Category Archives: Building Wealth

U.S. Economy

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The U.S. economy is being fueled by productivity growth due to artificial intelligence and fiscal spending.

According to a report by Goldman Sachs Research, AI could increase US productivity growth by 1.5 percentage points annually, assuming widespread adoption over ten years. The report estimates a growth boost to GDP from AI of 0.4 percentage points in the US by 2034.

The US Bureau of Economic Analysis reported that real gross domestic product (GDP) increased at an annual rate of 4.9 percent in the third quarter of 2023, primarily reflecting rising consumer spending and inventory investment.

AI productivity growth and fiscal spending are the primary contributors to the growth of the US economy. However, other factors could have played a role as well.

Return on Invested Capital

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“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” – Warren Buffett, 2007 Chairman’s Letter for Berkshire Hathaway.

Invested capital is the amount of money that has been invested in a business for purchasing inventory, equipment, property, leases, and funding the difference between accounts receivable (i.e., how much money is owed by customers to the business) versus accounts payable (i.e., how much business owes vendors).

Return on Invested Capital (ROIC) is a financial ratio that shows a company’s ability to allocate capital. The standard formula to calculate ROIC is to divide a company’s after-tax net operating profit by the sum of its debt and equity capital.

Once the ROIC is calculated, it is evaluated against a company’s weighted average cost of capital, commonly referred to as WACC. If a company’s WACC is not immediately available, it can be calculated by taking a weighted average of the cost of a company’s debt and equity.

The cost of debt is calculated by averaging the yield to maturity for a company’s outstanding debt. This is easy to find, as publicly traded companies must report debt obligations.

The cost of equity is typically calculated using the capital asset pricing model, or CAPM.

Once the WACC is calculated, it can be compared with the ROIC. Investors want to see a company’s ROIC exceed its WACC. This indicates the underlying business successfully invests capital to generate a profitable return. In this way, the company is creating economic value.

References:

  1. https://www.suredividend.com/high-roic-stocks/
  2. https://www.stratechi.com/fcf-and-roic/

25 Things About Life I Wish I Knew

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Life is all about relationships, health & wellness, purpose, being grateful and mindful, and learning:

  • Relationship refers to the state of being related or interrelated to others. It refers to the connection or bond between two or more people.
  • Health is the state of complete physical, mental, and social well-being, while wellness is the active process of achieving it. Wellness has six dimensions: physical, intellectual, emotional, environmental, social, and spiritual.
  • Purpose refers to having a definite vision and goal and being determined to achieve it. It is your “why” for life.
  • Being grateful is a positive emotion that entails focusing your time and attention on what you appreciate. The intent is not to block out difficulties but to approach those difficulties from a different perspective.
  • Being mindful is a state of active, open attention to the present moment. It involves observing one’s thoughts and feelings without judging them as good or bad.
  • Learning is acquiring new knowledge, skills, and behaviors through experience, observation, and reading. It is a relatively lasting change in perspective and behavior resulting from experience, observation, and reading.

Reference:

  1. Psyche Wizard

Free Cash Flow Yield

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Key variable: free cash flow yield.

Free cash flow (FCF) is one of the most important financial metrics you can study – especially if you’re a buy-and-hold investor. Free cash flow is the amount of money generated from a company’s operations minus any capital expenditures; it is the cash remaining after a company has paid its expenses, interest on debt, taxes, and long-term investments to grow its business.

Suppose a company generates more cash than it needs to run its business. In that case, it can do several valuable things, such as pay dividends, buy back its stock, acquire other companies, expand its business, and knock out its debts.

Free cash flow yield is thus free cash flow per share divided by the stock’s price.

By looking at operating earnings, free cash flow takes out one-time gains or losses that may obscure the actual state of a company’s business. It’s also less susceptible to the accounting gimmicks impacting a company’s reported earnings.

Many of the greatest investors consider free cash flow yield a key factor in analyzing a stock. There are limitations to any single metric, and free cash flow per share and free cash flow yield are no exceptions to that rule.

A company, for example, can have an extremely high free cash flow in part because it is putting off necessary capital expenditures. Similarly, a good company that makes significant capital investments one year may see its free cash flow take a hit but may benefit over the longer haul. That’s why it’s important to consider free cash flow along with a stock’s other fundamentals.

References:

  1. https://www.forbes.com/sites/investor/2013/08/08/four-free-cash-flow-yield-all-stars/
  2. https://www.kiplinger.com/slideshow/investing/t052-s001-10-stocks-to-buy-for-kingly-free-cash-flow/index.html

Citi AAdvantage Executive World Credit Card

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Frequent American Airlines flyers have one big reason to consider the Citi AAdvantage Executive World credit card with its $595-a-year fee: It comes with access to the carrier’s exclusive airport lounges, wrote Gregory Karp and Craig Joseph.

The advantages of the card include:

Pros

  • Admirals Club® membership for you and access for up to two guests or immediate family members traveling with you.
  • No Foreign Transaction Fees on purchases.
  • Earn 1 Loyalty Point for every 1 eligible AAdvantage® mile earned from purchases.
  • First checked bag is free on domestic American Airlines itineraries for you and up to 8 companions traveling with you on the same reservation.
  • $100 credit on Global Entry or TSA PreCheck every four years.
  • 25% discount on in-flight food and beverages on AA flights.
  • Priority boarding, check-in and screening on AA flights.
  • Luxury perks

One of the easiest ways to get an Admirals Club membership is to get the Citi AAdvantage Executive World Elite MasterCard. The credit card includes access to nearly 100 Admirals Club® and partner lounges worldwide. Immediate family (spouse, domestic partner and/or children under 18) or up to 2 guests may join you. Up to $850 value.

This card has some great perks that would interest anybody looking to frequently fly with American Airlines, such as: 2X on purchases on American Airlines, free baggage, and priority boarding privileges.

Priority check-in offers you a special counter area for you to check in at many airports. These check-in areas (seen below) can have much smaller crowds than the standard check-in areas so you can save a lot of time.

Priority boarding privileges

The priority boarding benefit will display on your American Airlines boarding pass as “Group 4.”

This is the final group in the priority boarding group, so you’ll be boarding before all the economy passengers but you’ll still have some first class and elites in boarding in front of you.

Additionally, American Airlines implemented a fully dynamic award chart, where the number of miles required for a free flight changes based on demand.

For low-demand periods, you can reportedly find flights within the lower 48 states for as low as 7,500 miles each way.

The bottom line is if access to Admirals Club airport lounges is a high priority for you, then this is your card.

References:

  1. https://www.nerdwallet.com/reviews/credit-cards/citi-aadvantage-executive

Baby Boomers’ Wealth Transfer

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“Experts say baby boomers will transfer over $50 trillion in wealth to their heirs. But for many, health care costs will claim the bulk of that wealth.” ~ NBC News

Baby boomers have experienced decades of wealth-building through real estate and the stock market, but skyrocketing healthcare costs will drain those resources faster for those who aren’t extraordinarily wealthy, according to NBC News.

Healthcare costs for elderly Americans and baby boomers are incredibly expensive and frequently wipe out people’s life savings. Thus, many people hoping that the “wealth transfer” will leave them with a substantial inheritance will end up disappointed because health care for older people in America is very expensive and destroying the transfer of wealth from baby boomers to subsequent generations.

According to the Bureau of Labor Statistics, people under the age of 65 reported spending an average of $5,209 per year on their health care in 2022, while those over 65 reported $7,540 annually.

By 2050, there are expected to be 84 million people over 65, according to the Bureau of Labor Statistics. That’s almost 50% more seniors than there are today.

Thus, the widely held belief that baby boomers are going to transfer tens of trillions of dollars to their heirs over the next few decades may not be entirely true.

The “generational wealth transfer” from Baby Boomers to Generation X and Millennials may not be as large as previously forecasted due to the rising costs of healthcare. The overwhelming cost of health care for older people means most people in those later generations won’t inherit much, even if their elders seem well-off today.

Cerulli estimated that 68% of the wealth transferred between 2020 and 2045 — which includes boomers as well as older generations — will come from U.S. households with at least $1 million in investable assets. And only 6.9% of households have that kind of wealth to begin with, Cerulli added.

References:

  1. https://www.nbcnews.com/business/consumer/generational-wealth-transfer-baby-boomers-cant-save-gen-x-millennials-rcna128099

Google’s “Owner’s Manual for Shareholders.”

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“Our goal is to develop services that significantly improve the lives of as many people as possible. In pursuing this goal, we may do things that we believe have a positive impact on the world, even if the near term financial returns are not obvious.” ~ Google founders  Sergey Brin and Larry Page

The founders, Sergey Brin, 31, and Larry Page, 32, launched Google in September 1998 in a friend’s garage in Menlo Park, Calif., naming the company after the mathematical term “googol,” which stands for a 1 followed by 100 zeros. They met in 1995 when they were doctoral students in computer science at Stanford. Both were enthralled with information retrieval and artificial intelligence. The two collaborated in 1996 on a search engine called BackRub, Google’s precursor, which gained notoriety on campus for its ability to analyze the “back links” pointing to a given Web site.

In 2004, Google generated 95 percent of its revenue from advertising. Advertisers buy keywords that launch tiny text ads alongside search results each time someone types those words into Google’s search box and clicks “Google Search.” Advertisers pay the amount they bid for the terms, but only if someone clicks their ads.

In 2004, Google founders  Sergey Brin and Larry Page issued a letter to investors called an “Owner’s Manual for Shareholders.” The seven-page letter was an organizational manifesto crafted by the co-founders to map out Google’s credo as a public company.The letter outlines the company’s goals, warning investors that as a public company, Google will not follow the usual path.

The letter outlines everything from the triumvirate leadership between the co-founders and CEO Eric Schmidt to its promise not to be “evil” by sacrificing its ideals for short-term financial gains. It promises more spending on employee perks such as free meals, a separate voting structure for executives, and avoidance of making financial predictions for Wall Street. Instead, the company will focus on long-term priorities that do not have an immediate effect on earnings.

“If opportunities arise that might cause us to sacrifice short-term results but are in the best long-term interest of our shareholders, we will take those opportunities,” the letter read. “We will have the fortitude to do this. We would request that our shareholders take the long-term view.”

The pair have created a corporate environment that fosters individual creative pursuits while pampering employees with free meals and regular beer bashes.

Here are several Google’s promises and processes as outlined in the owner’s manual:

Managing Wall Street: “Many companies are under pressure to keep their earnings in line with analysts’ forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction.”

Risk vs. reward: “As the ratio of reward to risk increases, we will accept projects further outside our normal areas, especially when the initial investment is small. We encourage our employees, in addition to their regular projects, to spend 20 percent of their time working on what they think will most benefit Google. Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses.”

Executive decision-making: “To facilitate timely decisions, Eric, Sergey and I meet daily to update each other on the business and to focus our collaborative thinking on the most important and immediate issues. Decisions are often made by one of us, with the others being briefed later. This works because we have tremendous trust and respect for each other and we generally think alike.”

Dual class voting: “While this structure is unusual for technology companies, it is common in the media business and has had a profound importance there. The New York Times Company, the Washington Post Company and Dow Jones, the publisher of The Wall Street Journal, all have similar dual class ownership structures. Media observers frequently point out that dual class ownership has allowed these companies to concentrate on their core, long-term interest in serious news coverage, despite fluctuations in quarterly results.

Googlers: “We provide many unusual benefits for our employees, including meals free of charge, doctors and washing machines. We are careful to consider the long-term advantages to the company of these benefits. Expect us to add benefits rather than pare them down over time.”

Kumbaya: “We aspire to make Google an institution that makes the world a better place. And now, we are in the process of establishing the Google Foundation. We intend to contribute significant resources to the foundation, including employee time and approximately 1 percent of Google’s equity and profits in some form.”

“As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same,” the letter states.

“In our opinion, outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes, this pressure has caused companies to manipulate financial results in order to ‘make their quarter.’ In Warren Buffett’s words, ‘We won’t smooth quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.'”

References:

  1. https://abc.xyz/investor/founders-letters/ipo-letter/
  2. https://www.cnet.com/tech/tech-industry/google-files-for-unusual-2-7-billion-ipo/
  3. https://www.cnet.com/tech/tech-industry/co-founders-release-google-owners-manual/
  4. https://blog.google/