“Money will make you more of what you are now.” ~ Dave Ramsey
Tag Archives: Building Wealth
The Real Value of Wealth
Invest first before living like a King and Queen
Asset vs Liability
Son: Dad, may I speak with you?
Dad: Go ahead.
Son: Among all my classmates, I am the only one without a car. It is embarrassing.
Dad: What do you want me to do?
Son: I need a car. I don’t want to feel odd.
Dad: Do you have a particular car in mind?
Son: Yes dad (smiling)
Dad: How much?
Son: $15K
Dad: I will give you the money on one condition.
Son: What is the condition?
Dad: You will not use the money to buy a car but invest it. If you make enough profit from the investment, you can go ahead and buy the car.
Son: Deal.
Then, the father gave him a check of $15K. The son cashed the check and invested it in obedience to the verbal agreement that he had with his father.
Some months later, the father asked the son how he was faring. The son responded that his business was improving. The father left him.
After some months again, the father asked him about his business again and the son told him that he is making a lot of profit from the business.
When it was exactly a year after he gave him the money, the father asked him to show him how far the business has gone. The son readily agreed and the following discussion took place:
Dad: From this I can see that you have made a lot of money.
Son: Yes dad.
Dad: Do you still remember our agreement?
Son: Yes
Dad: What is it?
Son: We agreed that I should invest the money and buy the car from the profit.
Dad: Why have you not bought the car?
Son: I don’t need the car. I want to invest more.
Dad: Good. You have learned the lessons that I wanted to teach you.
– You didn’t really need the car, you just wanted to feel apart of the crowd. That would have placed extra financial obligations on you. It wasn’t an asset then; but a liability.
– Two, it is very important for you to invest in your future before living like a king.
Son: Thanks dad.
Then the father gave him the keys of the latest model of that car.
MORALS:
1. Always invest first before you start living the way you want.
2. What you see as a need now may become a want if you can take a little time to get over your feelings.
3. Try to be able to distinguish between an asset and a liability so that what you see as an asset today will not become a liability to you tomorrow.
You’re Responsible for Managing Your Money
“Don’t be like a ship at sea without a rudder, powerless and directionless. Decide what you want, find out how to get it, and then take daily action toward achieving your goal. You will get exactly and only what you ask and work for. Make up your mind today what is it you want and start today to go after it! Do It Now!” ~ Napoleon Hill
When you understand that you alone are responsible for managing your money and building wealth, everything changes. It’s not up to the government or your neighbor—it’s all on you.
Take control and make it happen.
It is ultimately the choices and actions you take with your money that have the greatest impact on your financial well-being.
It is about developing disciplined spending and saving habits, being responsible with debt, making wise investment decisions, and exhibiting patience and long-term thinking when it comes to financial goals.
Start by thinking about your end financial goal. What is the number (amount needed for retirement) you are aiming for? Once you have that number in mind, consider what actions you need to take now to make it a reality. If you’re unable to invest a lot right now, think about what steps you can take to change that situation.
Break down your goals into smaller, more manageable tasks, and you’ll be surprised at how much progress you can make.
Even if you cannot afford to invest $1,000 monthly, do not allow that to discourage you from investing. Beginning with more modest amounts such as $25, $50, or $100 can be a great starting point. It is crucial to make investing a priority, no matter how little, and then gradually increase your investments as time goes by.
When striving to build wealth and for financial freedom, don’t forget the importance of maintaining good health. True wealth is not only the freedom to pursue personal goals, but also the presence of good health. Without good health, financial freedom holds little to no worth.
While a healthy person desires numerous things, a sick person longs for just one: good health.
Building Wealth & Financial Freedom
Work allows you to earn an income.
Income allows you to purchase assets.
Assets allow you to create wealth.
Wealth allows you to buy freedom.
Defining Wealth
Frequently, when discussing wealth, the importance of good health is overlooked.
Being wealthy means more than just having money—it also means having good health. So, while you’re working hard to build wealth and be financially free, don’t discount the importance of good health.
Wealth is not about having the most expensive possessions, but rather having the freedom to do what you want, feeling joy and contentment in life, and being healthy. This is the best definition and meaning of wealth.
Billionaire hedge fund manager Paul Tudor Jones II, Tudor Group’s Founder and Chief Investment Officer, is one of the pioneers of the modern-day hedge fund industry. He is known for his macro trades, particularly his bets on interest rates and currencies.
In 1980, he founded Tudor Investment Corporation, which now manages $13 billion in assets.
Between 1989 to 2014, he generated compounded annual returns of nearly 20% without a single down year.
Paul Tudor Jones is one of history's most prolific traders.
Between 1989 to 2014, he generated compounded annual returns of nearly 20% without a single down year.
Here are eleven of his most insightful comments and ideas. pic.twitter.com/RVNbeKK3Jo
— Commonstock (@JoinCommonstock) April 30, 2023
Tudor considers himself one of the most conservative investors in the world. He would describe himself as the “single most conservative investor on earth”, and he “absolutely hates losing money.” Once he commented that his grandfather told him at a very early age that “you are only worth what you can write a check for tomorrow.”
Thus, his investment philosophy is that he does not take a lot of risks, instead, he looks “for opportunities with tremendously skewed reward-risk opportunities.” Others describe his strategy as: ‘Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead”
Source: https://www.tudor.com/
Building Wealth ‘One Brick at a Time’
“Rome wasn’t built in a day, but they were laying bricks every hour.” – James Clear
Laying bricks systematically to build a city works similarly well for building wealth. Building wealth is a slow systematic process of investing over the long term and compounding returns over time for most savers and investors. Successfully building wealth is not an overnight success.
“Rome wasn’t built in a day, but they were laying bricks every hour.” – James Clear
This is the same for building wealth.
It’s a slow rise over time for most.
Not an overnight success. pic.twitter.com/d2wjHVh1jh
— Cade Invests (@cadeinvests) September 4, 2021
“Goals are good for setting a direction, but systems [habits] are best for making progress.” ~ James Clear
Small Cap Stocks Performance
Historically, small-cap stocks have been shown to outperform the rest of the market over the long term. And, small-caps tend to underperform during bear markets but outperform in bull markets.
Some of the best stocks to buy in the past 25 years started as small-cap stocks. Amazon was a $7 stock in 1998, and Tesla had a market valuation of just over $1 billion in 2010. Of course, not every small-cap company becomes a giant. Investing in small companies can be rewarding, but it also comes with risks that investors need to understand.
Over the long-term, small caps tend to outperform because of greater growth opportunities. A massive company is limited by its existing size. It’d be exceptionally difficult for, say, Apple Inc. to triple its revenues and free cash flow anytime soon.
However, a $1 billion company can much more easily grow to be multiples of its current size. Many small caps stay small because they have structural problems, management lacks the capability to grow the business, or their niche simply isn’t large enough to support a bigger enterprise. That said, many small caps can graduate to greater things, earning shareholders tremendous returns along the way.
Small-cap stocks tend to experience more price volatility and to suffer more stock price destruction than their larger cap peers during bear markets and when equities are broadly struggling due to inflationary and recessionary fears.
Small cap stocks typically underperform entering recessions and periods of economic weakness but outperforms coming out of them. In the long run, small caps tend to be winning investments. Yale professor Roger Ibbotson and financial consultancy Duff & Phelps analyzed nearly a century of data to find that small caps have outperformed large companies by 1.6% on average every year through 2020.
Fearful investors who throw in the towel during market downturns risk missing out on the rewards when the market possibly reverses course in 2023.
“This is one of the best times to invest in small company stocks that we’ve seen in a very long period of time,” says Gregg Fisher, founder of global small cap hedge fund Quent Capital, which manages $1 billion in assets. “The odds historically of a huge rally off this massive decline are high.”
The small-cap benchmark Russell 2000 Index (RUT) generated a total return (price appreciation plus dividends) of -20.4% for the year-to-date through Dec. 16. That trailed the S&P 500’s (SPX) total return of -17.9%.
No surprises there. Risker and “growthier” equities such as small-cap stocks tend to underperform when markets are volatile and headed south (bearish).
By the same token, however, small-cap stocks also tend to outperform the broader market when equities are catching a bid. No one can know for certain if we’ve already seen the bottom of our current bear market. Once the equity malaise lifts, however, the best small-cap stocks to buy should theoretically be among the market’s top outperformers.
To find the best performing small cap that have continued to grow through the bear market, Search for companies with a market value between $300 million and $2 billion that also had positive sales growth over the past 12 months and a share price of at least $5. Financial institutions, REITs, utilities, royalty trusts and limited partnerships were excluded, as were companies that have been public for less than one year.
Over time, small-cap stock prices tend to be more volatile than those of larger companies, and stock values fluctuate more dramatically. But, in general, the longer the evaluation period, the greater the likelihood that small-cap stocks outperform the large-caps.
in recent months small-cap stocks have fallen sharply amid a broader pullback on fears of a Federal Reserve Board rate hike, especially in high-priced growth stocks. Since small-cap stocks are more likely to be in their growth phase and are often unprofitable or minimally profitable, they get hit harder during “risk-off” moments like the one that started 2022. In other words, small-caps tend to underperform during bear markets but outperform in bull markets.
References:
- https://www.fidelity.com/insights/investing-ideas/small-caps-2023
- https://www.forbes.com/lists/best-small-cap-companies
- https://money.usnews.com/investing/slideshows/9-of-the-best-small-cap-stocks-to-buy-for-2023
- https://www.fool.com/investing/stock-market/types-of-stocks/small-cap-stocks/
- https://www.fool.com/investing/stock-market/types-of-stocks/small-cap-stocks/how-to-find-small-cap-stocks/
The Power of Compounding
There are two things to direct your attention to.
- First, the power of compounding. A 12% return in one year isn’t life changing, but stay invested for 20 years and, on average, you’ve grown your capital nearly ninefold.
- Second, notice that the lowest number on the chart is the worst one-year return, a 39% loss. As the time extends, not only do the average results improve, but the worst losses also get smaller.
Over the long-term, the worst 20-year S&P 500 returns result has been a gain of 155%. The fact that risk decreases with time is apparent in the annualized standard deviations, which are lowest for the longest holding periods. That means the annual returns are not independent of each other, but rather, are mean reverting. And that’s good to know after a year like this year.
That’s why buying stocks only for investors who can leave their money in the market for multiple years is encouraged. If you expect to cash in your stocks in just a year, you expose yourself to a loss that is multiples of your expected gain. If you can wait five years to cash in, your expected gain is multiples of the worst historical loss. And if you can wait 20 years, there has never been an outcome worse than doubling your investment.
You shouldn’t buy stocks if you expect to sell within five years. And you’re also discouraged market timing. Most investors tend to throw in the towel after large losses and go all in after large gains. History says the opposite has produced better results market tended to increase more than usual following a bear market. The average two-year increase was 33% after hitting down 20%, meaning the market had usually recovered more than all its losses within two years. Further, that 33% gain was nearly double the median two-year increase. This positive outlook can be hard to wrap your arms around given that most advice you hear, especially from professionals, is to get more cautious after the market has fallen.
The tendency of good periods following bad and vice versa is part of the reason why the long-term risk-return characteristics of equities have been so favorable. The table below shows the average 1-, 5-, 10- and 20-year total returns for the S&P 500 for the past 77 years and the best and worst returns for each period.
References: