Category Archives: Building Wealth

Wealth is what you don’t see

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“Spending money to show people how much money you have is the fastest way to have less money.” ~ Morgan Housel, The Psychology of Money

The definition of wealth, in its simplest form, is the total value of assets that are owned by an individual. Wealth is also defined as a person’s Net Worth. This is calculated by adding up all the assets and subtracting all the liabilities.

Wealth means different things to different people. The first and most obvious definition of wealth is owning appreciable and income producing assets. On the other hand, wealth can mean to some people the ability to travel wherever you want, and to do things on your own schedule. But chances are, everybody has a completely different definition of wealth.

Wealth is what you don’t see.

Being wealthy means that you have assets that generate you income as well as a store of wealth. A wealthy person is typically invested in real estate, the stock market, and might own a business or two. These individuals have assets that can be passed down generation to generation and don’t waste time keeping up with the Joneses. They focus on amassing assets and wealth.

“Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see,” explains Morgan Housel, author of The Psychology of Money.

“That’s not how we think about wealth, because you can’t contextualize what you can’t see.

When most people say they want to be a millionaire, what they might actually mean is ‘I’d like to spend a million dollars.’ And that is literally the opposite of being a millionaire.”

Wealth defined

In their groundbreaking book, The Millionaire Next Door, authors Thomas J. Stanley, Ph.D, and William D. Danko, Ph.D, do not define wealthy, affluent, or rich in terms of material possessions. They opined that many people who display a high-consumption lifestyle have little or no investments, appreciable assets, income-producing assets, common stocks, bonds, private businesses, oil/gas rights, or timber land.

Conversely, those people whom they define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.

Bottomline, the most important parts of wealth and personal finance are how you behave with it and your related habits.

Wealth gives you freedom

Wealth give you time to do what you want and give you Freedom. When you are wealthy, you don’t have to sell hours of your day working. You can instead choose to spend your day doing the things you love and enjoy it.

And, freedom is defined as “the power or right to act, speak, or think as one wants without hindrance or restraint.” When you have wealth, you have the freedom to do things that you have always wanted to do, with minimal hindrances.

References:

  1. https://retirementfieldguide.com/wealth-is-what-you-dont-see/
  2. https://themillionairenextdoor.com/publications/the-millionaire-next-door/
  3. https://www.msn.com/en-us/money/personalfinance/definition-of-wealth-what-does-being-wealthy-mean/ar-AAWpqRq

Discipline and Patience are two great personal superpowers.

High-Income Taxpayers Paid the Majority of Federal Income Taxes

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In 2018, the top 1 percent of taxpayers (taxpayers with AGI of $540,009 and above) accounted for more income taxes paid than the bottom 90 percent combined. ~ Tax Foundation

Federal individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income, explains the Tax Foundation.

Federal individual income tax represent for more than 25 percent of the nation’s taxes paid (at all levels of government). Federal income taxes are much more progressive than federal payroll taxes, which are responsible for about 20 percent of all taxes paid (at all levels of government) and are more progressive than most state and local taxes.

Federal individual income taxes are the largest source of tax revenue in the U.S. In 2018, 144.3 million taxpayers reported earning $11.6 trillion in adjusted gross income (AGI) and paid $1.5 trillion in individual income taxes. Adjusted gross income is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions.

AGI is a fairly narrow income concept and does not include income items like government transfers (except for the portion of Social Security benefits that is taxed), the value of employer-provided health insurance, underreported or unreported income (most notably that of sole proprietors), income derived from municipal bond interest, net imputed rental income, and others.

In 2018, the top 1 percent of all taxpayers (taxpayers with AGI of $540,009 and above) earned 20.9 percent of all AGI in 2018 and paid 40.1 percent of all federal income taxes.

In contrast, the top 1 percent of all taxpayers (taxpayers with AGI of $540,009 and above) earned 20.9 percent of all AGI in 2018 and paid 40.1 percent of all federal income taxes.

In 2018, the top 1 percent paid a greater share of individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent). The top 1 percent of taxpayers paid roughly $616 billion, or 38.5 percent of all income taxes, while the bottom 90 percent paid about $479 billion, or 29.9 percent of all income taxes.

The top 1 percent of taxpayers (AGI of $540,009 and above) paid the highest average tax rate, 25.4 percent.

References:

  1. https://taxfoundation.org/federal-income-tax-data-2021/
  2. https://taxfoundation.org/summary-of-the-latest-federal-income-tax-data-2020-update/
  3. Internal Revenue Service, Statistics of Income, “Number of Returns, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates,” Table 1, and “Number of Returns, Shares of AGI and Total Income Tax, and Average Tax Rates,” Table 2, https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-rates-and-tax-shares.

Best Investing and Trading Advice

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  1. “History repeats because of the weakness of human nature. The greed for quick fortunes has cost the public countless millions of dollars. Every experienced stock trader knows that overtrading is his greatest weakness, but he continues to allow this weakness to be his ruin. There must be a cure for this greatest weakness in trading, and that cure is STOP LOSS ORDERS. The weakest point must be overcome and the stop loss order is the cure for overtrading.” ~ WD Gann
  2. The only true test of whether a stock is “cheap” or “high” is not its current price in relation to some former price, no matter how accustomed we may have become to that former price, but whether the company’s fundamentals are significantly more or less favorable than the current financial-community appraisal of that stock.” ~ Philip Fisher
  3. “Trading is a waiting game. You sit, you wait, and you make a lot of money all at once. Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between.” ~ Michael Covel
  4. “I learned to avoid trying to catch up or double up to recoup losses. I also learned that a certain amount of loss will affect your judgment, so you have to put some time between that loss and the next trade.” ~ Richard Dennis
  5. “Trading is a psychological game. Most people think they are playing against the market, but the market doesn´t care. You’re really playing against yourself.” ~ Martin Schwarz
  6. “Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.” ~ Seth Klarman

References:

  1. https://www.t3live.com/blog/2017/12/01/best-trading-investing-quotes/

U.S. 10 Year Treasury Note

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The benchmark 10-year yield matters to financial markets because it informs prices for everything from mortgages to corporate debt. Higher borrowing costs can slam the brakes on economic activity, even provoking a recession.

The 10-year treasury bond is a debt instrument issued by the government of the United States. As its name implies, it matures in ten years. Over the course of that time, investors holding 10-year treasury notes, earn yields. The 10-year T-notes are issued at a face value of $1,000, and a coupon.

The Coupon is the nominal or stated rate of interest on the 10-year Treasury Note. This is the annual interest rate paid by the U.S. government, based on the note’s face value. These interest payments are made semiannually. 

The 10-year Treasury Note is also an economic indicator. Its yield provides information about investor confidence. While historical yield ranges do not appear wide, any basis point movement is a signal to the market. The 10-year treasury note is the gold standard of interest rates. Nearly every United States lending institution derives its interest rates by benchmarking the 10-year treasury note. This makes it both a powerful investment tool and a financial barometer for evaluating other types of investments—including debt securities. 

There are many factors that affect the 10-year yield, the most substantial being investor sentiment. When investors have high confidence in the markets and believe they can profit outside of Treasury securities, the yield will rise as the price falls. This sentiment is determined by both the individual investor and investors as a whole, and can be based on any number of factors such as economic stability, geopolitical fluctuations, war, black swan events and more.

The 10-year treasury note is both a powerful investment tool and a financial barometer for evaluating other types of investments—including debt securities. 

If bond investors think the economy will do better in the next decade, they will require a higher yield to keep their money socked away. When there is a lot of uncertainty, they don’t need much return to keep their money safe. Usually, investors don’t need much return to keep their money tied up for only short periods of time, and they need a lot more to keep it tied up for longer.

Treasury yields change every day because they are resold on the secondary market. Hardly anyone keeps them for the full term. If bond prices drop, it means that demand for Treasurys has fallen, as well. That drives yields up as investors require more return for their investments.

Thus, on the secondary bond market, when there’s a bull equity market or the economy is in the expansion phase of the business cycle, there are plenty of other favorable investments. Investors are looking for more return than a 10-year Treasury note will give. As a result, there’s not a lot of demand. Bidders are only willing to pay less than the face value. When that happens, the yield is higher. Treasurys are sold at a discount, so there is a greater return on the investment.

The 10-year Treasury note yield is also the benchmark that guides other interest rates. As yields on the 10-year Treasury notes rise, so do the interest rates on other types of debt instruments like fixed-rate mortgages. Investors who buy bonds are looking for the best rate with the lowest return. If the rate on the Treasury note drops, then the rates on other, less safe investments can also fall and remain competitive.

10-year bond yields provide insight into a number of interrelated variables, including bond prices, mortgage rates, investor confidence, and more. This means that Treasury yields can provide insight into upcoming market conditions, or otherwise reflect current investor sentiment.

This all begs the question, what do the currently elevated 10-year Treasury yields say about the state of the economy.

Rising yields in particular present a uniquely terrifying possibility to investors. Should the yield grow too high, the stage could be set for a substantial stock market selloff as investors instead funnel their money into safer Treasurys. This could spell the end of whatever bull market Americans have been enjoying.

With that said, historically troublesome 10-year yield rates are closer to the 3% to 4% psychological level. But the above 4.0% yield currently in play is actually not as troublesome as one might have anticipated.

Depending on inflation expectations, the point where investors begin to look at Treasurys as a substitute for stocks will change. Should investors expect more inflation, which, despite the Fed’s plan is still the general consensus, the yield may have to hit 4% to present a comparable threat to the markets.

There may not exist a static roadmap for understanding 10-year Treasury yields, as they themselves are dynamic. Understanding the role Treasurys play in reflecting economic expectations and investor sentiment can dramatically enhance your understanding of financial markets, and facilitate better decisions for your portfolio.

Government bonds are the safest, because they are guaranteed. Since they’re the safest, they offer the lowest returns. U.S. Treasury notes and bonds are the most popular.

The 10-year Treasury yield is used to determine investor confidence in the markets. It moves to the inverse of the price of the 10-year Treasury note and is considered one of the safest—if lowest returning—investments that can be made. Although the investment is guaranteed by the U.S. government, investors could still lose money if inflation outpaces the 10-year yield.

The 10-year Treasury note is worth paying attention to as a key metric for tracking other interest rates. Use it as a barometer for understanding why other debt securities behave the way they do.

You can learn a lot about where the economy is in the business cycle by looking at the 10-year U.S. Treasury note. It indicates how much return investors need to tie up their money for 10 years.

References:

  1. https://www.thebalancemoney.com/10-year-treasury-note-3305795
  2. https://investorplace.com/2022/02/10-year-treasury-yields-today-what-to-know-as-yields-continue-climb-above-1-9/
  3. https://investmentu.com/what-is-a-10-year-treasury-note/

Investing Lessons Learned

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“To maximize returns, buy stocks when everyone hates them and sell them when everyone loves them. This is easy in theory, but brutally difficult in practice.” ~ Brian Feroldi

Brian Feroldi is a financial educator and he has been saving and investing for 18+ years. From his experiences, below he shares 10 painful lessons he had to learn and sometimes relearn the hard way:

1. You don’t need leverage.

Margin and options are fun on the way up and BRUTAL on the way down. Many investors have lost more than 100% on investment before. Why? Leverage.

Buffett said it best:

2. Optimize for longevity, not upside

Compound interest is the most powerful wealth-building force that exists. But, it only works if you SURVIVE long enough for it to work.

You must avoid investing to optimize for upside potential. Instead, you should follow the barbell method to optimize for longevity.

3. High conviction DOES NOT = correct

If you convinced yourself that a certain stock could only go up. you might be right on some. On others, you may lost significant value.

Conviction is useful, but just because you think you are right doesn’t mean that you are right.

Allocate accordingly

4. Stock prices and business results (and intrinsic value) are 0% correlated in the short-term and 100% correlated in the long-term

Do not sell future mega-winners because their stocks were down (dumb).

Instead of watching the stock, instead focus on the fundamentals of the business.

5. Not having a system

Do not try to keep everything in my head, which was dumb (and impossible).

Instead, use checklists, journals, or watchlist, which are invaluable free tools.

6. Not understanding the P/E ratio

Do not pass on high P/E ratio stocks that went up big and buy low P/E ratio stocks that went down big.

Why? It’s about understanding the P/E ratio’s flaws.

Now, P/E only works in stage 4. It doesn’t work in stages 1, 2, 3 or 5

7. Panic selling and panic buying

Emotions have caused many investors to panic buy hype stocks and panic sell future mega-winners.

It’s easy to say you’ll be greedy when others are fearful, and visa-versa.

It’s hard to actually do it.

8. Study history

Human nature is remarkably consistent. The same forces that drove markets 100+ years still exist in all of us today.

There’s always a smart-sounded reason to sell and it’s important to understand that.

9. Don’t focused on what you can’t control

Do not follow the news closely, or watch for clues to predict the market.

This will be time poorly spent. Macro factors matter, but you have no control over them.

It essential you focus far more on what you can control.

10. Not changing your mind

This one is REALLY hard, but it’s necessary to do well.

Changing your mind is hard. Admitting you’re wrong is hard.

But, @JeffBezos said it best:

Learning invaluable investing lessons, especially from the mistakes of others, is an essential part of becoming a more successful long-term investor.

References:

  1. https://bookshop.org/shop/Feroldi
  2. https://www.marketwatch.com/amp/story/the-critical-money-and-investing-lessons-i-wish-my-younger-self-had-understood-11651762064
  3. http://mindset.brianferoldi.com

September PPI 8.5% and Stubborn Inflation

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Inflation at the wholesale level rose 8.5% in September

September’s Producer Price Index (PPI) came in at 8.5% on a year-over-year (y/y) basis and 0.4% month-over-month (m/m) basis, according to the Bureau of Labor Statistics (BLS). Both numbers are higher than expected. Goods (ex-food & energy) added nothing on a m/m basis, but services (which are stickier) were up 0.6% m/m. Not great news in the fight against inflation.

The Producer Price Index (PPI), produced by the Bureau of Labor Statistics (BLS), is an index that measures the average change over time in prices received (price changes) by producers for domestically produced goods, services, and construction. PPI measures price change from the perspective of the seller.

Inflation operates much like a tax, a particularly egregious one that disproportionately falls on the poor and leads to a variety of economic problems, including, as we’re seeing, higher interest rates, slow economic growth, and reduced incomes, according to the Tax Foundation. Inflation reduces every Americans purchasing power.

With inflation stubbornly running high, bondholders and consumers bear much of the burden of inflation over the long run, however a new Congressional Budget Office (CBO) report reveals that lower- and middle-income households are disproportionately shouldering the burden of this current inflation wave.

Inflation is a burden on all those who use U.S. dollars, but the burden varies considerably across users. For instance, it falls particularly heavy on lenders, who subsequently are repaid in less valuable dollars.

In contrast, borrowers benefit from inflation, with the single largest beneficiary being the federal government, as Treasury debt is repaid with less valuable dollars. Publicly held Treasury debt is currently about $31 trillion, larger than the size of U.S. economy measured by GDP.

There is a long history of the federal government using inflation, or money creation, to finance spending instead of taxes, particularly in times of war, states the Tax Foundation. For example, the sharp increase in federal spending during World War II produced large fiscal deficits that were financed by Treasury debt. The debt was purchased by the Federal Reserve through printing money.

References:

  1. https://www.bls.gov/news.release/pdf/ppi.pdf
  2. https://taxfoundation.org/inflation-regressive-effects/

Atomic Wealth Building Habits

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“You do not rise to the level of your goals. You fall to the level of your systems.” James Clear, a core philosophy of Atomic Habits:

“An atomic habit is a little habit that is part of a larger system. Just as atoms are the building blocks of molecules, atomic habits are the building blocks of remarkable results,” writes James Clear, author of the best selling book, Atomic Habits.

Applying the principles and philosophies of Atomic Habits to your wealth building, money management and achievement of financial freedom can grow into life-altering outcomes.

Focusing on little habits repeated over a long period of time is how to create good habits, break bad ones, and get 1 percent better every day.

Habits are the compound interest of self-improvement. Getting 1 percent better every day counts for a lot in the long-run. “It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent,” writes Clear.

Thus, habits are a double-edged sword. They can work for you or against you, which is why understanding the details is essential.

Small changes often appear to make no discernible difference in the short term until you cross a critical threshold. The most powerful outcomes of any compounding process are delayed. You need to be patient. “Many of the choices you make today will not benefit you immediately,” Clear explains.

If you want better results, then forget about setting goals. Focus on your system instead. “You do not rise to the level of your goals. You fall to the level of your systems,” stresses James Clear. “Goals are good for setting a direction, but systems are best for making progress,”

Habits Shape Your Identity (and Vice Versa) There are three levels of change: outcome change, process change, and identity change.

Focus on who you wish to become

The most effective way to change your habits is to focus not on what you want to achieve, but on who you wish to become, writes Clear. Your identity emerges out of your habits. Every action is a vote for the type of person you wish to become.

Becoming the best version of yourself requires you to continuously edit your beliefs, and to upgrade and expand your identity. Your behaviours are usually a reflection of your identity. “What you do is an indication of the type of person you believe that you are either consciously or non consciously.,” Clear says.

The real reason habits matter is not because they can get you better results (although they can do that), but because they can change your beliefs about yourself.

A habit is a behavior that has been repeated enough times to become automatic. “Every action you take is a vote for the type of person you wish to become. No single instance will transform your beliefs, but as the votes build up, so does the evidence of your new identity,” said James Clear.

The ultimate purpose of habits is to resolve the routines, challenges and problems of daily life with as little conscious energy and effort as possible.

References:

  1. https://jamesclear.com/atomic-habits
  2. https://waymakerfinance.com.au/blog/applying-atomic-habits-to-your-finances

How to Invest for Beginners: Peter Lynch

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Investing can be for anybody, but is certainly not for everybody.

Only a handful of professional investors can compare to the legendary Peter Lynch. He rose to investing stardom in 1977 when he was appointed the fund manager of Fidelity’s Magellan Fund.

When Lynch took over, the fund had around $18 million in assets under management. After 13 years at the helm, Lynch increased the fund’s size by almost a thousand-fold.

In 1990, the Magellan Fund, and its over $14 billion in assets under management, became the biggest mutual fund in the world. At times, the fund held over 1,000 different stocks in its portfolio. Also, there was a period when it had an average annual return of 29.9%.

It doesn’t matter if you don’t know anything about investing, since there are actions a beginning investor can take to learn how to invest and how to manage their money and finances. One of the most important actions for new investors is to get started early.

Investing doesn’t have to be hard. Yet, it’s important to learn the basics of investing and what type of investments are the best depending on your financial situation and the amount of money you want to make. 

When you make it a point to save money, you are protecting yourself against life’s unforeseen difficulties. And when you invest, if you choose to do so, you will have a chance to earn much more than you would have expected to, growing your money exponentially.

Time Period

Long-term investing is one of the key concepts in Lynch’s and many of the most successful investor’s investment philosophy. Lynch argued that the value of stocks was rather easy to predict over a 10 to 20-year period, while short term predictions were pretty much useless and effectively impossible to make accurately due to market volatility.

Source: Brian Feroldi

Therefore, he strongly urged investors to always select stocks of companies that they understand, believe in and be patient to wait for them to go up over a long period of time rather than selling for profits.

According to research, if you invest a $1,000 every year on the highest day for a period of 30 years, you can expect a 10.6% annualized return. On the other hand, if you invest the same sum on the lowest day of the year, you can expect an 11.7% compounded return over the same period.

Peter Lynch also encouraged the reader to look for the tenbagger stocks.

A tenbagger is a stock that rises in value 10-fold or 1,000%. He advises against selling when the stock goes up 40% or even 100%. Instead, he urges investors to hold onto them for the long-term, despite the common trend of many investors to take profits by selling appreciated stocks.

References:

  1. https://finmasters.com/one-up-on-wall-street-review/
  2. https://www.benzinga.com/money/peter-lynch-books

Index Fund and Stock Investing

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“I’m extremely sceptical that anyone can do stockpicking well. The evidence is clear that simple low-cost index funds have outperformed 90 per cent actively managed funds over 10 years. A precious few stockpickers do outperform but there is no way to know in advance who they might be.” ~ Dr. Burton Malkiel

Burton Malkiel’s mission has been a multi-decades long advocate of index-based investing. In his book, A Random Walk Down Wall Street, published in 1973, he championed the premise that short run changes in stock market prices are unpredictable and that trying to beat the market is a fool’s game

Currently, index-tracking strategies account for about 40 per cent of U.S. mutual fund assets. Mr Malkiel’s advice is to ignore swings in short-term sentiment and to follow the ideas that he has supported over half a century–invest in low cost index funds. “What you shouldn’t do is panic and sell out. It is invariably a mistake, contends Malkiel. “Rather than trying to find undervalued US stocks, maybe the best solution would be to buy and hold an index comprising all the securities available for investment globally.”

Invest in index-funds (low cost), and get international exposure. The US is only one third of the world economy, and other areas are growing quickly.

Investors cannot consistently beat the market or achieve outsized returns, so invest in low-cost, tax-efficient, broad-based index funds. Not only is it simple, but it’s likely to give you the best outcome as an individual investor.

Rules to stock investing

  1. Confine stock purchases to companies that appear able to sustain above-average earnings and cash flow growth for at least five years. Growth increases, earnings, dividends, and likely the multiple the market will pay for those earnings.
  2. Never pay more for a stock than can reasonably justified by a company’s intrinsic value. Not a perfect measure, but look at how stock trades relative to earnings and cash flow growth potential. Avoid stocks with many years of high growth priced in.
  3. It helps to buy stocks with the anticipated growth. Try to be where other investors will be a few months from now. Look for companies that have strong balance sheet and strong financial growth.
  4. Trade as little as possible. Ride the winners and sell the losers. Sell before end of each calendar year any stocks on which you have a loss. Don’t have patience for losing stocks whose fundamentals have changed. Losses can help less tax burden through tax loss harvesting.

According to Dr. Malkiel, you aren’t likely to win even with these sensible rules. That said, those with a penchant for investing in individual stocks of companies, may still enjoy the game and not want to give it up.

References:

  1. https://www.ft.com/content/c67c06ba-b19c-3341-9665-eb985e3f8d02
  2. https://calvinrosser.com/notes/random-walk-down-wall-street-burton-malkiel/

Dr. Burton Gordon Malkiel, Ph.D, the Chemical Bank Chairman’s Professor of Economics at Princeton University, is responsible for a revolution in the field of investment management. His book, A Random Walk Down Wall Street, first published in 1973, used new research on asset returns and the performance of asset managers to recommend that all investors use passively managed “index” funds as the core of their investment portfolios.