How to Value Companies

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

IN THIS EPISODE, YOU’LL LEARN:

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

References:

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

Discounted Cash Flow Analysis

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

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

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

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

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

To use the Discounted Cash Flow Model to Value Stock:

Step 1 : Calculate the Free Cash flow to the firm

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

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

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

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

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

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

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

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

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

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

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

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

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

References:

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

Falling Home Sales and Rising Mortgage Rates

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

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

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

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

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

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

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

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

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

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

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

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

References:

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

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

16 Rules for Investment Success – Sir John Templeton

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

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

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

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

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

John Templeton’s 16 rules for investment success include:

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

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

References:

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

Inflation: A Hidden Tax

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. Its a “hidden tax” on your money.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets.

Conversely, the same American’s paycheck covers less monthly goods, services, bills and debt payments. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power, concludes the nonpartisan Tax Foundation.

Simply, inflation occurs when there is more money for the same amount of real goods and services, which forces an increase in prices.

The way this occurs is when policymakers put more money into the economy, through either deficit-financed government spending or Federal Reserve loose monetary action, both actions can result in an increase in the money supply of an economy.

A Hidden Tax.

This means that if any other type of tax has to be levied on the general population, it must be introduced in and approved by Congress or legislatures. However, this is not the case with the “hidden tax” of inflation.

Inflation tax is not an actual statuary tax paid to a government; instead “inflation tax” refers to the penalty incurred to purchasing power for the money you’re holding at a time of high inflation.

“Inflation is the one form of taxation that can be imposed without legislation.” ~ Milton Friedman

Inflation is an extremely destructive hidden tax, especially on working families. Inflation reduces the buying power of money. Put simply, high inflation means your money is not stretching as far as it once did. As prices rises, it is felt because wages and benefits are not rising in equal measures.

References:

  1. https://debtinflation.com/why-is-inflation-a-tax/
  2. https://taxfoundation.org/tax-basics/inflation/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

Will Higher Interest Rates Tame Inflation?

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Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation.  At this point, there are over $5 trillion in excess money in the system. Brian Wesbury

While inflation roars at its highest level in four decades, President Joe Biden tried to downplay skyrocketing inflation, insisting it was only up “just an inch” in the short term.

“Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all,” President Joe Biden on Sixty Minutes

Despite the fact that consumer prices rose in August by one-tenth of a percentage point to 8.3 percent, economists had expected inflation to go down. Additionally, median inflation hit the highest level ever recorded.

The median CPI, which excludes all the large changes in either direction and is better predicted by labor market slack, is extremely ugly at 9.2% annual rate in August, the single highest monthly print in their dataset which starts in 1983 (second highest was in June).

The Federal Reserve has been raising interest rates since March to slow the economy in a bid to tame America’s worst bout of inflation in four decades. However, the data suggested that their efforts have not yet had much of an effect.

The Federal Reserve raising interest rates may reduce economic growth, make capital more expensive and may throw the US economy into recession, however there is no guarantee that these actions will tame or fix inflation, opines Brian Wesbury, Chief Economist, First Trust Advisors L. P. Interest rates, supply disruptions or Russian’s war in Ukraine don’t determine inflation; the amount of money circulating in the economy determines inflation.  

“Inflation is always and everywhere a monetary phenomenon.” ~ Milton Friedman

The Fed’s balance sheet held $850 billion in reserves at the end of 2007.  Today, the balance sheet is close to $9 trillion.  Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic.  At this point, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators.

  • They can hold them at the Fed and get the interest rate the Fed sets, or
  • They can lend them out at current market interest rates.  

In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

The Fed has never tried to stop bank lending in an inflationary environment by just raising the interest rate on excess reserves (IOER). Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/9/19/will-higher-interest-rates-tame-inflation
  2. https://www.breitbart.com/economy/2022/09/13/underlying-inflation-reaches-scorching-new-record-high/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

How to Protect Your Money from Inflation

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Inflation causes your money to be worth less over time. To hedge against inflation, you need to invest your money in assets.

Inflation in the U.S. is at the highest rate in four decades.

Inflation decreases the purchasing power of your dollars over time. Here are steps you can take to protect the purchasing power of your dollars, according to Forbes.

  • Trim your expenses. To minimize the impact of inflation, review your spending and identify areas to reduce or eliminate completely.
  • Wait to pay off low-interest debt. Paying off debt is usually good, but you may want to hold off on making extra payments if you have low-interest debt. Your debt becomes less expensive due to inflation. Use the money for other purposes—like paying off higher-interest loans.
  • Invest your money. Inflation causes your savings to be worth less over time. To hedge against inflation, you need to invest your money. If the prospect of investing is scary, consider a diversified portfolio of broad market index funds to lower your risk levels and costs.

Getting inflation under control

The Federal Reserve is tasked with keeping inflation at a healthy level by adjusting the nation’s money supply and interest rates.

When the economy is expanding too quickly and inflation rises, the Fed will typically raise interest rates or sell assets to reduce the amount of cash in circulation. These actions tend to reduce demand within the economy and can push the economy into recession.

References:

  1. https://www.forbes.com/advisor/investing/is-inflation-good-or-bad/

Social Security Retirement Benefits

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

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

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

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

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

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

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

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

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

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

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

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

Children’s benefits

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

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

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

Your benefits may be taxable

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

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

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

References:

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

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

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

Federal Reserve Balance Sheet and Inflation

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The U.S. Federal Reserve’s balance sheet consists of the Fed’s portfolio of U.S. Treasury and government-guaranteed mortgage-backed securities (MBS).

The balance sheet is one of the Federal Reserve’s main instruments for conducting monetary policy and for fulfilling the Federal Reserve’s dual mandate that requires it to ensure both stable prices and maximum employment.

The traditional tool the Fed used to accomplish these goals was the adjustment of the federal funds rate, the short-term interest rate that determined how much it costs for banks to lend to each other overnight.

The 2007-2008 financial crisis, however, demonstrated that even lowering the interest rate to zero was considered insufficient to shore up economies in freefall, and the Fed turned to more unusual tactics.

One of these measures was what the Fed refers to as “large-scale asset purchases,” which is more commonly known as “quantitative easing.” Just as with any other firm, securities that the Fed purchases through quantitative easing are considered assets and therefore are represented on the Fed’s balance sheet.

The value of the balance sheet of the Federal Reserve increased overall since 2007, when it stood at roughly $0.9 trillion U.S. dollars.

As of September 6, 2022, the Federal Reserve had $8.82 trillion U.S. dollars of assets on its balance sheet.

This dramatic increase can be traced back to two black swan events that had a disastrous impact on the U.S. economy:

  • the 2008 financial crisis and
  • the COVID-19 pandemic,

Both events led to a negative annual growth of the real gross domestic product (GDP) of the United States, writes Thomas Wade is the Director of Financial Services Policy at the American Action Forum. Therefore, the Federal Reserve’s response to these crises was to adopt expansionary monetary policies to stimulate employment and economic growth.

Increasing the money supply — an expansionary monetary policies which intends to increase the amount of money circulating in the economy — tends to increase inflation, states Statista.com, which destabilizes the economy and erodes purchasing power. Currently, the inflation rate in the United States reached 8.5 percent in 2022, the largest value in four decades.

Bottomline is that by expanding its balance sheet—i.e., by buying government bonds and MBS—the Fed expands the nation’s money supply in the hope of lowering interest rates and stimulating the economy; contracting the balance sheet should have the opposite effect.

However, by expanding the money supply too much, the Fed ran the risk of igniting inflation [“Inflation is one form of taxation that can be imposed without legislation.” Milton Friedman], while overly contracting it may stifle economic activity, including increasing unemployment and triggering an economic recession.

Inflation’, quipped Milton Friedman, ‘is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.statista.com/statistics/1121448/fed-balance-sheet-timeline
  2. https://www.americanactionforum.org/insight/tracker-the-federal-reserves-balance-sheet/#ixzz7esb8x4vu
  3. https://www.fxcm.com/markets/insights/federal-reserve-balance-sheet/

Social Security cost of living for 2023 could increase 8.7%

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. New York Times

More than 70 million Americans receiving Social Security benefits could see the largest annual cost-of-living increase in more than four decades in 2023, considering the government CPI inflation data.

The Social Security Administration will announce the formal 2023 figure around October 13, after the release of September CPI inflation data. However, the August CPI point to a Social Security cost-of-living adjustment, known as the COLA, of 8.7 percent, according to an estimate by the Senior Citizens League that lobbies for seniors and reported by The New York Times.

The COLA is calculated annually using a formula detailed in federal law. It uses one of the broadest government measures of inflation, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers‌, or CPI.‌

Social Security averages together the CPI figures during the third quarter of each year, and compares that with the previous year’s figure. For example, the 2023 COLA will be calculated by averaging together the CPI figures for the third quarter of 2022 and comparing that with the same averaged figures for 2021.

Rapid inflation typically results in trouble for equity stocks and the overall market. Financial risk assets have historically performed badly during periods of inflation, while tangible assets like real estate have held their value better.

References:

  1. https://www.nytimes.com/2022/09/14/business/social-security-cola-increase.html
  2. https://www.ssa.gov/
  3. https://www.whio.com/news/trending/social-security-boost-cost-of-living-increase-2023-pace-be-largest-since-1981/

Social Security is a program run by the federal government. The program works by using Social Security taxes paid into a trust fund to provide benefits to people who are eligible. Eligibility for Social Security retirement benefits starts at age 62 (the earliest you can receive them) to age 70 (when you hit your greatest amount).