Review of Black Enterprise Guide to Investing by James A. Anderson

Black Enterprise Guide to Investing Cover, James A. Anderson

Why I Chose this Book

I have been interested in investing and learning about money for years now. This isn’t the first book on investing that I’ve read, but it’s one that I have avoided for awhile. This book used to lie around my parents’s house for years. I think I actually picked it up once or twice and briefly looked through it. I think, the first time some of the words and figures seemed too technical were over my head. The second time I looked at it years later after I had become a little bit more familiar with managing one’s finances and investing, I think its contents upon brief inspection didn’t seem sexy enough. It looked like it was too…technical. I wanted to become a millionaire, but this book discussed P/E ratios and fund analyses. Too boring. Now, for the third time, I had a little bit more patience, was more familiar with some of the concepts, and was willing to attempt to absorb whatever it held.

Black Enterprise Guide to Investing

Black Enterprise is a magazine company that publishes articles related to finance and entrepreneurship targeted towards the black community. In 2001, the same company published the book Black Enterprise Guide to Investing by James A. Anderson. This book is written in the same spirit of the magazine, giving basic investment advice applicable to anyone, while also incorporating some information for African Americans. The book’s topics range from why you should care about money management, especially African Americans to investing in the stock market and how to do so.

Below is a summary of what I’ve taken from the book:

According to Anderson, before you invest, you should free up money to invest. One must pay down debt. One must understand the difference between good debt (ex. Mortgage and student loans), so-so debt (ex. A car), and bad debt (ex. Credit cards). No more than 10-15% of your take-home pay should be spent on debt and expenses. No more than 35-40% should be spent on rent/mortgage and household expenses. A safety net of about six months worth of salary should be saved, preferably in a money market account rather than a regular savings account because the interest rates are better.

Savings accounts, meanwhile, dole out microscopic amounts of interest-2 percent or so, if you’re lucky.”

Once you’ve freed money to invest and you’ve saved an emergency fund you are ready to invest. When investing, there are three asset classes to invest in: stocks, bonds, and cash. Stocks grow the most of the three asset classes. Bonds have stable growth and are less risky, but have slower growth. Cash is the cushion and needed in case something unexpected occurs. Diversification is a way to protect your investment portfolio from the extreme ups and downs of the stock market. There are a couple of degrees of diversification. 1) Investing in several asset classes such as stocks, bonds, and mutual funds and 2) invest in a variety of mutual funds, stocks, or bonds, and investing abroad.

Two people to consider consulting when investing are a financial planner, who helps matches an investing plan to your goals, and a broker, which is a professional that trades stocks on behalf of the client.

Important questions to ask a potential financial planner include:

  • How does he/she get paid?
  • Does he/she make money from fees or commissions?
  • Experience?
  • Certified?
  • How does he/she keep up with changes in the business?
  • How often does he intend to notify you?

Some brokers get paid on commissions and may steer you towards investments that earn them more money so be cautious of when using brokers.

Different bonds include A level, B level, and junk bonds. Junk bonds have higher interest, but are riskier. In general, bonds are stable investments. There are federal government, local government, and corporate bonds, with federal bonds being the most stable and reliable. Characteristics such as yield and maturity are good measures to assess for values of bonds. Treasury bond and Lehman Brothers aggregate bond index are good measures for the bond market.

Over time, stocks have gained investors significant amounts of money. Stocks make money from capital gains, rising in price over the years or from dividends though this isn’t as likely nowadays. Riskier investments tend to have higher returns. One investing strategy is timing the markets in which an investor will try to predict when a stock will increase or decrease in price and buy it before the price increases and sell before it drops. This is nearly impossible to do; even experts fail at it. In addition, constantly selling and buying eats away your gains due to capital gains taxes. One solution to timing the markets is dollar cost averaging in which you invest a consistent amount of money through the ups and downs of the stock market. Compounding grows your money faster. Inflation eats away at your money and the average annual inflation rate is 3%. Any investment vehicle earning less than 3% a year is losing money every year.

Thoroughly research a company you’re interested in. Read the prospectus and check the management. Expect to hold the stock for at least five years. If you’re going to use a broker, the commission should be 1% or less. An American depository receipt (ADR) is like an ordinary stock representing shares in a foreign company. Know how much a company makes and how it’s financials such as earnings and sales have done over time. Read up on management and what the competitors do. One way to start getting into stocks is to buy shares of companies you like. If you like it, it’s possible that other people like it too. Buying hometown companies may also give you an advantage on information about the company. Direct stock plans (DSPS) and dividend reinvestment plans (DRPs) allow you to invest in a company directly through the company and the dividends are reinvested into shares.

Read a company’s annual report and 10-k to learn more about the company and its financial handlings. An annual report is flashier and made by the company. A 10-k is thicker and drier, but more comprehensive than an annual report. 10-ks and annual reports can be found online. Below are some numbers to pay attention that are listed in the book (note: It’s usually useful to compare these numbers to a standard such as the S&P 500 and track over time):

  • Price-to-earnings multiple or P/E (Very Important)
    • High P/E value compared to the standard may indicate it is undervalued. Low value compared to the standard may mean it is overvalued.
  • Total Return (Very important)
  • Earning (Very important)
  • Dividends and Yield (Very Important) Consistent dividend is a good sign. High yield relative to the market means it may be undervalued. Low yield relative to the market means it may be overvalued.
  • Sales (Important)
  • PEG ratio (Important) PEG 1-1.5 range is reasonable, but 2 or more is risky
  • Volume (Important)
  • Debt-to-Capital Ratio (Important) Reasonable cutoff is 40%.
  • Price-to-Book Value (Important) (Warren Buffett’s investing strategy?)
  • Return on Equity or ROE (Important) 20% ROE is typically a good number.
  • Beta (Somewhat Important) Above 1 are more volatile and below one are less.
  • Market Cap (Somewhat important) Used to determine big, medium, and small companies.
  • Share Price (Not important)

There are two major investing styles of professionals: value and growth. Value investors look for underappreciated stocks while growth investors look for companies who are currently doing well. Neither is necessarily better. Each has its time. If picking stocks by yourself, you can use online stock screeners to weed out stocks using the criteria listed above. Some investors are known as technical analyzers. These people use concepts such as support and resistance, trend lines, moving averages, volume, head and shoulders and double bottoms to guide their investing strategies. Many employees of a company are legally allowed to engage in insider trading, trading stocks within the company. If many employees are selling stocks of their company, it could indicate that things are not going well especially if a top executive does so.

Mutual funds are a good starter investment for those interested in investing. Mutual funds invest in several stocks and reduce risk.  They are good if you don’t have a lot of time to research stocks and bonds and they are less volatile. Index funds are like mutual funds, but with fewer fees. The S&P 500 is an often recommended starter index fund. Different types of funds include index, international, balanced, socially responsible, convertible bond, sector, and bond. International funds are more complicated and risky. You should thoroughly research them if you are considering investing in one. You can use a mutual fund screen as with stocks. Read the prospectus. Numbers to pay attention to when doing your research include total return, expense ratio, minimum initial investment-most important. Open-ended funds have unlimited numbers of shares while closed-ended ones do not.

African American mutual funds include Ariel, Brown Equity, Chapman Institutional, Edgar Lomax Fund, Kenwood Growth and Income, Lou Holland Growth fund, MDL Broad Market Fixed Income Fund, Profit Value, Victory Lakefront, Subadvised Funds, Calvert New Africa Fund, and Dreyfus Premier Third Century Fund. Investing in Africa is risky. No more than 10% in African markets.

If you plan to diversify your investment portfolio with the different asset classes, general allocation rules of thumb are as follows (% stocks, bonds, and cash): conservative-25, 40, 35, moderate-40, 40, 20, balanced-60, 30, 10, and growth-80% stocks, 20% cash. Generally, long-term goals such as retirement utilize a growth strategy, immediate term goals such as saving for your kids’s tuition utilize a balanced or moderate strategy and short-term goals such as saving for a car or a down payment on a house utilize conservative strategies. Long-term can be more aggressive (30 yrs). Short term goals are more conservative (3-5 yrs). You can consider using investment clubs such as The Coalition of Black Investors (COBI), American Association of Individual Investors (AAII), or National Association of Investors Corp (NAIC) to help reach your investing goals. In addition to fees, taxes may eat away at your gains. Taxable and tax-deferred accounts such as 401ks and IRAs provide some protection against tax erosion.

It’s important that we teach our kids about investing and building and maintaining wealth so hopefully, they will be financially secure when they get older. One way to begin teaching your kids about investing is to allow them to earn an allowance to learn about the relationship between work and money. You can even base the compensation on the difficulty of the task. Open a savings account so they can watch their money grow. You can start purchasing shares of companies they’re familiar with such as Nike, Disney, Sony etc. There are also kiddie funds such as SRYIX that not only invest in companies that affect kids’s lives, but that also aim to teach them about investing through their website and other material. Check mutual fund education alliance.

Conclusion

This book is more of a practical guide rather than a motivational book. It spends a significant amount of time discussing measures to evaluate stocks, bonds, and mutual funds such as checking share price, earnings, market cap, P/E, dividends and yield. If looking to learn about technical and fundamental aspects of investing without going into too much detail, then this book is good for that purpose. There are a few dated parts of the book such as when it discusses the use of technology such as the internet and computers as if a significant portion of its audience still isn’t familiar with these. Statements such as “Savings accounts, meanwhile, dole out microscopic amounts of interest-2 percent or so, if you’re lucky” can also make you feel as if this book was written in a different universe rather than a time not so long ago. Much of the information is basic fundamentals though and is relevant across time.

 

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