts; North American Limited-Service Lodging, which includes the Courtyard; International Lodging, which includes the Marriott Hotels & Resorts, and Luxury Lodging, which includes The Ritz-Carlton. In September 2012, its JW Marriott hotel brand opened JW Marriott Essex House New York. In October 2012, Gaylord Entertainment Company sold the Gaylord Hotels brand and the rights to manage its four hotels to the Company.

 

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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Company name Worthington Industries, Inc.
Stock ticker WOR
Live stock price [stckqut]WOR[/stckqut]
P/E compared to competitors Fair

MANAGEMENT EXECUTION

Employee productivity Poor
Sales growth Poor
EPS growth Good
P/E growth Good
EBIT growth Good

ANALYSIS

Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $39.38
Target stock price (averages with growth) $35.04
Target stock price (averages with no growth) $24.11
Target stock price (manual assumptions) $24.92

The following company description is from Google Finance: http://www.google.com/finance?q=wor

Worthington Industries, Inc. (Worthington Industries) is a diversified metals processing company, focused on steel value-added steel processing and manufactured metal products. It operates in three segments: Steel Processing, Pressure Cylinders and Metal Framing. Its manufactured metal products include pressure cylinder products, such as propane, oxygen and helium tanks, hand torches, refrigerant and industrial cylinders, camping cylinders, scuba tanks and helium balloon kits; framing systems and stairs for mid-rise buildings; steel pallets and racks, and through joint ventures, suspension grid systems for concealed and lay-in panel ceilings, laser welded blanks; light gauge steel framing for commercial and residential construction and current and past model automotive service stampings. In September 2012, it acquired the Westerman Companies. In October 2012, its Pressure Cylinders segment has completed the sale of its European air brake tank business to Frauenthal Automotive.

 

Confident Investor comments: At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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In my book The Confident Investor I frequently discuss GOPM (Grow on Other People’s Money). This is a key concept in building your stock portfolio while reducing your financial risk.

Let me show you a quick example of how this works.

You buy 100 shares of company A (perhaps one that is on the Watch List on this site) at $40 with $10 in stock broker commission, so you have invested $4,010. Over the course of a few months, the stock rises to $44. Your investment is now worth $4,400. The technical indicators make you think that this great company will have a short-term pullback in its stock price, so you want to sit back while the market moves against the stock price. However, you still want your money to work for you at this great company. You sell just your initial investment ($4,010) plus the selling commission of $10. $4020 divided by $44 means 92 shares (or a net of $4,048). Your principle is safe (plus $28) and you still have 8 shares of this great company. These 8 shares were bought with Other People’s Money. You have not invested one cent of your own cash in these 8 shares of stock.  They are free!

Perhaps while the market is moving against company A, you buy shares in company B that is experiencing bullish action. This allows you to not have your money sit idle but rather continue to grow while you wait for company A to rebound.

Eventually, the indicators confirm that you should buy in again with company A. Perhaps this new position is $43. You reinvest your $4,048 minus $10 commission and buy 93 shares with $39 left over. You now own 101 shares for your original $4,000 investment with $39 left in your money market account. This $39 is earning interest in your money market account or could be applied to a different stock.

With this technique on a great company, over time your investment will increase and your downside risk will be minimized. However, it is important to remember that, with any investment, there will always be some degree of risk. By bouncing between several well-run companies, you can constantly keep your original investment capital growing even though some stocks are experiencing a bull market.

This is the just the first aspect of the techniques that are taught in my book. The real power lies in learning which companies are worthy of using GOPM. You could just trust my analysis on this site or you can buy my book and understand how you find truly excellent companies to consider for investment. The next tactic after finding the great companies is to anticipate the market and my book will help you with that as well.