Category Archives: Building Wealth

Warren Buffett Investing Lessons

Posted on by

“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

Posted on by

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

Posted on by

“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

Posted on by

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

Posted on by

“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

Economic Reality of Student Loan Forgiveness

Posted on by

The Biden Administration’s student loan forgiveness program executive order would generate significant current and future liabilities for taxpayers, and cause college costs to soar.  Brian Wesbury, First Trust Advisors L.P.

Biden Administration announced a student loan forgiveness program in late August that is creating significant political and economic debate. And, the more economists and the public learn about the details of the pending Presidential executive order, the worse it looks and smells.

The executive order would generate huge costs and future liabilities for taxpayers, and cause college costs to soar, which already generates negative marginal value-added for both students and our country, writes Brian Wesbury, Chief Economist, First Trust Portfolios L.P.

The Biden Administration says the changes would cost $240 billion in the next ten years.  The Committee for a Responsible Federal Budget says $440 – 600 billion.  A budget model from Wharton says $1 trillion.  But even that $1 trillion figure might be way too low. The key factor driving the extraordinary costs is the cancellation of some student debt that already exists is only a small part of the policy change.

The much bigger change, and the one that the market has finally begun to absorb, is limiting future payments on debts to 5% of income, but only after the borrower’s income rises above roughly $30,000 per year.

For example, if someone makes $70,000 per year, then no matter how much they borrow they’re limited to paying $2,000 per year (5% of the extra $40,000).  After twenty years, any remaining debt would simply disappear.

The perverse incentives for the vast majority of students, choosing this “income-based repayment” system would be a no-brainer. And once they pick it, they wouldn’t care at all whether their college charges $35,000 per year (tuition, room, board, and fees), $85,000, or even $150,000.

In fact, students would have an incentive to pick the priciest college with the best amenities they could find and pay for it all with federal loan money, because their repayments are capped, states Wesbury.

Meanwhile, students would have the incentive to take out loans greater than what they need because they can turn the excess into cash for “living expenses.”  Then they could use it to buy crypto, throw parties, or pretty much anything else. The government would limit their future repayments.

And here’s what might be the worst part: colleges would have an incentive to enroll students even if they have horrible future job and earning prospects.  By enrolling people no matter how poorly prepared they are, a college can charge whatever they want and get huge checks from the federal government.  And the unprepared students won’t care because they really don’t have to pay it back.  In effect, colleges could create massive and perfectly legal money-laundering schemes.

Although, no one can be certain if the new proposal will be implemented fully.  But, if it is: college costs are poised to skyrocket and academia is courting a political backlash of enormous proportions. Meanwhile, the financial market is attempting to digest just how far from economic reality Washington politicians have become. The political allocation of capital is a sure recipe for economic disaster, states Wesbury.

And, don’t forget that a Presidential executive can be expediently reversed by the next president,quickly erasing the benefits of student loan debt forgiveness.

  • Brian S. Wesbury – Chief Economist
  • Robert Stein, CFA – Deputy Chief Economist

References:

  1. Brian S. Wesbury and Robert Stein, Biden’s Student-Loan Fiasco, First Trust Economic Blog, August 29, 2022.   https://www.ftportfolios.com/blogs/EconBlog/2022/8/29/bidens-student-loan-fiasco

The Power of Compounding

Posted on by

“The elementary mathematics of compound interest is one of the most important models there is on earth. The first rule of compounding: Never interrupt it unnecessarily.” Charlie Munger

Compounding returns for years and even decades without having to pay taxes on interim gains (apart from taxes on dividend income) results in an investment returns advantage, versus earning similar returns in a more typical high-turnover strategy.

When it comes to compounding, more time in the market results in more wealth accumulated. If you wait to contribute to your retirement account until 10 years from now, you may have a lot more money to set aside, but you’ll also have lost 10 years of potential growth. And from the hypothetical example above, you know that extra time could potentially lead to greater returns. Of course, investing always comes with risk. Even with the power of compounding, returns are not guaranteed. 

When it comes to saving and investing for the long term, there is tremendous potential power of tax-efficient compounding when it comes to long-term wealth creation.

taxes and the long-term implications taxes have on wealth accumulation.

The ability to hold an investment for years allows investments to compound in a tax-efficient manner over long periods of time. Unfortunately, the typical retail investor does not capitalize on this opportunity. In fact, the average holding period for investing in equities in the U.S. has declined for decades.

References:

  1. https://www.osterweisprivateclient.com/insights/Tax_Efficient_Compounding_2021

Small Cap Company Investment

Posted on by

The Russell 2000 Index tracks the 2,000 smallest stocks (or companies) out of the 3,000 stocks in the Russell 3000 Index

The threat of recession, or even a significant economic slowdown alongside persistent decades high inflation, could prove to be a challenging investment environment, especially for investors in small cap companies and stocks.

The Russell 2000 has outperformed and has offered the strongest performance in all indexes both month-to-date and quarter-to-date according to WisdomTree data. The Russell 2000 Index is one of the most commonly watched indexes among investors, and it’s considered a benchmark for how smaller capitalized US companies are doing.

The Russell 2000 is a stock index that tracks the performance of 2,000 small-capitalization companies and often serves as a measure of the underlying health of the US economy.

It is comprised of the smallest companies included in the broader Russell 3000 Index, and is one of the most widely used benchmarks for funds that invest in small-cap stocks.

“Small-capitalization stocks tend to be more economically-sensitive and cyclical than large-capitalization stocks,” says Ari Wald, a technical analyst at Oppenheimer. “That is, they both rise and fall by a greater magnitude through the ups-and-downs of an economic cycle.”

The Russell 2000 represents around 97% of the investable US equity market. The Russell 2000 serves as a benchmark for small-cap funds and a barometer for the overall health of the US economy.

Note: It’s important to always keep in mind that owning a stock means buying a percentage of ownership in the company. In short, when you buy a stock, you’re buying a fraction of a company, and that fraction may pay dividends and provide you voting right privileges.

Stocks are a way to build wealth.

References:

  1. https://www.businessinsider.com/personal-finance/russell-2000-index
  2. https://www.cnbc.com/2018/04/03/when-you-buy-stock-heres-what-you-actually-own.html

Rules to Pick Quality Stocks

Posted on by

“For the individual investor, investing in low-cost, tax efficient, broad-based, capitalization-weighted index funds is still the best way to build an investment portfolio.” ~ Burton G. Malkiel, author “A Random Walk Down Wall Street”

Index funds serve investors far better than expensive, tax inefficient, actively managed funds, argues Burton G. Malkiel, author ” A Random Walk Down Wall Street”. By holding a portfolio of all stocks on the market, in the proportion to their relative size or capitalization, the investor would be guaranteed to realize market return.

Index funds generally provide higher net returns for investors than actively managed funds that try to beat the market. “You are much better off not buying individual stocks, but buying an index fund,” Malkiel wrote. When investors talk about “beating the market,” they mean getting returns — over time — that are higher than what the broader market achieves.

Malkiel believes investors are generally better off to buy-and-hold rather than trying to chase particular strategies or make short-term moves. One of the best ways to cut down on both trading costs and capital gains taxes is simply to invest for the long-term. Do your research and buy into stocks slowly so you get comfortable with them. Hold them for decades.

But, if you’re inclined to invest in individual stocks, what follows are Malkiel’s Rules for picking quality stocks

1. Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years.

Malkiel says although it is a difficult job to do, picking stocks whose earnings grow should be the main objective of investors.

“Consistent growth not only increases the earnings and dividends of the company but may also increase the multiple that the market is willing to pay for those earnings. Thus, the purchaser of a stock whose earnings begin to grow rapidly has a potential double benefit—both the earnings and the multiple may increase,” he says.

2. Never pay more for a stock than can reasonably be justified by a firm foundation of value.

Malkiel says investors can roughly gauge when a stock seems to be reasonably priced so they can look at the market price-earnings multiple before making an investment decision.

“Buy stocks selling at multiples in line with, or not very much above, this ratio. Look for growth situations that the market has not already recognized by bidding the stock’s multiple to a large premium. If the growth actually takes place, you will often get a double bonus—both the earnings and the price-earnings multiple can rise,” he says.

Malkiel says investors should be cautious of stocks with very high multiples as many years of growth is already discounted in their prices.

“If earnings decline rather than grow, you can get double trouble—the multiple will drop along with the earnings. Buy stocks whose P/Es are low relative to their growth prospects. If you can be even reasonably accurate in picking companies that do indeed enjoy above-average growth, you will be rewarded with above average returns,” he said.

3. It helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air.

Malkiel says investors are emotional human beings driven by greed, gambling instinct, hope, and fear in their stock market decisions. This is why successful investing demands both intellectual and psychological sharpness.

“The key to success is being where other investors will be, several months before they get there. So ask yourself whether the story about your stock is one that is likely to catch the fancy of the crowd. Can the story generate contagious dreams? Is it a story on which investors can build castles in the air—but castles in the air that really rest on a firm foundation?,” he says.

4. Trade as little as possible.

Malkiel says frequent switching accomplishes nothing but subsidizing the broker and increasing tax burden when investors do realize gains.

“I do not say, “Never sell a stock on which you have a gain.” The circumstances that led you to buy the stock may change, and, especially when it gets to tulip time in the market, many of your successful growth stocks may become overweight in your portfolio,” he says.

Hence, Malkiel says picking individual stocks is a fascinating game and investors should tilt the odds in their favor while protecting themselves from the excessive risk involved in high-multiple stocks.

The odds of anyone consistently beating the markets are very low. Therefore, the recommended strategy includes index funds as the core of your portfolio follow by picking stocks with the money you can afford to put at somewhat greater risk.

While “beating the market” is a pursuit that can lead you to substantially grow your wealth, it’s not healthy to make it the cornerstone of your life. Investing should serve a bigger purpose in your life — like achieving financial independence, helping to send your kids to college, or whatever else matters to you. When you have a nest egg to do that, it’s entirely possible that it’s time to stop focusing on “beating the market” and turn your attention elsewhere.

References:

  1. Burton G. Malkiel, A Random Walk Down Wall Street, W. W. Norton & Company, New York, 2015, pp. 261-262.
  2. https://economictimes.indiatimes.com/markets/stocks/news/burton-malkiels-rules-to-pick-quality-stocks-avoid-irrational-decisions/articleshow/91850408.cms

International Dividend Investing

Posted on by

U.S. dividend stocks continue to sport relatively low yields compared with other assets, especially as bond yields climb amid the Federal Reserve’s rate-hike.

But, there are alternatives assets to U.S. dividend stocks…international stocks:

  • MSCI Europe index was yielding 3.4%,
  • Japan’s Nikkei 225 index was yielding 2%,
  • MSCI Emerging Markets index was at 3.1%.
  • S&P500 was yielding 1.6%.

“Outside the U.S., there’s more of a culture of returning capital to shareholders through dividends rather than buybacks,” says Julian McManus, a portfolio manager at Janus Henderson Investors.

International stocks offer an higher yield than U.S. equities, though there are risks. Early in the pandemic, for example, dividend cuts went much deeper overseas than they did in the U.S.

Additionally, most countries impose a withholding tax on dividends paid to nonresidents. However, those withholding taxes, in many cases, can be credited against the U.S. shareholder’s U.S. tax liability, according to Robert Willens, a New York–based accounting and tax expert.

Another risk international dividends pose is that they can be more apt to get cut in economic downturns.

U.S. investors face a trade-off when it comes to international dividends: higher yields with higher risk.

References:

  1. Lawrence C. Strauss, Why Income Seekers Should Consider International Stocks, Barron’s, August 5, 2022.
    https://www.barrons.com/articles/international-stocks-income-dividends-yield-51659585601