Long-Term Planning

Posted on February 21, 2022 by admin

“In preparing for battle I have always found that plans are useless, but planning is indispensable.” General Dwight D. Eisenhower. U.S. Army and Supreme Allied Commander

Dwight Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” In simple terms, great investors, same as great leaders, are proactive in building wealth and they follow a plan.

Most retail investors don’t plan and just react to market volatility and events. Instead, investors should engage in long-term financial planning from the beginning with the intent to anticipate problems and come up with solutions.

“Nobody ever created a plan to be broke, bankrupt, behind in monthly payments, drowning in insurmountable credit card debt, or a financial failure. Those things are what happen when you don’t create or follow a plan.”

Planning helps you prepare for the potential challenges and keep you on track. And with an effective action plan, you can boost your productivity and keep yourself focused. The benefits of an action plan are:

It gives you a clear direction. As an action plan highlights exactly what steps to be taken and when they should be completed, you will know exactly what you need to do.
Having your goals written down and planned out in steps will give you a reason to stay motivated and committed throughout the project.
With an action plan, you can track your progress toward your goal.
Since you are listing down all the steps you need to complete in your action plan, it will help you prioritize your tasks based on effort and impact.

Failing to plan means planning to fail. That’s why you should create a action plan before making any financial or wealth building decisions, and then stick to the plan. Whether you are deciding on investing in cryptocurrencies or acquiring real estate for your business, it’s smart to do so with a list or plan of action that has your budget in mind.

“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” – Pablo Picasso

A well-designed action plan can make it easier for you to track and realize your goals. For your personal goal, you can use an action plan to create a clear path to success.

An action plan is a document that lays out the tasks you need to complete in order to accomplish your goal. It also breaks up the process into actionable assignments based on a timeline. A good action plan will outline all the necessary steps to achieve your goal and help you reach your target efficiently by assigning a timeframe—a start and end date—to every step in the process.

Step 1: Define your end goal

If you are not clear about what you want to do and what you want to achieve, you are setting yourself up for failure. Start by defining where you are and where you want to be. Analyze the situation and explore possible solutions before prioritizing them.

Then write down your goal. And before you move on to the next step, run your goal through the SMART criteria. Or in other words, make sure that it is

Specific – well-defined and clear
Measurable – include measurable indicators to track progress
Attainable – realistic and achievable within the resources, time, money, experience, etc. you have
Relevant – align with your values and other wealth building goals
Timely – has a finishing date or deadline

Step 2: List down the steps to be followed

Once the goals are clear, the next step is to list all the tasks that you must perform to realize your goals and due dates.

It’s important that you make sure that each task is clearly defined and is attainable. If you come across larger and more complex tasks, break them down to smaller ones that are easier to execute and manage.

Step 3: Prioritize your tasks and add deadlines

It’s time to reorganize the list by prioritizing the tasks. Some steps, you may need to prioritize as they can be blocking other sub-steps.

Add deadlines, and make sure that they are realistic. Consult with the person responsible for carrying it out to understand his or her capacity before deciding on deadlines.

Step 4: Set Milestones

Milestones can be considered mini goals leading up to the main goal at the end. The advantage of adding milestones is that they give you something to look forward to.

Start from the end goal and work your way back as you set milestones. Remember not to keep too little or too much time in between the milestone you set. It’s a best practice to space milestones two weeks apart.

Step 5: Identify the resources and time needed

Before you start working on your tasks, it’s crucial to ensure that you have all the necessary resources at hand to complete the tasks. And if they are not currently available, you need to first make a plan to acquire them.

This should also include your budget, any advisors and determine the cost of each task if there are any.

Step 6: Visualize your action plan

The point is to create something that you can understand. Make sure that your action plan clearly communicates the elements – tasks, deadlines, resources, etc. This should be a working document that is kept updated and adjustable.

Step 7: Monitor, evaluate and update

Allocate time to evaluate the progress you’ve made. You can mark tasks that are completed on the final action plan, bringing attention to how you’ve progressed toward the goal.

An action plan can also make it easier for you to monitor your progress toward your goals, allowing you to keep your projects on schedule and, if applicable, within budget.

“Have a bias towards action – let’s see something happen now. You can break that big plan into small steps and take the first step right away.” – Indira Gandhi

References:

Long Term Investing is about Future Cash Flow

Posted on February 18, 2022 by admin

Ultimately, in long term investing, fundamentals and cash flow are paramount for an investor (an investor is a business owner).

Years ago, a hockey game between the Boston Bruins and Edmonton Oilers had been paused for some technical issues with the stadium lights. To kill some time, the announcers started interviewing people including the Edmonton Oilers, Wayne Gretzky, undoubtedly the world’s greatest hockey player at the time. The announcer stated that Gretzky wasn’t the biggest guy in the league, or the strongest, or the fastest or the toughest, yet he was regarded as the greatest hockey player in the world. So, how then did Gretzky explain his own genius? Gretzky simply replied:

“I don’t go where the puck is; I go where the puck is going to be!”

In a simple one liner, Gretzky confirmed that his success did not come from chasing the puck. Instead it came from staying one step ahead and by anticipating where the puck would likely go next.

Thus, it is important to look at the future potential of a stock or investment instead of focusing solely on past performance. Long term investing is about looking from the perspective of a business owner at a company’s fundamentals and cash flow.

Cash Flow

In finance, cash flow (CF) is the term used to describe the amount of cash (currency) that is generated or consumed in a given time period by a business. It has many uses in both operating a business and in performing financial analysis. In fact, it’s one of the most important metrics in all of finance and accounting.

Every investment is the present value of all future cash flow.

Many investors are lured by short term performance. They are interested in finding the latest, hottest, top performing stocks and investments driven by the financial entertainment media. However, investors who buy those top performing investments today may not necessarily enjoy the same returns in the future. In investing, it’s essential you approach buying stocks like a business owner.

Cash flow is not the same as net income (or profit).

While cash flow describes the movement of money into and out of your business, profit is the surplus of money your business has after you’ve subtracted the revenue from your expenses.

The inflow and outflow of cash into and out of a company reflects the health of that company’s operations. That’s why it’s important as an investor (business owner) to be able to understand a company’s fundamentals and cash flow.

Cash flow is more dynamic in concept then profit – as it measures the movement of money – then profit, which simply demonstrates how much money you have left over after your expenses have been deducted. Even a profitable business can fail if a business doesn’t have a healthy cash flow.

Without a healthy cash flow, profit is meaningless.

Many successful companies (like Amazon, Twitter, Uber and Yelp) actually existed a long time without profits, but no company can survive without a healthy cash flow. For small to mid-cap companies, profit is still important, but cash flow is vital.

If you don’t have cash on hand, you can’t pay for your company’s basic needs like rent, employee salaries, electricity or equipment. If you don’t have enough cash on hand to replenish inventory or pay operating expenses, you will become unable to generate new sales. If you can’t afford operating expenses, your company will eventually fail. That’s why cash flow is such an accurate predictor of an investment or company’s success.

Cash Flow From Operating Activities

The operating activities reflects how much cash is generated from a company’s products or services. Positive (and increasing) cash flow from operating activities indicates that the core business activities of the company are thriving.

Cash Flow From Investing Activities

Investing activities include any purchase or sale of an asset, loans made to vendors or received from customers or any payments related to a merger or acquisition is included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

Cash Flow From Financing Activities

Cash flow from financing activities shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends. Some examples are: issuance of equity (shares), payment of dividends, issuance of debt (e.g. bonds) and repayment of debt.

Free Cash Flow

One of the most important financial number is free cash flow (FCF). It is the cash flow available to all the creditors and investors in a company, including common stockholders, preferred shareholders, and lenders.

You can calculate FCF, if not provided, quickly. FCF = Operating cash flow – capital expenditures (aka. CAPEX). Simply, capital expenditures on the CFS is the line item “Purchase of Property, Plant and Equipment” (PPE). the PPE expenditure is the “maintenance amount” of running a business. Though it says “purchase”, this includes repairing, renewal and/or maintenance of the companies assets.

No company can survive without a healthy cash flow.

Generally, you want to see a steady increase in cash flow from operations. If this number is growing (while debt being in control) at a rate of 10% or more annually.

However, past performance cannot guarantee future results. In other words: don’t assume that an investment is going to continue to perform well in the future simply because it’s done well during a specific time period in the past.

Two of the key ingredients for success in investing is understanding that cash flow is king and your a business owner when you purchase a company’s stock.

References:

Inflation…a “Hidden Tax”

Posted on February 12, 2022 by admin

Inflation means there is more money out there chasing the same number of goods and services.

Inflation is an economic situation in which the general price level in the economy increases over a period of time, increasing the market value of all goods and services in monetary terms. As the general price level rises, the quantity of goods and services each unit of currency can buy decreases, indicating a decline in the purchasing power of the currency.

A little bit of inflation is considered by economists to be good for the economy. Technically speaking, inflation gets the economic ball rolling, greases the wheels of commerce, and stimulates the economy. The Federal Reserve has set as a goal 2% inflation.

Most people and politicians believe that inflation is just rising prices. That is not quite true. Inflation means there is more money out there chasing the same number of goods and services. As a result, the value of the money is diluted. One result is higher prices. Thus, there are two different types of “inflation”.

The first kind of inflation is “monetary inflation” i.e. an increase in the overall money supply. This is accomplished by a complex process between the government, the central bank, the open market, and the member banks.
The second form of inflation is an increase in the price that consumers pay, which is the result of an increase in the money supply and it is more accurately called “price inflation”. Price inflation reduces our purchasing power (as prices rise each dollar in your bank account buys less) and thus makes us poorer.

Because things are getting more expensive and savings are becoming less valuable, inflation discourages saving and encourages spending. This is how it “stimulates the economy” but it also encourages misallocation of capital. Because people are motivated to spend now, they end up chasing short-term goals rather than long-term goals which might actually have been more beneficial and in their best wealth building interest; but they no longer appear so because of the distortions caused by inflation.

Inflation is a long used, secret method of taxing people without their knowledge, a “hidden tax”, because the recipients of inflated money are unaware that it is really worth less than they thought it was; it is certainly “hidden”. And because the primary beneficiary is the government you can rightly say that inflation is a “hidden tax”. Every time someone has to pay an increased price for what they want they are paying this hidden inflation tax.

Inflation is like if a person were to slowly add a little water to the milk that is sold in the store. For a while, no one might notice at all. However, the milk is less nutritious, and won’t taste quite right. Eventually, the people wake up and realize the milk is not nearly as good, although it might still look okay. That is the impact of inflation

When extra money is printed up and put into circulation, it costs the government very little. It seems like governments can create value out of nothing. It is wonderful for the government, which is why most governments do it all the time. The government can spend the money on all their pet projects without worrying about their constituents complaining, because the money seems to be “free”.

However, it is not free and there are consequences to unconstrained printing money. What printing money does is to slowly dilute the money that is in existence already, like diluting the milk in the analogy above. So all the money the people already have, including all their savings, salaries and all the rest, slowly start to be worth less. In this sense, inflation is a very hidden tax, or way the government confiscates the people’s real wealth.

References:

Long Term Investing is about Your Behavior

Posted on February 11, 2022 by admin

Investing and managing money successfully is all about how you behave. Morgan Housel

Most investors are not as smart as they thought they were a year ago in the midst of a raging bull market and rising stock prices. Fortunately, they’re also not as dumb as they feel today during a market correction, says Morgan Housel, author of “The Psychology of Money”

Investing, specifically successful investing, is, and has always been, the study of how people behave with money. And behavior is hard to teach, even to really smart and educated people. Effectively, success in investing is achieved by being patient and remaining calm through ‘punctuated moments of terror’ and volatility in the market.

You can’t sum up behavior with systems to follow, formulas to memorize or spreadsheet models to follow, according to Housel. Behavior is both inborn and learned, varies by person, is hard to to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.

Actually, the best strategy is to invest as a long-term business owner which isn’t widely practiced on Wall Street or Main Street. It’s one thing to say you care about long-term value and another to actually behave as a long-term business owner. None of this is easy, but it’s never been easy. That’s what makes investing interesting.

The only thing that you can control in investing is your own behavior.

There is the old pilot quip that their jobs flying airplanes are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

Managing money and investing isn’t necessarily about what you know; it’s how you behave. But that’s not how finance is typically taught or discussed in business school and at financial institutions. The financial industry talks too much about what to do, and not enough about what happens in your head when you try to do it.

There were 1,428 months between 1900 and 2019. Just over 300 of them were during a recession. So by keeping your cool and staying in the market during just the 22% of the time the economy was in or near a recession would have allowed your investments to compound and to grow significantly.

You must invest in the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing. How you behaved as an investor during a few months will have the greatest impact on your lifetime returns.

There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

For many investors, they are their own worst enemies. Since, the biggest risk to you as an investor is yourself and your own biases, your win mindset, your own misconceptions, your own behaviors, that impact your returns as an investor.

“Investing is not the study of finance. It’s a study of how people behave with money. It’s a really broad, all-encompassing field of how people make decisions around risk and greed and fear and scarcity and opportunity,” says Housel.

You can’t control what the economy is going to do or how the market will react. You can’t control what the Fed is going to do next. The only thing that you can control in investing is your own behavior. Thus, it’s important you realize that the one thing you can control, your behavior, is the thing that makes the biggest difference over time. Your investing behavior is the most fundamental factor in your investing success.

Simply, investing is about how you behave with money. And, it’s the ability to sacrifice spending money in the present with the expectation of making money in the future. Investing is a risk.

“A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.” Morgan Housel

References:

Build Wealth in 2022: Dave Ramsey

Posted on February 7, 2022 by admin

According to a recent survey, eight out of 10 of everyday millionaires invested in their employer’s 401(k) plan, and that simple step was a key to their wealth building. Not only that, but three out of four of those surveyed invested money in brokerage accounts outside of their company plans.

Moreover, they didn’t risk their money on single-stock investments or “an opportunity they couldn’t pass up.” In fact, no millionaire in the study said single-stock investing was a big factor in their financial success. Single stocks didn’t even make the top three list of factors for reaching their net worth.

The people in the study became millionaires by consistently saving over time. In fact, they worked, saved and invested for an average of 28 years before hitting the million-dollar mark, and most of them reached that milestone at age 49.

Dreams of trips to visit grandkids, travel adventures, and family celebrations at your paid-for home. That’s the kind of retirement many Americans dream about. You don’t have to earn six figures to turn this dream into a reality. But you do have to live and plan today with that goal in mind.

It’s important to get started building wealth no matter how old you are. Depending on your income and current financial circumstances, it might take some folks longer than others. But the fact is, you will get there if you do these five things over and over again.

Here are the five keys to building wealth:

1. Have a Written Plan for Your Money (aka a Budget)

No one “accidentally” wins at anything—and you are not the exception! If you want to build wealth, you have to plan for it. And that’s exactly what a budget is—it’s just a written plan for your money.

You have to sit down at the start of each month and give every dollar an assignment—and then stick to it! When our team completed The National Study of Millionaires, we found that 93% of millionaires said they stick to the budgets they create. Ninety-three percent! Getting on a budget is the foundation of any wealth-building plan.

2. Get Out (and Stay Out) of Debt

According to Dave Ramsey, the only “good debt” is paid-off debt. Your most powerful wealth-building tool is your income. And when you spend your whole life sending loan payments to banks and credit card companies, you end up with less money to save and invest for your future. It’s time to break the cycle!

Trying to save and invest while you’re still in debt is like running a marathon with your feet chained together. That’s dumb with a capital D! Get debt out of your life first. Then you can start thinking about building wealth.

3. Live on Less Than You Make

Proverbs 21:20 says that in the house of the wise are stores of choice food and oil, but a man devours all he has. Translation? Wealthy people don’t blow all their money on stupid stuff. The myth that millionaires live lavish lifestyles that include Ferraris in their garage and lobster dinners every night is just that—a foolish myth.

Here’s the truth: 94% of the millionaires we studied said they live on less than they make. The typical millionaire has never carried a credit card balance in their entire lives, spends $200 or less on restaurants each month, and still shops with coupons—even after reaching millionaire status!1 So ask yourself: Do you want to act rich or actually become rich? The choice is yours.

4. Save for Retirement

According to The National Study of Millionaires, 3 out of 4 millionaires (75%) said that regular, consistent investing over a long period of time is the reason for their success. They don’t get distracted by market swings or trendy stocks or get-rich-quick schemes—they actually save money and invest!

Being debt-free and having money in the bank to cover emergencies gives you the foundation you need to start saving for retirement. Once you get to that point, invest 15% of your gross income into retirement accounts like a 401(k) and Roth IRA. When you do that month after month, decade after decade, you know what you’re going to have in your nest egg? Money! Lots of it!

5. Be Outrageously Generous

Don’t miss this, y’all. At the end of the day, true financial peace is having the freedom to live and give like no one else. When you write a plan for your money, get rid of debt, live on less than you make, and start investing for the future, you can be as generous as you want to be and help change the world around you.

But when you make giving a part of your life, it doesn’t just change those around you—it changes you. Studies have shown over and over again that generosity leads to more happiness, contentment and a better quality of life.3 You can’t put a price tag on that!

How to Build Wealth at Any Age

That’s some big-picture financial advice that works no matter how old you are or how much money you make. It’s also true that each decade of your life will have specific challenges and opportunities. So let’s break things down decade by decade to see what you can do to maximize your savings potential.

In fact, the majority of millionaires didn’t even grow up around a lot of money. According to the survey, eight out of 10 millionaires come from families at or below middle-income level. Only 2% of millionaires surveyed said they came from an upper-income family.

The National Study of Millionaires showed a dramatic difference between how Americans think wealthy people get their money and how they actually earn and spend their money.

The salaries wealthy people make is not as much as you might think. The majority of millionaires in the study didn’t have high-level, high-salary jobs. In fact, only 15% of millionaires were in senior leadership roles, such as vice president or C-suite roles (CEO, CFO, COO, etc.). Ninety-three percent (93%) of millionaires said they got their wealth because they worked hard, and saved for the future and invested for the long term, not because they had big salaries.

References:

Financial Freedom

Posted on January 27, 2022 by admin

“It’s the ability to live and maintain the lifestyle which you desire without having to work or rely on anyone for money.” T Harv Eker

Financial Peace guru Dave Ramsey proclaims that “Financial freedom means that you get to make life decisions without being overly stressed about the financial impact because you are prepared. You control your finances instead of being controlled by them.”

It’s about having complete control over your finances which is the fruit of hard work, sacrifice and time. And, as a result, all of that effort and planning was well worth it!

Nevertheless, reaching financial freedom may be challenging but not impossible. It also may seem complicated, but in just a straightforward calculation, you can easily estimate of how much money you’ll need to be financially free.

What is financial freedom? Financial freedom is the ability to live the remainder of your life without outside help, working if you choose, but doing so only if you desire. It’s the ability to have the things you want and need, despite any occurrence other than the most catastrophic of outside circumstance.

To calculate your Financial Freedom Number, the total amount of money required to give you a sufficient income to cover your living expenses for the rest of your life

Step 1: Calculate Your Spending

Know how much you are spending each year. If you’ve done a financial analysis (net worth and cash flow), created a budget, and monitored your cash flow, then you’re ahead.

Take your monthly budget and multiply that amount by 12. Make sure you include periodic expenses such as annual premiums and dues or quarterly bills. Also include continued monthly contributions into accounts like your emergency fund, vacation clubs, car maintenance, etc.

Add all these together to get your Yearly Spending Total.

Keep in mind the lower the spending total, the lower the amount of money you’ll need to become financially independent. Learn how to lower your monthly household expenses and determine the difference between needs and wants.

Step 2: Choose Your Safe Withdrawal Rate

The safe withdrawal rate (also referred to as SWR) is a conservative method that retirees use to determine how much money can be withdrawn from accounts each year without running out of money for the rest of their lives.

The safe withdrawal rate method instructs financially independent people to take out a small percentage between 3-4% of their investment portfolios to mitigate worst-case scenarios. This withdrawal percentage is from the Trinity Study.

The Trinity Study found the 4% rule applies through all market ups and downs. By making sure you do not withdraw more than 4% of your initial investments each year, your assets should last for the rest of your life.

Step 3: Calculate Your Financial Independence (FI) Number

Your FI number is your Yearly Spending Total divided by your Safe Withdrawal Rate.

To find the amount of money you’ll need to be financially independent, take your Yearly Spending Total and divide it by your SWR.

For example:

Yearly Spending: $40,000
Safe Withdrawal Rate: 4%

Financial Independence Number = Yearly Spending / SWR

$40,000 / 0.04 = $1,000,000

Who becomes financially free? According to most financial advisors, compulsive savers and discipline investors tend to become financially free since:

They live on and spend less they earn.
They organize their time, energy and money efficiently in ways conducive to building wealth.
They have a strong belief that gaining financial freedom and independence is far more important than displaying high social status and financial symbols.
Their parents did not keep on helping them financially.
They have a keen insight to recognize financial and wealth building opportunities.

Net worth is the most important number in personal finance and represents your financial scorecard. Your net worth includes your investments, but it also includes other assets that might not generate income for you. Net Worth can be defined to mean:

Income (earned or passive)
Savings
Investing to grow and to put your money to work for you)
Simple and more frugal lifestyle

Financial freedom means different things to different people, and different people need vastly different amounts of wealth to feel financially free.

Maybe financial freedom means being debt-free, or having more time to spend with your family, or being able to quit corporate America, or having $5,000 a month in passive income, or making enough money to work from your laptop anywhere in the world, or having enough money so you never have to work another day in your life.

Ultimately, the amount you need comes down to the life you want to live, where you want to live it, what you value, and what brings you joy. Joy is defined as a feeling of great pleasure and happiness caused by something exceptionally good, satisfying, or delightful—aka “The Good Life.”

It is worth clearly articulating what the different levels of financial freedom mean. Grant Sabatier’s book, Financial Freedom: A Proven Path to All the Money You’ll Ever Need, the levels of financial freedom are:

Seven Levels of Financial Freedom

Clarity, when you figure out where you are financially (net worth and cash flow) and where you want to go
Self-sufficiency, when you earn enough money to cover your expenses
Breathing room, when you escape living paycheck to paycheck
Stability, when you have six months of living expenses saved and bad debt, like credit card debt, repaid
Flexibility, when you have at least two years of living expenses invested
Financial independence, when you can live off the income generated by your investments and work becomes optional
Abundant wealth, when you have more money than you’ll ever need

The difference between income and wealth: Wealth is accumulated assets, cash, stocks, bonds, real estate investments, and they have passive income. Simply, they don’t have to work if they don’t want to.

Accumulating wealth and becoming wealthy requires knowing what you want, discipline, taking responsibility and have a plan.

Hundreds of thousands of Americans have great incomes, but you wouldn’t call them wealthy because of debt and lack of accumulated assets, instead:

They owe for their homes
They owe for their cars and boats.
They have little savings and investments
They have few “paid for” assets
They have negative net worth

Essentially, if you make a great income and spend it all, you will not become wealthy. Often, high income earners’ true net worth is far less than they think it is.

Here are several factors and steps to improve your financial life:

Establishing financial goals
Paying yourself first and automate the process
Creating and sticking to a budget. Know where you money goes.
Paying down and/or eliminating credit card and other bad debt. Debt which is taking from your future to pay for your past.
Saving for the future and investing for the long term consistently
Investing the maximum in your employer’s 401(k)
Living on and spending less than you earn
Simplify – separating your needs from your wants. You don’t need to keep buying stuff.

Financial freedom can look something like this:

Freedom to choose a career you love without worrying about money
Freedom to take a luxury vacation every year without it straining your budget
Freedom to pay cash for a new boat
Freedom to respond to the needs of others with outrageous generosity
Freedom to retire a whole decade early

When you have financial freedom, you have options.

“Your worth consists in what you are and not in what you have. What you are will show in what you do.” Thomas Edison

References:

Valuing a Company | Motley Fool

Posted on December 23, 2021 by admin

The most common way to value a stock is to compute the company’s price-to-earnings (P/E) ratio. The P/E ratio equals the company’s stock price divided by its most recently reported earnings per share (EPS).

You can calculate it two different ways, by:

Taking the company’s market cap and dividing it by net income – or,
Dividing a company’s current stock price by earnings per share

You’ll wind up with the same number either way because in the share price approach, both numbers have already been divided by the total number of shares the company has outstanding. So it’s two different ways to the same place.

A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.

You’ll usually see the P/E ratio quoted two different ways:

Trailing twelve month (TTM) – which looks at the company’s actual income over the past twelve months.
Forward – This approach takes analyst estimates of earnings expectations for the upcoming year and using that as the earnings figure.

If a company is growing, its forward P/E ratio will always be smaller than its trailing twelve month P/E ratio, because more income is expected and the denominator will be larger. If you see a P/E ratio out in the wild and it isn’t specified which kind it is, you can probably assume it’s based on the company’s trailing twelve month earnings.

The P/E ratio only works if there’s an E – or earnings. So it’s a helpful tool for companies that have income, but it’s totally useless if a company isn’t currently profitable. That’s why investors also use another tool for unprofitable companies, the P/E ratio would return a negative number, which really wouldn’t be very helpful, so instead investors use the price to sales ratio.

Price-to-sales is a company’s market cap divided by its total sales over the past twelve months. Because the P/S ratio is based on revenue instead of earnings, this metric is widely used to evaluate public companies that do not have earnings because they are not yet profitable.

High growth software companies can have price-to-sales ratios of over 10, while more established businesses are usually in the mid to low single digits. The P/E and P/S ratios are great because they allow you to normalize companies of different sizes and immediately get a sense of what investors are willing to pay for a piece of that company’s earnings or revenue.

You can use these ratios to compare how a company stacks up to the overall stock market, peers in their industry, or itself relative to the past. Generally, businesses that are posting high growth rates are going to have higher price-to-earnings and price-to-sales ratios. That’s because investors expect that company to be considerably bigger in the future, and they have bid up shares to reflect that. That doesn’t mean that they’re bad stocks to own, it just means that people are expecting big growth to continue and if it doesn’t, shares could fall dramatically.

Conversely, stodgy old businesses in crawling industries tend to have lower p/e ratios because they aren’t growing very quickly – for them this year’s earnings will probably look a lot like last year’s earnings. The market isn’t expecting much from stocks with low valuations, so if the outlook gets worse, they’re less likely to take a huge hit, but they’re also less likely to give investors huge returns.

All you’re trying to do with valuation is to get a sense of how much you have to pay for a dollar of earnings or revenue from a company, and what the market expects of that company.

You can look at to see how a company’s valuation compares to the growth the company is posting. The PEG ratio accounts for the rate at which a company’s earnings are growing. It is calculated by dividing the company’s P/E ratio by its expected rate of earnings growth.

Most investors use a company’s projected rate of growth over the upcoming five years, you can use a projected growth rate for any duration of time. Using growth rate projections for shorter periods of time increases the reliability of the resulting PEG ratio.

The generally accepted rule is that a PEG ratio of 1 represents a “fair value” while anything under 1 is cheap and anything over 1 is expensive compared to the growth the company is posted.

For all these ratios there aren’t absolutes, just guidelines.

As investors we’re looking for quality companies with good business models and exciting growth prospects — it’s worth paying a premium for companies like that, these metrics help us understand what the premium looks like and how it fits into the company’s growth story.

References:

https://www.fool.com/investing/how-to-invest/stocks/how-to-value-stock/

Long Term Investing

Posted on December 17, 2021 by admin

“No matter what the market is doing, no matter how it’s performed, there is always a smart-sounding excuse to sell that is very often regrettable in hindsight.” Motley Fool

Over the past century, research continues to demonstrate that staying invested in stocks over the long term has consistently outperformed every other investing strategy. Since, you can’t predict (or time the market) with certainty and you can’t meet long-term goals with short-term investment strategies.

Stocks have outperformed most assets such as bonds, real estate and cash, over the long run. Ideally, anyone with more than 10 years to invest would buy stocks at good prices and exercise patience. Stocks return 7% to 9% a year over the long run — better than any other asset class. But that can be misinterpreted to imply that stocks return 7% to 9% every year. While the long-term average annual return works out to 7% to 9% a year, what happens in between is wild and chaotic.

Investing is just a fancy word for making your money work for you!

Taking an appropriate amount of market risk is necessary because it’s difficult to meet long- term goals with only short-term investments.

It is widely accepted that there are risks of losing your hard earn money money when you invest in stocks, bonds and mutual funds. However, what is less well known and not widely discussed are the greater risks in not investing in assets. Over time, cash loses purchasing power and value.

Yet, in December 2020, households were holding about $16 trillion in cash, according to Motley Fool. Having this much cash on the sidelines is risky. By not investing your money and keeping it in cash will certainly result in your money losing purchasing power due to inflation and may result in you not achieving your long-term financial goals by having money sit on the sidelines.

Ultimately, it’s important to remember your long term financial goals, why you’re investing and to understand the risks of not investing.

According to investing guru Jeff Gundlach, the single biggest reason why most retail investors fail is simple: Their money flows in and out of assets at exactly the wrong time — in just when things are expensive, and out just as they’re cheap. “Volatility scares enough people out of the market to generate superior returns for those who stay in,” Wharton professor Jeremy Siegel explains.

There’s simply too much uncertainty, and no one can accurately predict or time the market. To successfully time the market, it requires a level of precision that nobody’s been able to achieve. Always remember, only a small number of days provide a huge proportion of total growth. Missing them can completely derail your long-term performance.

Bottomline, you should be invested should be in the stock market right now. And, the best way to build wealth is to be invested in stocks, stay invested, and not get scared out because of temporary fears and market volatility.

“The single biggest reason why most investors fail is simple and widespread: Money flows in and out of assets at exactly the wrong time — in just when things are expensive, and out just as they’re cheap.” Morgan Housel

References:

Beat Inflation with Dividend Stocks | Fidelity Viewpoints

Posted on December 15, 2021 by admin

“Stocks that can boost dividends during periods of high inflation may outperform.” Fidelity Viewpoints

Key takeaways according to Fidelity Viewpoints

Dividends aren’t just nice to have, they’re essential to the stock market’s return—accounting for approximately 40% of overall stock market returns since 1930.
During periods of high inflation, stocks that increased their dividends the most considerably outperformed the broad market, on average, according to Fidelity’s sector strategist, Denise Chisholm.
Dividend-paying stocks’ regular, scheduled payments also may help to reduce the volatility of a stock’s total return.

The economy is gradually recovering from its pandemic-related slowdown and shutdowns, and inflation has hit its highest rate in 39 years. People are emerging from the pandemic and are spending money they saved or money they’re getting from the government. Thus, a combination of soaring pent-up consumer demand and persistent supply chain disruptions has tarnished an otherwise robust economic recovery.

The Bureau of Labor Statistics said the Consumer Price Index of food, energy, goods and services rose by 0.8 percent in November, pushing annual inflation above 6.8 percent. The level is the highest since 1982 and it also marked the sixth consecutive month in which annual inflation rates have exceeded 5 percent.

Currently, approximately 70 percent of Americans rate the economy negatively, with nearly half of Americans blaming Biden for inflation, according to a recent Washington Post-ABC poll.

This combination of economic challenges and consumer worries may make this an especially good time to consider investing in stocks that pay consistent dividends.

A few important things for investors to know about dividend stocks:

Dividend payouts typically happen quarterly, although there are a few companies that payout monthly.
Many high-quality companies routinely raise their dividend payouts, helping hedge against inflation.
A stock’s dividend yield moves in the opposite direction of its stock price, all else being equal, so a high yielding stock may be reason for caution.

Fidelity research finds that dividend payments have accounted for approximately 40% of the overall stock market’s return since 1930. What’s more, dividends have propped up returns when stock prices struggle.

Dividends account for about 40% of total stock market return over time

US stock returns by decade (1930–2020). Over various decades, dividends have remained a fairly steady component of stocks’ total returns amid more highly volatile stock prices. Past performance is no guarantee of future results. Source: Fidelity Investments and Morningstar, as of 12/31/2020.

To invest successfully in dividend stocks, one of the keys is finding companies with strong balance sheets and with secure payouts that can grow consistently over the long haul. Moreover, it’s important to understand the concept of dividend yield, which investors use to gauge how much dividend income their investment will produce.

Investing in dividend stocks

When selecting dividend stocks, it’s important to keep dividend quality in mind. A quality dividend payout can grow over time and potentially be sustained during economic downturns. It’s the primary reason investors must not focus solely on yield.

Steve Goddard, founder and chief investment officer of Barclay, prefers companies with high returns on capital and strong balance sheets. “High return-on-capital companies usually by definition will generate a lot more free cash flow than the average company would,” he says. And cash flow is what pays the dividend.

Although overall dividend health has improved markedly since 2020 and looks good heading into 2022, it’s equally important to check a company’s dividend policy statement so you know how much to expect in payment and when to expect it. Dividend yield is a stock’s annual dividend expressed as a percentage of its price.

It’s crucial to recognize that a stock’s price and its dividend yield move in opposite directions, as long as the dollar amount of the dividend doesn’t change. Investing in the highest-yielding shares can lead to trouble, notably dividend cuts or suspensions and big capital losses

This means a high dividend yield may be a red flag of a problem with the underlying company. For example, a stock’s yield may be high because business problems are weighing down the company’s share price. In that case, the company’s challenges may even cause it to stop or reduce its dividend payments. And before that happens, investors are likely to sell off the stock.

Fidelity Investments’ research has found that stocks that reduce or eliminate their dividends historically have underperformed the market by 20% to 25% during the year leading up to the cut.

Also consider the company’s payout ratio—the percent of its net income or free cash flow it pays in dividends. Low is usually good: A low ratio suggests the company may be able to sustain and possibly boost its payments in the future.

“As a rule of thumb, no matter what the payout ratio is, it is always important to stress test a company’s payout ratio at all points in the business cycle in order to carefully judge whether it will be able to maintain or increase its dividend,” says Adam Kramer, portfolio manager for the Fidelity Multi-Asset Income Fund.

“It all depends on the stability of the cash flows of a company, so it’s more about that than the level of payout. You want to test the company’s ability to pay and increase the dividend under different scenarios. In general, when the payout ratio is more than 50%, it’s a good reminder to always stress test that ratio,” Kramer explains.

Be sure to diversify as you build a portfolio of dividend-paying stocks. To help manage risk, invest across sectors rather than concentrating on those with relatively high dividends, such as consumer staples and energy.

References:

Past performance and dividend rates are historical and do not guarantee future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Investing in stock involves risks, including the loss of principal.

Historic Inflation Worries Americans

Posted on December 13, 2021 by admin

Worries by Americans over historic inflation level and higher retail prices are now larger than concerns about the coronavirus pandemic, according to recent polls from Monmouth and AP-NORC.

The U.S. consumer price index rose 0.8% in November from October. The Labor Department said consumer prices grew last month at an annual rate of 6.8%, which is the highest in 39 years since President Carter administration. The growth in prices were led by cars, food, gasoline, electricity and fuel oil.

As the bulk of Americans cite inflation and paying their bills as their top concerns, President Joe Biden’s job approval ratings fell to new lows with 69% disapproving of how he is handling inflation, according to an ABC/Ipsos poll.

Additionally, inflation concerns could potentially cost the President and Democrats’ their coveted social and environment legislation. It is believed that adding additional fiscal spending to already exploding government debt that adds juice to the economy might worsen inflation critics assert.

Most economists agree that the Build Back Better bill would add to inflationary pressures in the short run, however, they differed over its effects on inflation over the long term. Furthermore, most economists see inflation coming down sometime next year, but the debate is over how soon and by how much.

The bill will probably increase demand over the next few years, Harvard University professor Doug Elmendorf said. “That will tend to push up GDP and employment and inflation — which is not the policy impulse we need right now,” he added. Elmendorf served in the administration of former Democratic President Bill Clinton

References:

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