Invest Your Way to Financial Freedom: A Step-By-Step Guide to Investing and Building Wealth in the Stock Market

By Bradford Woods

Whether you are a seasoned stock investor looking for higher and more consistent returns, or a relative newcomer seeking to build the necessary knowledge to be successful in the stock market, Invest Your Way to Financial Freedom was written for you.

Regardless of your level of experience, the share market can be a daunting and at times perplexing forum. The challenge is to know where to start, which markets to invest in, how to select quality companies, when to buy, when to sell, how much to invest and how best to structure and manage your portfolio. Importantly, this book will teach you how to achieve optimum returns whilst minimising risk.

If your objective is to have life choices that only financial freedom can provide, Invest Your Way to Financial Freedom will guide you through a disciplined system based predominantly on the teachings of investing gurus Ben Graham and Warren Buffett. Rich in detailed examples, this book will serve to educate and provide you a highly structured step-by-step process to research, analyse, and invest in quality companies at a discount.

If any of the above resonates with you, or you simply want to learn how to implement a disciplined investment methodology, Invest Your Way to Financial Freedom will guide you through the process.

• Language: English
• Publisher: Tellwell Talent
• Release date: Oct 24, 2022
• ISBN: 9780228880097

Bradford Woods

Bradford Woods has been investing and trading in various financial instruments across both domestic and international markets for some forty years. This has included real estate, equities, options on futures, and share option strategies.Brad holds a bachelor's degree in Chemical Engineering from the University of Sydney, Australia, and a Master of Engineering Science degree from the University of New South Wales, Australia. He has also undertaken many short courses in trading, investing, and finance, including completion of an MBA unit, Management Accounting from Macquarie Graduate School of Management (MGSM), Australia.Brad has had a varied career traversing several industry sectors including downstream oil & gas, mining and minerals processing, engineering & environmental consulting, asset-based finance, and business consulting.He is widely read and practiced in structuring and trading stock option strategies, stock investment, portfolio management, and technical and fundamental analysis. Brad's methodical approach to investing is inspired by and based on the teachings of Warren Buffett and Ben Graham. His step-by-step filtering process involves researching and understanding businesses, conducting extensive fundamental analysis, categorising, valuing, shortlisting, then when the time is right, investing in quality companies at a discount to intrinsic value.Brad is retired and lives in Sydney, Australia. Much of his time is dedicated to researching, analysing, and investing in quality companies. He has three wonderful adult children. When he is not investing, he enjoys travelling, playing keyboard, swimming, walking, golf, and modern jive dancing.

Book preview

Invest Your Way to

Financial Freedom

A Step-By-Step Guide to Investing and Building Wealth in the Stock Market

Bradford Woods

Invest Your Way to Financial Freedom

Copyright © 2022 by Bradford Woods

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law.

Limit of Liability and Disclaimer of warranty:

While the author and publisher have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied merchantability or fitness for a particular purpose. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher or author shall be liable for any loss or profit or any other commercial damages including, but not limited to special, incidental, consequential, or other damages.

Tellwell Talent

www.tellwell.ca

ISBN

978-0-22888-008-0 (Hardcover)

978-0-22888-007-3 (Paperback)

978-0-22888-009-7 (eBook)

This book is dedicated to my three wonderful adult children, Joshua, Lachlan, and Alysha. Their mum, Cherryann, has done a fabulous job in raising and nurturing each one of them.

Table of Contents

Introduction

PART I: GETTING STARTED

Chapter One: Why Invest in the Stock Market?

Chapter Two: The Ten Pillars of Successful Investing

PART II: BUILD A STABLE INVESTMENT PLATFORM

Chapter Three: Investment Objectives, Circle of Competence, and Risk Profile

Chapter Four: Introduction to Portfolio Structuring

Chapter Five: Follow a Well-Defined Process

PART III: BUILD A QUALITY PORTFOLIO

Chapter Six: Selecting Quality Companies – Company Narrative

Chapter Seven: Selecting Quality Companies – First Filter

Chapter Eight: Selecting Quality Companies – Value Filter

Chapter Nine: Selecting Quality Companies – Competitive Advantage Filter

Chapter Ten: Selecting Quality Companies – Management and Capital Allocation

Chapter Eleven: Selecting Quality Companies – Determine the Intrinsic Value

PART IV: MANAGE THE GAINS

Chapter Twelve: Invest with Disciplined Patience

Chapter Thirteen: Portfolio and Risk Management

PART V: SUPERCHARGE YOUR PORTFOLIO RETURNS

Chapter Fourteen: The Power of Covered Call Options

Conclusion

References

Acknowledgements

About the Author

Introduction

Congratulations on acquiring your copy of Invest Your Way to Financial Freedom. Whether you are a seasoned stock investor looking for higher returns or a relative newcomer seeking to gain the necessary knowledge to be a successful investor in the stock market, Invest Your Way to Financial Freedom has been written for you.

I have been trading and investing in the stock and commodities markets for close on forty years. This includes buying and selling Australian and international shares, structuring and trading option strategies, writing covered calls, executing buy-writes, and trading futures. Sounding complicated? Don’t worry, all will be revealed in the following chapters.

Over the years, my trading and investing outcomes have ranged from terrific to outright disastrous! At one point, with my tail between my legs, I opted out of actively trading the share market for a period of almost ten years, holding but one bank stock and simply collecting the dividends (a truly passive era in my trading and investing career). However, while I had achieved mixed results from trading and investing, despite having educated myself with many great books, seemingly endless research, and way too many expensive trading and investment courses (with a view that each time, the next course was going to be the holy grail), I continued to believe that I could build wealth in the stock market.

What were my drivers? Why did I persist? Why was success so important? Put simply, I wanted to build wealth for myself and my family, to be able to provide them a safe and healthy upbringing, a fabulous home, a great education, and as many wonderful life experiences as possible, and importantly, I wanted to have life choices that only financial freedom could provide. In short, I wanted to be financially secure in my retirement. I was determined to achieve financial independence and to pass this knowledge to my three adult children and to others.

So where am I at today? Over the past forty years, I have covered what seems to be an enormous stretch of trading and investing turf, studied and adopted a myriad of trading strategies along the way, made some money, taken some bark off (at times a lot!) and experienced the odd sleepless night. I wish I knew then what I know now!

At the time of writing, I reside in Sydney, Australia, and have clocked over sixty-one years on the planet. My children have grown to be delightful adults, each attempting to make their way through the maze of life. Each wondering how they will ever possibly afford, in our burgeoning Sydney, Australia, property market, to buy a home and not be so overcommitted that they can no longer enjoy life. Leveraging an age-old metaphor and in response to my earlier question ‘where am I at today?’, my mission is to teach my adult children how to fish—fish in a way that they will also have the knowledge and skill to each achieve financial freedom through methodical and disciplined investment in the stock market. Invest Your Way to Financial Freedom is written for them and for others like them.

Invest Your Way to Financial Freedom is applicable for those investors who are new to the stock market as well as those who are more experienced. For those relatively new to the stock market, this book will serve to educate you and provide you with a detailed step-by-step guide to researching, analysing, selecting, and investing in quality companies. For the more seasoned investor, particularly those who may have become disillusioned, frustrated, or simply want to achieve a higher and more consistent return from their share portfolio, this book will provide you a disciplined system based predominantly on the investing approach of Benjamin Graham and Warren Buffett. If any of the above resonates with you, or you simply want to learn how to implement a tried and tested investment methodology, then read on . . .

Regardless of your level of experience, the share market can be a daunting and at times perplexing forum. The challenge is to know where and how to start, which markets to invest in, which companies to select, when to buy, when to sell, how much to invest, and how best to manage your portfolio. In addition, how do you do this with the objective to achieve optimum returns whilst minimising risk? Invest Your Way to Financial Freedom outlines an easy-to-understand step-by-step approach, including many worked examples to demonstrate the process, which will empower you to build a robust and profitable share portfolio. Based on a methodical, time tested, low risk approach to investing, Invest Your Way to Financial Freedom will teach you ‘how to fish’.

A fabulous catchphrase I read many years ago coined by Charlie ‘Tremendous’ Jones, went something like this: ‘The difference between you now and you in ten years’ time, is the things that you learn, the people you meet, and the actions you take’. Whatever your motivation, if you are ready and committed to understand how to invest to build wealth in the stock market, read on. In pursuit of your objective to build wealth, your next action is to learn and apply the step-by-step process outlined in the following chapters. Whilst embarking on this journey, you are likely to meet many interesting people and may even discover a few important attributes about yourself.

‘The more that you read, the more things you will know. The more that you learn, the more places you’ll go.’ Dr Seuss

Having now introduced you to Invest Your Way to Financial Freedom, your next question may be ‘when should I make a start?’ My response is ‘why procrastinate?’, right now is an excellent time to get started, ‘do something today that your future self will thank you for’, take control and plot your path to building wealth.

PART I

GETTING STARTED

Before we get started, it is important to understand what to expect from this book and also what this book is not. Invest Your Way to Financial Freedom is not a get rich quick scheme. There are many ways to make money, but if you are looking to make (or lose) a quick buck, then this book is not for you!

To this end, I have a confession. The step-by-step process outlined in this book is based on the knowledge I have acquired and successfully implemented through the extensive teachings of stock market investment gurus including but not limited to Benjamin Graham, Warren Buffett, Charlie Monger, Peter Lynch, Bill Ackman, Mohnish Pabrai, Joel Greenblatt, Seth Klarman, Aswath Damodaran, and Phil Town.

Invest Your Way to Financial Freedom will provide you a comprehensive, yet succinct, easy-to-apply step-by-step process to researching, analysing, categorising, shortlisting and investing in quality companies at discount prices. Your objective is to achieve exceptional returns that in the medium to long term will outstrip the performance of the major indices and potentially many of the large managed funds.

In the introduction I referred to the phrase ‘trading and investing.’ Whilst the terms are often interchanged and sometimes used synonymously, for the purposes of this book, each term has a very different and distinct meaning. I define trading as a process of buying and selling shares, options, futures, crypto or Forex often within very short timeframes (minutes, hours, days, weeks, or months). Traders often use technical analysis to make buying and selling decisions.

With a focus on the long term, Invest Your Way to Financial Freedom is focused on teaching and guiding you how to research, select and invest in quality listed companies at/or below fair market value. Whilst I have included a chapter describing how and when I supercharge my share portfolio using call options, which I deem as a trading strategy, this book is not about trading. The alternate approach ‘investing’, is a long-term strategy based on analysis of the business fundamentals. The key differentiator is that you are investing for the long term in businesses in which you become a part owner.

If you are determined to build wealth in the stock market, have a long-term perspective, are prepared to invest time and effort into understanding and adopting the step-by-step process outlined in this book, then read on, strap in, get involved, and enjoy the journey.

To provide you some vision of what is ahead, Chapter One explains why we choose to invest in the stock market and the advantages and disadvantages of doing so. Chapter Two provides an overview of the Ten Pillars of successful investing which represent the critical themes and ethos I deem required to be a successful and profitable investor.

Chapter One

Why Invest in the Stock Market?

There are many forums and financial instruments within which you can invest your money. The more common include investing in your own business (start-up or otherwise), investing in someone else’s business, real estate and property, commercial and government bonds, interest bearing deposits, commodities (directly or indirectly), options, futures, crypto currency, equities/stocks, and many more.

Each forum and financial instrument have a unique personality with a distinct set of behaviours. Whilst each is geared with the common objective of generating profits and/or cash flow, each has a unique mechanism of doing so. Each comes with its respective pros and cons including varying capital requirements, profit and return expectations, investment timeframes, levels of risk, and varying levels of liquidity to get in and get out of the market in a timely manner and at a reasonable price. Each has its own distinctive risk profile and barriers to entry, the major barrier being that of access to investment capital. For example, property investment requires a significant level of capital and/or a healthy salary combined with existing equity to borrow the necessary funds, usually hundreds of thousands of dollars or more.

There are many reasons why I choose to invest the significant majority of my resources in the share market, listed below:

Low barrier to entry. One of the fabulous attributes of the stock market is that anyone can invest. It has a low financial barrier to entry. That is, you can start with a small amount, for example a few hundred dollars.

Trade online. You can execute all your transactions online. This is a far cry from the days of ringing your broker to have them place a trade on the stock exchange trading floor. Setting up an online account is relatively straight forward and involves no set-up cost.

Low transaction fees. The internet has manifested a fierce level of competition in many markets, including stock transaction brokerage. Most, if not all of the brokers provide very cost-effective transaction fees.

Trading platform. Many stockbrokers provide some form of web-based or downloadable trading platform for free. These days, the platforms are quite comprehensive allowing the user to apply technical and fundamental analysis for their trading decisions.

Access to information. To invest successfully in any forum, reliable and accurate information is vital. Whilst many brokers, investment banks and other financial institutions publish and distribute company research online, there was a time when we were totally dependent on printed reports (usually on a subscription fee basis) and news. Today, there are many free websites that provide an abundance of company-specific financial data and information easily accessible to aid your decision-making process.

Reliable and timely information. With the arrival of the internet, combined with the financial regulatory authorities requiring publicly listed companies provide transparency with respect to the performance of their financial, environmental, and social responsibilities, key information is readily accessible. Companies are also required to proactively communicate any changes to the business or business environment within which they operate that may materially impact the share price or intrinsic value of the company. What this means is that as investors we can readily gain access to the information required to make well-informed investment decisions.

Market depth and liquidity. The respective global exchanges are made up of thousands of companies. This provides a depth of choice when researching and choosing which companies to acquire. Dependent upon the size and popularity of the company there are usually thousands and often millions of shares traded every day. This means that the market is liquid, hence you can buy and sell shares at any time with a reasonable buy-sell price spread.

Dividends and buybacks. Many companies pay regular dividends distributing a portion of the profits to shareholders. Australian companies typically pay a dividend half-yearly while US companies typically pay quarterly dividends and some even monthly. When a company has surplus cash and management determines it is the best use of capital, it may buy back a proportion of its own shares from the market, thereby increasing your proportion ownership of the company.

However, investing in the share market is not all beer and skittles! As alluded to earlier, investment of any kind in any forum involves a level of risk. Several inherent risks to investing in the stock market include:

Market prices and volatility. Market prices are driven by investors ranging from large institutions, hedge funds, managed funds, private investors like ourselves, and others. As the decisions to buy and sell are predominantly being made by human beings, there is a significant level of emotion and sentiment driving the market. This creates a level of volatility which is the degree of variation of a trading price over time. In general, the more stable a company is, the lower the volatility or price change will be. Start-ups and some technology-based companies can be very volatile with large swings in share price over sometimes short periods of time (hours, days, weeks).

Major events. Over the past decades, there have been times when the stock market has declined to significant levels. These share price retracements have ranged from 10 to 50%, sometimes declining rapidly over a period of days and weeks and at other times a more gradual decline over months and years. The decline triggered by Covid-19 involved a 32% decline in the S&P 500 Index over a period of 35 days!

Industry cycles. Several industry sectors can be very cyclical. These include Consumer Discretionary, Financials, Industrials, Information Technology, and Materials. Any investor who invests in cyclical stocks needs to be aware of the specific industry cycles (peaks and troughs), understand what phase the cycle is in, and invest accordingly.

Interest rates. Historically, rising interest rates can be detrimental to stock prices. This is because as interest rates rise, the returns on interest bearing deposits (IBDs) and bonds increases. Defensive investors will tend to liquidate part of their stock portfolio to invest in IBDs and bonds.

Inflation. Inflation diminishes your buying power. This may dilute the returns on your share portfolio, or worse, exacerbate your loss in real terms.

Cash flow. Whilst the stock market is very liquid, if you have a need to sell your stock to provide cash flow, and should the market be in a downturn, this may manifest a net loss or reduced return.

Emotional risks. As the stock market can be volatile including wide swings in stock prices, investors can be subject to both fear and greed, attributes that are not compatible with effective decision making.

Loss of capital. If the market swings against you, particularly if this occurs over an extended period of time, should you decide or need to sell, you may incur a capital loss.

Table 1-1 summarises the advantages and disadvantages of investing in the stock market.

Table 1-1 Advantages and Disadvantages of investing in the stock market.