The 4 Most Important Metrics If You Are Just Starting Your Passive Income With Stocks

All you need to know to make your first step into financial independence

Hi, my name is Marcus. I live in part from the dividends that I get into my bank account every month.

Before we start, I would like to ask you one question:

Wouldn’t it be great to let your capital do the work for you?

If your answer is yes, here is your first to do:

Before you buy a stock, do your research.

“Risk comes from not knowing what you are doing.” — Warren Buffett

Define a target, say 3 hours of research on a particular company, and the associated stock valuation. The rule is simple:

If you are not 100 % sure about the investment, skip the stock.

A useful concept is the so-called 100:10:1-rule.

1. Get an overview of 100 companies
2. Take a closer look at 10
3. Buy 1

You are probably wondering where to find 100 companies. You can explore stocks here:

If you buy financial assets, you have to be financially and psychologically prepared to hold them for a long time without looking at the quotes. If you can’t handle fear and greed, stay away from stocks!

Here are the 4 most important metrics for your stock-research:

1. Future

This is the first and also the most important question for every investor.

What are the company plans for the future?

You are going to be a shareholder, not a speculator.

Your decision to buy stocks of a company hence reflects your trust in the future competitiveness of the products and services.

“Being successful in the market requires one to bet against the consensus, expect to be wrong a lot of times” — Ray Dalio

Here are the most important questions:

1. How will the market in which the company operates develop over the next 10 years?
2. Who is the leader of the company? Does he have a clear vision? Is he also a shareholder?
3. Who are the competitors? Is the company vulnerable to disruption through emerging technologies?

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” — Warren Buffett

Here is my favorite website to follow the stock market:

2. Value

The second most important metric is the value of the stock.

There are prices and values.

The price is the quote on the stock exchange. The value is your personal estimation that you have unlocked through research.

“Price is what you pay. Value is what you get.” — Warren Buffett

When you buy a stock, you are buying a share of the underlying company.

You are becoming a fractional owner of the company.

The price you pay for the share might be either too high, low, or adequate (fair value)

The stock prices quoted on the exchange include a certain expectation of the stock market’s participants towards future earnings.

Here are the estimated earnings for the apple stock.

How Does DCF Work?

The technique used is called “Discounted Cashflow” and takes future earnings with a certain discount-rate into consideration. I recommend this video:

Here are the most important questions:

1. Does the company trade below or above your calculated DCF-fair value?
2. How does the company perform with PE (Price-Earnings) and PB (Price-Book Ratios?)
3. Are the market estimations correct in your opinion?

For example, here you can see apple’s financial-ratios:

And keep in mind:

In the long run, the share price will always follow the value of the company.

Stick to your plan.

3. Dividends

When a public traded company like Coca-Cola makes a profit, it can decide to either keep the cash or return a certain part of the profit to its shareholders.

If you are a shareholder of a fast-growing company, you shouldn’t expect any dividends. Fast-growing companies focus on gaining market share and do not pay any dividends.

Here is what to look for:

1. How does the dividend-yield compare to the peer-group?
2. Has the dividend been stable for the last 10, 25 years?
3. To which degree are the dividends covered by earnings?

4. Health

Last but not least, financial health is one of the most important metrics you can look out for. You will find the data on the company’s balance sheet.

Here is what to look for:

• Are the interest payments are covered by the EBIT (Earnings before Interest and Taxes)
• Is the debt to equity ratio considered high or low within the peer group?
• Is the debt payment covered by operating cash flow?

For example, here you can see apple’s long-term debt:

Once you have found your desired company, you only need to calculate how much you want to invest. I recently wrote an article that might be useful for you:

Disclaimer: This article is not investment advice, but for analysis and informational purposes only. It should not be considered Financial Advice. Consult a financial professional before making any significant financial decisions.

I hope to see you again in the future.

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