Category Archives: Investing

Difficult Financial Conversations

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The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.

Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments

“Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”

“Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”

References:

  1. https://www.fidelity.com/learning-center/personal-finance/women-talk-money/investing

Things to Consider When Saving, Investing and Building Wealth

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Saving for the future, investing to grow your money and building wealth has little to do with the economic cycle, the stock market valuation or even how much money you earn.

It’s your mindset that can hinder your financial outcome and keep you trapped at an unsatisfying level of financial success. And, unless you can embrace a positive financial mindset, your ability to save, invest and build wealth will be hindered for the rest of your financial life.

The process of investing and wealth-building can be improved by a adhering to the following tips to set yourself up for potential financial success and freedom:

1. Start Early

It’s important to invest a percentage of your salary each month. And, starting early could be a way to dramatically increase your savings over time. The good thing about starting early is you can get the benefits of compound interest!

2. Set Investment Goals

Are you saving up to buy a house? Or putting money away for retirement? Investing with a purpose will help you determine the right strategy and keep you on track to pursue your financial goals. Determine your financial freedom number.

3. Know Your Time Horizon

If you think you’ll need the money within the next five years, you might consider less volatile investments, like fixed income securities. Investing for the long-term (think: 15 or more years)?  You might think about adopting a less conservative strategy.

4. Assess Your Risk Level

Knowing how much risk you’re willing to take on will help you narrow down your investment choices and keep you from letting your emotions guide your investing during periods of high market volatility.

5. Analyze Your Budget

Take your monthly income and take a list of your monthly expenses and create a budget (for instance, the popular 50/30/20 budget). By looking at your spending, you may discover extra money to invest each month.

6. Know Your Investment Choices

Familiarize yourself with different investment types to see what makes sense for you. Are you interested in international stocks and ETFs (exchange-traded funds)? Maybe bonds and mutual funds?

7. Go It Alone or Use an Advisor

If you’re the independent type, you may be drawn to Self-Directed Trading. Or if you prefer an advisor or to automate your investments with a Robo Portfolio.

8. Consider Avoiding Individual Stocks and Bonds; Invest in Market Index Funds

If you’re still learning the ropes, you might be more comfortable sticking to broader based investments like index funds and ETFs. These types of investments require less of your time and are less risky since they invest in numerous companies. As an alternative, an market index fund is an investment that tracks a market index, typically made up of stocks, like the S&P 500, or bonds. Index funds typically invest in all the components that are included in the index they track,

9. Diversify Your Portfolio

If all your investments are your company’s stock, and they go out of business, you’ll wish you had a diversified portfolio. You may reduce your risk by holding a variety of securities that react differently to market changes.

10. Think Long-term

History shows whenever the market takes a dip due to volatility, it eventually bounces back. Be patient and disciplined: Give your money time, make consistent contributions and wait out inevitable market downturns.

11. Don’t Forget High Interest Debt

School loans or credit card debt can make allocating money to investments a tough choice. It’s possible to reduce your debt and invest, and we can help you accomplish both.

12. Get Your Match

Many employers offer a 401(k) match, which can be a great incentive to invest for retirement, helping you to potentially build tax deferred savings.

13. Save and Invest for Retirement

When you’re young, retirement seems like eons away — but for many, regardless of age, now is the best time to start saving for your golden years. You may consider looking into Traditional and Roth IRAs to get started. The typical retirement strategy is built on the pillars of your pension, 401(k) plan, your Traditional IRA, and taxable savings.

14. Automate Your Contributions and Pay Yourself First

Pay yourself first instead of saving what remains after monthly expenses. Set up recurring investments to take advantage of dollar cost averaging. With this strategy, instead of trying to time the market, you invest the same amount each month — sometimes you might buy high, but other times, you’ll purchase low.

15. Beware of Fads

Just because everyone is jumping on the latest meme stock or investing app doesn’t mean you should. Fad stocks are often unpredictable, so if this doesn’t align with your investment strategy, feel confident to sit them out.

16. Be Informed

A prospectus sheet details the performance of a company to help you understand its stock performance. And digital tools can help you track your investments, too. If you cannot dedicate time to read and research, invest in a market index fund which is one of the easiest and most effective ways for investors to build wealth.

17. Don’t Neglect Your Emergency (or Peace of Mind) Fund

Investing grows your money and helps build long-term financial freedom, but you need to be prepared for short-term unexpected expenses. So when setting out on your own, don’t forget to start setting aside funds in an emergency (or peace of mind) fund. This money should be liquid (not invested in securities), so you can access it for unexpected expenses.

18. Watch Out for Fees

Some brokers will charge a commission fee whenever you buy or sell stocks, which add up and make a dent in your overall returns. Trade U.S. stocks and ETFs commission-free with our Self-Directed Trading.

19. Ask for Help

Investing can get complicated. Don’t be afraid to reach out to a financial advisor for advice and support.

20. Adjust as You Go

As life circumstances change, it might make sense to move your money into different types of investment accounts or change up how much you contribute. Any time your financial circumstances change, remember to reassess your financial goals, plan and investments.

21. Create and Follow a Financial Plan

Every living adult needs to financially plan. A financial plan is a comprehensive overview of your financial goals, net worth, cash flow, debt, taxes, risk tolerance, time horizon and it provides the steps you need to take to achieve and manage them.

22. Investing has risks.

No one knows exactly what will happen in the future and investments could lose money, so be aware of how much you are able to invest and be comfortable leaving it there for a period of time since it may have ups and downs.

23. A Wealthy (or Positive Financial) Mindset

It’s imperative that you refocus your mindset and change how you think about yourself, your finances, and the world around you. If you keep thinking about things the same way, you’re going to get the same results. Change in the world around you doesn’t happen until you change yourself. Embrace and grow your positive financial mindset about money, wealth and financial freedom.

Getting Started

Getting started is often the hardest step for most new investor to take, but starting to invest today is advice worth implementing! “The best time to plant a tree is twenty years ago; the second best time is today.” And, what’s true for a tree is also true for growing your money.

References:

  1. https://www.ally.com/do-it-right/investing/things-to-know-when-investing-in-your-20s/
  2. https://www.harveker.com/blog/11-principles-infographic-financial-freedom/

Own Your Net Worth and Cash Flow

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8 out of 10 women will be solely responsible for their financial well-being. Some women will be ready. Many won’t. UBS Wealth Management Report

As women’s life expectancies increase and the rate of divorce for individuals over age 50 continues to climb, more women will find themselves solely responsible for their own current and long term financial well-being.

UBS Wealth Management embarked on research–Own Your Worth–to explore women’s thoughts and feelings, the challenges they faced, lessons they learned and advice they would impart to other women.

With the wisdom of hindsight, nearly 60% of widows and divorcees regrettably wish they had been more involved in long-term financial decisions while they were married, according to UBS’ findings. A full 98% of them urge other women to become more involved early on.

Unfortunately, too many women ignore the advice of widows and divorcees. In direct contrast to the advice, many married women are taking a lesser role in managing the household finances. In a counterintuitive twist, Millennials are the most willing to leave investing and financial planning decisions to their husbands.

Fifty-six percent of married women still leave investment decisions to their husbands, according to UBS. Surprisingly, 61% of Millennial women do so, more than any other generation. What’s more, most women are quite content with their backseat role when it comes to investing and financial planning.

UBS’ research reveals many reasons for women’s abdication, from historical and social precedents to family, gender roles and confidence levels.

So. why do women minimize their role in major financial decisions? According to USB’ research, the reasons vary:

  • Gender roles run deep – Gender roles are ingrained from early in life and often prove hard to shake. In many cases, married couples are simply imitating the gender roles they witnessed growing up.
  • Men are still the breadwinners – Within families, 70% of men are the main breadwinners, in part because of the gender pay gap and the career breaks women take to raise children.
  • Time constraints are challenging – Whether married or not, women have many demands on their time. They take on the majority of household duties, including childcare and chores, as well as paying bills and tracking spending.
  • Competence vs. confidence – Together, history and society have conspired to affect women’s financial confidence. Both women and men think men know more about investing, and women are less confident than men in making major financial decisions. Women consistently underestimate their own abilities while overestimating what is required to be financially involved.

Yet, most study respondents participated in some financial decisions while married, from handling cash flow and bills to saving and investing. Regardless of their level of engagement, however, most agree it wasn’t enough. The research shows:

  • 59% of widows and divorcees wish they had been more involved in long-term financial decisions
  • 74% don’t consider themselves very knowledgeable about investing
  • 64% of widows blame themselves for not being more financially involved (53% of divorcees)
  • 56% of widows and divorcees discover financial surprises
  • 53% would have done fewer household chores to find more time for finances
  • 79% of women who remarry take a more active role

USB recommends three actions to take today

The advice from women who have been there is clear: The time to become involved in your family’s present and future financial well-being is today, not when some unforeseen events happen in the future.

Women are encouraged to get involved in their financial well-being as a form of self care, much in the same way you would take care of your health by:

  1. Owning your worth – Know where you stand and what you want for the future. Take the time to add up your assets and liabilities, like loans, credit and other debts, and ask for full transparency from your partner.
  2. Finding your voice – Start the conversation with your partner. Talking about money is considered taboo to some couples, particularly before they are married. But if you found yourself alone tomorrow, do you know what you’d do to make sure you’re financially secure? There is a tremendous benefit to having open communication about money with a trusted confidante.
  3. Setting an example – Model financial partnership for your family and loved ones. According to our survey, women are repeating the gender roles they saw growing up. As you begin taking a more active role in your finances, you can set an example of financial partnership for the younger generation.

Though women are aware of their increasing longevity and the financial needs associated with it, most tend to focus their efforts on short-term financial responsibilities such as managing the household’s day-to-day expenses and paying the bills.

In contrast, taking charge of long-term financial decisions, such as investing, financial planning and insurance, can have far more impact on their future than balancing a checkbook.

By sharing decisions jointly, both women and men can face the future with optimism—and set an example of financial partnership for generations to come.

Almost 60% of women do not engage in the most important aspects of their financial well-being: investing, insurance, retirement and other long-term planning. USB Wealth Management Report

References:

  1. https://www.ubs.com/content/dam/WealthManagementAmericas/documents/2018-37666-UBS-Own-Your-Worth-report-R32.pdf
  2. https://www.ubs.com/us/en/investor-watch/own-your-worth/_jcr_content/mainpar/toplevelgrid_1797264592/col2/teaser/linklist/link_2127544961.2019551086.file/PS9jb250ZW50L2RhbS9XZWFsdGhNYW5hZ2VtZW50QW1lcmljYXMvZG9jdW1lbnRzL293bi15b3VyLXdvcnRoLXJlcG9ydC5wZGY=/own-your-worth-report.pdf

Growing Your Money

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When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.

It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.

People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.

But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.

As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.

Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).

Stock’s Value vs. Price

Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.

A company’s stock price has nothing to do with its value, because the share price means nothing on its own.

The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.

The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.

Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.

Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.

Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,

References:

  1. https://www.thebalance.com/the-complete-beginner-s-guide-to-investing-in-stock-358114

Sequence of Returns Risk in Retirement

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A stock market pullback can pose a risk early in retirement.

Retirees face many risks when investing for retirement. Markets crash, inflation can eat into your returns, you might even worry about outliving your savings. And, there’s another big retirement risk: Sequence of returns risk.

Down markets can pose significant “sequence of returns” risk in the early years of retirement. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor, according to Investopedia.

A “sequence of returns” risk is basically about how the order, or sequence, of stock returns over time — combined with your portfolio withdrawals — can impact your balance down the road.

Once you start withdrawing income, you’re affected by the change in the sequence in which the returns occurred. During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime.

Timing is everything. Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.

“If there’s a big loss in the market and you’re taking withdrawals, you could be taking more from your portfolio than what it can make up for,” said certified financial planner Avani Ramnani, managing director at Francis Financial in New York. “If that happens early in retirement … the recovery may be very weak and put you in danger of not recovering at all or being lower than where you would have been and therefore jeopardizing your retirement lifestyle.”

One of the basic rules of investing is that a long-term strategy is self-correcting. And, for long-term investors — those whose retirement is many years or decades away — such market drops matter less because there’s time for their portfolios to recover from this risk before they need to start relying on that money for cash flow in retirement.

Retirement is a long game.

Since running out of money in retirement is the primary concern for most retirees, fortunately, there are options for mitigating the risk:

  • Plan to spend more conservatively since the less you spend consistently, the less you have to withdraw overall.
  • Withdraw and spend less when your portfolio performance is suffering. 
  • Reduce the risk in your portfolio by creating a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.
  • Set aside assets outside your investment portfolio that can support your spending needs when stocks are underperforming.

You may simply be able to meet your goals without taking on the risk that comes with stocks.

Key Takeaways

Sequence of return risk is basically the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of your portfolio. Thus, timing is everything, and in retirement early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain you in retirement.

The recommended way to mitigate sequence of returns risk when you can’t predict future market performance or future rates of inflation is by managing spending and/or keeping a portion of your portfolio in liquid assets, such as cash or bonds, to ride out the market downturn.

When market returns are high and inflation is low, retirees can distribute more from their portfolios, according to Forbes Advisor Staff Editors Rob Berger and Benjamin Curry. When market returns are negative and inflation is higher than expected, retirees reduce the amount of their annual distributions.

Remember, no one can forecast market performance or economic inflation. Yet, by managing your spending, you can adjust annual withdrawal amounts to reflect inflation and market returns.

References:

  1. https://www.investopedia.com/terms/s/sequence-risk.asp
  2. https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
  3. https://www.cnbc.com/2021/09/21/stock-market-pullback-is-a-big-risk-early-in-retirement-what-to-know.html
  4. https://www.forbes.com/advisor/retirement/sequence-of-returns-risk/

Best Investment Advice – Mark Cuban

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“You can’t buy health and you can’t buy love.” Warren Buffett

“The best investment you can make is paying off your credit cards, paying off whatever debt you have.” Mark Cuban

Cuban lived for years on the budget of what he referred to as “a broke college student”, driving lousy cars, eating lousy food and saving, saving, saving. He believed that overspending can be an unnecessary cause of stress, and he advocates for living like a student if that’s all you can truly afford. “Your biggest enemies are your bills,” Cuban wrote. “The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. The cheaper you can live, the greater your options.”

A forward-thinking investor and notorious taker of calculated risks, he built his wealth slowly over time and he derived as much pleasure out of saving as he did spending.

Here is top investing advice from Mark Cuban to builde wealth and achieve financial freedom:

  • Pay Off Debt, Then Invest – Paying off debt before you invest delivers the best returns for your money (capital). “The best investment you can make is paying off your credit cards, paying off whatever debt you have. If you have a student loan with a 7% interest rate, if you pay off that loan, you’re making 7%, that’s your immediate return, which is a lot safer than picking a stock, or trying to pick real estate, or whatever it may be,” Cuban said.
  • Never Invest To Get Out of Trouble – Just like you should never gamble if you absolutely have to win, the same rules apply to investing as a remedy for financial trouble. “If you are buying because you need the price to go up and solve a financial hole you are in, that is the EXACT WRONG time to trade,” Cuban commented. “And we all have to respect people who choose to sell because they need to. Bills don’t care what the market does. Get right and come back later.”
  • Don’t Invest In the Stock Market – Cuban disagrees with investors who think capitalism’s greatest wealth-generation machine is the stock market. “Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.”
  • But If You Invest in the Stock Market, Buy an Index Fund – Avoid picking your own stocks or buying into expensive mutual funds — buy an index fund. “For those investors not too knowledgeable about markets, the best bet is a cheap S&P 500 fund,” according to Cuban.
  • Buy a Stock You Believe In and Hold on for Dear Life – Ignore short term volatility and market gyrations. “When I buy a stock, I make sure I know why I[‘m] buying it. Then I HODL until … I learn that something has changed,” using text-slang acronym for “hold on for dear life.”
  • Take Risks — But Play It Safe 90% of the Time – Without risk, there can be no reward, and the bigger the risk, the bigger the potential payout. Cuban suggests that investors to go for broke and swing for the fences — but only with a sliver of their investments. “If you’re a true adventurer and you really want to throw the hail Mary, you might take 10% and put it in Bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money,” Cuban commented. “It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes. It’s a flyer, but I’d limit it to 10%.”
  • If One of Those Risks Is Crypto, Stick With the Big Boys – If you’re considering jumping on the cryptocurrency bandwagon, you’d be wise to place your bets on the biggest names in the game because Cuban sees way too many similarities to 1999 for comfort. “Watching the cryptos trade, it’s exactly like the internet stock bubble. exactly. I think Bitcoin, Ethereum, a few others will be analogous to those that were built during the dot-com era, survived the bubble bursting and thrived, like AMZN, EBay, and Priceline. Many won’t,” commented Cuban
  • If You Don’t Understand an Investment, Walk Away –  Investing fundamentals dictates against investing in things you don’t understand. “If you don’t fully understand the risks of an investment you are contemplating, it’s okay to do nothing,” Cuban wrote. “No. 1 rule of investing: When you don’t know what to do, do nothing.” Always invest in what you know.
  • Knowledge Is the Best Investment – The best way to avoid investing in something you don’t understand is to understand whatever you’re invested in. “At MicroSolutions it, “knowledge advantage”. gave me a huge advantage. A guy with little computer background could compete with far more experienced guys just because I put in the time to learn all I could. I read every book and magazine I could. Heck, three bucks for a magazine, 20 bucks for a book. One good idea that led to a customer or solution paid for itself many times over.”

You must be able to earn, save, and manage your spending, then you can start investing and building wealth.

Cuban was influenced by a book called “Cashing in on the American Dream: How to Retire by the Age of 35.”“The whole premise of the book [Cashing in on the American Dream] was if you could save up to $1 million and live like a student, you could retire” Cuban said. “But you would have to have the discipline of saving and how you spent your money once you got there. I did things like have five roommates and live off of macaroni and cheese and really was very, very frugal. I had the worst possible car.”

  1. https://www.gobankingrates.com/money/wealth/millionaire-money-rules/
  2. https://www.gobankingrates.com/investing/strategy/mark-cubans-top-investing-advice

Believe in the Power of Compounding

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“Compounding is the eighth wonder of the world.” Albert Einstein

It is said that Albert Einstein once noted that the most powerful force in the universe is the principle of compounding. In simple terms, compound interest means that you begin to earn interest on the interest you receive, which multiplies your money at an accelerating rate. This is one significant reason for the success of many top investors.

Believe in the power of compounding

The key to successful investing is patience to search and wait for great companies that are selling for half or less than what they were worth (intrinsic value), and to hold the investment for the forever. The task is to try to buy a dollar of value for a fifty cents price, and to hold the investment for the long term.

  • Compound interest is the interest you earn on interest.
  • Compounding allows exponential growth for your principal.
  • Compounding interest can be good or bad depending on whether you are a saver or a borrower.
  • Think of stocks as a small piece of a business
  • Think of Investment fluctuations, volatility, are a benefit to a patient investor, rather than a curse.
  • Focus your attention on businesses where you think you understand the competitive advantages
  • The more people respond to short term events allow patient and value investors to make a lot of money.
  • Buy stocks when things are cheap. It’s important to control your emotions.

The key is that if you spend less than you earn, you put something away, and that little something can become more and more and eventually what you want to do is you want to be your own boss.” Mohnish Prbrai

Four important factors that determine how your money will compound:

  1. The profit you earn on your investment.
  2. The length of time you can leave your money to compound. The longer your money remains uninterrupted, the bigger your fortune can grow.
  3. The tax rate and the timing of the tax you have to pay to the government. You will earn far more money if you do not have to pay taxes at all or if the taxes are deferred.
  4. The risk you are willing to take with your money. Risk will determine the return potential, and ultimately determine whether compounding is a realistic expectation.

Rule of 72

The Rule of 72 is a great way to estimate how your investment will grow over time. If you know the interest rate, the Rule of 72 can tell you approximately how long it will take for your investment to double in value. Simply divide the number 72 by your investment’s expected rate of return (interest rate).

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

The power of compounding is truly visible with billionaire investor Warren Buffett, the Oracle of Omaha. He first became a billionaire at the age of 56 in 1986. Today, his net worth is over $100 billion at the age of 90-plus. And that’s after he donated tens of billions of stock to charity. His wealth is due to compounding, over 99% of the billionaire’s net worth was built after the age of 56.

When you understand the time value of money, you’ll see that compounding and patience are the ingredients for wealth. Compounding is the first step towards long-term wealth creation.

References:

  1. https://www.thebalance.com/the-power-of-compound-interest-358054
  2. https://www.valuewalk.com/2020/07/power-compounding-getting-rich/

Peter Lynch’s Investing Maxims

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Here are several investing maxims that every investor should memorize and insight repeatably to pick winning stocks, according to Peter Lynch:

  1. A good company usually increases its dividend every year.
  2. You can lose money in a very short time; it takes a long time to make money.
  3. The stock market really is not a gamble; as long as you pick good companies that you think will do well and not because of the stock’s price.
  4. You can make a lot of money in the stock market; but then again, you can lose a lot of money.
  5. You have to research the company before you put your money into it.
  6. When you invest in the stock market, you should always diversify.
  7. You should invest in several stocks becasue for every five you pick, one will do very great, one will be very bad, and three will be okay.
  8. You should never fall in love with a stock…you should always have an open mind.
  9. You shouldn’t just pick a stock: you should do your homework.
  10. Buying stocks of utility companies is good because it gives you higher dividends, but you will make more money in growth stocks.
  11. Just because a stocks goes down doesn’t mean it can’t go lower.
  12. Over the long term, it is better to buy stocks in small companies.
  13. You should not buy a stock because it is cheap, but because you know a lot about it.

Look for shares that offer “growth at a reasonable price” which helps you to avoid two common investment mistakes:

  1. Either paying too much for fast-growing companies;
  2. Or buying seemingly cheap firms without realizing that they have stopped growing.

https://youtu.be/hKdtS_0vQ48

References:

  1. https://www.safalniveshak.com/value-investing-course-peter-lynch-way
  2. https://sites.google.com/site/changechina2050/investment/learn/peter-lynch-s-investment-rules

Financial Metrics for Evaluating a Stock

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“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” Peter Lynch

Anyone can be successful investing in the stock market. But, it does take thorough research, patience, discipline and resilience. And, it’s important to appreciate that “Behind every stock, there is a company. Find out what it’s doing”, says Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990 and achieved an impressive return which reportedly averaged over 20% per year.

With a long-term view to investing, Lynch would patiently wait for the company to become recognized by Wall Street for its growth, which subsequently unleashed an explosive rise in its stock price as smart money and institutional investors rush to buy stock.

In his book “One Up On Wall Street”, he reveals his principles and metrics for successful investing. Here are 11 financial metrics investors can utilize to evaluate a company’s value:

  1. Market Cap – Shows the current size and scale of the company. “If a picture is worth a thousand words, in business, so is a number.” Peter Lynch
  2. Strong Balance Sheet (Cash on Hand / Long Term Debt to Equity) – Shows how financially sound a business has become and its capacity to withstand an economic downturn. Determine if the company’s cash has been increasing and long term debt has been decreasing?
  3. Sales and Earnings Growth Rates – Shows if the business model works & current growth rate
  4. Free Cash Flow – Shows if company generating or burning through cash
  5. Returns on Capital (ROE / ROIC / ROA)- shows capital efficiency of business
  6. Margins (Gross Profit Margin / Operating Margin / Profit Margin / Net Income) – Shows current profit profile of products, spending rates, & potential for operating leverage
  7. Total Addressable Market – What is market size and long term growth potential for the company.
  8. Long Term (5+ years) Stock Performance vs. market – has the stock created or destroyed value for shareholders. “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” Petere Lynch
  9. Current Valuation (Price to Sales / Price to Earnings / Price to Book / Price to FCF) – How expensive or inexpensive is the stock price.or is the company reasonably priced. “If you can follow only one bit of data, follow the earnings (assuming the company in question has earnings). I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.” Peter Lynch
  10. Mission and Vision Statement – Understand why the company exist.  What is it doing. “Behind every stock is a company. Find out what it’s doing.” Peter Lynch
  11. Insider Ownership – Do insiders have skin in the game. SEC Filings. Information available on proxy statement.

Additionally, it is important to figure out:

  1. What is changing
  2. What is not changing
  3. Is there an underappreciation for either. “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.” Peter Lynch

Do that well, move on #3, you’re the best investor in the world.

As an investor, unless you understand the underlying business of a company, you will not be able to hold its stock when the price is falling. You could end up selling a great company out of fear – even though its price will recover in the future and give you great returns in the years to come. The ability to hold a good company even when its stock price is falling or undergoing a time correction – will play a crucial role in you becoming a successful investor.

In the long run, the stock price will go up only if the business of the company does well.

In Peter Lynch’s own words “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies”

If you like a stock, buy small quantity of shares. Study the company in more detail. Buy more shares if you like its business. As your understanding of the business increases, your conviction (confidence) will also increase, this will allow you to give higher allocation in your portfolio.

Categories of Stocks in the Stock Market

Peter Lynch divided different stocks into six categories

Slow Growers – Slow growers are those stocks that have a slow growth rate i.e. a low upward slope of earnings and revenue growth.These slow growers can be characterized by the size and generosity of their dividend. According to Peter Lynch, the only reason to buy these stocks are dividends.

The Stalwarts – The Stalwarts have an average growth rate as that of industry and are usually mid to large companies. They have an earnings growth between the 8-12 percent CAGR range. According to Peter Lynch, investors can get an adequate return from these stocks if they hold these stocks for a long time.

The Fast Growers – The fast growers are generally aggressive companies and they grow at an impressive rate of 15-25% per year. They are fast-growth stocks and grow at a comparatively faster rate compared to the industry average and competitors. However, Peter Lynch advises that one should be open-eyed when they own a fast grower. There is a great likelihood for the fast growers to get hammered if they run out of steam or if their growth is not sustainable.

The Cyclicals – Cyclical are stocks that grow at a very fast pace during their favorable economic cycle. The cyclical companies tend to flourish when coming out of a recession into a vigorous economy. Peter Lynch advises investors to own the cyclical only on the right part of the cycle i.e. when they are expanding. If bought at the wrong phase, it may even take them years before they perform. Timing is everything while investing in cyclical stocks.

The Turnarounds – The turnarounds are characterized as potential fatalities that have been badly hammered by the market for one or more of a variety of reasons but can make up the lost ground under the correct circumstances. Holding turnarounds can be very profitable if the management is able to turn the company as these stocks can be bought at a very low valuation by the investors. However, if the management fails to bring back the company on track, it can be very troublesome for the investors.

Asset Plays – Asset Plays are those stocks whose assets are overlooked by the market and are undervalued. These assets may be properties, equipment, or other real assets that the company is holding but which is not valued by the investors when there has been a general market downturn. The real value may be worth more than the market capitalization of the company. Peter Lynch suggests owning a few of these stocks in your portfolio as they are most likely to add a lot of value to your portfolio. However, the biggest significant factor while picking these stocks is to carefully estimate the right worth of the assets. If you are able to do it, you can pick valuable gems.

“Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.” Peter Lynch

Infinity income – When your income from investments is higher than your expenses, you might be able to live off those returns for 10 years, 30 years, 50 years… or forever!

References:

  1. https://stockinvestingtoday.blog/the-investing-style-of-peter-lynch?
  2. https://www.thebalance.com/peter-lynch-s-secret-formula-for-valuing-a-stock-s-growth-3973486
  3. https://goldenfs.org/wp-content/uploads/2020/12/summary-One-Up-On-Wall-Street-Peter-Lynch-2-scaled.jpg

Four Secret to Investing Outperformance – Motley Foolo

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“The average investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points.”

The average retail investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points, a DALBAR study shows. The lag is a result of bad behaviors by investors because investors jumped into funds when they were already at a high mark—with lower returns in their future—and dumped funds when they were on the way down, without waiting for a rebound.

The returns received by investors vs. returns earned by funds based on Morningstar data

There are four secrets to outperformance, according to Motley Fool, and the secrets are simpler than you might expect.

  • You take market returns – According to a 2020 study by financial research company Dalbar, average investors earned about 5% annual growth in their accounts over the last 30 years. That’s roughly half the average growth rate of the S&P 500 in the same time frame. You can avoid lagging the S&P 500 index by 4% to 5%. If you invest in S&P 500 index funds, you should see performance that’s only a fraction below the index.
  • You stay calm – The Dalbar report finds that 70% of the average investors’ underperformance occurred in volatile markets. Specifically, most of the investors who performed the worst sold their securities when the market was in crisis. Had they held on to those investments, they would have ultimately fared better. The takeaway here is it’s usually best to stay calm and stay invested.
  • Selectively, you do the opposite of the crowd – When everyone else is selling, it’s often a good time to buy. By following best practices such as not investing in a downturn unless your finances are in order; not expecting a quick return; and investing in a “quality” stock of an established company with low or manageable debt, experienced leadership, and consistent cash flows and profits.
  • You buy and hold  – The Dalbar report also concludes that a buy-and-hold strategy with the S&P 500 would have returned more than the average investor’s portfolio. Buy-and-hold investing is the practice of investing in stocks and funds that you intend to keep for years or decades. To implement this approach, pick quality stocks or funds and hold them indefinitely. You might sell if the company changes in some fundamental way, but you won’t sell because the market’s having a temporary crisis.

Hopefully, these four secrets to beating the average investor sound easy. They are, as long as you can resist making emotional decisions.

The average investor can get anxious about market volatility, and that’s often when shortsighted decisions are made. Even investors who can tune out market noise sometimes find it hard to avoid tinkering with a portfolio that doesn’t seem to be growing as anticipated.

When it comes to investing, patience is a virtue.

References:

  1. https://investor.vanguard.com/investing/portfolio-management/performance-overview
  2. https://www.fool.com/investing/2021/07/22/4-secrets-to-beating-the-average-investor/