Tag Archives: Investing

Timeless Investing Lessons

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“It is near impossible to consistently outperform the market, which supports passive investing in lieu of active management strategies.” ~ Burton G. Malkiel

  1. Buy and hold investments for the long-term. Investment expenses and taxes will eat away at your returns. It’s impossible to perfectly time the market. You will make mistakes. Buying total market index fund will include buying nonprofitable companis in the mix. And, historical analysis shows:
    • When markets are high is when most people put money into the market.
    • When markets are low is when most people take money out of the market.
  2. Timing the market doesn’t work. Timing the market means selling assets at the top of the market and buying the asset at the bottom of the market. Successfully trying to time the stock market has never earned. Thus, you should not try to time the market.
  3. Dollar cost averaging. DCA means putting money into the market regularly overtime.
  4. Broad Diversification. You do not want all your personal capital and savings invested in a single stock or a single asset class, such as stocks only. You should diversify your investment across different asset classes (stocks and bonds), industries and countries. You want to own both domestic and foreign stocks, bonds, real estate and some cash.
  5. Cost matters. The two variable costs you can control are investment costs and taxes. Jack Bogle said, “you get what you don’t pay for.” Since, the lower the expense ratio the investor pays the purveyor of investment services, the more capital that is left over for the investor. Look carefully at the expense ratio.
  6. Index funds. Buy a total market index fund with zero or low expenses. Two-thirds of active investment managers are beaten by stock index funds annually. Ninety percent of active investment managers are beaten by stock index funds over a ten year period.
  7. Buy bond substitutes instead of total bond index fund such as preferred stocks or high yielding dividend paying established companies.
  8. Rebalance annually or at least bi-annually. This requires you to sale highly appreciated assets to buy assets that have not appreciated greatly or are on sale.

These are just a few timeless investing lessons that invest can follow to build wealth

References:

  1. https://www.wallstreetprep.com/knowledge/random-walk-theory/

Quote of the Day

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“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” ~ Burton G. Malkiel, Professor of Economics, Emeritus, Princeton University

Gratitude and Overcoming Limiting Beliefs

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Gratitude enables you to overcome your limiting beliefs.

Limiting thoughts and beliefs are false thoughts and beliefs that prevent you from pursuing your goals and desires. They can affect every aspect of your life from your wealth, health, relationships and emotional well-being. For example, if you believe you don’t deserve to be happy, you may never pursue your dreams or goals, and you will not be happy.
Gratitude in all things

Gratitude enables you to overcome and replace you limiting thoughts and beliefs with positive and abundant thoughts and beliefs. Further, your attitude, mood, behavior and thoughts improve when you practice gratitude.

The three keys to gratitude include :

  • Emote – to feel emotionally grateful
  • Extend – reach out and connect socially
  • Exercise – practice until it’s instilled

Be grateful in all circumstances, no matter what, both in good times and dark times. Although, it is easier to be thankful during good times than during hard times. The trials and sufferings in your life are there to strengthen you. They’re there for you to learn and grow.

Dr. Robert Emmons, known as the “world’s leading scientific expert on gratitude”, andis a psychology profession from the University of California, Davis and also the founding editor-in-chief of the Journal of Positive Psychology, found that being more grateful can lead to increased levels of well-being and that being grateful towards a higher power may lead to increased physical health. Giving thanks to those you are in a relationship with (not only your family) will strengthen the relationship.

Studies found that persons practicing gratitude showed more optimism in life, reduced stress, depression, and anxiety levels. It is a continuous loop.  The more you experience gratitude and say ‘thank you’  the more you will find in life to appreciate. When you choose gratitude over happiness even your self-control is stronger.

Research found that patients with heart failure showed reduced symptoms of heart failure and inflammation, improved sleep, and moods through keeping a gratitude journal.

Daily gratitude exercise

  • Reflect on three things your grateful for
  • Feel the gratitude in your body and
  • Extend the gratitude to others

When you practice gratitude, you change your thoughts and beliefs about yourself. You are happier and experience greater joy in life. And, when you change yourself, you change your perception of the world.

Be thankful for everything that God has given you. Apostle Paul declared, “I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want” (Philippians 4:12, NIV).

An attitude of gratitude and a spirit of thankfulness make all the difference. Thus, to change your life and your world, change your attitude and in all things, practice gratitude.

References;

  1. https://www.virtuesforlife.com/33-gratitude-affirmations-to-transform-limiting-beliefs/
  2. https://billygraham.org/story/how-to-be-thankful-in-all-things/
  3. https://lovegodgreatly.com/be-thankful-in-all-things/
  4. http://www.thelife.digital/tl/articles/gratitude-is-the-best-attitude/

“I am grateful to feel stronger, wiser and more confident with each new day.”

Qualified Dividends vs. Ordinary Dividends

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The distinction between Qualified and non-Qualified dividends has to do with how you’re taxed on those dividends.

  • Qualified dividends are taxed at 15% for most taxpayers. (It’s zero for single taxpayers with incomes under $40,000 and 20% for single taxpayers with incomes over $441,451.)
  • Ordinary dividends (or “nonqualified dividends”) are taxed at your normal marginal tax rate.

The concept of qualified dividends began with the 2003 tax cuts. Previously, all dividends were taxed at the taxpayer’s normal marginal rate.

The lower qualified rate was designed to fix one of the great unintended consequences of the U.S. tax code. By taxing dividends at a higher rate, the IRS was incentivizing companies not to pay them. Instead, it incentivized them to do stock buybacks (which were untaxed) or simply hoard the cash.

By creating the lower qualified dividend tax rate that was equal to the long-term capital gains tax rate, the tax code instead incentivized companies to reward their long-term shareholders with higher dividends. It also incentivized investors to hold their stocks for longer to collect them.

Qualified Dividends

To be qualified, a dividend must be paid by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.

Importance of dividends

From 1871 through 2003, 97% of the total after-inflation accumulation from stocks came from reinvesting dividends. Only 3% came from capital gains.”

To put this into perspective, take a look at the example used by John Bogle, where he writes: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded)—an amazing gap of $32 million.” The reinvestment of dividends accounted for almost all of the stocks’ long-term total return.

Dividends are an important consideration when investing in the share market as they provide a reliable source of return while you wait.

References:

  1. https://www.kiplinger.com/investing/stocks/dividend-stocks/601396/qualified-dividends-vs-ordinary-dividends

Price to Earnings (P/E) Ratio

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Price is what you pay. Value is what you get.

The price-to-earnings ratio, or P/E ratio, helps investors compare the price of a company’s stock to the earnings the company generates. The P/E ratio helps investors determine whether a stock is overvalued or undervalued.

By comparing the P/E ratios companies in the same industry, investors can determine which companies are relatively under or over valued in comparison to their industrial peers.

The P/E ratio is derived by dividing the market price of a stock by the stock’s earnings.

The market price of a stock tells you how much people are willing to pay to own the shares, but the P/E ratio tells you whether the price accurately reflects the company’s earnings potential, or it’s value over time.

If the P/E ratio is much higher than comparable companies, investors may end up paying more for every dollar of earnings.

The typical value investor search for companies with lower than average P/E ratios with the expectation that either the earnings will increase or the valuation will increase, which will cause the stock price to rise.

On occasion, a high P/E ratio can indicate the market is pricing in greater growth that’s expected in the future years.

A negative P/E ratio shows that a company has not reported profits, something that is not uncommon for new, early stage companies or companies undergoing financial perturbations.

Current stock price may be important in choosing a stock, but it shouldn’t be the only factor. A low market stock price does not necessarily correlate to a undervalued or cheap stock.

The P/E ratio is a key tool to help you compare the valuations of individual stocks or entire stock indexes, such as the S&P 500.

References:

  1. Rajcevic, Eddie, Greenbacks & Green Energy, Luckbox, May 2022, pg. 58.
  2. https://www.forbes.com/advisor/investing/what-is-pe-price-earnings-ratio/

Ten Critical Investing Lessons

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Investing in assets is a great way to grow your money or to put your capital to work.

If there’s any lessons investors relearned in 2022, when investing in stocks, bonds, derivatives and real estate, it’s that the markets will be unpredictable, defy logic and offer unexpected surprises.

Sometimes investors can correctly anticipate what’s coming based on our past investing experience and macro economic information. Other times, investors are reminded no matter what they thought they knew, the market always knows better.

For these reasons, it’s important to remember you can always become a better, more patient and disciplined investor, whether you’re learning lessons the hard way, reminded of lessons you previously learned, but forgot, or learning from the good or bad experiences of others.

Here are 10 Critical investing lessons you wish you could teach your younger, novice self:

1) Personal finances first – Master and manage your personal finances first and foremost. Dealing with volatility is never easy, but it’s so much easier when your personal finances are rock-solid (no bad or debilitating debt, positive cash flow and net worth, emergency fund established). Know and strengthen your personal balance and cash flow statements. And, always have some cash on hand to take advantage of market dips and pullbacks.

2) Expect to be wrong often when investing – You’re going to be wrong when investing. You’re going to be wrong a lot. Your goal isn’t to bat 1.000 (that’s impossible). Your goal is to increase your odds of success. Even the best investors are wrong approximately 2 out of 5 times.

3) Sell slow – Don’t be in a rush to sell – It’s tempting to book a profit quickly or sell when you get scared. One investor sold MSFT at $24. Current price: $268. Selling a mega-winner early is the most expensive investing mistake you can or will make. And, don’t forget about taxes when you earn income or sell assets. Any income (or profit) you earn from selling assets is taxable. Before you sell any appreciated asset or take any income, make sure you have enough money for the taxes so that your gains will not be wiped out by taxes alone.

4) Watch the business – Watch the business, not the stock. The two are not linked at all in the short-term. But are 100% linked in the long-term. Always remember, you’re buying a piece of a business, do understand the business and how that business generates cash flow.

5) Buy quality – Capital is precious. Making money and putting money to work for you are hard. Saving it and growing it are harder. Buy the highest-quality investments you can find. Avoid everything else. When you focus on buying quality, opportunities can be found in any market whether it be up (bull) or down (bear). Thus, stick to your long-term plan of buying quality companies every month and forget about how everybody else is performing.

6) Add to winners, not losers – Add more capital to your winners, not your losers. “Winners” means the business is executing. “Losers” means the business isn’t. Add to the best companies you can find at better and better value points.

7) Patience above all – Your biggest edge and investing super power is patience. Don’t waste it. Compounding over the long term is the greatest power of investing. Your holding period for an investment asset should be measured is in decades, not days.

8) Do nothing is usually correct – “Do nothing” (being a long term investor) sounds easy, until you start investing your capital. Investing should be more like watching paint dry than a Las Vegas casino. More often than not, it’s the correct thing to do. Ninety-nine percent of good investing is doing nothing. It’s essential to ignore the noise and the hysteria of Mr. Market. Never Let Short-Term Volatility Dictate Your Long-Term Investment Decisions.

9) Learn valuation – Know what valuation metrics matter and when they matter. P/E Ratio is great, but it’s not universally applicable, and it only works when a company is in mature (stage 4). Consider ROIC, P/FCF, and P/Sales. Remember: Every investment is the present value of all future cash flow.

10) Network with others – Connect with other trusted long-term investors and experts. A good community is worth its weight in gold. Especially when bear markets appear.

Final thought: Have a plan – A financial plan is paramount to your financial success. During periods of volatility, you often hear that investors should “stay the course”, but there is not a course to stay without having a comprehensive financial plan.

The plan should be based upon your goals, values, purpose and dreams for the future, short and long term. It is a roadmap for your financial future and it should provide a guide for how you invest. The plan should also address other areas such as retirement planning, estate planning, risk management, asset allocation review, and cash flow planning.

In all things, be grateful! Appreciate and be grateful for all aspects for your current life and the abundance of opportunities. Gratitude influences your state of mind, your behavior, your relationships and your perspective on the world.

Roman philosopher Cicero said that, “Gratitude is not only the greatest of the virtues but the parent of all the others.”

Source: Brian Feroldi, 10 Critical Investing Lessons, Twitter, June 25, 2022.

Warren Buffett’s Three Investing Principles

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If you want to invest on your own, billionaire investor Warren Buffett recommends three investing principles that have guided him over the decades.

The principles are derived from a book first published in 1949: “The Intelligent Investor”, written by Buffett’s mentor, Benjamin Graham:

Principle 1: Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.

Buffett has four things he wants to see, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock:

  1. “One that we can understand …” When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future. He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them.
  2. “With favorable long-term prospects …” Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.” A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.
  3. “Operated by honest and competent people …”. “Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something. And it’s just a lot easier to operate with people that are candid. “And we like people who are smart, you know. I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING. The quality of the business itself, however, takes precedence.
  4. “Available at a very attractive price.”Buffett’s goal is to buy when the price is below a company’s “intrinsic value.”“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.“And we’re not perfect at estimating that, obviously”, Buffett stated. “But that’s what an investment or a business is all about. You put money in, and you take money out.”

Principle 2: The stock market is there to serve you, not instruct you.

Many non-professional investors become concerned when stock prices fall. They think the market is telling them they made a mistake. Some may even be so shaken that they sell stocks at the lower prices.

Buffett takes the opposite view. If he buys a stock because he thinks the company will be a long-term winner, he doesn’t let the market convince him otherwise.

Principle 3: Maintain a margin of safety

“We try not to do anything difficult …

“This is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive.

“That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly.

“So, we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one-foot bars.” — 1998 BERKSHIRE ANNUAL MEETING

Low cost index funds

Buffett has long recommended that investors put their money in low-cost index funds, which hold every stock in an index, making them automatically diversified. The S&P 500, for example, includes big-name companies like Apple, Coca-Cola and Amazon.

Buffett said that for people looking to build wealth and their retirement savings, diversified index funds make “the most sense practically all of the time.”

“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.”

References:

  1. https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2022/03/22/bwp22links.pdf
  2. https://www.cnbc.com/2022/05/02/warren-buffett-says-investing-is-a-simple-game.html

Start Early to Build Wealth

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The single most important thing you can do to build wealth is to start early. Getting started is more important than becoming a financial expert and the easiest way to manage your money is to take one small step at a time.

You, like most people, do not need a financial adviser to help you build wealth. Instead, you need to set up accounts at financial institutions, such as Fideltiy or Vanguard, automate the day-to-day money management (including bills, savings, investing and paying off debt). And, you need to know a few things to invest in, and then be patient and wait thirty years for your money to grow.

But, that’s not cool or exciting. Instead of listening to the noise of the financial entertainment media, instead you want your money to go where you want it to go in accordance with your goals and values. You want your money to grow automatically, in accounts that don’t nickel-and-dime you with excessive expenses and fees.

It’s essential to start today to learn about building wealth and take small steps to save, invest and manage your money. You don’t have to be a genius or financial expert to build wealth. Successful wealth building takes time, discipline and patience.

What do I want to do with my life–and how can I use my wealth to do it!

Investing early is the best thing you can do; ‘doing nothing’ ranks right up there with trying to drive a car without tires; it’s a bad idea and it won’t get you anywhere.

The single most important thing you can do to build wealth is to start early.

Here’s a great example of why investing early matters, that puts it in numbers:

  • If you invest $5,000 every year (which is $417/month) for 10 years, from age 25 to age 35 and then never invest again, you’d still have more money at retirement, than someone who starts at age 35 and invests $5,000 every year until they retire.
  • The 25 year old starter invests $55,000 and ends up with $615,000 (given an 8% annual return, which is close to the average return of the stock market per year). The 35 year old invests $130,000 and ends up with $431,000.

So, remember the adage “The best time to start building wealth is twenty years ago. The second best time is today.” You can save and invest modest amounts, like $20 a monty, and over time realize thousands of dollars in gains.

There are a lot of societal problems, but it’s important to focus on what you can control. Don’t be a passenger in life. It’s a lot more fun to be a captain of your own ship, even if you go off course a few dozen times. Building wealth does require some work. But, the benefits and rewards will surpass the effort.

Take a long term view. The economy grows and contracts in cycles ( business cycle). Fear is no excuse to do nothing with your money. You cam automate your saving and investing, thus you can continue to save and invest whiles others respond to emotions of fear.

Investing for average stock market returns (8% to 9%) is great since most retail and so call smart money fail to beat the average returns of the stock market. Moreover, theses investors tend to do the things that guarantee their failure: trade frequently, make outlandish investments, incur high taxes and pay unnecessary fees. The single most important factor to building wealth is getting started.

The challenges and opportunities with building wealth, and the corresponding solution, are you. Your mindset, behaviors and actions are the number one problem.

  1. You’re the only one responsible for your financial problems.
  2. Know how much money you have coming in and then automatically direct it where you want it to end up.
  3. It’s essential to start early and to start investing today, even if it’s just $1.

References:

  1. https://fourminutebooks.com/i-will-teach-you-to-be-rich-summary/

Buying Stocks On the Dip

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“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” ~Warren Buffett

Billionaire investor Warren Buffett added shares of companies during the market downturn. He has been acquiring stocks on the dip during the recent quarter’s market downturn and bulking up his stakes in oil companies such as Occidental Petroleum (OXY)

Buying a ‘Wonderful Company at a Fair Price’

The most important concept to appreciate when buying stocks is that price is what you pay for a stock, and value is what you get. Paying too high a price can decimate returns and increase your investing risk. 

To delve deeper, the value of a stock is relative to the number of earnings or cash flow the company will generate over its lifetime. In particular, this value is determined by discounting all future cash flows back to a present value, or intrinsic value.

Buffett has said that “it is much better to buy a wonderful business at a good price than a good business at a wonderful price”.

Buffett’s investing style has been buying stocks on sale priced below its intrinsic value. He has never been one that favors acquiring commodities, but higher inflation rates could have played a role, Thomas Hayes, chairman of Great Hill Capital in New York, commented.

“As for Buffett buying shares in OXY, I wouldn’t make too much on it,” Hayes said. “Historically, he has avoided investing in commodity stocks. Today he sees it as a hedge against inflation and a potential supply/demand imbalance.”

Inflation is the biggest strain on the economy. While the pace of inflation eased slightly during the month of April, investor sentiment towards the Fed’s pace of tightening remains mixed.

The fact that he is deploying his war chest of cash is a strong indication that he and his lieutenants believe that there are undervalued stocks out there,” he said. “This doesn’t mean he believes that the market is undervalued or will rebound in the near future, but that some companies are compelling buys. This is a good signal for value investors.”

Buffett’s energy investments demonstrate the 91-year old’s investing strategy of acquiring shares in companies that have low valuations and shareholder returns in the form of dividends and buybacks, Art Hogan, chief market strategist B Riley Financial, told TheStreet.

References:

  1. https://www.thestreet.com/investing/buffett-buying-stocks-on-the-dip

10 Powerful Quotes ~ “The Psychology of Money”

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“Rich is the current income. Wealth is income not spent. Wealth is hard because it requires self-control.” Morgan Housel

10 Powerful Quotes from “The Psychology of Money” by “Morgan Housel”

  1. “Spending money to show people how much money you have is the fastest way to have less money.”
  2. “Getting money is one thing. Keeping it is another.”
  3. “Be nicer and less flashy. No one is impressed with your possessions as much as you are.”
  4. “You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration.”
  5. “Use money to gain control over your time.”
  6. “Saving is the gap between your ego and your income.”
  7. “Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you. Money relies more on psychology than finance.”
  8. “Rich is the current income. Wealth is income not spent. Wealth is hard because it requires self-control.”
  9. “Happiness is just results minus expectations.”
  10. “In fact, the most important part of every plan is planning on your plan not going according to plan.”

https://twitter.com/books_dq/status/1517815934056075264

A few bonus quotes:

“”Be more patient” in investing is the “sleep 8 hours” of health. It sounds too simple to take seriously but will probably make a bigger difference than anything else you do.”

“The formula for how to do well with money is simple. The behaviors you battle while implementing that formula are hard.”

“”Save more money and be more patient” is too simple for most people to take seriously, but it’s the best solution to most financial problems.”

References:

  1. https://www.collaborativefund.com/blog/rules-truths-beliefs/
  2. https://www.collaborativefund.com/blog/$/