What is Value Investing?

If you’re the type of person who researches every big purchase, hoping to get the highest quality merchandise or service for the least amount of money possible—whether it’s a TV, a smartphone, or a car—you’re a value shopper.

Value investors bring that same concept to building a stock portfolio. They seek out stocks they believe are worth more than the current prices reflect.

Value investing is an investment philosophy that takes an analytical approach to selecting stocks based on a company’s fundamentals—such as earnings growth, dividends, cash flow, book value, and intrinsic value. Value investors don’t follow the herd when it comes to buying and selling, which means they tend to ignore tips and rumors they hear from coworkers and talking heads on TV.

Instead, they look for stocks that seem to be trading for less than they should be, perhaps because of a negative quarterly report, management scandal, product recall, or simply because they didn’t meet some investors’ high expectations.

That doesn’t mean value investors are looking for the cheapest stocks out there.

Their goal is to find stocks the market may be underestimating and, after doing their own in-depth analysis, decide whether those stocks have the potential to pay off over the long term.

Who Made Value Investing Popular?

Billionaire Warren Buffett , the CEO of Berkshire Hathaway, also known as the “Oracle of Omaha,” is probably the most famous (and most quoted) value investor of all time.

From 1965 to 2017, Buffett’s shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500’s 9.9% return.

Buffet is often quoted as saying, “The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.”

Buffett’s mentor was Benjamin Graham , his teacher at Columbia Business School and later his employer, who is known as “the father of value investing.” Columbia professor David Dodd , another Graham protegee and colleague, is recognized for helping him further develop several popular value investing theories.

Billionaire Charlie Munger , vice chairman of Berkshire Hathaway Corp., is another super-investor who follows Graham and Dodd’s approach.

And billionaire investor Seth Klarman , chief executive and portfolio manager of the Baupost Group, is a longtime proponent.

Joel Greenblatt , who ran Gotham Capital for over two decades and is now a professor at Columbia Business School, is the co-founder of the Value Investors Club .

How Does Value Investing Work?

Value investing is an investing strategy, but it’s similar to how a value shopper might operate when hoping to buy a certain brand of a smartwatch for the lowest price possible.

If that shopper suddenly saw the watch advertised at half the price, it would make them happy, but it also might make them wonder: Is there a new version of the watch coming out that’s better than this one? Is there something wrong with the watch I want that I don’t know about? Is this just a really good deal, or am I missing something?

Their first step would likely be to go online and do some research. And if the watch was still worth what they thought, and the price was a good discount from a reliable seller, they’d probably go ahead and snap it up.

Investing in stocks can work in much the same way. The price of a share can fluctuate for various reasons, even if the company is still sound. And a value investor, who isn’t looking for explosive, immediate returns but consistency year after year, may see a drop in price as an opportunity.

Value investors are always on the lookout to buy stocks that trade below their intrinsic value (an asset’s worth based on tangible and intangible factors).

Of course, that can be tricky. From day to day, stocks are worth only what investors are willing to pay for them. And there doesn’t have to be a good reason for the market to change its mind, for better or worse, about a stock’s value.

But over the long run, earnings, revenues, and other factors—including intangibles such as trademarks and branding, management stability, and research projects—do matter.

Or, as Buffett’s mentor Graham, put it: In the short run, the market is like a voting machine, tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine—assessing the substance of a company.

What Factors Are Worth Considering?

Value investors use several metrics to determine a stock’s intrinsic value. A few of the factors they might look at (and compare to other stocks or the S&P 500) include:

Price-to-Earnings Ratio (P/E)

This ratio is calculated by dividing a stock’s price by the earnings per share. For value investors, the lower the P/E, the better; it tells you how much you’re paying for each dollar of earnings.

Price/Earnings-to-Growth Ratio (PEG)

The PEG ratio can help determine if a stock is undervalued or overvalued in comparison to another company’s stock. If the PEG ratio is higher, the market has overvalued the stock. If the PEG ratio is lower, the market has undervalued the stock. The PEG ratio is calculated by taking the P/E ratio and dividing it by the earnings growth rate.

Price-to-Book Ratio (P/B)

A company’s book value is equal to its assets minus its liabilities. The book value per share can be found by dividing the book value by the number of outstanding shares.

The price-to-book ratio is calculated by dividing the company’s stock price by the book value per share. A ratio of less than one is considered good from a value investor’s perspective.

Debt-to-Equity Ratio (D/E)

The debt-to-equity ratio measures a company’s capital structure and can be used to determine the risk that a business will be unable to repay its financial obligations. This ratio can be found by dividing the company’s total liabilities by its equity. Value investors typically look for a ratio of less than one.

Free Cash Flow (FCF)

This is the cash remaining after expenses have been paid (cash flow from operations minus capital expenditures equals free cash flow).

If a company is in good shape, it should have enough money to pay off debts, pay dividends, and invest in future growth. It can be useful to watch the ups and downs of free cash flow over a period of a few years, rather than a single year or quarter.

Over time, each value investor may develop their own formula for a successful stock search. That search might start with something as simple as an observation—a positive customer experience with a certain product or company, or noticing how brisk business is at a certain restaurant chain.

But research is an important next step. Investors also may wish to settle on a personal “margin of safety,” based on their individual risk tolerance. This can protect them from bad decisions, bad market conditions, or bad luck.

Determining Margin of Safety

Solid research is the value investor’s first line of defense against losing money on a stock purchase. But while most investors may have access to the same basic information, their valuations could differ greatly.

Just in case that valuation is wrong (because intrinsic value is subjective), investors also can minimize their loss by building in a safety cushion. The idea of using a margin of safety, or leaving some room for error, is a core principle of value investing.

Or, as this Warren Buffet quote puts it: “You build a bridge that 30,000-pound trucks can go across, and then you drive 10,000-pound trucks across it.”

The greater the margin of safety—the difference between the stock’s prevailing market price and its estimated intrinsic value—the higher the potential for high-return opportunities and the lower the downside risk. What’s a good margin of safety? It’s different for everyone.

It all comes down to how much an investor is willing to lose. For example, an investor who uses a 20% margin of safety as a personal guide might buy a stock with an intrinsic value of $100 a share but a price of $80 per share or less. Another investor may feel more comfortable with a 30% to 40% margin of safety.

That investor might have to wait longer for the stock to drop to their price, or they might not ever get the opportunity to add it to their portfolio, but they’re doing what works for him.

Avoiding Herd Mentality

Doing what feels right on a personal level instead of going with the flow is a big part of value investing. And it isn’t always easy.

If everyone around you is talking about a particular stock, that enthusiasm can be contagious. Which is why a typical investor’s decision making is often heavily influenced by relatives, co-workers, friends, and acquaintances. (Beware the dangers of a chatty neighbor at the yearly barbecue!)

For an investor who believes the pursuit of market-beating performance is more about randomness than research, emotions (fear, greed, FOMO) can be their worst enemy.

According to the research firm DALBAR ’s latest Quantitative Analysis of Investor Behavior (QAIB), investors lost 9.42% of their investment over the course of 2018, compared with a 4.38% loss by the S&P 500.

“Judging by the cash flows we saw, investors sensed danger in the markets and decreased their exposure, but not nearly enough to prevent serious losses,” DALBAR’s chief marketing officer, Cory Clark, noted in a press release when the study came out in 2019.

“Unfortunately, the problem was compounded by being out of the market during the recovery months,” Clark said. “As a result, equity investors gained no alpha, and in fact trailed the S&P by 504 basis points.”

And that isn’t all that unusual. Over a 20-year period, from 1999 to the end of 2018, while the S&P 500’s average annual return was 5.62%, DALBAR found the average equity investor’s return was 3.88%.

Behavioral biases can lead to knee-jerk reactions, which can result in investing mistakes. It takes patience and discipline to stick with a value investing strategy.

Value investors don’t follow the herd. They eschew the Efficient Market Hypothesis (EMH ), which states that stock prices already reflect all known information about a security.

Value investors take the opposite approach. If a well-known company’s stock price drops, they look for the reasons why the company might be undervalued. And if there are strong signs the company could recover and even grow in the future, they consider investing.

What Are Some Strategies Value Investors Use?

Value investing isn’t about finding a big discount on a stock and hoping for the best, or making a quick buck on a market trend.

Value investors seek companies that have strong underlying business models, and they aren’t distracted by daily price fluctuations. Their decisions are based on research, and their questions might include:

•   What is the potential for growth?
•   Is the company well managed?
•   Does the company pay consistent dividends?
•   What is the company doing about unprofitable products, projects, or divisions?
•   What are the company’s competitors doing differently?
•   How much do I know about this company or the business it’s in?

Investors who are familiar with an industry or the products it sells (either because they’ve worked in that business or they use those goods or services) can tap that knowledge and experience when they’re analyzing certain stocks.

The same line of thought can be applied to companies that sell products or services that are in high demand. That brand might be expected to remain in demand into the future because the company has a reputation for evolving as times (and challenges) change.

Investors who are time-crunched or still learning the basics might find the homework daunting. Deep diving into earnings reports, balance sheets, and income statements, and pondering what the future might hold isn’t for everyone.

But those investors can still pursue a value strategy by putting their money into mutual funds or exchange-traded funds (ETFs) that follow the same principles.

Whether an investor is DIYing it or getting help from a professional, value investing is a long-term strategy. Which means it’s usually part of an overall financial plan.

And if all the pieces of that plan align, an investor may be able to better control when and if they want to sell certain shares to help with a home purchase or some other big expense, or for income in retirement.

Want to Give Value Investing a Try?

If you’d like to try value investing, opening an investment account with SoFi Invest® can be a good way to get started.

There are no account minimums, so you can take your time choosing the investments that feel right. And with SoFi Active Investing, you can be as hands on as you like, creating and managing your own portfolio. But you still can ask SoFi’s credentialed financial advisors for help at any time.

If active investing doesn’t suit you—or if it just isn’t a good fit right now—you can use SoFi Automated Investing and have SoFi help make and manage your portfolio without paying a management fee.

Ready to get started? Check out what SoFi Invest can do to help you work on growing your wealth.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

SOIN20030

Read more

What are Considered Blue Chip Stocks?

To an investing newbie, the term blue chip might just sound like a fancy vehicle for your salsa. But blue chips, more specifically blue chip stocks, are a part of many people’s diversified portfolio offerings.

So stave off that craving for a chip and take a moment to understand the importance of these specially designated stocks and how they might feed into an investor’s larger investment strategy.

What are Blue Chip Stocks?

If you look up blue chip stocks in the dictionary, you won’t find a list, chiseled in stone, that says which stocks are and forever will be designated blue chip. It could be considered more of an art than a science.

When people refer to blue chip stocks, they’re not adhering to a formal set of definitions, or the decision of a formal body or committee. That can make things a little tricky, but because of the many traits blue chip stocks share, they’re easy to spot.

Common Traits of a Blue Chip Stock

No two blue chip stocks are built exactly the same, but there are some similarities among this class of investment. Typically, a blue chip stock:

•   Is a household name. From the grocery aisle to television brands, chances are this stock is a familiar name outside of the stock market. Companies like Disney, Coca-Cola, and IBM are all considered blue chip stocks.
•   Is an industry leader. The stock has earned its blue chip reputation by innovating and being a leader. For that reason, an investor can expect the company to be a leader in its industry.
•   Has a market capitalization of $5 billion. This isn’t a hard and fast rule, but a blue chip stock’s market cap, or the value of all its shares of stock added together, is generally expected to be worth $5 billion at least.
•   Is well established. Blue chip stocks have a history of financial security, which means they need to have been on the market for some time before gaining their designation. A company that’s just gone public is not likely to be deemed a blue chip stock.
•   Has a model that performs well, and even grows, regardless of the market. Blue chip stocks are reliable, which means they typically perform the same regardless of the economic climate.
•   Is listed on an index. You’ll find blue chip stocks listed on the Dow Jones Industrial Average, S&P 500 Dividend Aristocrats, or the Bridgeway Blue Chip 35 Index.
•   Is paying out dividends. Blue chip stocks typically pay out dividends, or a share of the company’s profits, to shareholders, aka investors. That means an income stream on a quarterly basis.

There’s no consensus on what exactly defines the best blue chip stock, but many blue chip stocks share the above traits.

History of Blue Chip Stocks

Lore has it that the term blue chip stock originated in the 1920s . An employee of what would come to be known as Dow Jones noticed a company’s stock being sold at $200 a share (close to $2,600 today, adjusted for inflation).

He declared he’d have to go write about these “blue chip stocks” because of their high price.

Most believe that the term blue chip stock is in reference to the game of poker. Traditionally in a poker game, the blue chips have the highest value.

But, to extend the poker metaphor any further on blue chips could be misleading—typically, they’re not seen as the biggest gamble in the stock market. While they were once known as the most expensive stocks, nowadays they’re considered some of the most reliable.

Historically High Dividend Blue Chip Stocks

Companies that are considered blue chip stocks might be easy to identify. Here are a few that have been historically considered blue chip:

•   General Electric.
•   Eli Lilly and Company.
•   Kellogg Company (commonly known as Kellogg’s).
•   Procter & Gamble.
•   HJ Heinz (currently The Kraft Heinz Company).
•   DuPont (currently DuPont de Nemours, Inc.).
•   General Mills.
•   IBM (International Business Machines).
•   UPS (United Parcel Service).
•   Coca-Cola.

These companies have been around for decades (some even longer), and because of their history of returns and consistent performance, they’re all considered blue chip stocks today.

Modern-Day Blue Chip Stocks

While those on the list above are still widely considered to be blue chip stocks, a few newcomers (or relatively new) have crashed the party. Today, the following might be referred to as blue chip stocks as well:

•   Microsoft Corporation.
•   Amazon.com.
•   Apple.
•   Alphabet.
•   Berkshire Hathaway Inc.
•   Visa.
•   Johnson & Johnson.
•   JPMorgan Chase & Co.
•   ExxonMobil.

You’ll notice that some of the above haven’t been around for very long and aren’t on the Dow (we’re looking at you, Alphabet), but as always, there will be exceptions to the rule.

And while these newbies are rising stars in the stock market, the designation of blue chip stock isn’t permanent. As it’s not an official title, companies can be stripped of it when they stop meeting the criteria.
It’s always good to remember, even with the historically well-performing stocks, there’s no such thing as a sure thing in the investment world.

What’s considered a blue chip stock by one index or investor might not be by another. While there are some standard measurements, there’s no ruling body deciding on who gets blue chip status.

Advantages (and Disadvantages) of Investing in Blue Chip Stocks

Like any investment strategy, blue chip stocks have their benefits and drawbacks. Before investing in blue chip stocks, an investor may want to consider weighing the positives and negatives of these types of stocks on their overall investment strategy.

Advantages

Blue chip stocks have their fair share of benefits:

They’re established. Blue chip stocks have been around long enough and are included in some of the most well known stock indexes. Some of these indexes can have stringent rules that only the most financially stable companies could meet.

In addition, they’ve been around long enough to prove their ability to do business. They’re potentially leaders in their field and may be at the peak of their industry.

They’re big. The size of these companies is often global, meaning they’ve got economies of scale on their side. They have the potential to grow faster, secure larger loans, and continue to be a competitor in the market. Due to the size of their resources, blue chip stocks can often appear to be more stable than smaller companies in their field.

They consistently return dividends. Blue chip stocks are considered low risk with respect to other stocks because of their size and history in the market. Many of them also have a proven track record of yielding dividends consistently. Some consider them to be a safe bet relative to other stocks, due to their consistent, but not necessarily massive, returns.

They’re easy to follow. The companies behind many blue chip stocks tend to be well known. They do big business, which means announcements and news around them is likely to make the front page of the financial section.

There’s no need to dig around to see what these companies are up to. For those just beginning to invest, blue chip stocks can be reassuring since they’re already familiar and part of the news cycle.

Disadvantages

There’s no such thing as a “sure thing” and the drawbacks of blue chip stocks prove this point. Here are a few disadvantages to keep in mind while considering an investment strategy.

They fall a lot harder. The old adage “the bigger they are, the harder they fall” is easily applicable here. Just because a blue chip stock has a solid history does not ensure a profitable future.

With all eyes on these big companies, bad news can travel fast and lead to drops in the sales price. Any company can fail, even the ones behind the blue chip status.

Limited growth. Blue chip stocks are considered consistent and stable—some might say low risk. And, typically, with low risk comes stable return. Blue chip stocks set the standard, or average, for the market, so it’s nearly impossible for them to beat it.

For example, compare UPS to a small shipping upstart. UPS is widely used, which makes it consistent, and may not have much room to grow. In contrast, an enterprising shipping company managed well could possibly double in size year after year. It’s much less likely that a blue chip company will innovate and grow at the same scale as a smaller corporation.

Less cutting edge. Blue chip stocks are like heritage brands. Kellogg’s brand cereal might be an everyday breakfast staple, but chances are it’s not at the cutting edge of technology or innovation. For that reason, some investors might find it a little boring to invest in blue chip stocks.

More dividend focused. Blue chip stocks might often be the stock of choice for investors focusing on a low-risk portfolio due to their consistent performance and returns. However, if an investor’s tolerance for risk is a little higher, they might be willing to take more risk for a higher return.

They may be expensive. Blue chip stocks tend to be well-known brands and often a highly desirable part of people’s investment strategies. For that reason, it’s unlikely to get a deal on them.

Including Blue Chip Stocks in a Portfolio

Here’s the thing—like a well-balanced meal, investing in blue chip stocks can be one part of a healthy investment strategy. For those looking to make blue chip stocks a part of their balanced investment diet, here are a few ways to invest in them.

Individual Stocks

If one blue chip stock, in particular, strikes an investor’s fancy, they can go right ahead and purchase it directly. A tool like SoFi’s active investing makes it easy to search for a desired stock and purchase shares.

If the price per share is too steep for an investor’s budget, they might want to consider fractional share investing, like SoFi Stock Bits, which allows the purchase of a fraction of a stock instead of the whole thing starting at just $1.

Choosing to invest in an individual stock might be a good way to get a feel for the market, or it might be a way to take a more active investment strategy. Either way, a brokerage can handle an investor’s single blue chip stock purchase.

Index Funds and ETFs

Alternatively, if no individual stock strikes an investor’s fancy, but they still want to get into the blue chip game, they might consider investing in index funds or ETFs.

Index funds and ETFs do the stock picking for the investor who wants to choose an index fund or ETF that deals in blue chip stock. Both index funds and ETFs are sometimes considered a more passive form of investing, meaning investors don’t need to pick every individual stock they want to invest in. Think of it as buying a variety pack instead of a single flavor.

Investing in a blue chip fund or an ETF is investing in a portfolio of companies that a broker has vetted and designated as blue chip by their standards.

Ready to Invest in Blue Chip Stocks?

Brokerages give stocks the blue chip designation when they have a strong performance history, consistent returns, and a proven market capitalization.

For beginning investors, blue chip stocks can be a reassuring, familiar company to invest in. For that reason, blue chip stocks are often perceived as a safe investment.

Safety in an investment strategy is important, but it’s like a balanced diet. It’s not recommended to eat the same thing day after day, just like it’s not recommended for an investment strategy to be made of a single component.

Diversification is typically an important thing to consider, no matter how you designate your investments.
If you are ready to start online investing you can do so with SoFi Invest. Download the SoFi app to trade stocks, and ETFs, buy crypto, or start automated investing.

Get started in the market right away with simple tools from SoFi.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Active Investing
The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

Automated Investing
The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA / SIPC , (“SoFi Securities”).

SOIN20015

Read more

The Bottom Up Investing Approach

The types of strategies or philosophies investors use to grow their portfolios might be as varied as the types of investments they have to pick from—growth vs. value stocks, conscience-based investing or industry trends, to name a few.

More or less, however, stocks are commonly analyzed two different ways: top-down vs. bottom-up investing.
The top-down strategy starts with researching the big investing picture, including world economic news, market trends and other macroeconomic indicators.

Stocks are chosen based on how investors believe the market as a whole will perform. Individual stocks might play a role, but they aren’t the central focus. Mutual funds and exchange-traded funds (ETFs), that choose a group of stocks based on common factors, are more popular with top-down investors.

The bottom-up strategy focuses on microeconomic factors that influence individual businesses.

Investors research individual companies they believe to be good investments by digging deep into their financial reports, historical trends, profit margins and customer base.

Although industry trends and market factors do play some role, bottom-up investing is about picking companies that an investor believes will perform well no matter what the market does.

Theoretically, bottom-up investing is the notion that a handful of solid, handpicked companies will bring better returns over the long run than jumping on bandwagons or trying to time the market.

Strategically, it’s a long-term, buy-and-hold proposition. And philosophically, it’s making a well-educated bet on a company’s future profits based on thorough research of its inner workings and history.

How Bottom-Up Investing Works

A bottom-up investment strategy starts with research into individual companies, but that’s a lot easier than it sounds when there are around 630,000 publicly traded companies around the world.

To narrow down that field, some investors begin with public companies that either have long and successful track records or that they already know and love. From there—and thanks to the web—the amount of information they can gather is virtually limitless.

Useful Documents for Investment Research

In the United States, companies who trade on the stock exchanges must file a number of documents with the U.S. Securities and Exchange Commission (and the public) that outline a number of financial benchmarks, such as profit margin, cash flow, and income. All public documents held by the SEC are searchable via its EDGAR database .

Here are some of the most common:

•   Registration Statements: These documents are the first to be filed when a company wants to undergo an initial public offering (IPO), or “go public.” They include a prospectus, which summarizes the organization’s planned share quantity, size and price, and details on the company’s history, management, operations, current financial state and any insight into future risk.
•   10K Report: This is a company’s official (and lengthy) annual report , and it’s due to the SEC within 90 days of the end of its fiscal year. It lays out the company’s financial growth and change over the previous 12 months, as well as information about products or services, operations reviews, major markets or headlines. Often they’re accompanied by an earnings call, where the business’ top financial executive gives more details about the reports and takes questions from business reporters.
•   10Q Report: This truncated version of the 10K is filed quarterly, so it fills in the gaps between annual reports. They’re a bit less formal than the 10K reports and often review not only what’s happened in a company during the past three months.
•   Forms 3, 4 and 5: Company executives who become “insiders”—directors, officers, or anyone who holds more than 10% of any class of a company’s securities, for example—are required to report any transactions they make regarding their company’s own stock. Form 3 is for new insiders and must be filed within 10 days of the appointment, Form 4 documents actual securities transactions, and Form 5 catches any transactions that didn’t meet the threshold for Form 4. For some investors, these forms give good insight into how the company’s executives feel about their own position in the market.
•   Proxy Statements: This form is how investors get an inside look at a company’s executive and management salaries, potential conflicts of interest, and other perks of life in the C-suite. Shareholders aren’t allowed to vote on members of the board or approve other company actions until it’s filed with the SEC.
•   Schedule 13D: If any individual or entity acquires more than 5% of a company’s shares, this form introduces them to investors and includes information like the major shareholder’s contact information, background (including criminal), the type of securities they purchased, how they purchased them, and their relationship to the company. Sometimes a 13G, an abbreviated version of the 13D form, can be filed instead, but this depends on specific circumstances.

Crunching the Numbers

An annual report is pages and pages (and pages) of pie charts, graphs, equations, and numbers, all in small font. It can be dizzying just to look at, much less to decipher.

To separate the most important information, investors employ a number of investment ratios and key indicators when evaluating a stock.

Some key ratios and values include:

•   Price-to-Earnings (P/E) Ratio: The company’s market price divided by its earnings per share. It can predict how many years it will take for a company to have enough value to buy back its stock.
•   Price-to-Sales (P/S) Ratio: A company’s market capitalization (the dollar value of all the company’s outstanding stock) divided by its revenue. Ideally, the P/S ratio should be one, or as close to one as possible. If the value is lower than one, that indicates an even stronger P/S ratio.
•   Earnings per Share (EPS): Net income, minus any preferred stock dividends, divided by the total number of outstanding shares of common stock. An EPS on the rise over time means the company might have more money to either distribute to its shareholders or re-invest into the business.
•   Return on Equity (ROE): Find this number by dividing the company’s net income by shareholder equity, times 100. For many analysts, ROE is a major indicator of a company’s growth in profit over time.
•   Profit Margins: These come in three varieties: gross, operating, and net. Each measure the company’s profitability based on whether certain figures, such as operating costs and overhead expenses, are considered. These numbers give insight into a company’s efficiency and how it uses its resources.
•   Future Expected Earnings: This formula which considers annual dividends and their growth rates, can’t predict the future, but it can create an educated guess on where a company’s stock might go, especially one that has historical data to draw from.
•   Financial Statements: Analyzing financial statements can provide important insight into how a company operates. Common documents included in a company’s financial statements are; a balance sheet, which provides a snapshot of assets, liabilities and shareholder equity as they currently stand; a profit-and-loss statement (P&L), which looks at money coming in vs. money going out; and a cash-flow statement, which is a key indicator of whether the company is over or undervalued (a high valuation with little cash flow is a red flag.)

Yep—that’s a lot of math. But taken together, the numbers can paint a solid picture of not only a company’s past and current performance, but also it’s potential for the future as well. All of these factors can help investors as they decide which stocks to invest in.

Business News

Especially in today’s online-first world, all the good valuation in the world can’t help a company if its CEO is the star of a scandalous viral video.

For this reason, it’s just as important to keep an eye on the outside factors involving companies of interest, including personnel changes, headlines, new products or services, or marketing campaigns.

The financial world has its go-to publications, including the Wall Street Journal, Bloomberg and Investor’s Business Daily, along with a host of industry-specific publications.

Online tools employ tech to help investors play around with different scenarios, and even setting up a simple Google search on a business name can help interested investors stay in the loop.

Bottom-Up Investing: An IRL Example

Here’s a hypothetical example of how bottom-up investing works in action.

Jane is a loyal follower of The Widget Co. She’s used its products for years, is brand loyal and thinks the CEO is a visionary leader. She’s interested in purchasing Widget stock, but knows that being a shareholder is a lot different than being a consumer.

Although she likes what she has seen so far, she wants a peek behind the curtain—who holds leadership positions, its operational philosophy and how it manufactures those products she loves so much.

Her first step is Widget’s financial documents, where she looks for things like consistent upward trends in stock prices and a favorable P/E ratio. She compares Widget’s trends over time to the overall market to see its individual performance against market ups and downs.

Next, she takes to the web and discovers that The Widget Co. has a YouTube channel with behind-the-scenes tours of its manufacturing processes.

She checks LinkedIn profiles and Googles the names of the CEO and senior leadership to see their resumes, and whether they’ve ever made the news—for better or worse—and sets up news alerts with the company’s name so she doesn’t miss anything new.

Finally, to get a feel for the overall industry and the public’s feelings toward the company, she checks social media. Do other people love these products as much as she does? What are the ratings and reviews? She understands that just because one sector is popular at the moment doesn’t necessarily mean that The Widget Co. is a part of that trend.

Jane likes what she sees, but after running some numbers to determine the stock’s real value, she decides that it’s a bit too expensive to buy, for now. But if it hits her target number, she’s in.

Strategies for Success

Think of top-down investing vs. bottom-up investing as the tortoise vs. the hare (with the bottom-up approach, you’re the tortoise.) Finding success with the bottom-up investing approach is a long (long) game, so it can be important to come to the table with a double dose of patience.

It’s one reason long-term stock picks are often referred to as value stocks vs. growth stocks. Growth-stock investors go for the big risks and the big wins, while value investors (also called income investors) take a more calculated approach in hopes of steady growth over the long term.

One thing bottom-up investing is not, however, is set-it-and-forget-it. Things do change over time, and even the most seasoned companies can endure hardships—especially in the face of a changing economy and changing tech (brick-and-mortar shopping, for example.)

For that reason, it’s important for a bottom-up investor to periodically check in on their stock picks to ensure they’re still a good decision.

Things to Consider

No matter which type of investing approach is taken, it’s important to consider risk tolerance. How much would it be okay to lose if the market crashed?

Are you more fight or flight? For some investors, any dip in the stock market scares them into pulling out, and potentially missing out on even bigger returns in the future.

It’s also important to keep in mind that even the most solid companies now might see trouble in the future. What are the signs that a company is no longer a good investment?

Changes like a slowdown (or full stop) in profits, the accumulation of debt or cutting dividends are all potential watch-out for trouble, as well as any type of investigation.

Get Started With Stock Bits

Imagine finding the perfect stock, and then experiencing sticker shock at the price of one share.

That used to be the minimum buy-in for a stock purchase, but just like ETFs have made it possible to invest into little bits of business at a time, fractional shares allow investors to buy just a portion of even the most expensive stocks out there.

Fractional Share Investing allows investors to claim a sliver of their favorite stocks, for as little as $1 with no fees. Investing with SoFi Stock Bits, is as easy as opening and funding an online investing account with SoFi and selecting from stocks like Amazon, Apple, Facebook, Netflix, and Tesla.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

SOIN20032

Read more

4 Tips for Paying Off a Large Credit Card Bill

You know which three little words no one wants to hear? Credit card debt. It can go from zero to thousands with one quick swipe or build at a slow creep—a nice dinner here, a trip to the mall there, a gas fill-up to get you through until payday—and before you know it you could be staring at a credit card balance that’s a lot higher than you thought it was.

For Alicia Hintz, a member of the SoFi community, the debt creep started in 2016 with a large and unexpected loss of income—the day before she and her husband were to leave on their honeymoon. (Thanks, universe.)

Prior to that, they’d been toying with the idea of selling their Minneapolis home and moving closer to family in Wisconsin. The income reduction sealed the deal. But their house needed some work to be market-ready. The total bill was more than their savings, and their income wasn’t enough to pay in cash, so to the plastic they went.

For them the improvements were worth the investment—in that they sold their house for more than they paid for it, but almost every penny of it went toward fees, commissions, closing costs, and other expenses.

Alicia’s financial journey is likely to resonate with the 41.2% of American households that carry an average of about $9,300 in credit card debt, according to data reported by the Federal Reserve for Outstanding Revolving Debt. The statistics are sobering to be sure, but here’s a spoiler alert—thanks to some smart planning and a lot of stick-to-it-iveness, Alicia’s story ends on a high note.

4 Debt Payoff Strategies

Fast forward a few months and Alicia and her husband live in Wisconsin but on a much-reduced budget. In fact, it would be six more months before they were able to get their finances back up and running—that’s a lot of time for savings to shrink and debt to grow.

1. Zero Interest Credit Card

To try and combat the loss of income, Alicia opened a 0% interest (also known as a deferred interest) credit card with plans to pay it off within the year. “Before I opened that card, I had always paid off my credit card balance each month in full,” she said in a written interview with SoFi.

But, as is life, things didn’t go as planned. “The first month I didn’t pay off my full balance made me panic,” said Alicia. And on top of day-to-day financial challenges, the couple was invited to a destination wedding in the summer of 2017. In order to get the discounted room rate, they had to pay upfront for the flight and resort—close to $5,000.

“That extra money added to our credit card debt was a steep mountain to climb,” Alicia said. “After we had to pay that, I knew it would be years to get everything paid off.”

A 0% interest promotional period on a new credit card can last as long as 18 billing cycles , which could be a long enough time to make a large dent in the card’s principal balance.

But once the promo period expires, the interest rate can climb to as much as 27% (or higher). A credit card interest calculator can give you an idea of how much that rate will affect your total balance, and it’s important to consider whether you can achieve your payoff goal before the rate rises.

2. Creating a Debt-Focused Budget

Tackling a large credit card bill isn’t likely to be easy, so an important part of the process could be a hard look at what putting extra money toward credit card bills means for the rest of your budget.

One way to approach a solid debt-payoff plan is to begin with an organized budget. You can start by taking a look at the big picture, including all of your monthly expenses as they currently stand, all your income, and all your debt.

One way to make this task easier on yourself is to download an app like SoFi Relay, which pulls all of your financial information into one place.

Your next step might be to focus on your spending. You may see obvious areas where you can cut back, or see if you can get creative to come up with some extra cash flow each month.

“We definitely tried to eat out less and cut back on shopping for clothes,” Alicia said. “But it seemed like every month there were more unexpected expenses that needed to be put on the credit card.”

From there, you can start to focus on a plan that makes credit card payments as equally important as the electric bill. And while you may not be able to pay more than the minimum on all your cards, it’s important to ensure that you pay at least that much if you want to avoid accumulating additional debt.

That’s because, while paying only the minimum can lead to compounded interest rates and larger overall balance over time, skipping payments can also lead to higher, penalty interest rates, late payment fees, and can even affect your credit.

3. The Snowball, The Avalanche and The Snowflake

The snowball and avalanche debt repayment strategies take slightly different approaches to pay down debt, and both involve maintaining the minimum payment on all but one card.

The debt snowball method focuses on the debt with the lowest balance first, regardless of interest rate, putting extra toward that payment each month until it’s paid off.

Then, that entire monthly payment is added to the next payment—on top of the minimum you were already paying. Rinse and repeat with the next card, and it’s easy to see how this method can quickly get the (snow)ball rolling.

The debt avalanche is based on the same philosophy but targets the highest-interest payment first. Getting out from under the highest debt can save a lot of money in the long run, and just like the snowball method, applying that entire payment to the next-highest-interest debt can lead to quick results.

The third snow-related strategy, the debt snowflake, emphasizes putting every extra scrap of cash toward debt repayment. This method played an active role in Alicia’s debt-elimination strategy. “If you have extra money to throw at your loans, even $20, that can still make a difference in your overall amount owed,” she said.

4. Personal Loan

As Alicia’s credit card utilization went up, her credit score went down. She decided to research her options and was ultimately approved for a SoFi credit card consolidation loan at a considerably lower interest rate than her credit cards, which along with making extra payments, helped save her money in the long run.

Now facing one personal loan payment vs. multiple credit card bills, Alicia anticipated being able to pay down the debt sooner than the three-year term she selected. And once again, life happened.

Over the course of those years, her husband took a new job, and they both changed cars, bought a house, and had a baby. They also went to two more destination weddings. This time, though, the extra expenses didn’t derail the plan.

“The loan was paid off within two years,” she said, thanks in part to a conservative budget and using an annual work bonus as a snowflake to make a dent in the balance.

From Someone Who’s Been There

One of the biggest things to remember, Alicia said, is that debt elimination doesn’t happen overnight. “Paying off debt is hard work,” she said. “Take it one month at a time. Some months are easier on your wallet, and others are not—looking at you, December!”

She suggested using the time you’re working to pay off debt to develop good budgeting and spending habits so that your post-debt finances are about saving, not spending.

And another tip from Alicia? Celebrate even the little victories. “When I paid off half my SoFi loan, I celebrated by taking a nice long bath,” she said.

When they reached zero balance, she and her husband went out for ice cream. “You can celebrate by going to the park with your kids, reading an extra chapter in a book, or finding a new series to watch,” she said. “Always celebrate your loan payoffs, no matter how small!”

SoFi personal loans also have no fees and no surprises—just a helpful way to manage your money. Additionally, applying is all online. If you’re looking for ways to consolidate your credit card debt, you can check your rate at SoFi in just two minutes.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Member Testimonials: The savings and experiences of members herein may not be representative of the experiences of all members. Savings are not guaranteed and will vary based on your unique situation and other factors.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

SOPL19046

Read more

Budgeting for Buying A House

The American Dream—buying your own home— is sometimes perceived as an Impossible Dream, but it can be achieved if you have a plan and stick with it.

When planning a budget for buying a house, you might ask yourself the following questions:

•   What are the costs/fees to consider?
•   How can I create a budget in order to reach my goal?

Remember that life goes on while you are saving for your new house. You’ll likely have other priorities and monthly obligations while trying to fit those new home costs into your existing budget.

Consider this priority list when planning ways to budget for a house:

Upfront Expenses

Once an offer on a new home is accepted, there are certain costs the buyer needs to pay right off the bat, and in most cases, out of their own pocket. These are called upfront expenses. Here are a few:

20% Down Payment

You may have heard of the traditional 20% down payment guideline, which helps you avoid paying private mortgage insurance (PMI) on applicable loan programs. Additionally, a higher down payment can sometimes result in better loan terms which may translate into lower monthly mortgage payments.

Yep, it’s a lot of money to try to save, but if you can swing it, in the long run, applying a 20% down payment will likely save you from paying thousands of dollars in additional mortgage interest over the life of the loan
The 20% down is a guideline.

The minimum down payment for a First Time Homebuyer on a conventional loan can be as low as 3% and an FHA government loan that is open to everyone requires a down payment of at least 3.5%.

Sometimes exceptions can be found to minimum down payment requirements such as with Veteran VA loans or government USDA loans which will allow eligible borrowers to finance up to 100%.

In these instances, even if you save for a lower down payment, buying may still significantly reduce your overall expenses, compared to your current rent and real estate market conditions.

2-5% Closing Costs

You can likely expect to pay an estimated 2-5% of your home price for closing costs, and save accordingly. For example, if you buy a home that costs $150,000, you may be required to pay between $3,000 and $7,000 in closing costs.

Some costs are fixed and not tied to the price, so the percentage can be higher for the lower range and lower for the higher purchase price range. Keep in mind that there are alternatives to paying the closing costs out-of-pocket, such as requesting a seller credit, requesting a lender credit, or a down payment/closing costs assistance loan program.

Moving Costs

According to the American Moving and Storage Association, the average intrastate move is $2,300, and the average move between states is $4,300.

Costs can vary widely, so you might want to comparison shop for moving companies and factor this expense into your budget.

If you are moving for work reasons, check with your company to see if they offer a relocation package to help cover some or all of the moving costs.

New Furniture and Appliances

Your new house may not have the same dynamics, dimensions, and overall feel of your old house. That could mean that you need to buy new furniture, appliances, and even items you may have never considered, like shower rods.

You might want to start a savings account for these types of adaptations—some of them may be unexpected.

Ongoing Expenses

PITIA (principal, interest, property taxes, homeowners insurance, and other assessments) is an acronym describing all the components of a mortgage payment. The principal is the “meat” of the payment—paying down the principal will reduce the loan balance.

Interest is what you are charged for borrowing the money. Taxes refer to your property taxes. The insurance represents both your homeowners and mortgage insurance, if applicable. The other assessments refer to things that may be applicable to the home you purchase such as Homeowner Association Dues, Flood or Earthquake Insurance, and more.

HOA Dues

HOA stands for Homeowners Association. These dues usually apply to a condo, co-op, or property owned in a planned community.

The charge is usually monthly (but it could also be charged quarterly or annually), and it typically goes to maintaining the community (landscaping, garbage collection, repairs, and upgrades).

Ask the Homeowners Association for a complete HOA questionnaire so you can view how healthy the association is, whether there is any outstanding litigation due to structural or other issues, etc.

Maintenance and Lawn Care

Your budgeting probably won’t stop once you’ve moved and settled into your new home. Expenses will likely continue to knock on your door—landscaping, roof repair, and water heater replacement are just a few items that might require ongoing financial consideration.

You may want to budget for 1%-2% of the cost of your home in maintenance each year—however, deferred maintenance costs may depend on the age, quality of construction, where you live, and more.

Pest Control, Security, Utilities

Cost for electricity, gas, water, and phones may differ from market to market. This is also true with pest control, and making sure your home is secure and safe. You could find yourself paying more (or even less) for these services in your new home.

Planning Ahead

Do your research on the different types of mortgage loan programs and which programs may best suit you so you can start to budget for any down payment while taking care of current bills and other financial obligations.

Calculating After-Tax Income

Here’s how: subtract out all non-housing expenses that occur both now and that will occur in the future. Include savings goals; for instance, retirement contributions. Include any other debt that may be paid off before the house purchase.

Whatever is left over after this subtraction is what may be put toward housing costs.

What Are Your Savings Goals?

Once you determine which loan program(s) you may qualify for, you can begin to put together an estimate on how much money is needed to be saved each month in order to meet the target date of a home purchase.

What Are Your Priorities?

Take care of your current obligations first, especially if they have to do with the money you owe. Ridding yourself of debt may help you achieve your goals.

This may also help improve your financial profile so that the best loan deal may be more available.

You may also want to establish an emergency fund that, in a pinch, can keep you from using your credit card and running up even more debt.

Ready to Buy?

Once you have your savings set, you can begin to look for different mortgage loan options. SoFi for example, offers competitive rates, no hidden fees, and as little as 10% down. It takes just minutes to start your application online.

Ready to purchase your dream home? Find your rate with SoFi.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOMN19148

Read more
TLS 1.2 Encrypted
Equal Housing Lender