“One of the best ways to make progress towards your financial goals is to make your money work for you—or, in other words, investing.” SoFi

Investing your hard-earned money can seem challenging. After all, there’s an overwhelming amount of information, choice of accounts, and strategies out there. Plus, the markets fluctuate, and the idea of potentially losing money can create stress and fear.

By learning more about the process, understanding the business, and knowing what you are investing in— you’ll gain more confidence that you are on the right path.  It’s important to know what you need to know to get started, and how investing can help you achieve your goals

Before you invest, it’s important to understand your goals. Selecting an investment strategy depends on your goal amount (how much you want to save) and the time horizon (when you’d like to use that money). First, almost everyone should have these two goals:

• Create an emergency fund, and
• Save for retirement.

These are called “bookend goals”—your primary short-term and primary long-term goal. Your emergency fund is your primary short-term and a lump sum that you can easily access should an emergency ariset. This fund should be 6-12 times the amount you spend monthly, depending on how risk-averse you are. Retirement is your primary long-term goal and largest financial goal. Even if it feels very far away, it’s important to start saving early.

If you want to invest like Warren Buffett, you would need to invest in great businesses trading for less than their intrinsic values, and then hold on to these investments for as long as they remain great businesses and their fundamentals do not change.

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

1. Begin saving, investing and building wealth early. Live below your income.
2. Buy pieces of a business. A stock is a single share of ownership in a public company. When you buy stock, you become a part owner of the company.
3. Buy a business you know on Main Street and investigate it thoroughly.
4. Have a margin of safety and circle of competence. Draw a circle around the businesses you know or are capable of knowing. Also, own a business with a competitive advantage.
5. Be a business analyst and concern yourself with what is going on inside a business. Read and study businesses over many decades before you invest.
6. Learn to value businesses and buy pieces of businesses far below what you think they’re worth.
7. Set goals: 20% return on investments.
8. Buy a business with good economics and financial strength (free cash flow, revenues, earnings that will grow and less than it’s worth ( intrinsic value).
9. Look for and invest in a business with a history of earnings, little debt, and management that manages the business for the benefit of owners.
10. Buy a business with a strong and enduring moat.
11. Buy a a lot of a few businesses and buy to keep. Buy very few things, but buy very big positions. “Buy so we’ll, you don’t have to sell.” By holding, you save on taxes and avoid transaction costs. Also, “diversification serves as protection against ignorance. “
12. Power of compounding works best when you concentrate your investments and you buy to keep.
13. Keep it simple.
14. Sell only if something fundamental changes within the business or if a better quality investment presents itself.

Learn the basics of value investing

Warren Buffett is widely considered to be the world’s greatest value investor. Value investing prioritizes paying low prices for investments relative to their intrinsic values.  Value investors seek out and invest in companies with intrinsic values that are well above the enterprise values implied by the prices at which the companies’ stocks trade. Value investors like Buffett expect that the market will eventually recognize the full value of a currently undervalued company, resulting in an increase in the company’s stock price and a profit for the value investor.

Essentially you’re looking for outstanding businesses, operated by top notch managers, and selling at an attractive price. The most successful investing involves lifetime ownership and concentrating your wealth. Know what you own, own a few, and buy a lot. “Money will not change how healthy you are or how many people love you,”  Warren Buffett says. A man is rich according to what he has; he is wealthy according to who he is.

To be the best, you must study and learn from the best.

References:

1. https://www.fool.com/investing/how-to-invest/famous-investors/warren-buffett-investments/
2. https://d32ijn7u0aqfv4.cloudfront.net/wp/wp-content/uploads/20170718165706/Guide-to-Investing-Intelligently_V5-1.pdf

Money Supply M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.

The “M2 Money Supply” is a measure for the amount of currency in circulation. M2 includes M1 (physical cash and checkable deposits) as well as “less liquid money”, such as saving bank accounts.

M2 is an excellent measure of liquid money that is available to be spent. It is a much better measure of money demand than it is of money supply.

Money Supply M2 in the U.S. increased to $20,982.90 Billion in September from $20,797 Billion in August of 2021. Source: Federal Reserve

Many economists believe excessive monetary growth is a primary cause of recent high inflation. Behind the 35.7% monetary increase in M2 money supply lies $5.5 trillion of net fiscal spending power injected by the federal government. Milton Friedman famously said “inflation is always and everywhere a monetary phenomenon.” 

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

Effectively, inflation can happen if the money supply grows faster than the economic output under otherwise normal economic circumstances. Inflation, or the rate at which the average price of goods or services increases over time, can also be affected by factors beyond the money supply, such as supply chain constraints and labor shortages.

According to the monetary theory of inflation, inflation occurs when the supply of money exceeds the demand for it; in other words, when the Fed supplies more money to the economy than the economy wants.

The Fed’s quantitative easing changes the form of the “money” (purchasing power) that deficits create, not the amount.

The consumer-price-index report reveals that big relative price shifts, notably for energy, food and vehicles, and base effects lie behind the rise in inflation.

Wages in the third quarter were up 4.2% from a year earlier, according to Wall Street Journal, the fastest increase since 1990 as labor shortages in a widening range of industries prompted employers to raise pay. Meanwhile, inflation has topped 5% for the past four months, the hottest in decades.

At first blush, this looks like the start of a process where wages push up prices, which then prompt employees to ask for, and receive, higher wages. That sort of wage-price spiral has historically been a key ingredient in persistently high inflation.

Wages and prices are often thought to have “an iron lockstep relationship and that’s just not the case here,” said Peter Matthews, economics professor at Middlebury College. While firms will attempt to pass on higher labor costs to customers, differences in how various sectors tend to respond will determine the impact on inflation, he said.

Prices have surged even more for factory goods, but those increases seem linked to key materials, energy and shipping rather than wages.

Decades ago widespread unionization and cost-of-living adjustments meant wages responded relatively quickly to higher inflation. Since then declining unionization, slower-to-adjust minimum wages and lower productivity growth have restrained wage growth except when unemployment is low. Even in the third quarter wage growth lagged behind inflation.

References:

1. https://www.longtermtrends.net/m2-money-supply-vs-inflation/
2. https://www.nasdaq.com/articles/confusing-connection-between-m2-and-inflation-2009-12-16
3. https://www.wsj.com/articles/wages-and-prices-are-up-but-it-isnt-a-spiralyet-11635688981

“Free Cash Flow is the cash remaining after making investments in capital assets.”

Free cash flow (FCF) measures a company’s financial performance. It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from its operating cash flow.

FCF measures a company’s ability to produce what investors care most about: cash that’s available to be distributed in a discretionary way. The ways a business can use their free cash flow include:

• Pay dividends
• Buy back shares
• Make an acquisition
• Pay down debt

Free cash flow (FCF) is the cash that remains after a company pays to support its operations and makes any capital expenditures (purchases of physical assets such as property and equipment.

Free cash flow is related to, but not the same as, net income. Net income is commonly used to measure a company’s profitability, while free cash flow provides better insight into both a company’s business model and the organization’s financial health.

Many analysts believe that FCF is one of the key financial indicators for measuring business performance over the long term and provides useful information regarding how cash provided by operating activities compares to the property and equipment investments required to maintain and grow the business.

In addition to other financial measures, free cash flow (FCF) can be used to manage a business, make planning decisions, evaluate performance, and allocate resources.

There are two definitions of free cash flow:

1. Free cash flow to equity (FCFE) is the cash flow available for distribution to a company’s equity-holders. It equals free cash flow to firm minus after-tax interest expense plus net increase in debt.
2. Free cash flow to firm (FCFF) (also referred to as free cash flow) of a company is the cash flow in an accounting period which is available for distribution to the company’s debt-holders and equity-holders.

FCFE differs from FCFF in that the free cash flow to firm is the cash flow that is available for distribution to both the debt-holders and equity-holders while the free cash flow to equity is the cash flow that’s available only for distribution to equity-holders.

Free cash flow to firm (FCFF) valuation model is appropriate when the company do not pay dividends or where the dividends are disproportionate to the company’s earnings.

Free cash flow enables management to decide on future ventures that could improve the shareholder value. Additionally, having an abundant FCF indicates that a company is capable of paying its monthly dues. Companies can also use their FCF to expand business operations or pursue other short-term investments.

When compared to earnings, free cash flow is more transparent in showing the company’s potential to produce cash and profits. FCF serves as an important basis for determining the intrinsic value of a company and pricing its stock.

The formula below is the most commonly used formula for levered free cash flow:

Free Cash Flow = Operating Cash Flow (CFO) – Capital Expenditures

Most information needed to compute a company’s FCF is on the cash flow statement.

As an example, let Company A have $22 million dollars of cash from its business operations and $6.5 million dollars used for capital expenditures, net of changes in working capital. Company A’s FCF is then computed as:

FCF = $22 – $6.5 = $15.5m

DCF Analysis and Stock Valuation

Stock valuation is the process of determining the intrinsic value of a share of common stock of a company. The purpose of stock valuation is to find the value of a common share which is justified by the company earnings and growth potential, identify undervalued and overvalued stocks, overweight or underweight them in an investment portfolio and generate alpha i.e. excess return.

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC).

The weighted average cost of capital (WACC) is the minimum return a company must earn on its projects. It is calculated by weighing the cost of equity and the after-tax cost of debt by their relative weights in the capital structure.

WACC is an important input in capital budgeting and business valuation. It is the discount rate used to find out the present value of cash flows in the net present value technique.

The absolute valuation approach attempts to find intrinsic value of a stock by discounting future cash flows at an discount rate which reflects the risk inherent in the stock.

Free Cash Flow Models

The free cash flow valuation models can be used to value a majority i.e. controlling ownership based on free cash flows of the company which equals the cash flows from operating activities less any expected changes in working capital less any expected capital expenditure.

The single-stage free cash flow model discounts the expected free cash flows at the end of Year 1 at the weighted average cost of capital.

Stock Value = FCF1 / (WACC − g)

Where FCF1 is the free cash flow at the end of Year 1, WACC is the weighted average cost of capital and g is the growth rate of free cash flows.

Another back of the envelop valuation method is to take product of the five year average of free cash flow and multiply by twenty. Compare the product to the company’s market cap for a quick valuation model.

A business ability to generate significant amounts of free cash flow for years, which will support debt repayments, dividend payouts, share buybacks, and acquisition, is an essential valuation metric. Free cash flow can demonstrate a company’s ability to reward investors. It can provide useful information to help investors better understand underlying trends in a business.

Free cash flow is not perfect and has limitations, but it is more difficult to manipulate than net income or earnings per share.

FCF has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of other financial measures, such as return on invested capital (ROIC) and earnings. One of the limitations of FCF is that it does not reflect future contractual commitments.

FCF, as compared with net income, gives a more accurate picture of a firm’s financial health and is more difficult for a company to manipulate, but it isn’t perfect. Because it measures cash remaining at the end of a stated period, it can be a much “lumpier” metric than net income.

For example, if a company purchases new property, FCF could be negative while net income remains positive. Likewise, FCF can remain positive while net income is far less or even negative. If a company receives a large one-time payment for services rendered, its FCF very likely may remain positive even if it incurs high amortization expenses (like the costs of software and other intangible assets for a cloud computing company). 

In a nutshell, free cash flow is what a company has left over at the end of the year — or quarter — after paying all its employees’ salaries, its bills, its interest on debt, and its taxes, and after making capital expenditures to expand the business.

References:

1. https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-free-cash-flow-fcf/
2. https://xplaind.com/121791/free-cash-flow-to-equity-fcfe
3. https://xplaind.com/408436/free-cash-flow-to-firm-fcff
4. https://corporatefinanceinstitute.com/resources/knowledge/valuation/valuation-methods/
5. https://xplaind.com/965210/cost-of-capital
6. https://www.fool.com/investing/how-to-invest/stocks/free-cash-flow/
7. https://www.fool.com/investing/general/2007/09/05/foolish-fundamentals-free-cash-flow.aspx

Pfizer develops COVID therapeutic antiviral pill that cuts hospitalizations and deaths by 89%

Pfizer Inc. said its COVID-19 therapeutic antiviral pill, officially known as PF-07321332, reduced hospitalizations and deaths in high-risk patients exposed to the virus by 89%, a result that has the potential to upend how the disease caused by the coronavirus is treated and possibly end the course of the pandemic.

Pfizer’s oral antiviral reduced hospitalizations & deaths by 89% in a trial of high-risk #covid19 patients. CEO @AlbertBourla joins us next on @SquawkCNBC https://t.co/6r1q6PtRlW

— Meg Tirrell (@megtirrell) November 5, 2021

The drugmaker said that it was no longer taking new patients in a clinical trial of the treatment “due to the overwhelming efficacy” and planned to submit the findings to U.S. regulatory authorities for emergency authorization as soon as possible.

The Pfizer results mean there are now two promising candidates for treating COVID-19 patients early in the course of the disease. Last month, Merck & Co. and partner Ridgeback Biotherapeutics LP submitted their experimental pill to regulators after a study showed it slashed the risk of getting seriously ill or dying by half in patients with mild-to-moderate COVID-19.

A pill that could be taken at home at the first sign of symptoms is a crucial tool for reducing and possibly ending the COVID-19 crisis globally, so long as it’s widely available.

In Pfizer’s trial of 1,219 unvaccinated adults, five days of treatment with its drug dramatically reduced the rate of hospitalisation when it was started within either three days or five days of symptom onset, the company said. The drug, Paxlovid, binds to an enzyme called a protease to stop the virus from replicating itself.

Overall, just 0.8% of people who started treatment within three days of getting sick ended up in the hospital and no one died, while 7% of people who got a placebo in that window were later hospitalised or died. Similar results were found when the drug was started within five days of symptom onset. The result, which hasn’t been published in a medical journal, was highly statistically significant, Pfizer said.

“It’s a gamechanger,” Pfizer CEO Albert Bourla tells @megtirrell about its Covid-19 antiviral drug. “This is a fantastic demonstration of the power of science.” https://t.co/IUYCAbZUu9 pic.twitter.com/QTFfJBizPs

— CNBC (@CNBC) November 5, 2021

References:

1. https://www.business-standard.com/article/current-affairs/pfizer-develops-covid-pill-that-cuts-hospitalisations-and-deaths-by-89-121110500783_1.html
2. https://newsnationusa.com/news/world/uk/covid-breakthrough-as-pfizers-new-pill-slashes-hospitalisations-by-89/

“No matter how much money you earn, you’ll never build wealth and achieve financial freedom if you spend more than you make.”

Saving and investing for retirement depends on your current age, cash flow, desired lifestyle in retirement and the types of retirement accounts that are available to you. No one is born knowing how to save or to invest. A few people may stumble into financial freedom—a wealthy relative may die, or a entrepreneurial business may take off. But for most people, the only way to build wealth and attain financial freedom is to save and invest over a long term.

The amount of money you’ll need to live on in retirement depends on many personal factors, some you can control (such as when you start saving and how you budget) and some you can’t (including the length of your retirement, inflation and your health during it). As you save for retirement you want to amass the biggest pile of assets possible. More savings and investments equals more confidence and room to breathe. Less savings equals less confidence and more restrictions.

“Investing makes it possible for your money to work for you.”

There are basically two ways to make money.

1. You work for money. – Someone pays you to work for them or you have your own business.
2. Your money works for you. – You take your money and you save or invest it. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. Your money can make an “income,” just like you.

In general, experts recommend socking away 10%–20% of your income toward your future. Even if you’re not able to contribute that much early in your career, time and compound interest are on your side. And thanks to the power of compounding, the earlier you start investing, the less capital you may have to save to get you to your financial goal.

With the power of compounding, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved and invested can add up to big money.

Start early and pay yourself first

The earlier you start investing and growing your money for retirement the better, but it’s never too late. Regular contributions can keep your portfolio on track. Some strategies include:

• If you have a workplace 401(k) or 403(b) plan, decide how much of your salary to have deducted from your paycheck and deposited in your retirement account. Ensure you pay yourself first to avoid spending the money you set aside for saving.
• Budget using the 50/30/20 rule: 50% of your income should go toward essentials, 30% to discretionary spending, and 20% toward long-term goals (like retirement).
• Start catch-up contributions. This rule allows those over 50 to add more to an IRA or 401(k) (or similar plan), giving you a chance to make up lost time if you’re late to the retirement savings game.

There are many methods to meet your retirement savings goals, including tax-friendly workplace plans and IRAs. Diversifying how and where you save your money can be a smart strategy, especially when considering tax implications and rates of return. Here are some options for where to park your retirement savings.

• 401(k)s and other workplace plans – A 401(k) is a tax-deferred, employer-sponsored retirement account, typically for corporate workers. Unless you have and opt for a Roth or after-tax option, you don’t pay taxes on the money you contribute or your account as it grows; instead, you’ll owe income tax on withdrawals. 401(k)s, 403(b)s and 457s are “defined contribution” (DC) plans. With DC plans, you contribute your own money, and your employer or organization can choose to contribute as well, typically by matching some of what you save. If yours does, make sure to contribute at least the amount of the match. It’s “free money” and can provide a powerful boost to your savings.
• Individual retirement accounts (IRAs) – The most common types of IRAs are traditional and Roth IRAs. Which to choose can come down to taxes—that is, whether you want a tax break now or in the future. With a traditional IRA, some or all of your contributions may be tax deductible, but you‘ll owe income tax on withdrawals. With a Roth IRA, you contribute after-tax dollars, but withdrawals (and any investment gains) are tax free as long as you meet certain criteria.
• Annuities – Another tool to consider is an annuity. Annuities can provide guaranteed income, no matter what your other investments do. You can choose between a fixed or variable annuity. Fixed annuities offer consistent installment income, while income from a variable annuity fluctuates depending on how the stock market performs.
• Taxable accounts – Taxable accounts are offered through brokerage firms and enable you to invest in stocks, bonds, mutual and exchange-traded funds (ETFs) and a range of other investments. As the name suggests, you’ll owe tax on any interest or dividends earned though the accounts, as well as capital gains on investments you sell at a profit.

Other sources of retirement income

As you consider your budget, it’s helpful to understand other potential income sources during retirement. Though rare, a few companies still offer pension-style benefits. And most workers contribute to Social Security throughout their careers and will be able to receive regular payments when they retire.

• Defined-benefit plans – With defined-benefit plans, your employer fully manages and contributes to the account. When you retire, you receive a guaranteed income, typically in one “lump sum” payment or at defined intervals. The amount you receive will depend on many factors, including your salary and years of employment.
• Cash-balance plans – Some companies offer cash-balance pension plans. Like traditional pensions, employers fund the accounts. But, like 401(k)s, employees manage the distributions. Also, the amount an employer can contribute to your account rises with age.
• Social Security – Don’t forget about Social Security, which you contribute to through FICA taxes. The amount you’ll receive Opens in new window each month from Social Security depends on many factors including your lifetime earnings and how old you are when you start taking payments.

How to save and invest more

It’s one thing to have money to invest. But how to invest is a whole other subject. It can be particular challenge for busy and non financially savvy individuals. Investing your retirement funds in stocks could help give your money a chance to grow over time often faster than the rate of inflation.

There’s always time to save more for retirement while you’re still working. Here are some tips.

• Make retirement savings a priority: Put your future first by planning for it. Set up automatic investments so the money you put toward investing comes directly out of your paycheck. After all, if you don’t see it, you’re less likely to miss it.
• Maximize retirement accounts. Saving as much as you’re allowed Opens in new window in tax-favored retirement accounts is a great goal to have. But before you can max out, start small. For example, if your employer matches contributions to your workplace plan, it’s like free money—so make sure to save at least enough to earn every matching dollar.
• Save in a brokerage account. If you’re able to stash some extra funds in a taxable brokerage account, do so. This money won’t provide tax savings, like a 401(k) or individual retirement account (IRA) can. But it’s a powerful way to build additional funds for the future.
• Tax planning is an important part of retirement planning. Having a diversified tax approach, with savings in a traditional pretax 401(k) or tax-deductible IRA, plus an after-tax Roth account (which can mean tax-free withdrawals) and/or a brokerage account, can save you now and in the future. A financial planner or tax professional can help with your strategy.

When saving and investing for retirement, four factors are key in determining how much you’re going to have when you reach your leisure years. They are:

1. Time horizon – The number of years during which you save.
2. Amount or your retirement number – How much you save per year.
3. Rate of appreciation – How much your assets can grow through interest and investments.
4. Rate of depreciation (or loss of purchasing power) – How much you may lose from inflation, taxes, and bad investments.

The best investments depend on when you will need the money, your financial goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.

Being wealthy is not about how much money you earn each month but is about how much you’re able to save and invest for the long term. Everyone wants to build wealth and retire well. But investing to grow your money and to build wealth will lower your dependence on your job, giving you more options in life and results in financial freedom. Investing for building wealth may enable you to retire early in life.

References:

1. https://www.prudential.com/financial-education/how-to-save-for-retirement
2. https://www.sec.gov/investor/pubs/savings-investing-for-students.pdf
3. https://www.prudential.com/financial-education/retirement-for-women-and-common-challenges
4. https://www.thestreet.com/retirement-daily/tools-resources/retirement-remix-chapter-10-investing-for-retirement
5. https://www.entrepreneur.com/article/332372