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The Next Pandemic: Mental Illness has Arrived

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May is Mental Health Awareness Month, which is a time to bring awareness to this pervasive issue affecting millions of Americans and people worldwide. 

Within the past couple of years, this country has been facing a crisis that can no longer be ignored, the number of Americans dealing with mental health continues to grow.  

Mental Illness is the emerging post-Covid reality that a building crisis of poorly treated mental illness, anxiety, depression and suicide, writes Daniel Henninger, Opinion Columnist, Wonder Land, The Wall Street Journal.

Depression, self-harm and suicide are rising among young people. Suicide, already the second leading cause of death among people 15 to 34 before the pandemic, has increased.

The 2020 pandemic highlighted the significance of prioritizing mental health yet the number of those walking around untreated continues to grow. At some point, we will have to realize that mental health is a serious crisis for the country. 

America is facing a national mental health crisis that could yield serious health and social consequences for years to come. —American Psychological Association (APA).

According to the Centers for Disease Contro and Prevention (CDC), a study released in August 2020 that showed that over 40 percent of adults in the United States reported dealing with mental health challenges or substance use. 

Additionally, suicidal ideation continues to increase among adults in the U.S. The number of youth struggling with depression has increased, according to Mental Health America.

What’s alarming is that more than 50 percent of of adults with a mental illness do not receive treatment, totaling over 20 million adults in the United States who are being untreated. White youth with depression were more likely to receive mental health treatment while Asian-Americans youth were least likely to receive mental health care.

Many Americans spent the 26 months of the pandemic drinking too much alcohol or using drugs. One result: The Centers for Disease Control and Prevention just reported a record number of deaths from drug overdoses last year, nearly 108,000 and 15% higher than 2020, prominently from fentanyl.

Absent medical treatment, some of the most severely mentally ill individuals self-medicate on the street with alcohol or drugs, turn violent and typically end up in filling the jails and prisons across the country.

The solution to the deinstitutionalization movement of the 1970s emptied the mental hospitals was supposed to be outpatient “community care.” It never happened.

With the incidence of disorders and suicides rising, there will be postmortems on the damage done during the pandemic to young people. With their schools closed, some isolated from friends and disintegrated inside social-media sites like TikTok or the online cauldrons.

It was clear the lockdowns and closings were wrecking mental health, especially among children and teens. Sadly, the National Institute of Mental Health did not have a seat at the decision table at the national level. Political officials ceded complete control of pandemic policy to public-health authorities. Next time, private and personal mental health should get a voice.

Between the social isolation, economic instability, political turmoil, racial violence, death and sickness, and overall uncertainty about the future, it is no wonder that mental health in America is on the decline, that depression and anxiety levels are on the rise, and that the demand for mental health and addiction treatment is skyrocketing.

Mental disorder has become too pervasive to sweep under a rug. The current national solution has been to let families alone pick up the broken pieces. It’s not enough.

Write henninger@wsj.com.

Your mental health matters!

Mental health is just as important as physical health. Good mental health helps you cope with stress and improve your quality of life.

References:

  1. https://www.wsj.com/articles/the-next-pandemic-mental-illness-homelessness-buffalo-shooting-online-hospital-11652906894
  2. https://afro.com/mental-health-in-a-pandemic-take-it-seriously/
  3. https://www.psychologytoday.com/us/blog/nurturing-self-compassion/202103/is-mental-health-crisis-the-next-pandemic
  4. https://go.usa.gov/xuQPu #MentalHealthAwarenessMonth

Protect Yourself Against Inflation

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“Rising costs can erode your purchasing power if you aren’t careful.” Fidelity Investments

Adding certain asset classes, such as commodities or real estate, to a well-diversified portfolio of stocks and bonds can help buffer against inflation, according to Fidelity Investments.

The last 12 months have seen the highest increases in the consumer price index (CPI) and producer prices (PPI) in decades, and many investors are concerned about the impact that inflation might have on their ability to reach their financial goals.

A trip to the supermarket or your local restaurant brings home the reality of inflation.

The consumer price index (CPI) has risen 8.5% over the last 12 months. Meanwhile, producer prices (PPI) have jumped by 11.2%. Those are the highest rates since the 1970s. And the forces driving prices up such as war, the pandemic, supply chain disruptions, and surging demand from consumers and businesses don’t look to be going away anytime soon.

While it may not be possible to avoid or eliminate the effects of inflation completely, there are actions you may be able to do to reduce its sting.

Add inflation-resistant assets

Though the rise in inflation may be troubling, investors who already have a well-diversified portfolio of traditional stocks and bonds may already have some degree of protection, as portfolios such as these have historically tended to grow even in periods of high inflation. “We still believe that a mix of stocks and bonds can help investors experience growth while managing risk,” says Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC.

Source: Bloomberg Finance, L.P.

Malwal recommend specific steps to help provide additional inflation protection. They emphasize that certain investments that have historically done well in inflationary environments. This has included adding diversified commodities, such as energy, industrial metals, precious metals, and agricultural products, as well as real estate stocks and international stocks.

In the bond market, Malwal notes a greater emphasis on high-yield bonds. “While these carry more risk than investment-grade debt, the higher yield may allow them to more easily withstand any increases in interest rates that might occur in response to rising inflation.” He also highlighted a greater exposure to Treasury Inflation-Protected Securities (TIPS), which are designed to help protect investors from the impact of inflation.

Lastly, short-term bonds have typically experienced less volatility during periods of higher inflation. “We generally have more exposure to short-term bonds than to intermediate-term bonds in client accounts,” says Malwal, “But we also have more exposure to long-term bonds, as they have historically provided stability within well-diversified portfolios during periods of stock market volatility.”

References:

  1. https://www.fidelity.com/learning-center/wealth-management-insights/6-ways-to-help-protect-against-inflationhttps://www.fidelity.com/learning-center/wealth-management-insights/6-ways-to-help-protect-against-inflation
  2. https://www.fidelity.com/learning-center/trading-investing/markets-sectors/peak-inflation

Recession Causes

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Recessions occur typically when the demand for goods and services starts declining rapidly and steadily.

A recession is a significant decline in economic activity that lasts for months or even years. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.

The National Bureau of Economic Research (NBER) is generally defines the starting and ending dates of U.S. recessions. NBER’s definition of a recession is when “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

Unemployment rate. NBER-dated recessions in gray. (Cart below)

Source: Bureau of Labor Statistics via the Federal Reserve Bank of St. Louis.

There is more than one cause for a recession to get started, from a sudden economic shock to fallout from uncontrolled inflation. According to Forbes Advisors, some of the main drivers of a recession are:

  • A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. In the 1970s, OPEC cut off the supply of oil to the U.S. without warning, causing a recession. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
  • Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy. The housing bubble in 2007-8 that led to the Great Recession is a prime example of excessive debt causing a recession.
  • Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy. Former Fed Chair Alan Greenspan famously referred to this tendency as “irrational exuberance”. Irrational exuberance inflates stock market or real estate bubbles—and when the bubbles pop, panic selling can crash the market, causing a recession.
  • Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks, such as the Federal Reserve, control inflation by raising interest rates, and higher interest rates depress economic activity. Out-of-control inflation was an ongoing problem in the U.S. in the 1970s. To break the cycle, the Federal Reserve rapidly raised interest rates, which caused a recession.
  • Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy. Central banks and economists have few tools to fix the underlying problems that cause deflation.
  • Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological breakthroughs. In the 19th century, there were waves of labor-saving technological improvements. The Industrial Revolution made entire professions obsolete, sparking recessions and hard times.

According to NBER data, from 1945 to 2009, the average recession lasted 11 months. Over the past 22 years, the U.S. has gone through three recessions:

  • The Covid-19 Recession. The most recent recession began in February 2020 and lasted only two months, making it the shortest U.S. recession in history.
  • The Great Recession (December 2007 to June 2009). The Great Recession was caused in part by a bubble in the real estate market. It lasted 18 months, almost double the length of recent U.S. recessions.
  • The Dot Com Recession (March 2001 to November 2001). At the turn of the millennium, the U.S. was facing several major economic problems, including fallout from the tech bubble crash and accounting scandals at companies like Enron, capped off by the 9/11 terrorist attacks. Together these troubles drove a brief recession, from which the economy quickly bounced back.

If there’s a silver lining, it’s that recessions do not last forever.

References:

  1. https://www.forbes.com/advisor/investing/what-is-a-recession/
  2. https://corporatefinanceinstitute.com/resources/knowledge/economics/business-cycle/
  3. https://www.nber.org/research/business-cycle-dating

Long-Term Investing

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“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson

Everyone is a long-term investor up to the moment the stock market correction or crash occurs. “During bull markets, everyone believes that he is committed to stocks for the long term,” opines Billionaire investor William J. Bernstein. “Unfortunately, history also tells us that during bear markets, you can hardly give stocks away. Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy.

Yet, successful investing is a long game. It takes “time, patience and discipline”, says Warren Buffett. When you put money to work in markets it’s best to set it and forget it. Billionaire investor Warren Buffett quipped, “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Myopic Loss Aversion

Investors must manage the battle between fear and greed in their heads and stomachs to be successful in building wealth in the long term. Unfortunately, the fear of loss is generally a more powerful force that overwhelms many investors during periods of steep losses in stock prices.

Even though they don’t plan to liquidate the investment for decades, many investors panic during market corrections and bear markets; causing them to miss out on the often sharp recovery in prices that follows.

Being a long-term investor is more about inner attitude, about positive mindset and about behavior then the asset holding timeframe. Being a long-term investor requires a confidence based on clarity of purpose, rigorous research, and insightful analysis.

Long-term investors should invest in sustainable and growing companies – companies that are likely to be around and that are increasing their intrinsic value for the long term.

Behavior is an essential value of a long-term investor since behavior drives results. Thus, staying calm during a downturn is indeed a critical quality of any long-term investor,

For long-term investors, if you are clear about your investment principles, confident in your investment’s thesis, and genuinely believe in your investment strategy, a market downturn is the best time to invest in companies.

Overall, investing is all about focusing on your financial goals and ignoring the noise and mania of the markets and the financial media. That means buying and holding for the long term, regardless of any news that might move you to try and time the market. “There is only one way of investing, and that is long term,” says Vid Ponnapalli, a CFP and owner of Unique Financial Advisors and Tax Consultants in Holmdel, N.J.

Investor, Mohnish Pabrai, says it best, “You don’t make money when you buy stocks, and you don’t make money when you sell stocks. You make money by waiting.”

“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.” Warren Buffett

References:

  1. https://www.forbes.com/advisor/investing/tips-for-long-term-investing/
  2. https://www.institutionalinvestor.com/article/b18x07sykt3psy/What-Long-Term-Investor-Really-Means
  3. https://www.forbes.com/sites/forbes-shook/2022/05/10/an-investors-mind-6-ways-it-can-block-the-path-to-long-term-wealth/?sh=7ca749405f7c

Be Grateful and Emotionally Strong

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“Gratitude helps people feel more positive emotions, relish good experiences, improve their health, deal with adversity, and build strong relationships.”

The word gratitude is derived from the Latin word gratia, which means grace, graciousness, or gratefulness.

Gratitude is a thankful appreciation for what an individual receives, whether tangible or intangible. With gratitude, people acknowledge the goodness in their lives.

In the process, people usually recognize that the source of that goodness lies at least partially outside themselves. As a result, being grateful also helps people connect to something larger than themselves as individuals — whether to other people, nature, or a higher power.

Gratitude is a way for people to appreciate what they have instead of always reaching for something new in the hopes it will make them happier or thinking they can’t feel satisfied until every physical and material need is met.

Gratitude helps people refocus on what they have instead of what they lack. And, your mental and emotional resilience grows stronger with use and practice.

Ways to cultivate gratitude on a regular basis include:

  • Write a thank-you note. You can make yourself happier and nurture your relationship with another person by writing a thank-you letter or email expressing your enjoyment and appreciation of that person’s impact on your life. Send it, or better yet, deliver and read it in person if possible. Make a habit of sending at least one gratitude letter a month. Once in a while, write one to yourself.
  • Thank someone mentally. No time to write? It may help just to think about someone who has done something nice for you, and mentally thank the individual.
  • Keep a gratitude journal. Make it a habit to write down or share with a loved one thoughts about the gifts you’ve received each day.
  • Count your blessings. Pick a time every week to sit down and write about your blessings — reflecting on what went right or what you are grateful for. Sometimes it helps to pick a number — such as three to five things — that you will identify each week. As you write, be specific and think about the sensations you felt when something good happened to you.
  • Pray. People who are religious can use prayer to cultivate gratitude.
  • Meditate. Mindfulness meditation involves focusing on the present moment without judgment. Although people often focus on a word or phrase (such as “peace”), it is also possible to focus on what you’re grateful for (the warmth of the sun, a pleasant sound, etc.).

You should practice gratitude, especially towards your family, friends and loved ones. And let them know daily by telling them that you love and appreciate them.

Everyone is feeling challenged and a little extra stressed these days due to the pandemic and prevailing economic conditions, such as four decades high inflation. When you find yourself annoyed with someone in your life, you should pause, take a few relaxing deep breathes, and take a moment to think of at least five things you enjoy and love about that person. Often, you’ll be surprised that your list expands and you’re smiling before you’re done making the list.

Also, always remember that people with strong personal relationships are typically emotionally healthier. So make a commitment to connect regularly with friends and family.

Set a goal to reach out to one person a day. Ask about the other person and discuss something other than the day’s weather or the day’s awful news. And be open about how you are feeling and doing emotionally, because vulnerability can be bonding.

Additionally, try to use positive and uplifting language / self talk, suggests Patricia Deldin, a professor of psychology and psychiatry at the University of Michigan, Ann Arbor. Use language such as, “This is a challenge but I can handle it,” not “I’m overwhelmed”.

“A simple language change can influence your mood and feelings and, subsequently, your actions,” says Dr. Deldin, who is CEO of Mood Lifters, a mental-wellness program.

References:

  1. https://www.health.harvard.edu/healthbeat/giving-thanks-can-make-you-happier
  2. https://www.wsj.com/articles/a-workout-for-your-mental-health-11610917200?mod=article_inline

Magic Formula

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“Believe it can be done. When you believe something can be done, really believe, your mind will find the ways to do it. Believing a solution paves the way to solution.” – David J. Schwartz

In “The Little Book That Beats the Market”, Joel Greenblatt, Founder and Managing Partner at Gotham Capital (average annualized returns of 40% for over 20 years), sets out the basic principles for successful stock market investing.

In his book, Greenblatt provides a “magic formula” that makes buying good companies at bargain prices process driven. It takes a bunch of stocks (Russell 3000) and ranks them on quality; takes the same bunch and ranks them on value. Add the two ranks and buy the stocks with the highest summed ranks. Hold them for a year or preferably longer.

The formula is based on two very solid pillars of value investing: Invest in companies with high returns, and make sure they’re selling at a large discount (margin of safety).

For his quality factor, Greenblatt chose return on capital, defined as EBIT (earnings before interest and taxes) divided by the sum of working capital and fixed assets. For his value factor, Greenblatt chose EBIT divided by enterprise value.

“If you just stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can end up systematically buying many of the good companies that crazy Mr. Market has decided to literally give away.”

“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

“In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”

“Stock prices move around wildly over very short periods of time. This does not mean that the values of the underlying companies have changed very much during that same period. In effect, the stock market acts very much like a crazy guy named Mr. Market.”

“Although over the short term, Mr. Market may set stock prices based on emotion, over the long term, it is the value of the company that becomes most important to Mr. Market.”

“After more than 25 years of investing professionally and after 9 years of teaching at an Ivy League business school, I am convinced of at least two things: 1. If you really want to “beat the market,” most professionals and academics can’t help you, and 2. That leaves only one real alternative: You must do it yourself.”
― Joel Greenblatt, The Little Book That Beats the Market

“Over the short term, Mr. Market acts like a wildly emotional guy who can buy or sell stocks at depressed or inflated prices. Over the long run, it’s a completely different story: Mr. Market gets it right.”

“Although over the short term Mr. Market may price stocks based on emotion, over the long term Mr. Market prices stocks based on their value.”

Greenblatt’s three basic principles:

  1. Buy good companies;
  2. Buy them at bargain prices;
  3. Use ranking to pick stocks.

Financial commentator Gary Shilling likes to say, “The stock market can remain irrational a lot longer than you can remain solvent.”

T,hus, when looking for bargain prices, you need to look at a lot more things than earnings yield, and when looking for good businesses, you need to look at a lot more things than high return on capital.

You can’t judge a business as good or bad without looking at its stability, its growth prospects, and the quality of its earnings; and you can’t judge a business as a bargain without looking at a variety of valuation metrics.

References:

  1. https://www.goodreads.com/work/quotes/73414-the-little-book-that-beats-the-market
  2. https://www.fool.com/investing/general/2007/03/23/foolish-book-review-the-little-book-that-beats-the.aspx
  3. https://seekingalpha.com/article/4374333-how-market-beat-little-book-beats-market-stock-pickers-guide-to-joel-greenblatts-magic

Inspiring Story: Small Actions can Pay Big Dividends

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“If you cannot do great things, do small things in a great way.” – Napoleon Hill

A man was asked to paint a boat. He brought his paint and brushes and began to paint the boat a bright red, as the owner asked him.

While painting, he noticed a small hole in the hull, and quietly repaired it.

When he finished painting, he received his money and left.

The next day, the owner of the boat came to the painter and presented him with a nice check, much higher than the payment for painting.

The painter was surprised and said “You’ve already paid me for painting the boat Sir!”

“But this is not for the paint job. It’s for repairing the hole in the boat.”

“Ah! But it was such a small service… certainly it’s not worth paying me such a high amount for something so insignificant.”

“My dear friend, you do not understand. Let me tell you what happened:

“When I asked you to paint the boat, I forgot to mention the hole.

“When the boat dried, my kids took the boat and went on a fishing trip.

“They did not know that there was a hole. I was not at home at that time.

“When I returned and noticed they had taken the boat, I was desperate because I remembered that the boat had a hole.

“Imagine my relief and joy when I saw them returning from fishing.

“Then, I examined the boat and found that you had repaired the hole!

“You see, now, what you did? You saved the life of my children! I do not have enough money to pay your ‘small’ good deed.”

So no matter who, when or how, continue to help, sustain, wipe tears, listen attentively, and carefully repair all the ‘leaks’ you find. You never know when one is in need of us, or when God holds a pleasant surprise for us to be helpful and important to someone.

Along the way, you may have repaired numerous ‘boat holes’ for several people without realizing how many lives you’ve save.

Make a difference….be the best of you

So, no matter who, when, or how… just continue to help, sustain, wipe tears, listen attentively and carefully repair all the ‘leaks’ you find, because you never know when one is in need.

Along the way, you may have repaired numerous ‘boat holes’ for several people without realizing how many lives you’ve save.

References:

  1. https://www.kindspring.org/story/view.php?sid=137702
  2. https://motivateus.com/stories/hole-in-the-boat.htm

“Those who joyfully leave everything in God’s hand will eventually see God’s hand in everything. Worries end when faith begins.” – Nishan Panwar

Differences Between Price and Value

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“Price is what you pay; value is what you get.” Warren Buffett

“Don’t judge a company’s stock by its share price.” Many people incorrectly assume that a stock with a low dollar price is cheap, while another one with a four-digit dollar price is expensive. In fact, a stock’s price says little about that stock’s value. Moreover, it says nothing at all about whether that the market price of a company is headed higher or lower.

The most important distinction between the ‘market price you pay’ and the ‘intrinsic value you get’ is the fact that price is arbitrary and value is fundamental.

  • Price is the amount paid for the product or service.
  • Cost is the aggregate monetary value of the inputs used in the production of the goods or services.
  • Value of a product or service is the utility or worth of the product or service for an individual.

To effectively deploy this strategy, it’s essential to find a company that you understand, that has solid fundamentals — then be patient and wait until the company’s stock price falls below its intrinsic value before you purchase the company.

Regarding ‘understanding’ a company, it’s important for investors to know how a company makes its money–revenue, profits and free cash flow.

At some point, a stock’s market price over the long term adjusts to its intrinsic value. This fact is how successful investors such as Warren Buffet have used to make billions over the long term.

“Finding differences between price and value is by far the most effective investment strategy”, writes Phil Townes, founder of Rule One Investing . “Not recognizing differences between price and value is also what causes many investors to lose their shirts, as companies are just as often overpriced as they are underpriced.”

How do you find companies that are on sale for less than their true value is to evaluate companies using a set of standards that look beyond the company’s current price tag. Phil Town call these standards the four Ms:

  • Meaning,
  • Moat,
  • Management and
  • Margin of Safety

The first step is to make sure you understand the company and the company you invest in has meaning to you as an investor. If it does, you’ll understand it better, be more likely to research it and be more passionate about investing in it.

The second step is to choose a company that has a moat. This means that there is something inherent about the company that makes it difficult for competitors to step in and carve away part of their market share.

The third step is to look at the company’s management. Companies live and die by the people managing them, and if you are going to invest in a company, you need to make sure their management is talented and trustworthy.

Finally, calculate the company’s intrinsic value and determine a margin of safety. Margin of safety is the price at which you can buy shares of a company, being more likely that you won’t lose money and have increased confident that you will make a good return on your invested capital.

When the market price of a company is lower than the company’s intrinsic value number, the company is deemed underpriced and represents a great investment opportunity.

“Leveraging differences between price and value is as simple as that”, said Town. “Find a company that you believe in, that has solid fundamentals — then wait until their price falls below their value. If you do this, you can buy companies on sale, sell them for their true value and make a lot of money in the process.”

The goal is to identify stocks that are undervalued—that is, their market prices do not reflect their true intrinsic value.

References:

  1. https://www.forbes.com/sites/forbesfinancecouncil/2018/01/04/the-important-differences-between-price-and-value/
  2. https://keydifferences.com/difference-between-price-cost-and-value.html
  3. https://www.investopedia.com/articles/stocks/08/stock-prices-fool.asp

The overriding goal is to help individuals learn how to successfully invest in assets, to build long term wealth and achieve lifetime financial freedom. 

What is Return on Invested Capital (ROIC)

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Return on Invested Capital (ROIC) is a performance ratio that aims to measure the percentage return that a company earns on invested capital.

The Return on Invested Capital (ROIC) ratio shows how efficiently a company is using the investors’ funds to generate net income. Investors use the ROIC ratio to compute and to understand the value of a company. It represents for investors how well a company has put its capital to work in order to generate profitable returns on behalf of its shareholders and debt lenders.

Fundamentally, ROIC answers the question:

  • “How much in returns is the company earning for each dollar invested?”

Return on Invested Capital is calculated by taking into account the cost of the investment and the returns generated.

  • Returns are all the earnings acquired after taxes but before interest is paid.
  • The value of an investment is calculated by subtracting all current long-term liabilities, those due within the year, from the company’s assets.

The cost of investment can either be the total amount of assets a company requires to run its business or the amount of financing from creditors or shareholders. The return is then divided by the cost of investment.

Net operating profit after tax (NOPAT) is typically used in the numerator because it captures the recurring core operating profits and is an unlevered measure (i.e. unaffected by the capital structure).

Unlike net income, NOPAT is the operating profits post-taxes and thus represents what is available for all equity and debt providers.

  • Return on Invested Capital (ROIC): The numerator is net operating profit after tax (NOPAT), which measures the earnings of a company prior to financing costs.
  • Invested Capital: As for the denominator, the invested capital represents the sources of funding raised to grow the company and run the day-to-day operations.

Capital refers to debt and equity financing, which are the two common sources of funds for companies that are used to invest in cash flow generative assets and derive economic benefits.

A company can evaluate its growth by looking at its return on invested capital ratio. Any firm earning excess returns on investments totaling more than the cost of acquiring the capital is a value creator. Excess returns may be reinvested, thus securing future growth for the company. An investment whose returns are equal to or less than the cost of capital is a value destroyer. Generally speaking,

  • A company is considered to be a value creator if its ROIC is at least two percent more than the cost of capital;
  • A company is considered to be a value destroyer is if its ROIC is two percent less than its cost of capital.

There are some companies that run at zero returns, whose return percentage on the value of capital lies within the set estimation error, which in this case is 2%.

A higher return on invested capital can be considered an indication that a company is required to spend less to generate more profit.

  • Profitable Returns on Invested Capital (ROIC) → Positive Value Creation and Shareholder Returns

The higher the profit margins of the company, the higher the return on invested capital, as the company can convert more revenue (or NOPAT) into profits.

Companies that generate an ROIC above their cost of capital implies the management team can allocate capital efficiently and invest in profitable projects, which is a competitive advantage in itself.

When investors screen for potential investments, the minimum ROIC tends to be set between 10% and 15%, but this will be firm-specific and depend on the type of strategy employed.

ROIC is one method to determine whether or not a company has a defensible “economic moat”, which is the ability of a company to protect its profit margins and market share from new market entrants over the long run.

Warren Buffett

The overall objective of calculating ROIC is to better understand how efficiently a company has been utilizing its operating capital (i.e. deployment of capital).

Generally, the higher the return on invested capital (ROIC), the more likely the company is to achieve sustainable long-term value creation.

References:

  1. https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-roic/
  2. https://www.wallstreetprep.com/knowledge/roic-return-on-invested-capital/

Financial Literacy in the Black Community

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“The financial well-being of African Americans lagged that of the U.S. population as a whole, and whites in particular. The reasons for this gap are complex, but one area of importance in addressing it is increased financial literacy.”

There are several gaps that highlight the economic and wealth inequities between America’s Black and White citizens:

  • Income and wealth inequality,
  • Incarceration and felony rates,
  • Health care inequities,
  • Life span, and
  • Incidents of negative encounters with police to name just a few.

But no gap is wider than the wealth gap between the average White household and average Black household. Today, the average White family has eight times the wealth of the average Black family, according to the Federal Reserve’s 2019 Survey of Consumer Finances.

There is no single, simple explanation for the racial wealth gap, explains the Brookings Institute in a 2020 Examining the Black-white wealth gap report. It is not explained away by differences in educational attainment. It is not accounted for by indebtedness—White families actually tend to have higher levels of debt. It is not even fully accounted for by differences in income. In addition, the fact that intergenerational transfer of wealth is lightly taxed means that historical gaps persist over generations.

Effectively, gaps in wealth between Black and White households reveal the effects of accumulated inequality and discrimination, as well as differences in power and opportunity that can be traced back to this nation’s inception.

The Black-White wealth gap reflects a society that has not and does not afford equality of opportunity to all its citizens.

Wealth is the sum of resources (assets – liabilities) available to a household at a point in time; as such it is clearly influenced by the income of a household, but the two are not perfectly correlated.

Two households can have the same income, but the household with fewer expenses, or with more accumulated wealth from past income or inheritances, will have more wealth.

Closing the racial wealth gap isn’t a simple fix. But many experts say education and financial literacy can help.

What follows are excerpts from an annuity.com post entitled “Financial Literacy in the Black Community”, written by Rachel Christian and excerpts from the TIAA Institute-GFLEC Personal Finance Index (P-Fin Index).

The TIAA Institute-Global Financial Literacy Excellence Center (GFLEC) Personal Finance Index report examined the state of financial literacy among African American adults and the relationship between financial literacy and financial wellness.

African Americans have struggled for decades to build wealth in America. Historical injustices — including slavery, systematic inequality, employment discrimination, racist housing policies and other barriers — have stymied economic well-being and harmed retirement confidence for the community.

Closing the racial wealth gap in the United States is a complex issue with no one-size-fits- solution. But expanding financial literacy, education and job training efforts can help, experts say.

Financial literacy is knowledge and understanding that enable sound financial decision making and effective management of personal finances, according to TIAA.

In 2019, white Americans had a median family wealth of $188,200, while Black Americans had a median family wealth of just $24,100. Source: U.S. Federal Reserve

In 2018, just one-third of Americans could correctly answer at least four out of five financial literacy questions on concepts such as mortgages, interest rates, inflation and risk, according to a 2018 study by the Financial Industry Regulatory Authority (FINRA).

The disparity is greatest among African Americans.

According to the 2021 TIAA Institute-GFLEC Personal Finance Index, African Americans answered an average of 38 percent of the study’s financial literacy questions correctly, whereas white Americans answered an average of 55 percent of questions correctly.

Minority financial experts agree that strengthening financial literacy — the ability to use skills to effectively manage money and resources — can be the key for African Americans to achieve a lifetime of financial well-being.

Financial literacy is made of several components. The 2021 TIAA Institute Index study assess financial knowledge in eight key areas.

8 Areas of Financial Literacy

  • Earning
  • Consuming, such as budgeting and managing expenses
  • Saving
  • Investing
  • Borrowing, credit and debt management
  • Insurance
  • Comprehending risk and uncertainty
  • Recognizing trustworthy sources of financial information and advice

Borrowing is where African American financial literacy is highest, according to the study, while knowledge about insurance is the lowest.

While not a cure-all, increased financial literacy can lead to improved financial capability and practices that can benefit those who’ve been economically disadvantaged for decades and with relatively low incomes.

References:

  1. https://www.annuity.org/financial-literacy/black-community/
  2. https://gflec.org/wp-content/uploads/2020/10/TIAA_GFLEC_Report_AAPFinIndex_Sept2020_02.pdf
  3. https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/