Long Term Investing is about Future Cash Flow

Posted on by

Ultimately, in long term investing, fundamentals and cash flow are paramount for an investor (an investor is a business owner).

Years ago, a hockey game between the Boston Bruins and Edmonton Oilers had been paused for some technical issues with the stadium lights. To kill some time, the announcers started interviewing people including the Edmonton Oilers, Wayne Gretzky, undoubtedly the world’s greatest hockey player at the time. The announcer stated that Gretzky wasn’t the biggest guy in the league, or the strongest, or the fastest or the toughest, yet he was regarded as the greatest hockey player in the world.  So, how then did Gretzky explain his own genius?  Gretzky simply replied:

“I don’t go where the puck is; I go where the puck is going to be!”

In a simple one liner, Gretzky confirmed that his success did not come from chasing the puck. Instead it came from staying one step ahead and by anticipating  where the puck would  likely go next.

Thus, it is important to look at the future potential of a stock or investment instead of focusing solely on past performance. Long term investing is about looking from the perspective of a business owner at a company’s fundamentals and cash flow.

Cash Flow

In finance, cash flow (CF) is the term used to describe the amount of cash (currency) that is generated or consumed in a given time period by a business. It has many uses in both operating a business and in performing financial analysis. In fact, it’s one of the most important metrics in all of finance and accounting.

Every investment is the present value of all future cash flow.

Many investors are lured by short term performance.  They are interested in finding the latest, hottest, top performing stocks and investments driven by the financial entertainment media.  However, investors who buy those top performing investments today may not necessarily enjoy the same returns in the future. In investing, it’s essential you approach buying stocks like a business owner.

Cash flow is not the same as net income (or profit).

While cash flow describes the movement of money into and out of your business, profit is the surplus of money your business has after you’ve subtracted the revenue from your expenses.

The inflow and outflow of cash into and out of a company reflects the health of that company’s operations. That’s why it’s important as an investor (business owner) to be able to understand a company’s fundamentals and cash flow.

Cash flow is more dynamic in concept then profit – as it measures the movement of money – then profit, which simply demonstrates how much money you have left over after your expenses have been deducted. Even a profitable business can fail if a business doesn’t have a healthy cash flow.

Without a healthy cash flow, profit is meaningless.

Many successful companies (like Amazon, Twitter, Uber and Yelp) actually existed a long time without profits, but no company can survive without a healthy cash flow. For small to mid-cap companies, profit is still important, but cash flow is vital.

If you don’t have cash on hand, you can’t pay for your company’s basic needs like rent, employee salaries, electricity or equipment. If you don’t have enough cash on hand to replenish inventory or pay operating expenses, you will become unable to generate new sales. If you can’t afford operating expenses, your company will eventually fail. That’s why cash flow is such an accurate predictor of an investment or company’s success.

Cash Flow From Operating Activities

The operating activities reflects how much cash is generated from a company’s products or services. Positive (and increasing) cash flow from operating activities indicates that the core business activities of the company are thriving.

Cash Flow From Investing Activities

Investing activities include any purchase or sale of an asset, loans made to vendors or received from customers or any payments related to a merger or acquisition is included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

Cash Flow From Financing Activities

Cash flow from financing activities shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends. Some examples are: issuance of equity (shares), payment of dividends, issuance of debt (e.g. bonds) and repayment of debt.

Free Cash Flow

One of the most important financial number is free cash flow (FCF). It is the cash flow available to all the creditors and investors in a company, including common stockholders, preferred shareholders, and lenders.

You can calculate FCF, if not provided, quickly. FCF = Operating cash flow – capital expenditures (aka. CAPEX). Simply, capital expenditures on the CFS is the line item “Purchase of Property, Plant and Equipment” (PPE). the PPE expenditure is the “maintenance amount” of running a business. Though it says “purchase”, this includes repairing, renewal and/or maintenance of the companies assets.

No company can survive without a healthy cash flow.

Generally, you want to see a steady increase in cash flow from operations. If this number is growing (while debt being in control) at a rate of 10% or more annually.

However, past performance cannot guarantee future results. In other words: don’t assume that an investment is going to continue to perform well in the future simply because it’s done well during a specific time period in the past. 

Two of the key ingredients for success in investing is understanding that cash flow is king and your a business owner when you purchase a company’s stock.

References:

  1. https://ignorethestreet.com/cash-flow-statement-fundamentals/
  2. http://www.momentumcapitalfunding.com/cash-flow-fundamentals-business-owners/
  3. https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-flow/
  4. https://www.powerofpositivity.com/make-you-rich-quotes/

February is American Heart Month

Posted on by

February is American Heart Month, an opportunity to raise awareness to the fact that heart disease is the leading cause of death for men and women in the U.S.

American Heart Month is observed to raise awareness on the importance of a healthy heart and to encourage healthy habits that help reduce the risk of heart disease. It is an ideal time to remind Americans to focus on their heart health and encourage them to get their families, friends and communities involved.

Heart disease affects all ages, genders, and ethnicities.

Despite the significant progress researchers have made in understanding of heart disease risk factors. (such as high blood pressure, bad cholesterol, smoking, being overweight or obese, and type 2 diabetes), heart disease affects all ages, genders, and ethnicities. Moreover, heart disease continues to exact a heartbreaking toll — a burden disproportionately carried by Black and Brown Americans, American Indians and Alaska Natives, and people who live in rural communities.  

Every year, 1 in 4 deaths in the U.S. is attributable to heart disease, and the vast majority of those deaths can be prevented. By taking preventive measures, you can lower your risk of developing heart disease and also improve your overall health and well-being. 

Heart Disease, Stroke and other Cardiovascular Diseases

The human heart is responsible for pumping blood throughout our body, supplying oxygen and nutrients and removing toxins and waste. Weighing between 8 and 12 ounces, the heart is a mighty organ divided into four chambers that work together to pump blood in and out. The heart gets oxygenated blood from the lungs and pumps it throughout the rest of the body.

Heart disease occurs when the arteries leading to the heart become clogged. Although heart disease has been around for thousands of years, health experts do know that many aspects of modern life exacerbate risk factors and make people more prone to heart disease and heart failure. Heart disease can affect everyone, but taking stock of your prior health risks, activities and diet can help you reduce your risk.

Even in a pandemic, Cardiovascular Disease (CVD) continues to be the leading cause of death in the United States, and mortality rates are on the rise among younger demographic within the population. For example:

  • Cardiovascular disease (CVD), listed as the underlying cause of death, accounted for 874,613 deaths in the United States in calendar year 2019.
  • CVD claim more lives each year in the United States than all forms of cancer and Chronic Lower Respiratory Disease (CLRD) combined.
  • In 2015 to 2018 in the United States, 58.8% of non-Hispanic (NH) Black females and 60.1% of NH Black males had some form of CVD. This race category had the highest prevalence of CVD.
  • CVD accounted for approximately 19.05 million global deaths in 2020

Heart disease can often be prevented when you make healthy choices and manage your health conditions. The warning signs for heart disease have been known to appear when people are as young as 18. Red flags such as high blood pressure should be taken seriously and healthy habits should be adopted.

You can take steps to protect your heart. Additionally, you can work with your doctor to make a plan and your doctor can help by:

  • Checking your blood pressure and cholesterol numbers — and teaching you how to check your numbers at home
  • Sharing advice for healthy eating and physical activity
  • Supporting you in other heart-healthy changes, like quitting smoking
  • Connecting you with specialists to treat heart problems and other conditions
  • Prescribing medicines if you need them

If you haven’t been keeping up with regular doctor visits, you’re not alone. Many people have postponed doctor visits during the COVID-19 pandemic. But now’s the time to get back on track! Don’t wait — schedule an appointment today.

Heart Healthy Steps

Engaging in regular physical activity, maintaining a healthy diet and weight, managing stress, avoiding smoking and vaping, and getting quality sleep each night can all reduce the risk of heart disease and help people live longer, healthier lives.  

While it is essential to see a health care professional if you have symptoms or risk factors related to heart disease, research shows that taking a little time each day to promote a healthy lifestyle can help improve your long-term heart health.

Subsequently, you can prevent heart disease and stroke by taking small, healthy steps like moving your body and eating healthy.

  • Simple Ways to Get Active – Physical activity is key to a healthy heart. And when you’re active, it’s easier to keep doing all the things you love — like traveling, seeing friends, and walking around the neighborhood.
  • Tips for Healthy Eating – Small changes in your eating habits make a big difference in your heart health — and there’s no one right way to eat healthy! You can find healthy eating habits that work for you.
  • Heart-Health Role Model – Kids love to imitate their parents — so show your family how you’re taking steps to protect your heart.

Continuing the fight against cardiovascular disease is crucial to improving the Americans health.  During American Heart Month, we must recommit ourselves to ensuring a healthier future for all Americans.

How to observe American Heart Month:

  1. Take up a heart-healthy habit — Staying active, eating healthy, and watching our weight are all important parts of maintaining a healthy cardiovascular system. Pick a new heart-healthy habit like jogging or substituting sodas with water and try to stick to it for a whole month.
  2. Educate yourself — Learn about the risk factors for heart disease, the ways you can prevent them, and the lifestyle choices that can help you stay healthy.
  3. Get your cholesterol tested — If you’re worried you might be at risk for heart disease, ask your doctor to perform a simple cholesterol test to let you know if you’re at risk and should make adjustments to your diet.

References:

  1. https://nationaltoday.com/american-heart-month/
  2. https://www.nationalforum.org/heart-month-2022/
  3. https://www.cdc.gov/dhdsp/index.htm
  4. https://www.whitehouse.gov/briefing-room/presidential-actions/2022/01/31/a-proclamation-on-american-heart-month-2022/

Financial Planning Basics

Posted on by

Investment and financial planning can help you maintain a modest retirement — even amid COVID-19.

The latest Wells Fargo Retirement Study, underscores investment and financial planning’s role in how investors feel about their overall financial health. According to the study, those with specific financial plans indicated they save more for retirement, tap emergency sources less, and feel more in control of their finances and less stressed than those without the “planning mindset.”

“It is amazing the difference it [financial planning] can make when a client sees what the reality is and has a plan to help guide them,” Wells Fargo Financial Advisor Jenny Radke said.

“The earlier you can start planning financially and envisioning the future, the better,”

Yet, people tend to fall into two camps, according to Charles Schwab: non-planners and planners.

  • Non-planners typically save when they can, perhaps putting a small amount into a workplace retirement plan, hoping that everything will work out in the long run.
  • Planners generally know what they’re saving for, how much they need to put away, and how long it will take them to reach their goals.

Only 33% of Americans have a written financial plan, according to Schwab’s 2021 Modern Wealth Survey. Of the rest, almost half said they didn’t have enough money to make a plan worthwhile. Others said it was too complicated, or they didn’t have time to develop a plan.

Planning for anything can seem like a big headache and a lot of effort. It’s natural to wonder: Does financial planning really help?

Research show that it does. Here are five reasons why:

1. A written financial plan increases confidence

Our survey found that 65% of people with a written financial plan say they feel financially stable, while only 40% of those without a plan feel the same level of comfort. Fifty-four percent of planners felt “very confident” they would reach their financial goals, compared with only 18% of non-planners.

Having a written financial plan gives you a measurable goal to work toward. Because you can track your progress, you can reduce doubt or uncertainty about your decisions and make adjustments to help overcome obstacles that could derail you.

2. A financial plan can help jumpstart your savings, even with a small amount of money

The most common reason cited for not having a plan is “I don’t have enough money.” This is a misconception. Planning, even in small steps, doesn’t take large sums of money to start.

In fact, financial planning can have a profound impact on lower-income households by helping people improve their saving and budgeting habits. A written plan helps savers prioritize their goals and, as mentioned earlier, provides a way to gauge success.

3. A financial plan can help you create an investment portfolio

Your financial plan can give you the full lay of the land: You’ll know what your goals are, how much time you have to reach them, and how comfortable you are with risk. Once you have a comprehensive view, you can figure out how to reach each individual goal.

That will involve both saving—setting aside money you’ll need in the short term or for emergencies—as well as investing, which is setting aside money you’ll need in the long term and that, ideally, can grow. And with your financial plan as a roadmap, you’ll be better able to make thoughtful investing decisions—instead of heading out without a sense of direction and just hoping for the best.

4. A financial plan can lead to better habits

Financial planning isn’t just about investing; it’s about what money can do for your confidence, security, and quality of life—such as the protection that life insurance offers or the peace of mind that an emergency fund can provide. Research also shows that planning supports sound money habits as well.

Americans who have a financial plan also have healthy money habits

Source: 2021 Schwab Modern Wealth Survey

There are good investing habits, and there are healthy money habits. A written financial plan can lead to both.

5. Planning can be tailored to every personality type and investment style

Your approach to life can influence every decision you make, including those that involve your finances. By understanding the type of person you are with regard to planning, you can take proper steps toward reaching your financial goals. 

A financial plan is the foundation on which to build, understand and achieve your wealth goals and achieve financial freedom. Having a written plan can increase confidence and result in more constructive financial and investing behavior.

References:

  1. https://stories.wf.com/envisioning-retirement-through-investment-planning
  2. https://www.schwab.com/resource-center/insights/content/does-financial-planning-help

Focus on Growth (at a reasonable price) Stocks

Posted on by

“You should be looking for the next great growth stock.” Olivier Garret, founding Partner and CEO of RiskHedge

Cheap” Stocks Are Often The Worst Stocks You Can Own

By “cheap,” we mean stocks that have a low stock price in relation to their sales or earnings. If a stock trades for $20/share and earns $4/share, it’s cheap. If it trades for $200/share and earns $4/share, it’s not cheap.

People are drawn to “cheap” stocks for the same reason they flock to the Macy’s Department store clearance rack. It feels good to get a deal. Americans love nothing more than getting lots of “bang for their buck.”

But in investing, this can be a dangerous mistake. These stocks are cheap for a reason! They’re usually in dying industries or are a declining business. So they’re either barely growing, or shrinking.

“Cheap” does NOT equal “safe” in the stock market. Focusing on “cheap” stocks is not a wise investment strategy. Instead, you should be looking for the next great growth stock at a reasonable price.

Growth Stocks

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett

Growth stocks are companies that increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole. Growth stocks are great buys, especially if you can identify those with fair valuations, excellent fundamentals and capitalize on their momentum. Focus on one of the fastest-growing companies on the planet.

In the current environment where each of these stock picks offers a good balance of growth and value, it’s a great play to diversify your portfolio.

Unlike the cheap stocks some growth stocks are growing like crazy.

High-growth stocks tend to be more expensive than the average stock in terms of valuation metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios. Yet, despite their premium price tags, the best growth stocks can still deliver fortune-creating returns to investors as they fulfill their awesome growth potential, according to Motley Fool.

Earnings Growth

Earnings and cash flow growth are arguably the two most important factor, as stocks exhibiting exceptionally surging profit levels and cash flow tend to attract the attention of most investors. And for growth investors, double-digit earnings and cash flow growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.

Impressive Asset Utilization Ratio

Asset utilization ratio — also known as sales-to-total-assets (S/TA) ratio — is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.

Investing in growth stocks can be a great way to realize life-changing wealth in the stock market. The key, of course, is to know which growth stocks to buy — and when, and to be patient.

Even renown value investor, Warren Buffett, uses an approach that swings towards growth. This quote from Buffett is a classic articulation of the strategy: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In other words, price is an important part of any investment, but the strength of the business arguably matters just as much, if not more.

References:

  1. https://www.forbes.com/sites/oliviergarret/2020/10/08/why-you-should-focus-on-growth-stocks-today/#72d1ee102b81
  2. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/
  3. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/how-to-invest/

Goal Setting and Accomplishment

Posted on by

“Since “someday” never appears on the calendar, our good intentions don’t turn into action until we create deadlines.” Amy Morin

A staggering 92 percent of Americans that set New Year’s resolution goals never actually accomplish them, according to research by the University of Scranton.

But, when people followed two simple concepts — setting specific and challenging goals — it led to higher accomplishment of goals 90 percent of the time, according to research by Dr Edwin Locke and Dr Gary Latham. Basically, the more specific and challenging the goals you set, the higher your motivation toward hitting them while your easy or vague goals rarely get met.

Here’s an example: If your goal between now and the end of the year is to, say, lose 20 pounds, that  may be challenging, but it’s not specific enough.

It’s essential to eliminate vagueness and make it more achievable by stating it in a more detailed manner: During the month of August, I will lose five pounds by cutting off refined sugar, breads, and all fast food. I will also walk briskly for twenty minutes every day.

On the flip side, goals that are too difficult to accomplish don’t get met either. While it’s important to challenge yourself, nobody completes a goal when he/she is overwhelmed by the magnitude and difficulty in accomplishing the goal.

If you find yourself with such a scenario, break down your BHAG (Big Hairy Audacious Goal) into smaller bites you can actually chew. Use the same process of defining specific and challenging marks to hit when mapping out the smaller goals that will lead you to your final destination.

Additionally, those who succeed at accomplishing their BHAG, they tend to want it badly. So, it’s essential to determine what is your level of commitment? Are you totally committed to reaching your goal even when obstacles occur along the way? Are you committed to “do whatever it takes” to reach your destination. And, do you have the desire or passion to pursue the goal to reach it.

According to Locke and Latham’s research, there are five goal setting principles that can improve dramatically your chances of accomplishing your goals:

  1. Setting Clear Goals. Write your goal down and be as detailed as possible. Use SMART, and consider putting your goal into the form of a personal mission statement  for added clarity. Think about how you’ll measure your success toward this goal.
  2. Setting Challenging Goals. Look at your goal. Is it challenging enough to spark your interest Also, identify ways that you can reward yourself when you make progress. Incremental rewards for reaching specific milestones will motivate you to work through challenging tasks.
  3. Staying Committed. Stay committed by using visualization techniques to imagine how your life will look once you’ve achieved your goal.
  4. Gaining Feedback. Schedule time once a week to analyze your progress and accomplishments. Look at what has and hasn’t worked, and make adjustments along the way.
  5. Considering Complexity. Break large, complex goals down into smaller sub-goals. This will stop you feeling overwhelmed, and it will make it easier to stay motivated.

“Even if your goal is something that will take a long time to reach — like saving enough money for retirement — you’re more likely to take action if you have time limits in the present. Create target dates to reach your objectives. Find something you can do this week to begin taking some type of action now.” Amy Morin, Psychotherapist and author of ’13 Things Mentally Strong People Don’t Do’

Additionally, the following strategies can increase your likelihood of accomplishing your goals:

  1. Break goals into manageable chunks. If you only focus on the big picture, it’s easy to put things off until later. But, if you break those goals down into smaller, more manageable objectives such as, you can start tackling and accomplishing the manageable chunks today.
  2. Establish “now” deadlines. Even if your goal is something that will take a long time to reach – like saving enough money for retirement – you’re more likely to take action if you have time limits in the present. Create target dates to reach your objectives. Find something you can do this week to begin taking some type of action now. For example, decide “I will create a budget by Thursday,” or “I will lose two pounds in seven days.”
  3. Turn abstract ideas into concrete action steps. Abstract ideas encourage inactivity. Saying, “I’d like to be healthier,” won’t help you reach those goals. Establish concrete action steps that you can start doing today. For example, decide that you’re going to take a class, read a book, or conduct 30 minutes of research each day. Identify behavioral changes that you can begin working on immediately and you’ll be more likely to turn your abstract ideas into reality.

Identify some of those goals and dreams that you’ve always wanted to work on but just never had the motivation to start. Look for strategies that will help you view those goals in terms of the present and you’ll increase the likelihood that you’ll start taking steps to turn those dreams into a reality, explains Amy Morin

Goal setting is something that many of us recognize as a vital part of achieving success in the areas of health, wealth and emotional well-being. Understandably, goal-setting research confirms the usefulness of SMART goal setting.

To use the results of the research, you must set clear, challenging goals and commit yourself to achieving them. Be sure to get regular feedback on your progress towards achieving your goals. Also, consider the complexity, and break your goals down into smaller chunks, where appropriate.

If you follow these simple rules, your goal setting will be much more successful, and your overall performance and accomplishment rate will improve.

The path to building wealth and financial freedom is paved with goals!!!

References:

  1. https://www.inc.com/marcel-schwantes/science-says-92-percent-of-people-dont-achieve-goals-heres-how-the-other-8-perce.html
  2. https://www.mindtools.com/pages/article/newHTE_87.htm
  3. https://www.forbes.com/sites/amymorin/2014/09/04/study-the-secret-to-ending-procrastination-is-changing-the-way-you-think-about-deadlines/

Inflation…a “Hidden Tax”

Posted on by

Inflation means there is more money out there chasing the same number of goods and services. 

Inflation is an economic situation in which the general price level in the economy increases over a period of time, increasing the market value of all goods and services in monetary terms. As the general price level rises, the quantity of goods and services each unit of currency can buy decreases, indicating a decline in the purchasing power of the currency.

A little bit of inflation is considered by economists to be good for the economy. Technically speaking, inflation gets the economic ball rolling, greases the wheels of commerce, and stimulates the economy. The Federal Reserve has set as a goal 2% inflation.

Most people and politicians believe that inflation is just rising prices. That is not quite true. Inflation means there is more money out there chasing the same number of goods and services. As a result, the value of the money is diluted. One result is higher prices. Thus, there are two different types of “inflation”.

  • The first kind of inflation is “monetary inflation” i.e. an increase in the overall money supply. This is accomplished by a complex process between the government, the central bank, the open market, and the member banks.
  • The second form of inflation is an increase in the price that consumers pay, which is the result of an increase in the money supply and it is more accurately called “price inflation”. Price inflation reduces our purchasing power (as prices rise each dollar in your bank account buys less) and thus makes us poorer.

Because things are getting more expensive and savings are becoming less valuable, inflation discourages saving and encourages spending. This is how it “stimulates the economy” but it also encourages misallocation of capital. Because people are motivated to spend now, they end up chasing short-term goals rather than long-term goals which might actually have been more beneficial and in their best wealth building interest; but they no longer appear so because of the distortions caused by inflation.

Inflation is a long used, secret method of taxing people without their knowledge, a “hidden tax”, because the recipients of inflated money are unaware that it is really worth less than they thought it was; it is certainly “hidden”. And because the primary beneficiary is the government you can rightly say that inflation is a “hidden tax”. Every time someone has to pay an increased price for what they want they are paying this hidden inflation tax.

Inflation is like if a person were to slowly add a little water to the milk that is sold in the store. For a while, no one might notice at all. However, the milk is less nutritious, and won’t taste quite right. Eventually, the people wake up and realize the milk is not nearly as good, although it might still look okay. That is the impact of inflation

When extra money is printed up and put into circulation, it costs the government very little. It seems like governments can create value out of nothing. It is wonderful for the government, which is why most governments do it all the time. The government can spend the money on all their pet projects without worrying about their constituents complaining, because the money seems to be “free”.

However, it is not free and there are consequences to unconstrained printing money. What printing money does is to slowly dilute the money that is in existence already, like diluting the milk in the analogy above. So all the money the people already have, including all their savings, salaries and all the rest, slowly start to be worth less. In this sense, inflation is a very hidden tax, or way the government confiscates the people’s real wealth.

References:

  1. https://inflationdata.com/articles/2020/03/06/inflation-the-hidden-tax/
  2. https://drlwilson.com/Articles/INFLATON.htm

Long Term Investing is about Your Behavior

Posted on by

Investing and managing money successfully is all about how you behave. Morgan Housel

Most investors are not as smart as they thought they were a year ago in the midst of a raging bull market and rising stock prices. Fortunately, they’re also not as dumb as they feel today during a market correction, says Morgan Housel, author of “The Psychology of Money”

Investing, specifically successful investing, is, and has always been, the study of how people behave with money. And behavior is hard to teach, even to really smart and educated people. Effectively, success in investing is achieved by being patient and remaining calm through ‘punctuated moments of terror’ and volatility in the market.

You can’t sum up behavior with systems to follow, formulas to memorize or spreadsheet models to follow, according to Housel. Behavior is both inborn and learned, varies by person, is hard to to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.

Actually, the best strategy is to invest as a long-term business owner which isn’t widely practiced on Wall Street or Main Street. It’s one thing to say you care about long-term value and another to actually behave as a long-term business owner. None of this is easy, but it’s never been easy. That’s what makes investing interesting.

The only thing that you can control in investing is your own behavior.

There is the old pilot quip that their jobs flying airplanes are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

Managing money and investing isn’t necessarily about what you know; it’s how you behave. But that’s not how finance is typically taught or discussed in business school and at financial institutions. The financial industry talks too much about what to do, and not enough about what happens in your head when you try to do it.

There were 1,428 months between 1900 and 2019. Just over 300 of them were during a recession. So by keeping your cool and staying in the market during just the 22% of the time the economy was in or near a recession would have allowed your investments to compound and to grow significantly.

You must invest in the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing. How you behaved as an investor during a few months will have the greatest impact on your lifetime returns.

There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

For many investors, they are their own worst enemies. Since, the biggest risk to you as an investor is yourself and your own biases, your win mindset, your own misconceptions, your own behaviors, that impact your returns as an investor.

“Investing is not the study of finance. It’s a study of how people behave with money. It’s a really broad, all-encompassing field of how people make decisions around risk and greed and fear and scarcity and opportunity,” says Housel.

You can’t control what the economy is going to do or how the market will react. You can’t control what the Fed is going to do next. The only thing that you can control in investing is your own behavior. Thus, it’s important you realize that the one thing you can control, your behavior, is the thing that makes the biggest difference over time. Your investing behavior is the most fundamental factor in your investing success.

Simply, investing is about how you behave with money. And, it’s the ability to sacrifice spending money in the present with the expectation of making money in the future. Investing is a risk.

“A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.” Morgan Housel

References:

  1. https://acquirersmultiple.com/2021/11/morgan-housel-investing-behavior-is-inborn/
  2. https://www.msn.com/en-us/money/topstocks/how-to-prep-for-a-bear-market-morgan-housel/vi-AAThrqT
  3. https://acquirersmultiple.com/2020/09/morgan-housel-the-importance-of-remaining-calm-through-punctuated-moments-of-terror-in-the-market/
  4. https://www.cmcmarkets.com/en/opto/investing-psychology-with-morgan-housel
  5. https://acquirersmultiple.com/2020/08/morgan-housel-the-only-thing-that-you-can-control-in-investing-is-your-own-behavior/

Inflation Comes in Hotter than Expected

Posted on by

The consumer price index for all items rose 0.6% in January, driving up annual inflation by 7.5% which marked the biggest gain since February 1982

The consumer price index (CPI), which measures the costs of dozens of everyday consumer goods, rose 7.5% compared to a year ago vs. an estimate of 7.2%, the Labor Department reported.

Consumer prices in January surged more than expected over the past 12 months, indicating a worsening outlook for inflation and cementing the likelihood of substantial interest rate hikes this year, reports CNBC.

The closely watched inflation gauge was the highest reading since February 1982. On a percentage basis:

  • Fuel oil rose the most in January, surging 9.5% as part of a 46.5% year-over-year increase.
  • Vehicle costs, which have been one of the biggest inflation contributors since it began surging higher in the spring of 2021, were flat for new models and up 1.5% for used cars and trucks in January.
  • Shelter costs, which make up about one-third of the total CPI number, increased 0.3% on the month and is up 4.4% over the past year and could keep inflation readings elevated in the future.
  • Food costs jumped 0.9% for the month and are up 7% over the past year.

The hotter-than-expected inflation reading may prompt the Federal Reserve to accelerate interest rate hikes — a full percentage point increase by the start of July, according to CNBC.

References:

  1. https://www.cnbc.com/2022/02/10/january-2022-cpi-inflation-rises-7point5percent-over-the-past-year-even-more-than-expected.html

The Great Resignation: Simple Reason Why

Posted on by

Employees may be planning their exits if they feel undervalued

Americans have quit their jobs and not returned to the workforce at a historic rate, an exodus some call “The Great Resignation.” The Bureau of Labor Statistics reported that more than 4.5 million workers voluntarily left their jobs during November 2021–the highest number in the 20 years.

A survey by PlanBeyond, a market research agency, indicated that employees were feeling undervalued as a top reason for the Great Resignation. Among all the reasons for quitting cited in the poll, feeling undervalued factored in by 22%.

The survey found that the lack of appreciation was the top factor for quitting among men, it was only the second biggest driver for women, edged out by a lack of respect for supervisors, which was seen as having a 22% influence on women’s likelihood to quit.

This phenomenon should come as no surprise, given that many organizations and industries have long overworked and burned out their people. Leaders have bought into the false narrative that high performance and humanity are mutually exclusive. 

Individuals are disillusioned with their employers and are increasingly looking to hold them to “moral” standards that would have been unthinkable years ago. As such, they are more loyal to organizations that convey and uphold a mission that aligns with their personal values.

While it may seem obvious that workers are more likely to stay at organizations that offer such opportunities, most employment situations have historically lacked, and continue to lack, many of these very attributes. This illustrates how too few organizations have internalized the truism that attracting and retaining great people requires them to first become great places to work. 

Though quitting is happening across all job sectors and among workers at all skill levels, it has particularly impacted hospitality and food services, wholesale trade, and in state and local education.

References:

  1. https://www.fastcompany.com/90716203/the-great-resignation-heres-a-simple-reason-why-your-employees-want-to-quit
  2. https://news.harvard.edu/gazette/story/2021/10/harvard-economist-sheds-light-on-great-resignation/
  3. https://www.fastcompany.com/90715043/5-overlooked-opportunities-that-could-turn-the-tide-of-the-great-resignation

Estate Plan and Wills

Posted on by

“55 percent of all Americans—regardless of wealth or status—die without a will or estate plan in place,” American Bar Association

When R&B artist Prince died in April 2016 at the age of 57, he left behind an estate worth hundred of millions of dollars, along with music and other intellectual property of inestimable value. Despite his fame and wealth, Prince died without a will or estate plan. As a result, his estate has remained entangled in probate court for nearly six years. Although the value of his estate is estimated to be more than $100 million, it has paid more than tens of millions of dollars in administration fees.

Before you express too much astonishment that someone so wealthy left no will, ask yourself: do you have one? If the answer is no, then it should not be surprising that Prince didn’t.

If you don’t have a will, you’re not alone in America. According to the American Bar Association, 55 percent of all Americans—regardless of wealth or status—die without a will or estate plan in place, and the number can be as high as 64 percent. For some reason, many people who should have wills, whether because of their age or financial situation, just don’t.

It’s hard to understand why. Maybe because it’s depressing to think about needing one. Maybe it’s because we know we won’t be around when our estates are distributed, so we let it slide.

Regardless, everybody should have at a minimum a last will and testament if you don’t have a more complex estate plan like a trust, because it’s always cheaper to administer an estate when you have a will than when you don’t have anything.

When a person passes without a will, or what the law calls “intestate,” the estate property is distributed according to state succession laws. A probate court judge will have to determine who and how the assets are distributed in the event of your passing or incapacitation.

Additionally, if you die without a Will, you’re giving the state you reside in full control over the distribution of your assets, and intestate serves as the precedent for how decisions are made and how your assets will be distributed on your behalf.

Dying intestate means the most crucial decisions — including who will care for your children, aged parents, pets or other dependents — will be made without your input. Further, your family will be forced to endure a lengthy and costly probate process and incur potentially crippling legal expenses to regain control of your finances and assets.

Most probate court cases are open to the public, which means many of the details of a person’s estate could be aired like dirty laundry. Although, a judge could decide that the documents should be sealed.

In most states, a surviving spouse is first in line for the estate’s assets. If there is no spouse, the law provides an order of succession. In many states, if there’s no spouse, the children get the estate. If there are no children or grandchildren, then the parents inherit.

If no parents are alive, then siblings, nephews, and grandnephews inherit—and on and on—all the way to first cousins twice-removed. And, if no heirs can be found, it may not surprise you to learn that your property eventually goes to the state—a process called “escheating.”

Estate Planning

When you think about Estate Planning, you must not only think about when you die, but you must think about the possibility of becoming disable.

Estate planning is much bigger than “You get my assets after I die”—it is about setting your families up for the type of generational wealth.

An estate plan ensures your medical, financial and guardianship decisions will be handled by the person(s) you choose and trust. Your plan ensures you have an advocate acting on your behalf, carrying out your wishes and directions as you intended. It ensures you have the legal documents in place if you become disabled, as well as what will happen to your assets when you die.

Statistically speaking, most people are going to be disabled for some period of time before they die now that people are living so long. If the person becomes disabled and can’t make their own medical or financial decisions, the only way that somebody can legally make decisions for them is to go to court and do a guardianship or conservatorship proceeding. It’s expensive and time-consuming, and it’s really unnecessary.

In a will, the person who makes the will picks the executor, the person that’s in charge. You can say that you want your executor to serve without posting a bond. If that’s not stated in a will, you have to get a fiduciary bond so that the court knows you’re not going to steal the assets.

If you have minor children, a will is the only legal document where you can nominate guardians for your children.

But if you don’t have the will, then it’s the state statute that determines who is the person with priority to administer your estate. And because the state doesn’t know whether the person who says they want to administer your estate is a crook or not, the court often makes someone post a fiduciary bond. You have to pay the premium for the bond and the person has to qualify financially for a bond.

What you should learn from Prince’s passing without a Will or Estate Plan is that unless you create an estate plan now, you will leave your loved ones and potential heirs with a legal mess whether you are worth millions or not.

References:

  1. https://www.cnn.com/2016/04/28/opinions/prince-died-intestate-you-might-too-cevallos/index.html
  2. https://matermea.com/estate-planning-basics-african-americans-black-families/
  3. https://blavity.com/how-black-americans-are-missing-out-on-the-largest-wealth-transfer-in-history