Author Archives: Edward Brownlee

Investing and Building Wealth

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“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter.

Investing is putting money into different securities or investment vehicles, hoping these securities will increase in price and payout profits.

In particular, investing in the stock market involves buying shares of companies that then rise in price. Some companies also pay dividends on their shares at regular intervals.

The end goal of investing is to spread your wealth in different vehicles that grow your money over time.

“Don’t be afraid to overpay for a stock with a history of rewarding shareholders. Winning stocks tend to keep winning if you have a long-term outlook.”  Charlie Munger convinced Warren Buffett that sometimes it’s worth paying a premium for a great business.

A company’s intrinsic value is the present value of all of its future free cash flows (meaning from now until the end of time- all the free cash flows that it will ever generate).

Free cash flow (FCF) is the amount of cash the firm generates from its operations minus the amount of money it reinvested into its operations. Cash flows are “free” because they can be used to pay off debt, buy back shares, pay dividends, or leave in the firm’s bank account.

If you own a private company, this is what you would think of as “real earnings” that you can pay yourself with, given that you don’t have to reinvest those funds into the operation.

”Good things happen to cheap stocks of out-of-favor, industry-leading companies.” ~ Nancy Tengler

The most crucial quantitative evidence of an economic moat is a high return on invested capital (ROIC).

Return on invested capital, or ROIC, is a financial metric that helps understand how efficiently a company generates profits. The less capital it requires to produce earnings, the better.

For example, what does an ROIC of nearly 920% mean? It basically says that a company like Apple can generate massive profits with little investment.

The formula for ROIC is highlighted below. To reinforce, the larger the numerator (NOPAT is the after-tax operating profit) relative to the denominator (which can be defined as fixed assets plus net working capital), the more efficient the company is.

ROIC = NOPAT/Average Invested Capital

ROIC = NOPAT/Average Invested Capital

Investors— both shareholders and creditors— require a certain level of return in exchange for providing a company with the funds it needs to run its business. This is called the weighted average of capital (WACC). A company generates excess returns if its ROIC consistently exceeds its WACC.

For example, imagine little Joey wants to open a lemonade stand. He needs $100 upfront to buy a table, a pitcher, lemons, sugar, ice, and cups. This is invested capital. Joey borrows $50 from Mom and promises to pay her 5% interest ($2.50). Dad has a higher risk tolerance, so he buys $50 of common stock in Joey’s lemonade stand. Dad equity return (this is called the cost of equity).

Buffett created a concept called owner earnings. It is a measure of the firm’s potential free cash flows if it weren’t reinvesting them:

Owner Earnings = Earnings + Depreciation & Amortization + Other Non-Cash Charges – Maintenance Capital Expenditures

Attaining prosperity and financial freedom and building wealth through investing in the stock market for the long term is fundamental.

References:

  1. https://www.forbes.com/sites/qai/2022/01/19/financial-freedom-in-2022-investing-in-stock-market-ideas
  2. http://www.comusinvestment.com/blog/growth-returns-on-capital-and-business-valuation
  3. https://einvestingforbeginners.com/buffetts-return-on-invested-capital-formula-daah/

Spending More Than You Have Never Ends Well

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Spending more than you have never ends well.

Spending more than you have is indeed a precarious path. It’s like diving into a stormy sea without a life jacket, or standing on a brick wall while simultaneously removing one brick at a time. It can lead to financial stress, debt, and instability. Whether you’re young or mature, wise financial choices are essential.

Remember, financial stability and planning are like a well-anchored ship. They can provide you with financial peace of mind, lead you to financial independence, and help build wealth.

Keep in mind:  In the ocean of expenses, sail with care,

Overspending waves can lead to despair.

Budget your voyage, trim the excess sail,
And watch your financial ship weather the gale.

So, set sail wisely, and may your financial compass always point toward prosperity and abundance!

Here are some prudent tips to avoid falling into the overspending trap:

  1. Budgeting: Create a realistic budget that outlines your income, expenses, and savings goals. Please be sure to stick to it diligently.
  2. Emergency Fund: Build an emergency fund to cover unexpected expenses. Having a safety net helps prevent overspending during crises.
  3. Track Expenses: Keep a record of your spending. Use apps or spreadsheets to monitor where your money goes. Awareness is key.
  4. Prioritize Needs Over Wants: Distinguish between essential needs (like rent, groceries, and utilities) and discretionary wants (like dining out or shopping). Prioritize needs first.
  5. Avoid Impulse Purchases: Pause before making a purchase. Ask yourself if it’s necessary or if it’s an impulsive desire.
  6. Limit Credit Card Usage: Credit cards can encourage overspending. Use them wisely and pay off balances promptly.
  7. Set Financial Goals: Establish short-term and long-term financial goals. Having a purpose for your money helps curb unnecessary spending.

Remember, financial well-being is a journey. By practicing mindful spending and making informed choices, you can avoid the precarious path of overspending.

Superior Investors are Lonely

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“Large amounts of money [or wealth] aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.” ~ Investment Books

If everyone likes a stock or company, it’s likely the asset has been mined too thoroughly, and has seen too much capital from investors flow in.

“Large sums of money or wealth are not made by investing in what everybody likes. They are made by investing in what everybody underestimates. This implies that if everyone is investing in a stock or company, it has probably already been thoroughly researched and too much capital has already been invested in it, leaving little room for any bargains to exist.

Furthermore, if everyone likes a stock or company, it is highly probable that its price is overvalued and inflated, which means it is at risk of falling if the crowd changes its collective mind and decides to sell.

Successful investors, therefore, tend to identify and purchase assets when their price is lower than their intrinsic value or when they are mis-priced and undervalued by the crowd or market. This means that superior investors often spend a lot of time being lonely since they buy assets that others do not recognize or appreciate.

In essence, superior investing involves two primary elements: identifying a quality or economic moat in a company or stock that other investors do not recognize, and having it turn out to be true (and accepted by the crowd and market).

It is essential to note that macroeconomics may influence a stock price in the short term, while microeconomics dominate in the long term. Therefore, investors should look for situations where macroeconomic factors depress prices.

Ultimately, if a company delivers consistently quarter after quarter, year after year, the price will eventually follow.”

nto it for any bargains to still exist.

If everyone likes the stock or company, there exist significant risks that the stock’s price has become too inflated and overvalued, and will fall if the crowd changes it collective mind and moves to the exit.

Superior investors know—and buy assets—when the price of a company’s stock is below its intrinsic value or is lower than it should be. And the price of an investment can be lower than it should be when the crowd does not recognize its merit.

Large amounts of wealth are not made by buying what everybody likes or following the proverbial crowd. Wealth is made by buying what everybody or the crowd underestimates or mis-prices.

In short, there are two primary elements in superior investing:

  • Seeing some quality or economic moat in a company or stock that other investors don’t recognize or appreciate (and it’s not reflected in the stock’s price)
  • Having it turn out to be true (and accepted by the crowd and market)

That is why it is said that successful investors spend a lot of time being lonely.

Source:  https://x.com/investmentbook1/status/1759534213752102957

Macroeconomics determine a stock price in the short term. In the long term, microeconomics dominate.

If a company delivers quarter after quarter, year after year, eventually, the price will follow.

Look for situations where macro depresses prices.

Dividend Kings

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The highest yield is only part of it when finding the best dividend stocks. Income investors know there’s no substitute for regular dividend increases over the long haul.

Dividend Kings are a unique class of stock that offers investors a phenomenal track record of annual dividend increases.

These elite members of the Dividend Aristocrats, which are companies in the Standard & Poor’s 500-stock index that have raised payouts once a year for 25 years running, have far more extensive track records. Specifically, Dividend Kings must have at least 50 consecutive years of uninterrupted annual dividend hikes.

Dividend Kings’ appeal should be evident after 2020’s COVID-19 outbreak. Many dividend stocks cut or even suspended their payouts amid uncertainty and disruptions. Income investors who had hoped these companies were lower risk simply because they paid dividends received a rude awakening, as the payout cuts often came along with deep share price declines.

With half a century of increasing distributions, however, Dividend Kings have an excellent track record that adds a layer of stability in an otherwise uncertain market environment. Nothing is ever certain on Wall Street, but these are 15 of the best stocks for dividend growth. The names featured here are all longtime leaders who exhibit more than 55 years of increases – including one pick with a track record of 69 straight dividend hikes – making them a bit more trustworthy than your typical income investment.

Women of Color Lag Behind Economy

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“Race and racism create specific, unique challenges for women of color that are too easily ignored with broad platitudes that seek to advance women’s representation without questioning which women are most likely to benefit.“ ~ Adia Harvey Wingfield, author of the book Flatlining: Race, Work, and Health Care in the New Economy

Race and gender continue to create divergent and uneven outcomes for women of all races and men of color in America.

An oft-cited statistic reveals that women make 79 cents for every dollar men earn. But Black women earn only 64 cents on the dollar, and for Latinas,.racism and ,.racism and” it is a dismal 54 cents.

As it was in the early 20th century, women of color continue to experience occupational and economic disadvantages that reflect the ways both race and gender affect their work experiences.

Research indicates that both factors, racism and sexism, impact women of color in professional settings. The factors adversely affect Black women in a variety of occupations through stifled leadership opportunities, the ongoing persistence of specific forms of sexual harassment, and subtle but pervasive doubts about competence, intelligence, and skill that are unrelated to actual performance, according to a Brookings Institution report.

In a study by Adia Harvey Wingfield, Black women doctors observed that

The medical community is sorely lacking in diversity with respect to Black women doctors.

Black women doctors, in a study by Adia Harvey Wingfield, observed that race and gender were key factors shaping the challenges they faced in the field.

Despite being 7% of the U.S. population, Black women are a paltry 3% of medical doctors today, a disparity that has devastating consequences for health equity in a rapidly diversifying society.

Working in a profession dominated by white men, Black women doctors are very attuned to the ways that sexism impacts their lives. For instance, nearly every Black woman doctor with whom Wingfield spoke shared accounts of being mistaken for a nurse rather than a doctor, so much so that they argued that when it came to their everyday interactions, gender was a much more significant factor than race.

Source: https://www.brookings.edu/articles/women-are-advancing-in-the-workplace-but-women-of-color-still-lag-behind/

Warren Buffett and Berkshire-Hathaway’s Annual Letter

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“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.” ~ Warren Buffett

Berkshire’s goal is simple: “To own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen,” writes Warren Buffett, legendary Chairman and CEO of Berkshire-Hathaway.

At Berkshire, they “particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure,” writes Buffett.

Be patient when you find a wonderful business

“When you find a truly wonderful business, stick with it,” Buffett writes. “Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”

Never risk permanent loss of capital

The stock market is becoming more and more like a casino, offering daily temptations to ignore a long-term investment strategy and quickly turn over holdings when “feverish activity” brings all number of uninformed or ill-intentioned actors out of the woodwork.

He writes: “At such times, whatever foolishness can be marketed will be vigorously marketed — not by everyone but always by someone.”

The late Charlie Munger, Buffett’s long-time friend and business partner, argued that there were two types of individuals who buy shares in the stock market: investors and speculators. The investors tend to be disciplined, hard-working, and thoughtful when buying assets. But the speculators are those who seek nothing more than a quick buck without care for the intrinsic value of the underlying business they’re buying.

He notes do not fall for the marketing of the foolishness, or the scene could turn ugly, and the average investor may walk away “bewildered, poorer, and sometimes vengeful.”

Number One Rule

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been — and will be — rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes,” states Buffett.

The final statement from Warren Buffett as stated in Berkshire Hathaway’s Annual letter to shareholders:

“Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. This ability is one we will not relinquish. When economic upsets occur, as they will, Berkshire’s goal will be to function as an asset to the country – just as it was in a very minor way in 2008-9 – and to help extinguish the financial fire rather than to be among the many companies that, inadvertently or otherwise, ignited the conflagration,” commented Buffett.

Source:  https://www.berkshirehathaway.com/letters/2023ltr.pdf

Self-Worth: Self Confidence is Not Enough

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Self-worth is a profound concept that speaks to our inner value and sense of deservingness. It encompasses how we perceive ourselves, how we evaluate our abilities, and how we believe we should be treated by others.

Your self-worth is not tied to external validation or achievements. It resides within you, waiting to be acknowledged and nurtured.

Jamie Kern Lima, author of the new book ‘WORTHY: How to Believe You Are Enough and Transform Your Life,’ is a New York Times bestselling author, former Denny’s waitress turned founder of IT Cosmetics, which she grew into the largest luxury makeup brand in the US. She made history as the first female CEO of a brand in its 100+ year history when she sold it to L’Oréal in a billion-dollar deal.

Most important thing you’ll read this Year

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Possibly the Most important thing you’ll read this Year…

The following is the philosophy of Charles Schulz, the creator of the ‘Peanuts’ comic strip.

You don’t have to actually answer the questions. Just ponder on them. Just read it straight through, and you’ll get the point.

1. Name the five wealthiest people in the world.
2. Name the last five Heisman trophy winners.
3. Name the last five winners of the Miss America pageant.
4. Name ten people who have won the Nobel or Pulitzer Prize.
5. Name the last half dozen Academy Award winners for best actor and actress.
6. Name the last decade’s worth of World Series winners.

How did you do?

The point is, none of us remember the headliners of yesterday. These are no second-rate achievers. They are the best in their fields.
But the applause dies.
Awards tarnish.
Achievements are forgotten.
Accolades and certificates are buried with their owners.

Here’s another quiz. See how you do on this one:

1. List a few teachers who aided your journey through school.
2. Name three friends who have helped you through a difficult time.
3. Name five people who have taught you something worthwhile.
4. Think of a few people who have made you feel appreciated and special.
5. Think of five people you enjoy spending time with.

Easier?

The lesson:

The people who make a difference in your life are not the ones with the most credentials, the most money … or the most awards. They simply are the ones who care the most.

Source: Weird and Amazing Stuff

Mermaid or Whale?

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Recently, in a large city in France, a poster featuring a young, thin, and tan woman appeared in the window of a gym.It read: “This summer, do you want to be a mermaid or a whale?”

A middle-aged woman, whose physical characteristics did not match those of the woman pictured on the poster, responded publicly to the question posed by the gym. She had a whale of a lot to say:

“To Whom It May Concern,

Whales are always surrounded by friends: dolphins, sea lions, and curious humans. They have an active sex life, get pregnant, and have adorable baby whales. They enjoy stuffing themselves with shrimp, playing and swimming in the sea, and visiting wonderful places like Patagonia, the Bering Sea, and the coral reefs of Polynesia.

Whales are wonderful singers and have even recorded CDs. ?They are incredible creatures and virtually have no predators other than humans.They are loved, protected, and admired by almost everyone in the world.

Mermaids don’t exist.If they did exist, they would be lining up outside the offices of psychoanalysts due to their identity crisis. Fish or human would prove quite a quandary for even the most skilled of therapists.

They don’t have a sex life because they kill men who get close to them, not to mention how could they have sex? Just look at them … where is IT? Therefore, they don’t have kids either. Not to mention, who wants to get close to a girl who smells like a fish store?

P.S. We are in an age when the media attempts to convince us that only skinny people are beautiful. I prefer to enjoy ice cream with my kids, a good dinner with a man who makes me shiver, and good chocolate with my friends. With time, we gain weight because we accumulate so much information and wisdom in our heads that when there is no more room, it distributes out to the rest of our bodies. So we aren’t heavy, we are enormously cultured, educated, and happy.”
—-Copied from Brian Horne page—-