“An investment of $10,000 in Berkshire Hathaway stock in 1965 would have grown to approximately $355 million by 2022.” ~ Nasdaq
In 2022, Berkshire Hathaway outperformed the market, gaining 4% versus the S&P 500’s 19% drop.
Since Buffett took over in 1965, Berkshire Hathaway has beaten the market 39 out of 58 years. It has underperformed the market the other 19 years.
Since 1964, Berkshire Hathaway stock returns has outperformed the S&P 500 by a significant margin.
According to a report by Nasdaq, an investment of $10,000 in Berkshire Hathaway stock in 1965 would have grown to approximately $355 million by 2022, a compounded annual gain of 19.8%.
In contrast, an investment of $10,000 in the S&P 500 over the same period would have grown to approximately $2.3 million, a compounded annual gain of 9.9%.
Since that time, Berkshire Hathaway stock has gained more than 153 times the S&P 500’s gains over the same time period — good enough to give you roughly $355 million based on a $10,000 investment. That translates to a compounded annual gain of 19.8%, or nearly double the S&P 500’s 9.9% compound annual gain.
It’s worth noting that the above figures are based on past performance and do not guarantee future results.
Additionally, investing in individual stocks can be risky and requires careful consideration of one’s financial goals and risk tolerance.
Warren Buffett, Berkshire-Hathaway’s Chairman and CEO, is an advocate of buying stock in businesses that will last.
Value investors want to buy stocks for less than they’re worth. If you could buy $100 bills for $80, wouldn’t you do so? ~ Motley Fool
Most public equity stocks are classified as either value stocks or growth stocks. Generally speaking:
A value stock trades for a cheaper price than its financial performance and fundamentals suggest it’s worth.
A growth stock is a stock in a company expected to deliver above-average returns compared to its industry peers or the overall stock market.
Value stocks generally have the following characteristics:
They typically are mature businesses.
They have steady (but not spectacular) growth rates.
They report relatively stable revenues and earnings.
Most value stocks pay dividends, although this isn’t a set-in-stone rule.
Growth stocks generally have the following characteristics:
They increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole.
They developed an innovative product or service that is gaining share in existing markets, entering new markets, or even creating entirely new industries.
They grow faster than average for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process.
Regardless of the category of a stock, economic downturns present an opportunity for a value investor. The goal of value investing is to scoop up shares at a discount, and the best time to do so is when the entire stock market is on sale.
“Price is what you pay; Value is what you get.” Warren Buffett
The best investors tend to invest differently then the typical Wall Street and retail investors. The best investors don’t follow the crowd, or allow the emotions of fear or greed influence their savings, investing and building wealth decisions. Since, most people are in debt and are not building long term wealth.
They, the best investors, follow an analytical process to assess the value of an asset. They understand the difference between an asset’s value versus an asset’s market price. They understand that it matters how much you pay for an asset. And, they will not pay a price for an asset that far exceeds that asset’s value.
Emotional investing causes losses over the long term
Buying assets at market peaks or all time high stock valuations
Selling assets during times of high volatility and market corrections.
Avoid making the following investments:
If you don’t understand how a company or investment makes or loses money.
When the price of the stock (or investment) is greater than value of the company (or investment). It matters how much you pay for an asset.
If the asset class is at euphoric high.
When making investing decisions based on emotions or fear of missing out (FOMO), and you’re not being patient, disciplined and objective.
“The goal isn’t more money. The goal is to live life on your own terms.” Will Rogers
Freedom from work and trading time for money.
Freedom to live life intentionally and purposefully on your terms. You want the ability to take time off when you want and as long as you want.
Annually, financial planners and brokerage firms still make money off your money even when you lose money. Most financial planners, 95% of them, fail to outperform an index fund over a ten and twenty year period. No one can or has successfully predict the future, that’s why barely 5% of financial planners have out perform an market index fund over a ten to twenty year period.
Don’t forget, you will lose a large portion of your tax deferred retirement nest egg to federal and state taxes when you start withdrawing or commence taking required minimum distribution (RMD) from the accounts.
Cash flow is your monthly earned and passive incomes minus your monthly cost of living expenses.
If you want to invest on your own, billionaire investor Warren Buffett recommends three investing principles that have guided him over the decades.
The principles are derived from a book first published in 1949: “The Intelligent Investor”, written by Buffett’s mentor, Benjamin Graham:
Principle 1: Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.
Buffett has four things he wants to see, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock:
“One that we can understand …” When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future. He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them.
“With favorable long-term prospects …” Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.” A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.
“Operated by honest and competent people …”. “Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something. And it’s just a lot easier to operate with people that are candid. “And we like people who are smart, you know. I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING. The quality of the business itself, however, takes precedence.
“Available at a very attractive price.”Buffett’s goal is to buy when the price is below a company’s “intrinsic value.”“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.“And we’re not perfect at estimating that, obviously”, Buffett stated. “But that’s what an investment or a business is all about. You put money in, and you take money out.”
Principle 2: The stock market is there to serve you, not instruct you.
Many non-professional investors become concerned when stock prices fall. They think the market is telling them they made a mistake. Some may even be so shaken that they sell stocks at the lower prices.
Buffett takes the opposite view. If he buys a stock because he thinks the company will be a long-term winner, he doesn’t let the market convince him otherwise.
Principle 3: Maintain a margin of safety
“We try not to do anything difficult …
“This is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive.
“That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly.
“So, we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one-foot bars.” — 1998 BERKSHIRE ANNUAL MEETING
Low cost index funds
Buffett has long recommended that investors put their money in low-cost index funds, which hold every stock in an index, making them automatically diversified. The S&P 500, for example, includes big-name companies like Apple, Coca-Cola and Amazon.
Buffett said that for people looking to build wealth and their retirement savings, diversified index funds make “the most sense practically all of the time.”
“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.”
A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend.
Dividends can create a rising source of income for a lifetime. They have proven to grow at twice the rate of inflation over the better part of stock market history.
Dividends are one of three ways for a company to return value of their profits and a portion of its free cash flow to shareholders. The other two ways are for a company to buy back its shares and to re-invest in the company.
A share buyback is when a company uses cash on the balance sheet to repurchase shares in the open market. This has two effects.
It returns cash to shareholdersIt reduces the number of shares outstanding.
As a company increase the dividend on a annual basis, the amount may be small, but over time, it can become significant.
For example, if you own stock in a company that pays a dividend of 57 cents per share, they may announce a dividend increase of 4 cents to 61 cents. That means you get and extra 4 cents for each share you own.
Although, it’s only 4 cents, but 4 cents on 57 cents is am7% dividend increase on each share you own. If the dividend increased by this amount, 4 cents, every year, the dividend would double in about 10 years. Thus, over time, if you stick with dividends, the money will begin to grow.
In S&P 500 Index companies alone paid out $485 billion in dividends to shareholders.
Dividends outpace inflation
Back in 1980, a $10,000 investment in the S&P 500 Index paid a dividend of about $421, or 4.21%, on the initial investment. Forty years later, the dividend income had climbed to $5,724, a 57% annual yield on the original investment. And, the original $10K investment grew as well. The original $10K invested in the S&P 500 Index in 1980 would have grown into more than $287K as the stock price increased. That’s not counting the dividends paid.
The price-only-return (which excludes dividends income) is 8.75% per year. If you add in another 3% for the dividends you receive each year, you get a total average return of about 11.75% per year.
Dividends have proven to be a more consistent source of growing income that has outpaced inflation.
Dividends and Total Return over that 40 year period,
Total return is one of the most important concepts in finance, and it involves more than just the dividends a company pays out.
The total return of a stock is the total amount your investment changes in value, calculated by adding the amount of dividend or interest income received to the investment’s capital return (i.e. change in the investment’s price).
Total return is driven by three components: earnings growth (which fuels capital gains and the underlying intrinsic value of a stock), dividends, and changes in valuation multiples.
Dividends have been a major component of the stock market’s overall total returns throughout history and have contributed anywhere from 25% to 75% of the market’s overall total return over the past seven decades (the remaining portion of total return is accounted for by capital gains, or the market’s change in price).
Takeaway, dividends are a powerful wealth building tool. If you invest in perennial dividend payers and consistent dividend grower companies, and then be patient, the dividends will add up significantly over decades.
“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett
Patience is ofter referred to as the most underused investing skill and virute. And, learning patience could help you reach your financial goals of wealth building and finacial freedom.
Be extremely patient when investing in assets and wait until you can buy an investment at an entry price when everybody else hates the investment or are extremely pessimistic about the prospects of the investment.
In other words, wait until you can buy the asset at a extremely discounted price. Keep in mind that every investment is affected by what you pay for it. The less you pay, the better your rate of return on that investment. Never, Never, Never…overpay for an investment.
People feel losses twice as much as they feel gains.
Successful investors develop a number of valuable skills over their lifetimes. And many report that patience is the most important skill to learn and master, but often it goes underused.
We’re not born patient. But, patience can be learned and, if you’re an investor, learning it could help you reach your financial goals.
Patience often involves staying calm in situations where you lack control. Even if we’re patient in some parts of life, we have to practice and adapt to be patient in new situations. Just because you’re a patient person while waiting in line at the DMV doesn’t mean you’re a patient investor.
Alway keep in mind and retain the mantra that…if there is a good opportunity now, a better one will come in the future.
Yet, patience can be difficult for investors to master, why it’s an important investing skill and how to apply patience to investing.
Why Is it so Hard to Be Patient?
Simply put, your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. You’ve likely heard this called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.
The problem is, your body doesn’t recognize the difference between true physical danger (during which fighting or fleeing would actually be helpful) and psychological triggers, like scary movies. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response too but, unlike scary movies, there can be real-world impacts you’ll need patience to overcome.
When markets are seesawing and you’re overwhelmed with negative financial media, as we experienced this year during the pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is being harmed! Take action! Now! With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.
Impatient investors let anxiety and emotion rule their decision-making. Their tendency towards “doing something” can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan. And those bad behaviors could damage investors’ long-term returns.
Selling out of the market during a correction might feel like you’re taking prudent action. And you may even derive some pleasure in seeing the market continue to fall after you’ve sold your equities. But that pleasure could soon be replaced by regret, because consistently and correctly timing the market by selling and buying back in at the right time requires an incredible amount of luck — and we don’t know any investors who have that much luck.
Investment entry point and investor patience are super-important too.
Benjamin Graham, known as the “father of value investing,” knew the importance of patience in investing. Patience and investing are actually natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term hardship for a future reward.
The importance of being patient when investing can be best summed in this quote by Benjamin Graham…“In the end, how your investments behave is much less important than how you behave.”
“We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” Chuck Akre
Compounding works exponentially for the patient investor. The power of compounding is one of the most important concepts that investors need to learn and embrace. Since, patient and time are better friends to the investor than experience, expertise, and even research.
“A lot of people historically have done fairly well investing in companies they just genuinely like, whether it’s been Starbucks or Nike.” Gary Vaynerchuk, CEO, VAYNERMEDIA
“You should be looking for the next great growth stock.” Olivier Garret, founding Partner and CEO of RiskHedge
Cheap” Stocks Are Often The Worst Stocks You Can Own
By “cheap,” we mean stocks that have a low stock price in relation to their sales or earnings. If a stock trades for $20/share and earns $4/share, it’s cheap. If it trades for $200/share and earns $4/share, it’s not cheap.
People are drawn to “cheap” stocks for the same reason they flock to the Macy’s Department store clearance rack. It feels good to get a deal. Americans love nothing more than getting lots of “bang for their buck.”
But in investing, this can be a dangerous mistake. These stocks are cheap for a reason! They’re usually in dying industries or are a declining business. So they’re either barely growing, or shrinking.
“Cheap” does NOT equal “safe” in the stock market. Focusing on “cheap” stocks is not a wise investment strategy. Instead, you should be looking for the next great growth stock at a reasonable price.
Growth Stocks
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett
Growth stocks are companies that increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole. Growth stocks are great buys, especially if you can identify those with fair valuations, excellent fundamentals and capitalize on their momentum. Focus on one of the fastest-growing companies on the planet.
In the current environment where each of these stock picks offers a good balance of growth and value, it’s a great play to diversify your portfolio.
Unlike the cheap stocks some growth stocks are growing like crazy.
High-growth stocks tend to be more expensive than the average stock in terms of valuation metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios. Yet, despite their premium price tags, the best growth stocks can still deliver fortune-creating returns to investors as they fulfill their awesome growth potential, according to Motley Fool.
Earnings Growth
Earnings and cash flow growth are arguably the two most important factor, as stocks exhibiting exceptionally surging profit levels and cash flow tend to attract the attention of most investors. And for growth investors, double-digit earnings and cash flow growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
Impressive Asset Utilization Ratio
Asset utilization ratio — also known as sales-to-total-assets (S/TA) ratio — is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.
Investing in growth stocks can be a great way to realize life-changing wealth in the stock market. The key, of course, is to know which growth stocks to buy — and when, and to be patient.
Even renown value investor, Warren Buffett, uses an approach that swings towards growth. This quote from Buffett is a classic articulation of the strategy: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In other words, price is an important part of any investment, but the strength of the business arguably matters just as much, if not more.
Technology stocks have been the driving force behind the longest-running bull market in history.
The technology sector is vast, comprising gadget makers, software developers, wireless providers, streaming services, semiconductor companies, and cloud computing providers, to name just a few, according to Motley Fool. Any company that sells a product or service heavily infused with technology likely belongs to the tech sector.
And, the pandemic has been mostly positive for the tech industry. Companies like Amazon have thrived as consumers shifted hard toward e-commerce. Additionally, companies like Microsoft have also done well, buoyed by demand for collaboration software, devices, gaming, and cloud computing services as people spend more time at home.
Many of the most valuable companies in the world are technology companies.
Growth stocks have outperformed for 12 years and counting. Since the end of the Great Recession in 2009, growth stocks have been a driving force on Wall Street. Many of the most valuable companies in the world, like Apple and Microsoft, are technology companies.
Historically low lending interest rates and the Federal Reserve’s ongoing quantitative easing measures have created a pool of abundant cheap capital that fast-paced businesses have used to expand operations and investors have used to fuel the longest running bull market.
Technology stocks have been a key component of the market’s rising trend. Since the financial markets collapsed, demand for consumer electronics and related products and services has caused the tech sector to far outperform every other segment.
However, revenue growth is starting to slow, although the delta variant surge may drive consumers away from stores once again. The economic dynamics favoring technology’s 12 year growth are changing.
Inflation is running rampant, and the Federal Reserve has indicated it’s become more hawkish on fighting it, indicating as many as three interest rate hikes may be in the cards calendar year 2022, effectively ending its loose money policy. Higher interest rates hurt growth stocks because growth stocks intrinsic value is based on the value of their future earnings. And, those future earnings are not worth as much if interest rates go up.
To best analyze tech stocks, first determine if the company is profitable or not.
For mature tech companies that produce profits, the price-to-earnings ratio is a useful metric. Divide stock price by per-share earnings and you get a multiple that tells you how highly the market values the company’s current earnings. The higher the multiple, the more value the market is placing on future earnings growth.
Many tech companies aren’t profitable, so the price-to-earnings ratio can’t be used evaluate them.
Revenue growth matters more for these younger companies.
If you’re investing in something unproven, you want to make sure it has solid revenue growth.
For unprofitable tech companies, it’s important that the bottom line be moving from losses toward profits.
As a company grows, it should become more efficient, especially when it comes to the sales and managing expenses. If it’s not, or if spending is growing as a percentage of revenue, that could indicate something is wrong.
Ultimately, a good tech stock is one that trades at a reasonable valuation given its growth prospects.
Accurately figuring out those growth prospects is the hard part. If you expect earnings to skyrocket in the coming years, paying a premium for the stock can make sense. But if you’re wrong about those growth prospects, your investment may not work out.
Thus, investing in technology stocks can be risky, but you can reduce your risk by investing only when you feel confident their growth prospects justify their often lofty price to earnings valuations.
The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.
Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments
“Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”
“Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”
What a joy it was to join @fidelity's Women Talk Money series. I think a lot about how to start conversations about money, and this really reinforced WHY we need to do it more. More talk –> more clarity on how money works and who it can work better for. https://t.co/jCqrx3VSdOpic.twitter.com/rrKAx0vZGs
When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.
It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.
People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.
But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.
As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.
Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).
Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.
A company’s stock price has nothing to do with its value, because the share price means nothing on its own.
The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.
A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.
The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.
Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.
Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.
Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,
