Category Archives: Building Wealth

How to Value Companies

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Seven percent of companies drive the majority of the market returns from investments over the long term.

IN THIS EPISODE, YOU’LL LEARN:

  • 01:53 – How and when to apply metrics like P/E, P/GM and P/S depending on a company’s stage in its lifecycle
  • 12:17 – Brian’s most important attribute when valuing a company
  • 15:22 – The difference between real moats and fake moats
  • 27:51 – When to emphasize valuation and when not to
  • 37:12 – Brian’s assessments of Alphabet, FIGS & AXON
  • And a whole lot more!

References:

  1. https://podcasts.google.com/feed/aHR0cHM6Ly9yc3MuYXJ0MTkuY29tL3RoZS1pbnZlc3RvcnMtcG9kY2FzdA/episode/Z2lkOi8vYXJ0MTktZXBpc29kZS1sb2NhdG9yL1YwL2tfcnNCUnNOaC0tRERuUi11RV9KRUpJaW5zN0xodUhYaUtiRWJiQjFFbjg

Discounted Cash Flow Analysis

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Discounted cash flow model can be used for financial valuation of a project, company, stock, bond or any income producing asset.

Discounted cash flow is a financial valuation method that calculates the value of an investment based on the present value of its future income or cash flow. The method helps to evaluate the attractiveness of an investment opportunity based on its projected future cash flows.

Free Cash flow to the firm (FCFF) means the amount of surplus cash flow available to a business after a it pays its operational expenses like inventory, rent, salaries etc. and also invests in fixed assets like plant and machinery, property etc. Cash is an important element of business. It is required for business functioning; some investors provide more value to cash flow statements than other financial statements.

Free cash flow is important metric as it tells about the company’s ability to deploy capital in future projects. Without cash, it’s tough to develop new products, make acquisitions, pay dividends, buyback shares and reduce debt. Also, as cash is difficult to manipulate compared to other variables, FCFF is more reliable indicator of a company’s performance than net earnings.

DCF model can be used for valuation of a project, company, stock, bond or any income producing asset. The DCF method can be used for the companies which have positive Free cash flows and these FCFF can be reasonably forecasted. So, it cannot be used for new and small companies or industries which have greater exposure to seasonal or economic cycles.

To use the Discounted Cash Flow Model to Value Stock:

Step 1 : Calculate the Free Cash flow to the firm

Step 2 : Project the future FCFF – You need to project the future FCFF for the next couple of years. You can analyze the historical data to understand the past FCFF growth trend. However, relying on historical data only won’t give you the right result, so consider the present financials as well as future potential of the company while projecting the growth rate. When conducting a DCF analysis, investors and businesses must make estimations for future cash flows and the future value of the investment. For instance, a company considering a new business acquisition must estimate the future cash flows from expanding its processes and operations with the acquisition. The estimates the company makes can help determine if the investment is worth the cost of the acquisition.

Step 3 : Discount the FCFF — Calculate the present value of this cash flow by adjusting it with the discount rate. Discount rate is your expected return %. The discount rate is one of the most important elements of the DCF formula. Businesses need to identify an appropriate value for the discount rate if they are unable to rely on a weighted average cost of capital. Additionally, the discount rate can vary depending on a range of factors like an organization’s risk profile and the current conditions of capital markets. If you are unable to determine a discount rate or rely on a WACC value, an alternative model may be more beneficial and accurate.

Step 4 : Calculate the Terminal Value — It is the value of the business projected beyond the forecasting period. It is calculated by assuming the constant growth of a company beyond a certain period known as terminal rate.

When valuing a business, the annual forecasted cash flows typically used are 5 years into the future, at which point a terminal value is used.  The reason is that it becomes hard to make reliable estimates of how a business will perform that far out into the future. There are two common methods of calculating the terminal value:

  • Exit multiple (where the business is assumed to be sold)
  • Perpetual growth (where the business is assumed to grow at a reasonable, fixed growth rate forever)

Step 5 : Add discounted FCFF with Terminal value and adjust the total cash and debt.

Step 6 : Divide the Figure calculated in Step 5 by the outstanding number of shares to find out the DCF Value.

Step 7 : Adjust the Margin of Safety to find out the Fair value. Margin of Safety provides discount for uncertainties in the business.

When assessing a potential investment, it’s important to take into account the time value of money or the required rate of return that you expect to receive.

The DCF formula takes into account how much return you expect to earn, and the resulting value is how much you would be willing to pay for something to receive exactly that rate of return.

  • If you pay less than the DCF value, your rate of return will be higher than the discount rate.
  • If you pay more than the DCF value, your rate of return will be lower than the discount.

The DCF formula is used to determine the value of a business or a security.  It represents the value an investor would be willing to pay for an investment, given a required rate of return on their investment (the discount rate).

When using the DCF analysis, determine the discount rate and have estimates for future cash flows. Apply these values in the DCF formula to create a future outline that details expected returns. If the results appear at or above a company’s initial projections for future cash flows, then investing can be beneficial. However, if the discounted cash flow formula results in a value below a company’s projected future returns, it may consider alternative investments.

References:

  1. https://www.finology.in/Calculators/Invest/DCF-Calculator.aspx
  2. https://corporatefinanceinstitute.com/resources/knowledge/valuation/dcf-formula-guide/
  3. https://www.indeed.com/career-advice/career-development/discounted-cash-flow

Falling Home Sales and Rising Mortgage Rates

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Existing home sales have declined for seven straight months as the rising cost to borrow money puts homes out of reach for more people.

Many potential homebuyers are opting out of the housing market as the higher 30-year mortgage interest rates add hundreds of dollars to monthly mortgage payments. On the opposite side of the transaction, many homeowners are reluctant to sell as they are likely locked into a much lower rate than they’d get on their next home mortgage.

Rapidly rising 30-year mortgage interest rates threaten to sideline even more prospective homebuyers. Last year, prospective homebuyers were looking at 30-year mortgage rates well below 3% APR.

Mortgage buyer Freddie Mac reported that the 30-year rate climbed to 6.29%. That’s the highest it’s been since August 2007, a year before a crash in the housing market triggered the Great Recession.

“The rising mortgage rate has clearly hampered the housing market,” said Lawrence Yun, chief economist. “The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes.”

Sales of existing homes fell 19.9% year-over-year from August last year, and are now at the slowest annual pace since May 2020, near the start of the pandemic, according to NAR.

The national median home price jumped 7.7% in August from a year earlier to $389,500. As the housing market has cooled, home prices have been rising at a more moderate pace after surging annually by around 20% earlier this year. Before the pandemic, the median home price was rising about 5% a year.

The August home sales report is the latest evidence that the housing market, a key driver of economic growth, is slowing from its breakneck pace in recent years as homebuyers grapple with the highest mortgage rates in more than a decade, as well as inflation that is hovering near a four-decade high.

Higher home prices and mortgage rates have pushed mortgage payments on a typical home from $897 to $1,643 a month, an 83% increase over the past three years, according to an analysis by real estate information company Zillow.

Some 85% of US homeowners with a mortgage now have an interest rate well below 6%, according to Redfin. The disparity gives less incentive to these homeowners to sell and buy another home, because taking on a higher mortgage rate would mean paying more over the life of the loan and also as bigger monthly payment.

By raising federal funds borrowing interest rates, the Federal Reserve makes it costlier to take out a mortgage loan. Consumers then presumably borrow and spend less, cooling the economy and slowing inflation*.

Mortgage rates don’t necessarily mirror the Fed’s interest rate increases, but tend to track the yield on the 10-year Treasury note. That’s influenced by a variety of factors, including investors’ expectations for future inflation and global demand for US Treasurys.

References:

  1. https://www.nar.realtor/newsroom/existing-home-sales-slipped-0-4-in-august
  2. https://nypost.com/2022/09/22/mortgage-rates-jump-to-6-29-highest-in-15-years/
  3. https://www.zillow.com/research/august-existing-home-sales-2022-31458/
  4. https://nypost.com/2022/09/21/existing-home-sales-drop-for-7th-straight-month-in-august/

*August’s CPI data showed that inflation is not slowing as expected and required the 75-basis point interest increase from the Federal Reserve. In addition, jobless claims showed a persistently tight labor market, which could drive up costs of goods and services as wages increase.

16 Rules for Investment Success – Sir John Templeton

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“I never ask if the market is going to go up or down because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it’s worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.” ~ John Templeton

Sir John Templeton’s “16 rules for investment success” remain relevant in today’s volatile economic environment as they have for several decades.

Sir John Templeton was an investor and mutual fund pioneer who became a billionaire by pioneering the use of globally diversified mutual funds. He is known for searching far and wide for investments across countries and not restricting investments to UK or USA.

One of Templeton’s most noteworthy examples of investment success occurred when he bought stocks in 1939.

During the opening weeks of World War II and in response to the stock market crashing, Templeton bought 100 shares in stocks which were selling for $1 or less. Four out of the 104 companies in which he invested turned out worthless while he realized significant returns on the other companies.

John Templeton’s 16 rules for investment success include:

  1. Invest for maximum total real return. Templeton advises investors to be aware of how taxes and inflation erode returns and to avoid putting too much into fixed-income securities, which often fail to retain the purchasing power of the dollars spent to obtain them.
  2. Invest – don’t trade or speculate. Templeton warns that over-action and too much trading can eat into potential profits and eventually results in steady losses.
  3. Remain flexible and open-minded about types of investment. No one investment vehicle, whether it’s bonds, stocks, or futures, works best all the time. That being said, Templeton notes that the S&P 500 has “outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s.”
  4. Buy low. While this advice might seem obvious, it often means that you’ll have to go against the crowd. When equities are popular and in demand, their prices are generally higher. Opportunities to buy low usually only come when when people are pessimistic about the market’s performance.
  5. When buying stocks, search for bargains among quality stocks. Templeton advocates identifying sales leaders, technological leaders, and trusted brands when selecting stocks to ensure a company is well-positioned and well-rounded before purchasing its stock.
  6. Buy value, not market trends or the economic outlook. Templeton emphasizes that individual stocks determine the market and not the other way around. The market can disconnect with economic reality.
  7. Diversify. In stocks and bonds, as in much else, there is safety in numbers. There are several advantages to portfolio diversification: you’re less likely to endure a major loss due to a freak event that devastates one company, and you also have a larger selection of investment vehicles from which to choose.
  8. Do your homework or hire wise experts to help you. Sir John insists that you must be aware of what you’re buying. In the case of stocks, you are either buying earnings (if you expect growth) or assets (if you expect an acquisition).
  9. Aggressively monitor your investments. Templeton notes that “there are no stocks that you can buy and forget.” Markets are in a state of perpetual flux, and change instantaneously. If you’re not aware of the changes, you’re probably losing money.
  10. Don’t panic. Even if everyone around you is selling, sometimes the best idea is to take a breath and hold on to your portfolio. In the event of a sell-off, only divest if you have identified more attractive stocks to pick up.
  11. Learn from your mistakes. The stock market is a lot like university: it can cost a lot of money to learn a few lessons. So don’t make the same mistakes twice. Learn from them, and they’ll turn into profit-making opportunities the next time.
  12. Begin with a prayer. Templeton believes this helps a person clear his or her mind and make fewer errors during a trading session or in stock selection.
  13. Outperforming the market is a difficult task. This rules, in effect, is a reality check. The largest hedge funds produce some extremely volatile returns from year to year, and some have produced negative returns. And those are the experts!
  14. An investor who has all the answers doesn’t even understand all the questions. “Pride comes before the fall.” Likewise, overconfidence or certainty in one’s investment style or knowledge of the market will inevitably end in failure. 
  15. There’s no free lunch. Never invest on sentiment, on a tip, or on an IPO just to ‘save’ commission.
  16. Do not be fearful or negative too often. While there have been plenty of bumps along the road, Templeton acknowledges that for “100 years optimists have carried the day in U.S. stocks.” In his opinion, globalization is bullish for equities, and he thinks stocks will continue to “go up…and up…and up.”

His lessons are the end result of a lifetime of knowledge, and include advice on stock selection, going against market sentiment, keeping your cool, and putting investing in perspective.

References:

  1. https://www.caporbit.com/16-rules-for-investment-success-john-templeton/
  2. https://www.businessinsider.com/templetons-16-rules-for-investment-success-2013-1
  3. https://www.gurufocus.com/news/157687/sir-john-templetons-16-rules-for-investment-success

Social Security Retirement Benefits

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Social Security can be one of the most important parts of your retirement, and deciding when to claim is a big decision. The amount of your benefit will depend on your average income over your working years, your spouse’s average income and the age at which you claim benefits. AARP

Signed into law in 1935, the U.S. Social Security program replaces a percentage of your pre-retirement income based on your lifetime earnings. Traditionally, the retirement system in the U.S. has been a three-legged stool: Social Security, personal savings and investments, and pensions. Social Security was never intended to be the sole source of income for retirement.

Traditionally, the retirement system in the U.S. has been a three-legged stool: Social Security, savings and investments, and pensions.

The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.

When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits is 40 credits (usually, this is 10 years of work). Social Security Administration (SSA) uses the tax money to pay benefits to:

  • People who have already retired.
  • People who are disabled.
  • Survivors of workers who have died.
  • Dependents of beneficiaries.

Social Security is funded primarily through a payroll tax. The current tax rate for Social Security is 6.2 percent for the employer and 6.2 percent for the employee — 12.4 percent total. If you’re self-employed, you have to pay the entire amount. The government collects Social Security tax on wages up to $147,000 in 2022.

SSA uses these payroll taxes to pay people who are currently receiving benefits. Any unused money goes to the Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

The amount of the Social Security benefits you or your family receives depends on the amount of earnings shown on your record and when you decide to receive benefits.

SSA bases your benefit payment on how much you earned during your working career. Higher lifetime earnings result in higher benefits. If there were some years you didn’t work or had low earnings, your benefit amount may be lower than if you had worked steadily.

The age at which you decide to retire also affects your benefit. If you retire at age 62, the earliest possible Social Security retirement age, your benefit will be lower than if you wait.

Social Security retirement benefits were not intended to be enough to fully fund retirement – the average Social Security retirement benefit is just over $1,231.

Children’s benefits

Your dependent child may get benefits on your earnings record when you start your Social Security retirement benefits. Your child may get up to half of your full benefit.

To get benefits, your child must be unmarried and one of the following:

  • Younger than age 18.
  • 18-19 years old and a full-time student (no higher than grade 12).
  • 18 or older and developed a qualifying disability before age 22.

Your benefits may be taxable

About 40% of people who get Social Security have to pay income taxes on their benefits, according to SSA. For example:

  • If you file a federal tax return as an “individual,” and your combined income is between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefits. If your combined income is more than $34,000, up to 85% of your Social Security benefits is subject to income tax.
  • If you file a joint return, you may have to pay taxes on 50% of your benefits if you and your spouse have a combined income between $32,000 and $44,000. If your combined income is more than $44,000, up to 85% of your Social Security benefits is subject to income tax.
  • If you’re married and file a separate return, you’ll probably pay taxes on your benefits.

At the end of each year, SSA will send you a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received. This statement can be used when you complete your federal income tax return to determine if you must pay taxes on your benefits.

References:

  1. https://www.ssa.gov/benefits/retirement/learn.html#h1
  2. https://www.ssa.gov/pubs/EN-05-10035.pdf
  3. https://www.aarp.org/retirement/social-security/benefits-calculator/

Note: If you enrolled in Social Security early, you’ll automatically be enrolled in Medicare at 65. But if you haven’t signed up for Social Security, then you need to take steps to enroll in Medicare.

You have a seven-month window to sign up for Medicare — the three months before your birthday, your birthday month and three months afterwards.

Warren Buffett Investing Lessons

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“Most people get interested in stocks [or assets like Bitcoin] when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett

Warren Buffett, Chairman and CEO, Berkshire-Hathaway, the Oracle of Omaha, has been the most successful investor of the 20th Century and is considered by many to be one of the greatest investors of all time.. His investment track record is simply remarkable with compounded annual returns over 20% over the last 55 plus years.

Essentially, if you had invested $10,000 USD in his investment firm Berkshire-Hathaway in 1965, that $10,000 USD would today be worth over $280 million US dollars.

What follows are several investing lessons all investors can learn from Buffett:

Investing Lesson 1: Risk Comes From Not Knowing What You are Doing

Many first-time investors have started trading in stocks and cryptocurrency without really understanding how these asset classes work. Buffett has advised investors to not chase everything that is new and shiny, and instead to only focus on the opportunities that they painstakingly researched and understand.

Stick to your circle of competence. Try not to be good at all things, and instead try to be great at one thing and give it all you`ve got. It`s better to be known for one thing than nothing.

“Never invest in a business you cannot understand.” Warren Buffett.

Investing Lesson 2: System Overpowers the Smart

Buffett advises that retail investors use a low-cost index fund. Investing via index funds gives you the advantage of a system, it allows for a disciplined investing cycle via SIPs and keeps emotions away from corrupting that framework. In other words, Buffett wants retail investors to follow a system over everything else.

And the system and a clear investing framework finding great business at good reasonable prices that have powered Berkshire Hathaway for the last five decades.

Change the way you see setbacks. You will make mistakes, probably lots of them, as long as you choose to swing for the fences. Buffett believes you can do well if you program your mind to see opportunities in every setback.

“A low-cost index fund is the most sensible equity investment for the great majority of investors.” Warren Buffett.

Investing Lesson 3: Have an Owner’s Mindset

Buying a stock is effectively buying a business and investors should follow the same kind of rigorous analysis and due diligence as one would do when buying a business.

The lesson here is that instead of getting too caught up in the recent movement of the stock price, you should spend more time analyzing the business fundamentals behind the stock price.

You can only genuinely value a business if you can accurately predict future cash flows. This is impossible without an understanding of the company’s operating environment and fundamentals.

And once you have answers to the pertinent questions, invest in a business that you would like to own for the next 10 to 20 years.

On how to invest in stocks. His response is a simple five-word answer: “Invest in the long term.”

“That whole idea that you own a business you know is vital to the investment process.” Warren Buffett

Investing Lesson 4: Be Fearful When Others are Greedy and Be Greedy When Others are Fearful

The stock markets work in cycles of greed and fear. When there is greed, people are ready to pay more than what a business is worth. But when fear sets in, then great businesses are available at huge discounts for anyone who is ready to keep their gloomy emotions aside.

In Berkshire’s 2018 shareholder letter, Buffett wrote, “Seizing opportunities does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

In other words, Buffett encourages investors to not follow the herd. And strip away emotions when making investment decisions, which is likely to open up more profitable opportunities.

“What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.” Warren Buffett

Investing Lesson 5: Save and Preserve Capital for A Golden Rainy Day

Warren Buffett goes by the philosophy – hold onto your money when money is cheap and spend aggressively when money is expensive.

Financial expert criticized Buffett for holding onto billions of dollars in cash and not deploying it in stocks. But Buffett was saving all that cash to be used when companies come down from the then astronomical valuations to more reasonable prices.

“Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When a downpour of that sort occurs. It is imperative that we rush outdoors carrying washtubs and not teaspoons.” Warren Buffett

Investing Lesson 6: Never Invest Just Because a Company is Cheap

A cheap business may be cheap for a very good reason, but may not be a profitable or favorable investment.

His investing approach is to look at a business’s competitive advantage, intangibles like brand value, cost superiority and its strong growth prospects.

This goes hand-in-hand with his Buffett’s first rule of investing is “don’t lose money.” His second rule is “never forget rule number one.” In short, investors should try to avoid significant losses at all costs, but avoiding all losses is impossible.

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Warren Buffett

Investing Lesson 7: Time is The Friend of The Wonderful Business

Patience and time are important in investing and has investors can reap the benefits of compounding.

Additionally, “cash is king” and investors must avoid debt at all costs. Buffett has always had a strong net cash position. Cash gives optionality and means you’re unlikely to have to make hard decisions when the market becomes volatile and eventually turns.

Considering volatility, Buffett said, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions are not immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Buffett is not a fan of the kind of debt that can leave consumers broke and helpless, especially when the markets go down.

“It is insane to risk what you have and need in order to obtain what you don’t need,” Warren Buffett

Investing Lesson 9: Keep It Simple

An element of simplicity is important. Buffett himself follows a simple to understand investing framework, which can best be defined as buying stakes in a business where the price you pay is far lower than the value you derive. He wants investors to invest in simple and understandable instruments only and using a process that one can easily digest.

For example, if you don’t understand cryptocurrency, don’t invest, trade, or speculate in Bitcoins or glamorous-looking investment vehicles we are exposed to every year.

“If you are uncomfortable with the asset class that you have picked, then chances are you will panic when others panic,” Warren Buffett

Finally, treat your body and mind like the only car you could have. If someone offered you the most expensive car in the world with a single condition that you never get another one, how will you treat this car?

With this analogy in mind, Buffett urges you to treat your body and mind the same way you treat your one, and only car. If you don’t take care of your mind and body now, by the time you are forty or fifty you’ll be like a car that can’t go anywhere.

Investing Bottomline

Buffett’s lessons are simple and straightforward. He submits to keep it simple, improve upon what you know, stay within your circle of competence and comfort zone, and there are enough opportunities for one to thrive in investing.

References:

  1. https://www.etmoney.com/blog/9-lessons-in-investing-by-warren-buffett/
  2. https://thetotalentrepreneurs.com/business-lessons-warren-buffet/
  3. https://addicted2success.com/life/5-lessons-we-can-all-learn-from-the-life-of-warren-buffett/
  4. https://finance.yahoo.com/news/5-warren-buffetts-most-important-224429018.html

Recession…recessions always come with significant increase in unemployment. It’s basically definitional. Employment and gross domestic product fall together during a recession.

Lessons on Business and Life

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10 best lessons regarding business and life.

1. Hard work and working smart will always outweigh talent. Nothing beats hard work and working smart. Hard work and working smart outweigh talent and intelligence and are necessary if you want to succeed. This not only means working hard and working smart when things are going well, but working harder and smarter when things are not.

2. Believe in yourself; have faith in your abilities. Be confident enough to acknowledge your talents and accept your faults. No person is perfect or a complete failure, and everyone has faults and talents, no matter how successful or unsuccessful they may be. Don’t waste your time trying to cover up your faults or deny your talents. Instead, accept them, face reality and do your best to work around these faults and to utilize your talents. There is no greater sign of confidence than self-acceptance.

3. Learn and grow from the past. So many people focus on the future, and while having a plan in place is important, it is equally important to never forget to learn lessons and grow from the past. Don’t be afraid to look back. Your past performance actually can reflect future performance. You must make mistakes to learn, grow, build character and to make yourself a better. Make sure to look back on these mistakes and learn and grow from them.

4. Education in yourself is the best investment you can make. Successful individuals know that there is no better investment than an education. That is one reason they read voraciously. Invest heavily and regularly in your education, but only on things that truly interest you and that can enhance your life. And, education must be a lifelong process.

5. Never make a decision based solely on financial gain. Making money can be a huge motivator in all of our lives, but you should never travel down a road just because there is a promise of financial reward. You need to have a real passion and purpose for what you are doing and the choices you are making for your decision to be worth it.

6. Life is about relationships. Give respect to others and love to your friends and family. No matter where you go in the world, you will find that all people share one similar trait: they all want to be loved and respected. Respect every person you meet, no matter who they are or their socioeconomic status. As for your friends and family, love them unconditionally, and never forget to display your love for them no matter how busy you are.

7. Don’t automatically dismiss any opportunity that presents itself. When presented with opportunities, you should never judge or dismiss any opportunity without thought. You may be presented with a business or personal opportunity that is completely foreign to you. Don’t say no to hastily just because it is outside of your wheelhouse or comfort zone — you never know what this new opportunity could mean in the future.

8. Health is Wealth. Nothing is more important than your physical, mental and emotional health and well-being. Never sacrifice your health for anything, not even success and money. Nothing is as important as your health and nothing ever will be.

9. Don’t be afraid to start small. So many people are afraid to get started because they think they need a lot of capital and resources to succeed in this world. Don’t be afraid to start small. Everyone has to start somewhere, and you don’t need a lot of capital or resources to do it.

10. Take risks, but calculate that risk first. It is wise to take calculated risks. In fact, it’s essential to take risks. However, these need to be calculated risks. Taking risks without weighing your cost/benefit options is just foolish and reckless, but calculated risks tend to lead to the biggest rewards.

“If you don’t go after what you want, you’ll never have it. If you don’t ask, the answer is always no. If you don’t step forward, you’re always in the same place.” ~ Nora Roberts

No matter where your journey might take you in life or where your professional goals might take you, there are certain life lessons that you can always apply to your own journey or to your own “road less taken”.

References:

  1. https://www.entrepreneur.com/leadership/the-10-best-life-and-business-lessons-ive-learned-so-far/245385
  2. https://www.inhersight.com/blog/career-development/taking-risks-quotes

“A Plan Rarely Survives First Contact With Reality”.

Taxing Unrealized Gains: A Politically Dum Ideal

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“Honestly, I [Mark Cuban] don’t think Elizabeth Warren knows that’s all what she’s talking about when she deals with this. I think she just likes to demonize people that are wealthy, and that’s fine, it’s a great political move for her, but I just don’t think that they really understand the implications of taxing unrealized gains.” ~ Mark Cuban

U.S. Senator Ron Wyden, D-Oregon., has proposed a so-called mark-to-market version of the capital gains tax. Put more simply, investors would pay capital gains taxes each and every year in which their assets go up in value, instead of only when they are sold.

Additionally, President Joe Biden wants to introduce a new tax that targets the wealthiest families in the country. It’s called the Billionaire Minimum Income Tax—except that it doesn’t only tax billionaires, it isn’t a minimum tax, and it’s not really a tax on “income” either. But it is a tax . . . so at least they got that part right!

A wealth tax would apply to assets traded in liquid markets, like stocks and bonds, and to illiquid assets like real estate, private companies and complex investments.

This tax on unrealized gains would be not only difficult to implement but also could devastate markets, especially liquid markets, where stocks, bonds and commodities trade.

The annual tax would also apply to illiquid investments like the value of a private company, real estate and other complex investments.

This means that every year, these assets need to be revalued to determine if their worth went up or down (you can write off the estimated loss if the value of the company, or real estate, if realized), but this means annual appraisals for essentially every investment you own.

Unrealized Capital Gains

Capital gains—which are profits (or potential profits) from an investment that goes up in value after you buy it—can either be realized or unrealized.

Unrealized capital gains show you how much your investment has increased in value before you sell it. Once you sell an investment for a profit, you now have realized capital gains.

The difference is that unrealized gains are only on paper—they’re not really real —while realized gains represent real money that’s in your pocket.

Whenever a stock or investment you own is worth more than what you bought it for, you can sell it for a profit—and those profits are called capital gains.

If you decide to hold on to the stock and not sell it, then what you have are unrealized capital gains. After all, you can’t just walk up to your grocery store cashier and pay for milk and eggs with your stock—no matter how much it’s worth on paper.

Problems With an Unrealized Capital Gains Tax

There are three significant reasons why any proposal to make this a reality probably won’t make it too far.  

1. A new unrealized capital gains tax would be a headache to enforce.

For a tax like this to work, thousands of taxpayers would need to evaluate the value of all of their assets every single year. That raises the question: How in the world would the IRS—which is already understaffed and overburdened as it is—be able to audit all those filings?3

2. The proposed tax probably doesn’t have enough support in Congress.

“wealth tax” proposals have hit a brick wall on Capital Hill every time it has been proposed. It doesn’t look like this one is any different.

It’s important to remember, Congress treats the release of the budget from the White House more like a list of suggestions than something that’s written in stone.

3. A tax on unrealized capital gains might be unconstitutional.

It may be ok legal to tax unrealized capital gains. The Constitution makes it extremely tough for the government to impose direct taxes. In fact, Congress had to pass a constitutional amendment just to put a federal income tax in place.6

Basically, any tax that is passed must be spread evenly among every person in every state. And a tax on unrealized capital gains could be considered a direct tax because it’s a tax on the personal property of a select group of people.

References:

  1. https://www.foxnews.com/media/mark-cuban-screw-you-elizabeth-warren-declares-her-everything-wrong-politics
  2. https://www.cnbc.com/2019/04/03/top-democrats-proposed-capital-gains-tax-would-be-devastating-for-markets.html
  3. https://www.ramseysolutions.com/taxes/unrealized-capital-gains-tax

Inflation Reduction Act and IRS Enforcement

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Inside the Inflation Reduction Act is $80 billion in new funding for the IRS over the next 10 years. More than half of that new funding is slated for increased enforcement, including 87,000 new agents.

The president and IRS Commissioner say they won’t go after anyone making less than $400,000 a year with the increased enforcement. But, in reality, they won’t go after any wage earners making less than $400,000 on a W-2.

Yet, small business owners don’t appear to be included in this limitation. Thus, many law-abiding small business owners and high-net-worth individuals will find themselves the target of increased scrutiny, enforcement and costly audits.

If Congress were accurate, this bill would be called the Small Business Disruption Act, writes Tom Wheelwright, CPA, CEO of  WealthAbility, and the bestselling author of  Tax-Free Wealth: How to Build Massive Wealth By Permanently Reducing Your Taxes.

Bottomline, high net worth individuals, growth-minded entrepreneurs, small business owners and strategic investors need a plan for the IRS pending increased enforcement.

Here are three ways, according to Wheelwright, to protect yourself from the upcoming onslaught of audits.

1. Get a CPA Who Isn’t Afraid of the IRS

The question isn’t will you get audited by the IRS; it’s when. The IRS has been getting more aggressive in how it approaches certain types of taxpayers for years. Rather than make an effort to root out actual tax cheats, the IRS has been challenging legitimate tax incentives.

You’ll need a CPA who isn’t afraid to stand up to them. As the client, you should never speak with the IRS. That’s what your CPA is for. If your tax advisor seems uncomfortable with this idea, that’s a clear sign that it’s time to make a change.

2. Make Sure Your CPA Is Preparing Your Tax Return in Ways That Minimize Your Chance of an Audit

While you may not be able to avoid an audit forever, there’s no reason to position yourself at the front of the pack. There are choices that your tax preparer makes in creating your return that will either raise or lower potential flags to the IRS. All of these choices are legal options, but the terminology and methodology make a difference.

Ask your CPA for specific examples of how they are reducing your risk of an IRS audit. You want someone who can give you a clear plan and who demonstrates a level of confidence that reassures you they can deliver.

This shouldn’t mean missing out on tax deductions to which you are entitled. Missing out on tax incentives and deductions is like making a voluntary donation to Washington, D.C. No solid tax strategy makes this tradeoff.

3. Invest in Education and Advice

The government offers many compelling tax incentives to encourage investment. One of the keys to tapping into these incentives is ensuring you have the information and guidance you need to maximize your results. Take the time to learn how these programs work and, when needed, bring in an expert.

It’s not enough to have the right technology and equipment at the right price. You need to make sure you’re also structuring and documenting your purchase to maximize the available tax incentives.

With the IRS bearing down on small business owners, now is the time to surround yourself with high-powered tax professionals who will protect your interests.

References:

  1. Tom Wheelwright, What The Inflation Reduction Act Could Mean For You, Worth, August 22, 2022. https://www.worth.com/inflation-reduction-act-irs-80-billion-funding-increase-audits/

I Am What I Choose To Become

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“I am not what happened to me, I am what I choose to become.” – Carl Jung

A happy life is a life with purpose and meaning. If you had in your possession every penny on earth, and all the material possessions you desire, it would still give you no guarantees of happiness, and certainly no meaning.

Money or possessions will not give your life purpose and  meaning – but meaning does

With purpose and meaning in your life you can face the inevitable challenges of life without fear… With purpose and meaning in your life you can let go of the past, because there is always a brighter to work toward, to believe in… tomorrow.

Purpose and meaning give you reason to get up in the morning… enthusiasm to go about your day, purpose and meaning for living.  Kindle a light in the darkness of your being. Discover who you are, develop a life of meaning and purpose, and accept every inevitable challenge that comes your way.

Whatever happens in your life is not reality, but rather your interpretation of reality.

On one of your best days, a challenge appears, and you deal with it, with presence, with confidence, with competence… Then, the challenge disappears, perhaps even turns into a blessing… a new understanding.

On one of your worst days, the same challenge appears, you react angrily, unconsciously, the challenge turns into a bigger issue, a larger problem and consequently affects your life and others in a much bigger, not so pleasant way.

It was the same challenge and it depends how you look at it.

“The least of things with a meaning is worth more in life than the greatest of things without it.” – Carl Jung

 

  1. https://www.fearlessmotivation.com/2021/02/03/carl-jung-i-am-what-i-choose-to-become-must-watch-motivational-video