Tag Archives: Investing

Burton G. Malkiel: Index Funds and Bond Substitutes

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Burton Gordon Malkiel, the Chemical Bank Chairman’s Professor of Economics, has been responsible for a revolution in the field of investing and money management. And he’s also author of the widely influential investment book, A Random Walk Down Wall Street.

His book, A Random Walk Down Wall Street, first published in 1973, used research on asset returns and the performance of asset managers to recommend that all investors would be wise to use passively managed total market “index” funds as the core of their investment portfolios. An index fund simply buys and holds the securities available in a particular investment market.

There were no publicly available index funds when Malkiel in a Random Walk first advanced this recommendation, and investment professionals loudly decried the idea. Today, indexing has been adopted around the world.

Additionally, Malkiel believes that investors “probably needs to take a bit more risk on that stable part of the portfolio”. One asset class that he recommends, instead of low yielding bonds, is preferred stocks. There are good-quality preferred stocks, which are basically fixed-income investments. They’re not as safe as bonds. Bonds have a prior claim on corporate earnings.

According to Malkiel, investors need some part of the portfolio to be in safe, bond like assets–such as preferred stocks, or what he calls bond substitutes, for at least some part of their portfolio.

He suggest a preferred stock of like JPMorgan Chase. He doesn’t think you’re taking an enormous amount of risk. The banks now have much more capital. They are constrained by the Federal Reserve in terms of what they can do and buying back stock and increasing their dividends. And with a portfolio of diversified, high-quality preferred stocks, one can earn a 5% yield.

And if one wants to take on even a bit more risk, there are high-quality common stocks that also yield 5% or more: a stock like IBM, which has a very well-covered dividend, yields over 5%; AT&T– you can think of basically blue chips and they might play a role.

Regarding diversification, investors do need some income-producing assets in their portfolio. But his recommendation is that you think in the diversification of not simply bonds, but maybe some bond substitutes. However, there is a trade-off; there is going to be a little more risk in the portfolio. And one needs to recognize that there is not a perfect solution.

But part of the solution for an investor, especially a retired investor, must be to revisit their spending rule. If one is worried about outliving one’s money, then the spending rate has to be less. In part, it means maybe a bit more belt-tightening.

There’s no easy answer to this. Malkiel wished there were an easy answer that there’s a riskless way to solve the problem. But there isn’t. In terms of wanting more safety, one ought to be saving more before retirement, and maybe the answer is to be spending less in retirement. Thus, on a relative-value basis, things like preferred stocks, and some of the blue chips that have good dividends, and dividends that have been rising over time, ought to play at least some role in the portfolio.

In this age of “financial repression”, where safe bonds yield next to nothing, an asset allocation of 40% bonds is too high, states Malkiel. Now, of course, there’s not just one figure that fits all. For some people it might be 60-40 would be OK. But, in general, the asset allocations that Malkiel recommended have a much larger equity allocation and a much smaller bond allocation. And if you look at the 12th edition of Random Walk book, you’ll find that he has generally reduced the fixed-income allocation and increased the equity allocation–different amounts for different age groups,

References:

  1. https://dof.princeton.edu/about/clerk-faculty/emeritus/burton-gordon-malkiel
  2. https://www.morningstar.com/articles/995453/burton-malkiel-i-am-not-a-big-fan-of-esg-investing

Peter Lynch’s five rules to investing

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“If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train—and succumbing to the social pressure, often buys.” Peter Lynch

Legendary American investor Peter Lynch shared five rules everyone can follow when investing in the stock market.

Within his 13-year tenure, Lynch drove the Fidelity Magellan Fund to a 2,800% gain – averaging a 29.2% annual return. It is the best 20-year return of any mutual fund in history. He is considered the greatest money manager of all time, and he beat the market for so long through buying the right stocks.

No one can promise you Lynch’s record, but you can learn a lot from him, and you don’t need a billion-dollar portfolio to follow his rules.

https://youtu.be/6oYc3RbLO3Q

Lynch’s five rules for any investor in the stock market are listed below.

1. Know what you own

The most important rule for Lynch is that investors should know and understand the company they own.

“I’m amazed at how many people that own stocks can’t tell you, in a minute or less, why they own that particular stock,” said Lynch.

Investors need to understand the company’s operations and what they offer well enough to explain it to a 10-year-old in two minutes or less. If you can’t, you will never make money.

Lynch believes that If the company is too complicated to understand and how it adds value, then don’t buy it. “I made 10 to 15 times my money in Dunkin Donuts because I could understand it,” he said.

2. Don’t invest purely on other’s opinions

People do research in all aspects of their lives, but for some reason, they fail to do the same when deciding on what stock to buy.

People research the best car to buy, look at reviews and compare specs when buying electronics, and get travel guides when travelling to new places – But they don’t do the same due diligence when buying a stock.

“So many investors get a tip on a stock travelling on the bus, and they’ll put half of their life savings in it before sunset, and they wonder why they lose money in the stock market,” Lynch said.

He added that investors should never just buy a stock because someone says it is a great buy. Do your research.

3. Focus on the company behind the stock

There is a method to the stock market, and the company behind the stock will determine where that stock goes.

“Stocks aren’t lottery tickets, there’s no luck involved. There’s a company behind every stock; if a company does well, the stock will do well – It’s not complicated,” Lynch said.

He advises that investors look at companies that have good growth prospects and is trading at a reasonable price using financial data such as:

• Balance Sheet – No story is complete without a balance sheet check. The balance sheet will tell you about the company’s financial structure, how much debt and cash it has, and how much equity its shareholders have. A company with a lot of cash is great, as it can buy more stock, make acquisitions or pay off its debt.

  • Year-by-year earnings growth
  • Price-to-earnings ratio (P/E) – relative to historical and industry averages.
  • Debt-equity ratio
  • Dividends and payout ratios
  • Price-to-free cash flow ratio
  • Return on invested capital

4. Don’t try to predict the market

Trying to time the market is a losing battle. One thing to keep in mind is that you aren’t going to invest at the bottom. Buy stocks because you want to own the business long-term, even if the share price decreases slightly after you buy.

Instead of trying to time the bottom and throwing all your money in at once, a better strategy is gradually building your stock positions over time.

This approach spreads out your investments and allows you to buy into the market at different times at varying prices that ideally balance each other out versus investing one lump sum all at once.

This way, if you’re wrong and the stock continues to fall, you’ll be able to take advantage of the new lower prices without missing out.

“Trying to time or predict the stock market is a total waste of time because no one can do it,” Lynch said.

Corollary: Buy with a Margin of Safety: No matter how careful an investor is in valuing a company, she can never eliminate the risk of being wrong. Margin of Safety is a tool for minimizing the odds of error in an investor’s favor. Margin of Safety means never overpaying for a stock, however attractive the investment opportunity may seem. It means purchasing a company at a market price 30% or more below its intrinsic value.

5. Market crashes are great opportunities

Knowing the stock market’s history is a must if you want to be successful.

What you learn from history is that the market goes down, and it goes down a lot. In 93 years, the market has had 50 declines; once every two years, the market declines by 10%. of those 50 declines, 15 have declined by 25% or more – otherwise known as a bear market – roughly every six years.

“All you need to know is that the market is going to go down sometimes, and it’s good when it happens,” Lynch said.

“For example, if you like a stock at $14 and it drops to $6 per share, that’s great. If you understand a company, look at its balance sheet, and it’s doing well, and you’re hoping to get to $22 a share with it, $14 to $22 is terrific, but $6 to $22 is exceptional,” he added.

Declines in the stock market will always happen, and you can take advantage of them if you understand the company and know what you own.

References:

  1. https://dailyinvestor.com/finance/1921/peter-lynchs-five-rules-to-investing/

Discounted Cash Flow Analysis

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Discounted cash flow model can be used for financial valuation of a project, company, stock, bond or any income producing asset.

Discounted cash flow is a financial valuation method that calculates the value of an investment based on the present value of its future income or cash flow. The method helps to evaluate the attractiveness of an investment opportunity based on its projected future cash flows.

Free Cash flow to the firm (FCFF) means the amount of surplus cash flow available to a business after a it pays its operational expenses like inventory, rent, salaries etc. and also invests in fixed assets like plant and machinery, property etc. Cash is an important element of business. It is required for business functioning; some investors provide more value to cash flow statements than other financial statements.

Free cash flow is important metric as it tells about the company’s ability to deploy capital in future projects. Without cash, it’s tough to develop new products, make acquisitions, pay dividends, buyback shares and reduce debt. Also, as cash is difficult to manipulate compared to other variables, FCFF is more reliable indicator of a company’s performance than net earnings.

DCF model can be used for valuation of a project, company, stock, bond or any income producing asset. The DCF method can be used for the companies which have positive Free cash flows and these FCFF can be reasonably forecasted. So, it cannot be used for new and small companies or industries which have greater exposure to seasonal or economic cycles.

To use the Discounted Cash Flow Model to Value Stock:

Step 1 : Calculate the Free Cash flow to the firm

Step 2 : Project the future FCFF – You need to project the future FCFF for the next couple of years. You can analyze the historical data to understand the past FCFF growth trend. However, relying on historical data only won’t give you the right result, so consider the present financials as well as future potential of the company while projecting the growth rate. When conducting a DCF analysis, investors and businesses must make estimations for future cash flows and the future value of the investment. For instance, a company considering a new business acquisition must estimate the future cash flows from expanding its processes and operations with the acquisition. The estimates the company makes can help determine if the investment is worth the cost of the acquisition.

Step 3 : Discount the FCFF — Calculate the present value of this cash flow by adjusting it with the discount rate. Discount rate is your expected return %. The discount rate is one of the most important elements of the DCF formula. Businesses need to identify an appropriate value for the discount rate if they are unable to rely on a weighted average cost of capital. Additionally, the discount rate can vary depending on a range of factors like an organization’s risk profile and the current conditions of capital markets. If you are unable to determine a discount rate or rely on a WACC value, an alternative model may be more beneficial and accurate.

Step 4 : Calculate the Terminal Value — It is the value of the business projected beyond the forecasting period. It is calculated by assuming the constant growth of a company beyond a certain period known as terminal rate.

When valuing a business, the annual forecasted cash flows typically used are 5 years into the future, at which point a terminal value is used.  The reason is that it becomes hard to make reliable estimates of how a business will perform that far out into the future. There are two common methods of calculating the terminal value:

  • Exit multiple (where the business is assumed to be sold)
  • Perpetual growth (where the business is assumed to grow at a reasonable, fixed growth rate forever)

Step 5 : Add discounted FCFF with Terminal value and adjust the total cash and debt.

Step 6 : Divide the Figure calculated in Step 5 by the outstanding number of shares to find out the DCF Value.

Step 7 : Adjust the Margin of Safety to find out the Fair value. Margin of Safety provides discount for uncertainties in the business.

When assessing a potential investment, it’s important to take into account the time value of money or the required rate of return that you expect to receive.

The DCF formula takes into account how much return you expect to earn, and the resulting value is how much you would be willing to pay for something to receive exactly that rate of return.

  • If you pay less than the DCF value, your rate of return will be higher than the discount rate.
  • If you pay more than the DCF value, your rate of return will be lower than the discount.

The DCF formula is used to determine the value of a business or a security.  It represents the value an investor would be willing to pay for an investment, given a required rate of return on their investment (the discount rate).

When using the DCF analysis, determine the discount rate and have estimates for future cash flows. Apply these values in the DCF formula to create a future outline that details expected returns. If the results appear at or above a company’s initial projections for future cash flows, then investing can be beneficial. However, if the discounted cash flow formula results in a value below a company’s projected future returns, it may consider alternative investments.

References:

  1. https://www.finology.in/Calculators/Invest/DCF-Calculator.aspx
  2. https://corporatefinanceinstitute.com/resources/knowledge/valuation/dcf-formula-guide/
  3. https://www.indeed.com/career-advice/career-development/discounted-cash-flow

16 Rules for Investment Success – Sir John Templeton

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“I never ask if the market is going to go up or down because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it’s worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.” ~ John Templeton

Sir John Templeton’s “16 rules for investment success” remain relevant in today’s volatile economic environment as they have for several decades.

Sir John Templeton was an investor and mutual fund pioneer who became a billionaire by pioneering the use of globally diversified mutual funds. He is known for searching far and wide for investments across countries and not restricting investments to UK or USA.

One of Templeton’s most noteworthy examples of investment success occurred when he bought stocks in 1939.

During the opening weeks of World War II and in response to the stock market crashing, Templeton bought 100 shares in stocks which were selling for $1 or less. Four out of the 104 companies in which he invested turned out worthless while he realized significant returns on the other companies.

John Templeton’s 16 rules for investment success include:

  1. Invest for maximum total real return. Templeton advises investors to be aware of how taxes and inflation erode returns and to avoid putting too much into fixed-income securities, which often fail to retain the purchasing power of the dollars spent to obtain them.
  2. Invest – don’t trade or speculate. Templeton warns that over-action and too much trading can eat into potential profits and eventually results in steady losses.
  3. Remain flexible and open-minded about types of investment. No one investment vehicle, whether it’s bonds, stocks, or futures, works best all the time. That being said, Templeton notes that the S&P 500 has “outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s.”
  4. Buy low. While this advice might seem obvious, it often means that you’ll have to go against the crowd. When equities are popular and in demand, their prices are generally higher. Opportunities to buy low usually only come when when people are pessimistic about the market’s performance.
  5. When buying stocks, search for bargains among quality stocks. Templeton advocates identifying sales leaders, technological leaders, and trusted brands when selecting stocks to ensure a company is well-positioned and well-rounded before purchasing its stock.
  6. Buy value, not market trends or the economic outlook. Templeton emphasizes that individual stocks determine the market and not the other way around. The market can disconnect with economic reality.
  7. Diversify. In stocks and bonds, as in much else, there is safety in numbers. There are several advantages to portfolio diversification: you’re less likely to endure a major loss due to a freak event that devastates one company, and you also have a larger selection of investment vehicles from which to choose.
  8. Do your homework or hire wise experts to help you. Sir John insists that you must be aware of what you’re buying. In the case of stocks, you are either buying earnings (if you expect growth) or assets (if you expect an acquisition).
  9. Aggressively monitor your investments. Templeton notes that “there are no stocks that you can buy and forget.” Markets are in a state of perpetual flux, and change instantaneously. If you’re not aware of the changes, you’re probably losing money.
  10. Don’t panic. Even if everyone around you is selling, sometimes the best idea is to take a breath and hold on to your portfolio. In the event of a sell-off, only divest if you have identified more attractive stocks to pick up.
  11. Learn from your mistakes. The stock market is a lot like university: it can cost a lot of money to learn a few lessons. So don’t make the same mistakes twice. Learn from them, and they’ll turn into profit-making opportunities the next time.
  12. Begin with a prayer. Templeton believes this helps a person clear his or her mind and make fewer errors during a trading session or in stock selection.
  13. Outperforming the market is a difficult task. This rules, in effect, is a reality check. The largest hedge funds produce some extremely volatile returns from year to year, and some have produced negative returns. And those are the experts!
  14. An investor who has all the answers doesn’t even understand all the questions. “Pride comes before the fall.” Likewise, overconfidence or certainty in one’s investment style or knowledge of the market will inevitably end in failure. 
  15. There’s no free lunch. Never invest on sentiment, on a tip, or on an IPO just to ‘save’ commission.
  16. Do not be fearful or negative too often. While there have been plenty of bumps along the road, Templeton acknowledges that for “100 years optimists have carried the day in U.S. stocks.” In his opinion, globalization is bullish for equities, and he thinks stocks will continue to “go up…and up…and up.”

His lessons are the end result of a lifetime of knowledge, and include advice on stock selection, going against market sentiment, keeping your cool, and putting investing in perspective.

References:

  1. https://www.caporbit.com/16-rules-for-investment-success-john-templeton/
  2. https://www.businessinsider.com/templetons-16-rules-for-investment-success-2013-1
  3. https://www.gurufocus.com/news/157687/sir-john-templetons-16-rules-for-investment-success

How to Protect Your Money from Inflation

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Inflation causes your money to be worth less over time. To hedge against inflation, you need to invest your money in assets.

Inflation in the U.S. is at the highest rate in four decades.

Inflation decreases the purchasing power of your dollars over time. Here are steps you can take to protect the purchasing power of your dollars, according to Forbes.

  • Trim your expenses. To minimize the impact of inflation, review your spending and identify areas to reduce or eliminate completely.
  • Wait to pay off low-interest debt. Paying off debt is usually good, but you may want to hold off on making extra payments if you have low-interest debt. Your debt becomes less expensive due to inflation. Use the money for other purposes—like paying off higher-interest loans.
  • Invest your money. Inflation causes your savings to be worth less over time. To hedge against inflation, you need to invest your money. If the prospect of investing is scary, consider a diversified portfolio of broad market index funds to lower your risk levels and costs.

Getting inflation under control

The Federal Reserve is tasked with keeping inflation at a healthy level by adjusting the nation’s money supply and interest rates.

When the economy is expanding too quickly and inflation rises, the Fed will typically raise interest rates or sell assets to reduce the amount of cash in circulation. These actions tend to reduce demand within the economy and can push the economy into recession.

References:

  1. https://www.forbes.com/advisor/investing/is-inflation-good-or-bad/

Warren Buffett Investing Lessons

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“Most people get interested in stocks [or assets like Bitcoin] when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett

Warren Buffett, Chairman and CEO, Berkshire-Hathaway, the Oracle of Omaha, has been the most successful investor of the 20th Century and is considered by many to be one of the greatest investors of all time.. His investment track record is simply remarkable with compounded annual returns over 20% over the last 55 plus years.

Essentially, if you had invested $10,000 USD in his investment firm Berkshire-Hathaway in 1965, that $10,000 USD would today be worth over $280 million US dollars.

What follows are several investing lessons all investors can learn from Buffett:

Investing Lesson 1: Risk Comes From Not Knowing What You are Doing

Many first-time investors have started trading in stocks and cryptocurrency without really understanding how these asset classes work. Buffett has advised investors to not chase everything that is new and shiny, and instead to only focus on the opportunities that they painstakingly researched and understand.

Stick to your circle of competence. Try not to be good at all things, and instead try to be great at one thing and give it all you`ve got. It`s better to be known for one thing than nothing.

“Never invest in a business you cannot understand.” Warren Buffett.

Investing Lesson 2: System Overpowers the Smart

Buffett advises that retail investors use a low-cost index fund. Investing via index funds gives you the advantage of a system, it allows for a disciplined investing cycle via SIPs and keeps emotions away from corrupting that framework. In other words, Buffett wants retail investors to follow a system over everything else.

And the system and a clear investing framework finding great business at good reasonable prices that have powered Berkshire Hathaway for the last five decades.

Change the way you see setbacks. You will make mistakes, probably lots of them, as long as you choose to swing for the fences. Buffett believes you can do well if you program your mind to see opportunities in every setback.

“A low-cost index fund is the most sensible equity investment for the great majority of investors.” Warren Buffett.

Investing Lesson 3: Have an Owner’s Mindset

Buying a stock is effectively buying a business and investors should follow the same kind of rigorous analysis and due diligence as one would do when buying a business.

The lesson here is that instead of getting too caught up in the recent movement of the stock price, you should spend more time analyzing the business fundamentals behind the stock price.

You can only genuinely value a business if you can accurately predict future cash flows. This is impossible without an understanding of the company’s operating environment and fundamentals.

And once you have answers to the pertinent questions, invest in a business that you would like to own for the next 10 to 20 years.

On how to invest in stocks. His response is a simple five-word answer: “Invest in the long term.”

“That whole idea that you own a business you know is vital to the investment process.” Warren Buffett

Investing Lesson 4: Be Fearful When Others are Greedy and Be Greedy When Others are Fearful

The stock markets work in cycles of greed and fear. When there is greed, people are ready to pay more than what a business is worth. But when fear sets in, then great businesses are available at huge discounts for anyone who is ready to keep their gloomy emotions aside.

In Berkshire’s 2018 shareholder letter, Buffett wrote, “Seizing opportunities does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

In other words, Buffett encourages investors to not follow the herd. And strip away emotions when making investment decisions, which is likely to open up more profitable opportunities.

“What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.” Warren Buffett

Investing Lesson 5: Save and Preserve Capital for A Golden Rainy Day

Warren Buffett goes by the philosophy – hold onto your money when money is cheap and spend aggressively when money is expensive.

Financial expert criticized Buffett for holding onto billions of dollars in cash and not deploying it in stocks. But Buffett was saving all that cash to be used when companies come down from the then astronomical valuations to more reasonable prices.

“Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When a downpour of that sort occurs. It is imperative that we rush outdoors carrying washtubs and not teaspoons.” Warren Buffett

Investing Lesson 6: Never Invest Just Because a Company is Cheap

A cheap business may be cheap for a very good reason, but may not be a profitable or favorable investment.

His investing approach is to look at a business’s competitive advantage, intangibles like brand value, cost superiority and its strong growth prospects.

This goes hand-in-hand with his Buffett’s first rule of investing is “don’t lose money.” His second rule is “never forget rule number one.” In short, investors should try to avoid significant losses at all costs, but avoiding all losses is impossible.

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Warren Buffett

Investing Lesson 7: Time is The Friend of The Wonderful Business

Patience and time are important in investing and has investors can reap the benefits of compounding.

Additionally, “cash is king” and investors must avoid debt at all costs. Buffett has always had a strong net cash position. Cash gives optionality and means you’re unlikely to have to make hard decisions when the market becomes volatile and eventually turns.

Considering volatility, Buffett said, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions are not immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Buffett is not a fan of the kind of debt that can leave consumers broke and helpless, especially when the markets go down.

“It is insane to risk what you have and need in order to obtain what you don’t need,” Warren Buffett

Investing Lesson 9: Keep It Simple

An element of simplicity is important. Buffett himself follows a simple to understand investing framework, which can best be defined as buying stakes in a business where the price you pay is far lower than the value you derive. He wants investors to invest in simple and understandable instruments only and using a process that one can easily digest.

For example, if you don’t understand cryptocurrency, don’t invest, trade, or speculate in Bitcoins or glamorous-looking investment vehicles we are exposed to every year.

“If you are uncomfortable with the asset class that you have picked, then chances are you will panic when others panic,” Warren Buffett

Finally, treat your body and mind like the only car you could have. If someone offered you the most expensive car in the world with a single condition that you never get another one, how will you treat this car?

With this analogy in mind, Buffett urges you to treat your body and mind the same way you treat your one, and only car. If you don’t take care of your mind and body now, by the time you are forty or fifty you’ll be like a car that can’t go anywhere.

Investing Bottomline

Buffett’s lessons are simple and straightforward. He submits to keep it simple, improve upon what you know, stay within your circle of competence and comfort zone, and there are enough opportunities for one to thrive in investing.

References:

  1. https://www.etmoney.com/blog/9-lessons-in-investing-by-warren-buffett/
  2. https://thetotalentrepreneurs.com/business-lessons-warren-buffet/
  3. https://addicted2success.com/life/5-lessons-we-can-all-learn-from-the-life-of-warren-buffett/
  4. https://finance.yahoo.com/news/5-warren-buffetts-most-important-224429018.html

Recession…recessions always come with significant increase in unemployment. It’s basically definitional. Employment and gross domestic product fall together during a recession.

Timeless Investing Lessons

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“It is near impossible to consistently outperform the market, which supports passive investing in lieu of active management strategies.” ~ Burton G. Malkiel

  1. Buy and hold investments for the long-term. Investment expenses and taxes will eat away at your returns. It’s impossible to perfectly time the market. You will make mistakes. Buying total market index fund will include buying nonprofitable companis in the mix. And, historical analysis shows:
    • When markets are high is when most people put money into the market.
    • When markets are low is when most people take money out of the market.
  2. Timing the market doesn’t work. Timing the market means selling assets at the top of the market and buying the asset at the bottom of the market. Successfully trying to time the stock market has never earned. Thus, you should not try to time the market.
  3. Dollar cost averaging. DCA means putting money into the market regularly overtime.
  4. Broad Diversification. You do not want all your personal capital and savings invested in a single stock or a single asset class, such as stocks only. You should diversify your investment across different asset classes (stocks and bonds), industries and countries. You want to own both domestic and foreign stocks, bonds, real estate and some cash.
  5. Cost matters. The two variable costs you can control are investment costs and taxes. Jack Bogle said, “you get what you don’t pay for.” Since, the lower the expense ratio the investor pays the purveyor of investment services, the more capital that is left over for the investor. Look carefully at the expense ratio.
  6. Index funds. Buy a total market index fund with zero or low expenses. Two-thirds of active investment managers are beaten by stock index funds annually. Ninety percent of active investment managers are beaten by stock index funds over a ten year period.
  7. Buy bond substitutes instead of total bond index fund such as preferred stocks or high yielding dividend paying established companies.
  8. Rebalance annually or at least bi-annually. This requires you to sale highly appreciated assets to buy assets that have not appreciated greatly or are on sale.

These are just a few timeless investing lessons that invest can follow to build wealth

References:

  1. https://www.wallstreetprep.com/knowledge/random-walk-theory/

Gratitude and Overcoming Limiting Beliefs

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Gratitude enables you to overcome your limiting beliefs.

Limiting thoughts and beliefs are false thoughts and beliefs that prevent you from pursuing your goals and desires. They can affect every aspect of your life from your wealth, health, relationships and emotional well-being. For example, if you believe you don’t deserve to be happy, you may never pursue your dreams or goals, and you will not be happy.
Gratitude in all things

Gratitude enables you to overcome and replace you limiting thoughts and beliefs with positive and abundant thoughts and beliefs. Further, your attitude, mood, behavior and thoughts improve when you practice gratitude.

The three keys to gratitude include :

  • Emote – to feel emotionally grateful
  • Extend – reach out and connect socially
  • Exercise – practice until it’s instilled

Be grateful in all circumstances, no matter what, both in good times and dark times. Although, it is easier to be thankful during good times than during hard times. The trials and sufferings in your life are there to strengthen you. They’re there for you to learn and grow.

Dr. Robert Emmons, known as the “world’s leading scientific expert on gratitude”, andis a psychology profession from the University of California, Davis and also the founding editor-in-chief of the Journal of Positive Psychology, found that being more grateful can lead to increased levels of well-being and that being grateful towards a higher power may lead to increased physical health. Giving thanks to those you are in a relationship with (not only your family) will strengthen the relationship.

Studies found that persons practicing gratitude showed more optimism in life, reduced stress, depression, and anxiety levels. It is a continuous loop.  The more you experience gratitude and say ‘thank you’  the more you will find in life to appreciate. When you choose gratitude over happiness even your self-control is stronger.

Research found that patients with heart failure showed reduced symptoms of heart failure and inflammation, improved sleep, and moods through keeping a gratitude journal.

Daily gratitude exercise

  • Reflect on three things your grateful for
  • Feel the gratitude in your body and
  • Extend the gratitude to others

When you practice gratitude, you change your thoughts and beliefs about yourself. You are happier and experience greater joy in life. And, when you change yourself, you change your perception of the world.

Be thankful for everything that God has given you. Apostle Paul declared, “I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want” (Philippians 4:12, NIV).

An attitude of gratitude and a spirit of thankfulness make all the difference. Thus, to change your life and your world, change your attitude and in all things, practice gratitude.

References;

  1. https://www.virtuesforlife.com/33-gratitude-affirmations-to-transform-limiting-beliefs/
  2. https://billygraham.org/story/how-to-be-thankful-in-all-things/
  3. https://lovegodgreatly.com/be-thankful-in-all-things/
  4. http://www.thelife.digital/tl/articles/gratitude-is-the-best-attitude/

“I am grateful to feel stronger, wiser and more confident with each new day.”

Qualified Dividends vs. Ordinary Dividends

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The distinction between Qualified and non-Qualified dividends has to do with how you’re taxed on those dividends.

  • Qualified dividends are taxed at 15% for most taxpayers. (It’s zero for single taxpayers with incomes under $40,000 and 20% for single taxpayers with incomes over $441,451.)
  • Ordinary dividends (or “nonqualified dividends”) are taxed at your normal marginal tax rate.

The concept of qualified dividends began with the 2003 tax cuts. Previously, all dividends were taxed at the taxpayer’s normal marginal rate.

The lower qualified rate was designed to fix one of the great unintended consequences of the U.S. tax code. By taxing dividends at a higher rate, the IRS was incentivizing companies not to pay them. Instead, it incentivized them to do stock buybacks (which were untaxed) or simply hoard the cash.

By creating the lower qualified dividend tax rate that was equal to the long-term capital gains tax rate, the tax code instead incentivized companies to reward their long-term shareholders with higher dividends. It also incentivized investors to hold their stocks for longer to collect them.

Qualified Dividends

To be qualified, a dividend must be paid by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.

Importance of dividends

From 1871 through 2003, 97% of the total after-inflation accumulation from stocks came from reinvesting dividends. Only 3% came from capital gains.”

To put this into perspective, take a look at the example used by John Bogle, where he writes: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded)—an amazing gap of $32 million.” The reinvestment of dividends accounted for almost all of the stocks’ long-term total return.

Dividends are an important consideration when investing in the share market as they provide a reliable source of return while you wait.

References:

  1. https://www.kiplinger.com/investing/stocks/dividend-stocks/601396/qualified-dividends-vs-ordinary-dividends