Category Archives: Financial Literacy

The Power of Habit: Why We Do What We Do in Life and Business

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Habits are choices that you continue doing repeatedly without actually thinking about them.

The Power of Habit, written by New York Times business reporter Charles Duhigg, explains why habits exist and how they can be changed. According to Duhigg, if people can understand how behaviors became habits, they can restructure those patterns in more constructive ways.

Additionally, understanding and changing habits is one of the most important thing in developing good personal financial behaviors or eliminating bad personal financial behaviors.

https://youtu.be/W1eYrhGeffc

Source:

  1. https://charlesduhigg.com/books/the-power-of-habit/
  2. https://www.shortform.com/summary/the-power-of-habit-summary-charles-duhigg
  3. https://fastertomaster.com/the-power-of-habit-by-charles-duhigg/

Bill Miller 4Q 2019 Market Letter

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“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” Warren Buffett

Bill Miller, CFA, is the founder of Miller Value Partners, and currently serves as the Chairman and Chief Investment Officer. His fourth quarter 2019 Market Letter released 13 January 2020, to clients is loaded with useful insights for investors and followers of the financial markets. The letter has been discussed thoroughly by financial pundits and the financial entertainment media.

Market forecasts delivered by economists and the financial news entertainment media pundits on networks, such as CNBC, are rarely useful or insightful or accurate.  Bill Miller cited in his letter that “…the future is not forecastable with any degree of granularity”. 

The method most forecasters use is either to follow the consensus or to “believe that tomorrow will look pretty much like yesterday.”  He further mentioned that “one of the 20th century’s greatest economists, was once asked how far into the future a good economist could forecast”. He quipped: “One quarter back.””

“Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” Warren Buffett

Essentially, no economist or financial guru can accurately or reliability forecast the market’s direction (rise, flat or pullback) or its relative velocity of change. Despite their self proclaimed vast financial experience and inside knowledge of the inner workings of equity stock markets, the sophisticated financial tools available to them, and their early access to market news, they remain unable to reliably forecast the market.

Miller concluded in his letter that, “stocks will not move in a straight line higher even if the bull market continues in 2020, as I believe it will.”  He stated that,  “setbacks and corrections should be expected, but unless something causes the economy to tip into recession and earnings and cash flows to decline, which I do not expect even if the geopolitical situation gets grimmer, then the path of least resistance for stocks remains as has been for a decade: higher.”

To read the entire letter, go to:  Bill Miller 4Q 2019 Market Letter

Sources:

  1. https://millervalue.com/bill-miller-4q-2019-market-letter/
  2. https://www.evidenceinvestor.com/warren-buffetts-advice-investors-25-quotes/

U.S. Economic Expansion Continues

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Despite new records highs in the U.S. markets observed during the beginning weeks of calendar year 2020, investors remain skittish regarding the resiliency of the ten year old bull market. With slowing global growth, the threat of headline risks or adverse central bank actions clouding the horizon, it is difficult to predict what direction the markets are headed.

“Economic expansions don’t just experience a natural death…they get murdered. The culprits typically involve government policies: warfare, terrorism, trade protectionism, erosion of the rule of law, monetary policy mischief or invasive regulations.” – Former Federal Reserve Chair Ben Bernanke

Yet, the fundamentals of the U.S. economy remain strong. The economic expansion has run and jobs have increased for more than 110 straight months. Additionally, African-Americans and Hispanic unemployment rates are near historic lows, and wages are rising for lower paid employees.

Yet, there are risks to the continued health and expansion of the U.S. economy. There was a slowdown in manufacturing, GDP growth and business investment, which are warning lights but not a definitive signal that the economy was entering a recession. Despite these headwinds, the economy continues to grow.

Long-term, there exist one serious threat to the U.S. economy and the nation’s prosperity. The threat comes in the form of proposed massive increases in government’s share of, and control of, the U.S. economy.

The ballooning federal debt and the looming increase in federal taxes on all Americans to pay the federal debt obligation removes assets and capital from the more efficient private market to the least efficient and wasteful public sector.

Recession, the “R” Word

Many economists are wondering how much longer the expansion can continue and whether the economy is on the precipice of a recession. In fact, a number of financial pundits and financial news entertainment networks repeatedly say that the economy is due for a pull back. Or, they appear to be actively predicting or ‘rooting’ for recession. For example, CNBC Fast Money went as far to present on-air a ‘Countdown to Recession Clock‘ in August 2019.

Keep in mind that although the current U.S. economic expansions is the longest in the nation’s history, most financial pundits say that ‘expansions do not die of old age, the Federal Reserve kills them’ by their actions of raising interest rates and quantitative tightening.

Rising tide has not lifted all boats

“No American is ever made better off by pulling a fellow American down, and every American is made better off whenever any one of us is made better off. A rising tide raises all boats.” President John F. Kennedy

Many conservatives in America believe that ‘a rising tide will lift all boats’. America has experienced more than ten years of economic expansion and growth…its longest period in recorded history. This expansions has lifted the financial boats of many Americans, especially the wealthy and upper middle class.

According to CNBC, after years of rising, inequality is declining under President Trump. Despite the rhetoric, this expansion has lifted the economic boats of many Americans residing in the lower income brackets in America. It has slightly reduced inequality by proving job opportunities to the perennial unemployed or underemployed. Additionally, for the first time in decades, wages have risen for working class Americans. Nevertheless, there has been a relatively high percentage of Americans who have been stranded in the mud and have been left behind.

Consequently, a rising tide of the more than decade long expansion has done more through providing employment opportunities to reduce the income and wealth gap in our countries than decades of federal programs and policies. However, it has not lifted the boats stranded financially on land or stuck on shoals as a result of poor financial habits and behaviors.

Why economic inequality matters

According to the nonpartisan Pew Research Center, the rise in economic inequality in the U.S. has been tied to several factors. These include technological change, globalization, the decline of unions and the eroding value of the minimum wage. Whatever the causes, the uninterrupted increase in inequality since 1980 has caused concern among members of the public and U.S. Presidential candidates.

One reason for the concern is that people in the lower rungs of the economic ladder experience diminished economic opportunity in the face of rising inequality. Others have highlighted inequality’s negative impact on the political clout of the economically disadvantaged, on geographic segregation by income, and on economic growth itself.

Most Americans think there is too much economic inequality in the country, and about half believe addressing inequality requires significant changes to the Capitalist economic system. And according to Pew, 61% of Americans say there is too much economic inequality in the country today. Roughly a quarter (23%) say the country has about the right amount of inequality and 13% say there is too little inequality.

Tackling Inequality

Bottomline is that the longest economic expansion in U.S. history has not benefited all Americans. The top 5% have benefitted greatly while the bottom 50% have been left behind and have not benefitted equitably from the growing economic pie in the U.S.

In 2020 America, we must find someway for all Americans, not just the wealthy and political elite, to share in the nation’s prosperity brought about by Capitalism. Our goal should be to advance economic opportunities for working class Americans. Goal should be to lift those at the bottom up, not bring those at the top down.

References:

  1. https://www.pewsocialtrends.org/2020/01/09/trends-in-income-and-wealth-inequality/
  2. www.cnbc.com/video/2020/01/24/new-data-shows-wealth-inequality-declining-for-the-first-time-in-years.html

Stock Investing Basics

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“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” John Bogle

Investing, especially in stocks, is about putting your money to work for you with the goal of growing it over time. And, the sooner you start investing the less you may need to save because your money gets to work that much sooner. The more you invest; the more those returns can add up.

Investing does involve risk. And the stock market particularly will experience volatility, meltdowns and melt ups. But there are ways and means to mitigate that risk. The key is to choose a strategy that incorporates a broad range of investments in stocks, bonds, and cash based on your risk tolerance and time horizon and never put all your money in one particular stock.

Intelligent investing is based on the relationship between price and value. One other important factor is time.  Assessing the stock price relative to its intrinsic value remains the most reliable way to invest for the long term. To protect yourself against market downturns, a long-term approach is essential.

Important steps to smart investing

All too often, people fail to think about how to start or just fail to start investing. To stay ahead of inflation, your money needs to earn more than a typical savings account pay. Research indicates that the best action a long-term investor can take is to start investing early in life, like in their early twenties—regardless of what the markets are doing.

Create an investment plan

“The man without a purpose is like a ship without a rudder.” Thomas Carlyle

Like a ship without a rudder, trying to manage your money and achieve your long-term goals are unlikely without a plan. You would not start a trip without planning and mapping out your route in advance. So,why would you save for retirement without first planning your path to achieving your short-, intermediate-, and long-term financial goals. You will need to:

  • Have an investment plan that is realistic and actionable.
  • Understand your plan, follow it, and adjust it when things change in your life.

Put your plan into action.

  • Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
  • Don’t wait. If you invest now, you’ll start earning sooner.

Stay on track.

  • Do periodic checkups to keep your portfolio healthy.
  • Keep in mind that long-term goals are more important than short-term performance.

When you invest in a stock, you are buying ownership shares in a company—also known as equity shares. Your return on investment, or what you get back in relation to what you put in, depends on the success or failure of that company. If the company does well and makes money from the products or services it sells, you expect to benefit from that success. There are two main ways to make money with stocks:

  1. Dividends. Publicly owned companies can choose to distribute some of those earnings to shareholders by paying a dividend. Shareholders can either take the dividends in cash or reinvest them to purchase more shares in the company.
  2. Capital gains. When a stock price goes higher than what you paid to buy it, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you’ve incurred a capital loss.

Both dividends and capital gains depend on the returns generated by the company—dividends as a result of the company’s earnings and capital gains based on investor demand for the stock. 

The performance of a stock can be affected by what’s happening in the market, which can be affected by the economy as a whole or by changes in investor psychology. For example, if interest rates increase, and you think you can make more money with bonds than you can with stock, you might sell off stock and use that money to buy bonds.

If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn may affect the value of the investments you hold. Other factors, such as political uncertainty at home or abroad, energy or weather problems, or soaring corporate profits, also influence market performance.

Important Element of Investing

Stock prices will be low enough to attract investors again. If you and others begin to buy, stock prices tend to rise, offering the potential for making a profit. That expectation may breathe new life into the stock market as more people invest.

This cyclical pattern—specifically, the pattern of strength and weakness in the stock market and the majority of stocks that trade in the stock market—recurs continually, though the schedule isn’t predictable. Sometimes, the market moves from strength to weakness and back to strength in only a few months. Other times, this movement, which is known as a full market cycle, takes years.

At the same time that the stock market is experiencing ups and downs, the bond market is fluctuating as well. That’s why asset allocation, or including different types of investments in your portfolio, is such an important strategy: In many cases, the bond market is up when the stock market is down and vice versa.

Your goal as an investor is to be invested in several categories of investments at the same time, so that some of your money will be in the category that’s doing well at any given time.

Savers often think they can’t afford to lose any money by investing in the market. But they don’t realize that when they don’t make their money work for them, they are losing purchasing power. Inflation, for example, creeps up over the years and steals from your savings if you’re not earning enough to make up for it.

  1. https://www.oaktreecapital.com/docs/default-source/memos/nobody-knows-ii.pdf

Best Investing Strategies | Financial Literacy

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The best investing strategies are those that align with an investor’s values, long-term goals, objectives, mindset and risk tolerance. In other words, the best investment strategy is the one that works best for the investor. The major strategies are:

Fundamental Analysis

Fundamental analysis is a form of an active investing strategy that involves analyzing financial statements for the purpose of selecting quality stocks. It is primarily used for researching and analyzing individual equity stocks.

Technical Analysis

Technical analysis use charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. In different words, there are particular patterns and trends that can provide the technical trader certain cues or signals, called indicators, about future market movements and when o enter or exit a equity stock position.

Value Investing

The value investor searches for stocks that are undervalued or selling at a discount…meaning stocks priced below their intrinsic values. Value investing is based on the idea that some degree of irrationality exists in the market. This irrationality may present opportunities to realize a margin of safety and to get a stock at a discounted price. Rather than spending the time to search for value stocks and analyze company financial statements, many investors buy index funds that reflect a benchmark index.

Growth Investing

Growth stocks typically perform best in the later stages of a market cycle when the economy is expanding. The growth strategy reflects what corporations, consumers, and investors are all doing simultaneously in healthy economies–gaining increasingly higher expectations of future growth. Technology companies are currently good examples of this strategy. They are typically valued high but can continue to grow beyond those valuations when the environment is right.

Momentum investing

Momentum investing is a strategy that capitalizes on current price trends with the expectation that momentum will continue to build in the same direction. Momentum investors believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend.

Buy and Hold

Buy and hold investors believe “time in the market” is a more important than “timing the market.” The strategy is applied by buying investment securities and holding them for long periods of time…decades.

More on Risk Tolerance

Risk is a major component of an investing strategy. Some investors have a high tolerance for risk while other investors are risk-averse. Risk tolerance is normally determined by several key factors including your age, income, and how long you have until you retire. Technically, the younger you are, the more risk you can take.

Generally, the higher the risk, the higher the potential return. Conversely, the lower the risk, the lower the potential return. But, with higher risk comes higher volatility and greater potential for larger swings in stock prices. and, one rule to always remember is that investors should only risk what they can afford to lose.

Smart Investing.

According to Vanguard, smart investing includes focusing on things you can control, such as:

  • Start with asset allocation. Asset (stocks, bonds, real estate, commodities, cash, etc,) allocation could have the biggest impact on the performance and volatility of your investments.
  • Protection through diversification. The more variety of bonds and stocks you own, the smaller the impact each one individually can have on your overall portfolio, which lowers your risk.
  • Don’t let high fees costs eat away at returns. The amount you pay to invest has a direct impact on your returns.
  • Keep performance in perspective. The length of time you have until you need the money from your investments is inversely proportional to the amount of time you should spend focusing on your performance.
  • Monitor risk level & rebalance. Remember the importance of asset allocation and how it plays a critical role in keeping you on track.
  • Make regular investments. If you’re trying to increase your portfolio to meet a specific goal, making small investments consistently makes a big difference.
  • Prioritize financial goals. Most people have multiple demands on their money. There’s a right order in which to pursue financial goals such as eliminating debt, creating an emergency fund, and investing for retirement or college.

Investors should consider investment strategies that complement their financial plan and long term (10 years or more) investment objectives. The best strategy is the one that works best for the individual investor’s unique investment objectives and tolerance for risk.

In general, it is recommended that investors broadly diversify across asset classes, industries and geographies and remain flexible in order to navigate changing market conditions. For equities, it will be important to choose stocks with reasonable valuations that deliver some income and that have a margin of safety which can support valuations in a downturn.

Sources:

  1. https://investor.vanguard.com/investing/portfolio-management/investment-strategies

10 Rules for Financial Success – Barron’s

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“Wealth isn’t about how much money you make – wealth is about how much money you save and invest.”

The true measure of financial success isn’t how much money you make—it’s how much you keep. That’s a function of how well you’re able to save money, protect it, and invest it over the long term.

Sadly, most Americans are lousy at this.

Even after a decade of steady economic expansion and record-breaking stock markets, almost two-thirds of earners would be hard-pressed to cover an unexpected $1,000 expense—a medical bill, car repair, or busted furnace—and more than 75% don’t save enough or invest skillfully enough to meet modest long-term retirement goals, according to Bankrate.com.

Even wealthy families aren’t getting it right: 70% lose wealth by their second generation, and 90% by their third. “Shirtsleeves to shirtsleeves in three generations,” as a saying often attributed to Andrew Carnegie goes.

What’s at the root of these bleak data? Stagnant salaries amid rising costs of health care, education, housing, and other big-ticket necessities have put a major strain on folks of all ages. But advisors point to a deeper issue: an almost universal lack of financial literacy.

“This is a much bigger problem than most people are aware of,” says Spuds Powell, managing director at Kayne Anderson Rudnick Wealth Management in Los Angeles. “I’m constantly amazed at how common it is for clients, even sophisticated ones, to be lacking in financial literacy.”

The ten rules for financial success are:

  1. Set goals
  2. Know what you’ve got and know what you need
  3. Save systematically
  4. Invest in your retirement plan
  5. Invest for growth
  6. Avoid bad debt
  7. Don’t overpay for anything
  8. Protect yourself
  9. Keep it simple
  10. Seek unbiased advice

— Read on www.barrons.com/articles/10-rules-for-financial-success-51558742435

37 Earl Nightingale Quotes That Will Empower You to Soar High | Inc.com

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Earl Nightingale had a passion and mission to improve the lives of other people. In his view, he concluded:

“We become what we think about”

This fact, “we become what we think about”, is the Secret Power of Mindset. We are currently and will continue to be what we think about. Essentially, he advised that we are in control of our thoughts.

Additionally, he stated that we are creatures of habit. We tend to follow, either consciously or sub-consciously, the picture or script in our minds created by our past environment, our parents, our communities and the region from which we come. For better or for worst.

Instead, we must start imagining our lives the way we want it. We must create a picture in our mind and think about that picture of our future self steadfastly all day long. We must believe it.

Once we do, we will start making different choices in line with our picture…our self-image. We will take small steps in the right direction.

“People with goals succeed because they know where they are going”

He advised that goals are the destinations or effects of our thoughts, that is what we have been thinking and always think about is what we become. Here are 6 steps Earl Nightingale recommended that will help us achieve our goals:

  1. Give yourself a definite goal.
  2. Quit running yourself down.
  3. Stop thinking of all the reasons you cannot be successful and instead, think of all the reasons why you can.
  4. Trace your attitudes back through your childhood and try to discover where you first got the idea you couldn’t be successful – if that’s the way you’ve been thinking.
  5. Change the attitude you have of yourself by writing out the description of the person you’d like to be.
  6. Act the part of the successful person you have decided to become.

“Success is the progressive realization of a worthy ideal.”

If a man is working toward a pre-determined goal and knows where he’s going, that man is a success. If he’s not doing that, he’s a failure. Success is the progressive realization of a worthy ideal.

When you have an attitude of altitude, and when you are grateful for what you have, your chances to have a meaningful and successful life are greater. Start where you are now to develop this mindset. You have the potential to do many things, even those things you may think are impossible. Broaden your vision and keep moving forward–the sky truly is the limit.

Earl Nightingale was a motivational speaker and writer. He firmly believed the key to success can be found in these six simple words: We become what we think about. And, he encouraged us to:

“Learn to enjoy every minute of your life. Be happy now. Don’t wait for something outside of yourself to make you happy in the future. Think how really precious is the time you have to spend, whether it’s at work or with your family. Every minute should be enjoyed and savored.” – Earl Nightingale

— For Earl Nightingale’s Quotes, read on www.inc.com/peter-economy/37-earl-nightingale-quotes-that-will-empower-you-to-soar-high.html

References:

  1. http://www.asamanthinketh.net/files/EN_Greatest_Discover_eBook.pdf
  2. http://wordpress.nightingale.com/articles/is-your-personal-corporation-growing/

“William James said: “The greatest discovery of my generation is that human beings can alter their lives by altering their attitudes of mind. We need only in cold blood act as if the thing in question were real, and it will become infallibly real by growing into such a connection with our life that it will become real. It will become so knit with habit and emotion that our interests in it will be those which characterize belief.” He also said,”If you only care enough for a result, you will almost certainly attain it. If you wish to be rich, you will be rich. If you wish to be learned, you will be learned. If you wish to be good, you will be good – only you must, then, really wish these things, and wish them exclusively, and not wish at the same time a hundred other incompatible things just as strongly.” ― Earl Nightingale

Personal Finance: 4 Ways to Save Money and Improve Your Money Management Skills | Brian Tracy

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“Believe you’re the person you must become…”

Virtually every single person in America who is financially independent started off with nothing. But they acquired good personal finance habits, learned how to save money, and improve their money management skills, eventually becoming some of the most successful people in their communities. And anything that anyone else has done, you can probably do as well.

Save Money By Using A Long Time Perspective

To save money and become financially independent you must begin living on less than you earn even if you are deeply in debt. One of the most important guarantors of your personal finance success is called “Long time perspective.”

Take the long view.

Develop a long term attitude toward yourself and your financial future and begin thinking in terms of where you want to be in five and ten years. This long-time perspective will have an inordinate impact on your personal finance habits and money management skills in the present, and will help you save money over the years.

The starting point of financial independence is described in George Klasson’s book, The Richest Man in Babylon, as “Pay yourself first.” He says that, “A part of all you earn is yours to keep.” If you just save 10% of your gross earnings every single paycheck over the course of your working lifetime, you will become financially independent and gain personal finance success. In fact, if you saved $100 per month from the time you started work at age 20 until the time you retired at age 65, and this $100 per month earned 10% per annum return, compounded, you would be worth more than $1,100,000 when you retired, in addition to social security pensions and everything else. Major take-away from The Richest Man in Babylon are – pay yourself first, live within your means, invest your money wisely, and prepare for the future.

— Read on www.briantracy.com/blog/financial-success/personal-finance-money-management-tips-save-money/

Saving vs Investing

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“…(wealthly) people see every dollar as a ‘seed’ that can be planted to earn a hundred more dollars … then replanted to earn a thousand more dollars.”

T. Harv Eker, Secrets of the Millionaire Mind

Only about 55 percent of Americans invest in the stock market, according to a 2015 Gallup poll. For Americans to create and grow wealth, they must save and take steps to learn about and start investing.

Saving and investing often are used interchangeably, but there is a significant difference.

  • Saving is setting aside money you don’t spend now for emergencies or for a future purchase. It’s money you want to be able to access quickly, with little or no risk, and with the least amount of taxes.
  • Investing is buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will make money for you. Investments usually are selected to achieve long-term goals with increased risk and volatility. Generally speaking, investments can be categorized as income investments or growth investments through capital appreciation. 

Start Investing Early

One of the best ways to build wealth is by saving and investing over a long period of time. The earlier you start, the easier it is for your money to grow. If you have a workplace retirement plan, consider enrolling and maximizing your contribution—there are tax advantages and you may even be eligible for a match from your employer. Set up regular, automatic contributions. Investing early is especially important for retirement.

Make savings a priority

Keep your focus on your dreams and goals. Do the best you can to save and invest at least 15%-20%. It may not be always possible to hit that target every year due more pressing financial demands, but try. Your future depends on your efforts—make your retirement a priority.

Consider this …

If you deposited $2,000 in a savings account at 3 percent annual interest, it would grow to $3,612 in 20 years (before taxes). The same $2,000 invested in a stock mutual fund earning an average 10 percent a year would grow to $13,455 in 20 years (before taxes).

Reference:

  1. http://www.gallup.com/poll/182816/little-change-percentage-americans-invested-market.aspx

5 Retirement Rules to Live By

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Many people look forward to retirement because it represents freedom. You don’t have to get up and go to work every day or do what a boss tells you.

But just because your time is your own after you leave work doesn’t mean you have no rules to live by in your later years. In fact, it may be even more important to adhere to some guidelines to make sure you don’t run out of money when you’re living on a fixed income as a retiree. 

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