Tag Archives: Investing

Investing Involves Decision Making

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Investing involves decision-making. But not making those investing decisions can be a more costly move in itself.

Choosing to invest your money in the stock market is like picking your first tattoo. The stakes are high and all the available options can seem overwhelming to your senses. Thankfully, there is an an abundant amount of good financial services, resources and advice available to help you avoid making a mistake mistake and to get you started.

There is truly no time like the present to start investing. Because the sooner you start, the more time your money has to grow and the more potential you have to earn, because of the power of compound interest. This is when your money earns money on itself and grows exponentially.

But, growth isn’t always guaranteed. Investing means taking in a certain amount of risk since the market moves in cycles. Although investing comes with some risk, it doesn’t have to feel like a high-stakes gamble.

Rest assured, historically, stocks have bounced back from every downturn in history. And, then continued to climb. Investing consistently overtime can make it easier to ride out the market volatility, the ups and downs.

The first step is determining what you want your future to look like financially in retirement. Retirement is probably your most important and expensive goal, and a good place to start.

It’s important to build a portfolio based on your time horizon, how you want to invest, how comfortable you’re with risk and what you plan to use your investment earnings are for. But, you must get started.

Ready, set, go(als).

Investing could help you owe the IRS less during tax time. For example, you have until the tax filing deadline each year to open and fund an IRA, which could help you claim an extra deduction.

Harvesting losses in your brokerage account could help you reduce your capital gains taxes for the year.

If you want more control over your investment portfolio, self-directed investing is the way to go. Self-directed investing is for people at all experience levels.

However, if you prefer a hands-off approach, financial advisors or automated robo-advisors can help you capture your financial goals and tailor an investment portfolio to achieve your financial goals, complete with regular rebalancing.

But, before you jump headfirst into investing your money, it’s wise to assess your present financial status first (your cash flow and net worth) and make sure you’ve got a solid savings foundation to build on.

Finding a balance between saving your money and building wealth through investing for your future is not rocket science. It is simple to build savings and help take the fear and uncertainty out of investing.

References:

  1. https://taskandpurpose.com/from-our-partners/set-your-future-up-for-success-save-and-invest/
  2. https://www.brighthousefinancial.com/education/retirement-planning/covering-everyday-expenses-in-retirement/

Staying Invested Matters

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Investors are more likely to reach their long-term goals if they remain invested and avoid short-term decisions that may take them off course.

Staying the course during market volatility is often difficult for many investors. Some choose to move to cash investments, while others try to time the market. Regrettably, these investors are often buying high and selling low—and miss the rallies that follow the challenging periods.

Yet, staying invested through market ups and downs can help you stay on track to reach your investment goals.

Once you’ve determined how much you want to invest, setting up automatic transfers to your investment account or periodic investments can help you stay on track.

For example, investors often make suboptimal investing decisions when emotions take over, tending to buy out of excitement when the market is going up and sell out of fear when the market is falling. Markets do ultimately normalize, and when they do, those who stay invested may benefit more than those who don’t.  Consider this:

  • By missing some of the market’s best days, investors can lose out on critical opportunities to grow their portfolio. Market timing can have devastating results.
  • Seven of the best 10 days occurred within two weeks of the 10 worst days.
  • The second worst day for the markets during the early days of the COVID-19 pandemic, March 12, 2020, was immediately followed by the second best day of the year.

Trying to time the bottom is never considered a sound strategy for long-term investing.

Staying invested during periods of heighten market volatility is an important strategy as, historically, six of the ten best days in the market occur within two weeks of the ten worst days; those who miss the best days miss out on performance.

Thus, the decision to stay invested during market turmoil is often better than timing
when to sell and buy.

References:

  1. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/principles-for-investing/
  2. https://www.pimco.com/en-us/resources/education/the-benefits-of-staying-invested/

Power of Dividends

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A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend.

Dividends can create a rising source of income for a lifetime. They have proven to grow at twice the rate of inflation over the better part of stock market history.

Dividends are one of three ways for a company to return value of their profits and a portion of its free cash flow to shareholders. The other two ways are for a company to buy back its shares and to re-invest in the company.

  • A share buyback is when a company uses cash on the balance sheet to repurchase shares in the open market. This has two effects.
      • It returns cash to shareholders
      It reduces the number of shares outstanding.

    As a company increase the dividend on a annual basis, the amount may be small, but over time, it can become significant.

    For example, if you own stock in a company that pays a dividend of 57 cents per share, they may announce a dividend increase of 4 cents to 61 cents. That means you get and extra 4 cents for each share you own.

    Although, it’s only 4 cents, but 4 cents on 57 cents is am7% dividend increase on each share you own. If the dividend increased by this amount, 4 cents, every year, the dividend would double in about 10 years. Thus, over time, if you stick with dividends, the money will begin to grow.

    In S&P 500 Index companies alone paid out $485 billion in dividends to shareholders.

    Dividends outpace inflation

    Back in 1980, a $10,000 investment in the S&P 500 Index paid a dividend of about $421, or 4.21%, on the initial investment. Forty years later, the dividend income had climbed to $5,724, a 57% annual yield on the original investment. And, the original $10K investment grew as well. The original $10K invested in the S&P 500 Index in 1980 would have grown into more than $287K as the stock price increased. That’s not counting the dividends paid.

    The price-only-return (which excludes dividends income) is 8.75% per year. If you add in another 3% for the dividends you receive each year, you get a total average return of about 11.75% per year.

    Dividends have proven to be a more consistent source of growing income that has outpaced inflation.

    Dividends and Total Return over that 40 year period,

    Total return is one of the most important concepts in finance, and it involves more than just the dividends a company pays out.

    The total return of a stock is the total amount your investment changes in value, calculated by adding the amount of dividend or interest income received to the investment’s capital return (i.e. change in the investment’s price).

    Total return is driven by three components: earnings growth (which fuels capital gains and the underlying intrinsic value of a stock), dividends, and changes in valuation multiples.

    Dividends have been a major component of the stock market’s overall total returns throughout history and have contributed anywhere from 25% to 75% of the market’s overall total return over the past seven decades (the remaining portion of total return is accounted for by capital gains, or the market’s change in price).

    Takeaway, dividends are a powerful wealth building tool. If you invest in perennial dividend payers and consistent dividend grower companies, and then be patient, the dividends will add up significantly over decades.

    References:

    1. https://corporatefinanceinstitute.com/resources/knowledge/finance/dividend/
    2. https://www.wesmoss.com/news/the-power-of-investing-in-dividends-generating-income-from-stock-dividends-vs-bond-interest/
    3. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/paying-back-your-shareholders
    4. https://1.simplysafedividends.com/dividends-vs-total-returns/

    Inflation…the Enemy of Savers

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    Inflation is the enemy of those who save.

    For most of the 21st century, savers and investors have experienced a favorable period of relative low inflation stock market growth. In fact, the average annual inflation rate from 2000 through 2021 was 2.31%. Even with that “low” inflation rate, the proverbial uninvested dollar hidden under one’s mattress in the year 2000 would be worth a mere $0.62 today.

    With inflation approaching 7% in late 2021, we’re on the precipice of witnessing the rapid erosion in the value of the dollar which will create substantial risk for ordinary savers and ultra conservative investors. Keeping your money in a savings account, money market or CDs is failing to protect it from inflation.

    Instead, the best place to invest is in the economy. While large sums of money are generally required to purchase real estate or a small business, the stock market allows those with limited capital a means to invest regularly in a wide variety of businesses and benefit from the strength of the economy.

    The equity markets have a history of robust returns over the long run. Over the last one hundred years, the average annual stock market return is 10%. That means investors who stay invested are nearly doubling their investments every seven years.

    Some individuals view the stock market as too risky and they literally view investing in the market as “gambling”. But, when you choose to use less “risky” investments like bonds rather than investing in stocks, the results vary great.

    A study by NYU’s Stern School of Business gives insights into historical returns provided by an investment in U.S. Treasury bonds as opposed to corporate bonds and the S&P 500.

    Assume an investor received a $300 inheritance on the day he was born. On that date, his parents invested $100 (the inflation-adjusted equivalent of $1,630 today) in several asset classes in 1928.

    As of September of 2021, the above investor would have $8,920.90 in U.S. Treasury bonds, $53,736.50 from corporate bonds, and $592,868 in returns from an index fund that tracked the S&P 500.

    Obviously, the stock market beats “safe” investments. While bonds might play an important role in a balanced portfolio, a 100% bond portfolio will fail to achieve the investment goals for most.

    Investing a little now is better than a lot later

    “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

    A strong argument can be made that the amount of time one is in the market is of more importance than the sum invested in stocks.

    Consistently timing the market is impossible. There literally is no human being who can claim that he or she has been successful at that task with any degree of honesty. However, timing the market is not only unachievable, attempting to time the market can lead to poor investment returns.

    Over time, this would result in an ever-falling income stream. You spent your life buying stocks because they are a great source of return, that doesn’t stop just because you retire! The market is still the best source of future returns, you should be continuing to buy more, not sell!

    If one largely invests in stocks with yields of 5% or more, you can receive a substantial annual income without cannibalizing your portfolio. Furthermore, if the average annual market return is 10%, a stock that yields in the high single digits does not need to appreciate markedly to provide market-beating returns.

    Higher yield stocks outperform more often. They distribute cash on a recurring basis, whether share prices are up or down. Prices are volatile, and at the whims of emotional investors, dividends are the profit generated by the business and distributed to shareholders.

    Any investor with an employer with matching contributions should take full advantage of that opportunity. Any investor with an employer with matching contributions should take full advantage of that opportunity.

    By investing in dividend-bearing stocks and resisting the temptation to time the markets, you can be well on your way to building wealth and achieving financial freedom.

    References:

    1. https://seekingalpha.com/article/4484316-retirement-what-novice-investors-must-know

    9 Good Financial and Wealth Building Habits

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    Developing good financial habits is pivotal to maintaining a healthy financial life. It can be the most important tool you have to reach your goal of eliminating personal debt. Regardless of any bad money habits you’ve had in the past, there’s always time to make changes for the future.

    When adjusting your approach, don’t hesitate to learn from others. This could be the difference between success and continuing down the same old path.

    Below are nine good financial habits.

    1. Create a budget.

    The median household income in the United States in 2019 was $68,703. Whether you earn more or less than this, a budget can help keep your finances on track.

    When you know how much you earn, it’s much easier to determine how much you can comfortably spend each month.

    2. Avoid or consolidate higher-interest credit card and personal debt.

    Unexpected expenses can come up and we don’t always have the cash to pay for them. So we might swipe a credit card or take out a loan.

    The good news is you may be able to consolidate your higher-interest debt with a fixed rate personal loan, saving time and interest costs.

    If you’re paying a high interest rate on debt, and you had the opportunity to pay a lower rate that might lessen your monthly payment, why wouldn’t you?

    3. Understand your financial circumstances.

    You need to understand every aspect of your financial situation. From how much you earn to how you’re spending your money, every last detail is important.

    With an understanding of your finances, you’ll always know what makes the most sense for you and your money.

    4. Learn from past mistakes and failures.

    Learning from you past mistakes is one of the most critical money habits you can form. Even the most successful people make financial mistakes from time to time. For example, maybe you buried yourself in store card debt. Or maybe you “bit off more than you could chew” with a car loan.

    It’s okay to make financial mistakes, as long as you learn from them and use what you learn to manage your debt.

    5. Set goals and create a plan .

    Have you set both short- and long-term financial goals? Are you tracking your progress, month in and month out?

    Taking this one step further, you can do more than think about goals in your head. See where putting your goals to paper takes you. You could get a new sense of clarity and focus with everything written out in front of you.

    According to a research study completed by Gail Matthews at Dominican University, people who write down their goals accomplish “significantly more.”

    6. Ask questions.

    Although you know your financial situation better than anyone else, there are times when it makes sense to ask questions.

    For example, a CPA can provide guidance related to your tax situation. With more than 658,000 of these professionals in the United States alone, there are plenty of options for advisement.

    7. Save for retirement.

    Many Americans carry debt and find it difficult to save money. These challenges can make it hard to pay attention to retirement savings. In fact, a recent Employee Benefit Research Institute survey found a majority of people saying debt may be a hindrance to their retirement plans.

    You won’t be alone if you opt against saving for retirement, but if comfortable retirement is one of your goals, look towards the future. Putting a bit of money away for retirement is a good financial habit; consolidating higher-interest debt so that you save money on interest may be one way to find more savings opportunities.

    8. Automate your savings.

    There are many reasons why people may not save as much money as they should. For example, they may touch every bit of money they earn, meaning it never ends up in the right place.

    Protect against this by automating savings. Think about it like this: you can’t spend money that you don’t see or touch.

    9. Pay down debt.

    Taking on debt can be a successful strategy as long as you’re comfortable with two things:

    • The monthly payment
    • Your ability (and willingness) to pay down the debt.

    The longer you let debt linger the more you’ll pay in interest. Furthermore, debt can hold you back from reaching other goals, such as saving for retirement.

    If you implement these nine good financial habits, you may end up feeling better about your current situation and what the future will bring.

    Creating a wealth plan

    A well thought out wealth plan rests on three essential pillars:

    • Save
    • Invest
    • Repeat

    These are the core principles of every wealth plan. Disregarding even one will render a wealth plan useless. An important aspect to consider is that a wealth plan should be tailored to each individual’s needs and goals. So pay attention, and make sure that these simple steps are followed in order to create a wealth plan that allows individuals to achieve their dreams of building wealth and financial freedom.

    A wealth plan is a resource to help you achieve your financial goals. As it allows you to plan, and use it as a guide throughout your journey. However, having a wealth plan is not a guarantee of anything.

    Achieving wealth is like building a house. Thus, having the best architectural design will not ensure that the final product will be outstanding. This is why execution is the differentiating factor in achieving wealth. There are certainly several advantages to having a well-thought-out plan to help you in this process, such as:

    • Clear vision over goals
    • Easily control expenses and estimate savings
    • Automate investments
    • Define a strategy to achieve wealth
    • Adapt your strategy over time

    In essence, a wealth plan acts as a roadmap to financial freedom. The main difference is a map usually has a clear path towards a destination. A wealth plan, on the other hand, is filled with unknowns and obstacles that may lay ahead.

    In essence, a wealth plan acts as a roadmap to financial freedom.

    References:

    1. https://www.discover.com/personal-loans/resources/consolidate-debt/good-financial-habits/
    2. https://goodmenproject.com/featured-content/how-to-create-a-wealth-plan-get-started-now/

    Successful Investors are Patient

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    “The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett

    Patience is ofter referred to as the most underused investing skill and virute. And, learning patience could help you reach your financial goals of wealth building and finacial freedom.

    Be extremely patient when investing in assets and wait until you can buy an investment at an entry price when everybody else hates the investment or are extremely pessimistic about the prospects of the investment.

    In other words, wait until you can buy the asset at a extremely discounted price.  Keep in mind that every investment is affected by what you pay for it.  The less you pay, the better your rate of return on that investment.  Never, Never, Never…overpay for an investment.

    People feel losses twice as much as they feel gains.

    Successful investors develop a number of valuable skills over their lifetimes. And many report that patience is the most important skill to learn and master, but often it goes underused.

    We’re not born patient. But, patience can be learned and, if you’re an investor, learning it could help you reach your financial goals.

    Patience often involves staying calm in situations where you lack control. Even if we’re patient in some parts of life, we have to practice and adapt to be patient in new situations. Just because you’re a patient person while waiting in line at the DMV doesn’t mean you’re a patient investor.

    Alway keep in mind and retain the mantra that…if there is a good opportunity now, a better one will come in the future.

    Yet, patience can be difficult for investors to master, why it’s an important investing skill and how to apply patience to investing.

    Why Is it so Hard to Be Patient?
    Simply put, your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. You’ve likely heard this called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

    The problem is, your body doesn’t recognize the difference between true physical danger (during which fighting or fleeing would actually be helpful) and psychological triggers, like scary movies. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response too but, unlike scary movies, there can be real-world impacts you’ll need patience to overcome.

    When markets are seesawing and you’re overwhelmed with negative financial media, as we experienced this year during the pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is being harmed! Take action! Now! With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

    Impatient investors let anxiety and emotion rule their decision-making. Their tendency towards “doing something” can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan. And those bad behaviors could damage investors’ long-term returns.

    Selling out of the market during a correction might feel like you’re taking prudent action. And you may even derive some pleasure in seeing the market continue to fall after you’ve sold your equities. But that pleasure could soon be replaced by regret, because consistently and correctly timing the market by selling and buying back in at the right time requires an incredible amount of luck — and we don’t know any investors who have that much luck.

    Investment entry point and investor patience are super-important too.

    Benjamin Graham, known as the “father of value investing,” knew the importance of patience in investing. Patience and investing are actually natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term hardship for a future reward.

    The importance of being patient when investing can be best summed in this quote by Benjamin Graham…“In the end, how your investments behave is much less important than how you behave.”

    “We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” Chuck Akre

    Compounding works exponentially for the patient investor. The power of compounding is one of the most important concepts that investors need to learn and embrace. Since, patient and time are better friends to the investor than experience, expertise, and even research.

    “A lot of people historically have done fairly well investing in companies they just genuinely like, whether it’s been Starbucks or Nike.” Gary Vaynerchuk, CEO, VAYNERMEDIA

    References:

    1. https://www.thestreet.com/thestreet-fisher-investments-investor-opportunity/patience-the-most-underused-investing-skill
    2. https://www.nasdaq.com/articles/why-patience-is-crucial-in-long-term-investing
    3. http://mastersinvest.com/patiencequotes

    Being a Patient and Wise Investor

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    “You don’t make money when you buy a stock, you don’t make money when you sell a stock, you make money by being patient and you make money by waiting.” Charlie Munger

    Successful investing in stocks and building wealth does not have to be a complex or difficult personal financial enterprise. Focusing on a few “tried and true” investing rules and behaving rationally is effectively what it takes. And, keep in the forefront that, “Every investment is the present value of all future cash flow.” The rules or universal investing laws to follow are:

    1. Think and hold for the long-term, view investing as a compounding program
    2. Create and follow a plan
    3. Invest early and consistently, be discipline
    1. Buy what you understand and do your research
    1. Understand that when you buy a stock, you’re purchasing a portion of an existing business
    1. Maintain an emergency fund
    2. Save more than you spend
    3. Track your income and expenses, and calculate your net worth regularly
    4. Pay attention to how much you pay for assets, buy with a margin of safety
    5. Have a healthy contrarian view and don’t follow the crowd
    6. Don’t predict or time the market
    7. Behave rationally and ignore the financial market noise
    8. Practice investing risk management
    1. Be patient, Be patient, Be patient.

    Given the above investing rules, many successful investors repeatedly proclaim that the most important virtue with respect to long term investing is ‘patience’. As a tree takes time to grow, similarly investing will also take time to grow and build wealth. So, stay patient! Essentially, you should think of investing as a long term compounding system.

    In contrast, impatient investors let anxiety and emotion rule their behavior and decision-making. They often succumb to the ever present tendency towards “doing something”.

    Investing is the practice of leveraging one’s patience and exploiting the market’s impatience when it comes to seeking long term value. As Warren Buffett explained, “The stock market is a device for transferring money from the impatient to the patient.”

    “Investing is one of the only fields where doing nothing — sitting, being patient — is a competitive advantage.” Motley Fool

    Nothing should be a rush or expedited with respect to investing. If there isn’t a good investment opportunity now, there will be a better one in the future. It’s just a matter of believing that there is a great investment around the bend.

    Thus, it’s essential that you have patience and inherently understand that opportunities exist as long as you’re not buying assets just for the sake of being in an investment or succumbed to the “fear of missing out”.

    Here are three quotes that express concisely the sentimant of a being patient investor:

    “We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” — Chuck Akre

    “The single most important skill set that you can bring to value investing is patience. You have to have a temperament where you’re very happy watching paint dry. I would say that is the most difficult thing for investors and you can trade lot of IQ points for patience. You don’t need a lot of IQ points but you need a lot of patience. That’s the piece that usually gets missed.” — Mohnish Pabrai

    And finally…

    “The key rules are don’t swing the bat unless it’s a slow pitch right down the middle of the plate, and don’t be bullied by the market into doing something irrational, whether buying or selling. This may sound obvious or clichéd to some, and perhaps confusingly ironic to others, but the ability to sit and do nothing may be the most rare and valuable investing skill of all. Inevitably, extreme price dislocations occur that create real opportunities for action, and only the patient and prepared investor can recognize such ideal situations and take full advantage.” — Chris Mittleman

    Patience and discipline are the keys to successful investing and building wealthy through the magic of compounding. Thus, a key takeaway…investing in stocks is a long term game of patience, patience, patience!

    References:

    1. https://www.nasdaq.com/articles/why-patience-is-crucial-in-long-term-investing
    2. http://mastersinvest.com/patiencequotes
    3. https://pranav-mahajani.medium.com/richer-wiser-happier-how-the-worlds-greatest-investors-win-in-market-and-life-by-william-green-c907a3396faa

    Wealth Building and Dividends

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    “Systems are the vehicles that are going to take you to your goals—your goals are simply the destination.” James Clear

    “We don’t rise to the level of our goals; we fall to the level of our systems.  Don’t share with me your goals; share with me your systems.” James Clear

    Are you prepared for your financial future and to build wealth? There are many benefits of investing for the long term and to building wealth. Here is a simple and straightforward checklist to get started:.

    • Start early!
    • Investing starts with a plan
    • Investment plan starts with defining and identifying your financial goals.
    • Create a savings and investment plan based on your goals.
    • Two primary goals must be creating an emergency fund and building wealth for retirement
    • Develop good financial habits
    • Pay off high-interest debt first.
    • Participate in your company’s 401(k) plan and max out any employer match.
    • Understand your risk tolerance.
    • Understand investment fees and their impact on returns.
    • Research all investments thoroughly.
    • Check your investments regularly and maintain a diversified portfolio.
    • Avoid investment opportunities that sound too good to be true.

    40% of stock market returns come from dividends

    It’s interesting that most investors don’t know how powerful stocks that pay dividends are. Dividend stocks are stocks of companies which pay out a portion of their earnings to the shareholder in the form of dividends. Between January 1926 and December 2004, 41% of the S&P 500’s total return owed not to the price appreciation of the stocks in the index, but to the dividends its companies paid out.

    An additional benefit is that, under the current tax laws, qualified dividends are taxed at lower rate instead of your standard income bracket rate which translates into more money in your pocket.

    Investors know that the best dividend stocks aren’t those with a high yield, but rather are quality businesses that can grow over time and pass along profits to shareholders through the dividend, by repurchasing shares and reinvesting in the business.

    Bottomline is that dividend-paying stocks have outperformed in the past and that they have a good chance of doing so in the future. The secret is to reinvest those dividends, and put the power of compounding to work in your portfolio.

    To build wealth, investors need to account for a range of significant, real-world challenges, including:

    • Longevity
    • Inflation and rising costs
    • Fixed income vs. equity valuations
    • Low yields

    With tens of billions of dollars trading hands every day on the New York Stock Exchange alone, it’s easy to lose sight that when purchasing a stock investors are effectively purchasing ownership interest in a business. Assume for a moment that you don’t get a quote every day for your shares in that business and that you can’t sell your ownership interest for several decades. Your focus would likely shift from price to value.

    And the value of that business, whether publicly traded or privately held, is the present value of all future cash flows. After all, what is the point in owning a business – or any investment – if you’re never going to receive any cash from it? When a company generates positive free cash flow, it has several options; the company can hold cash in reserve, fund organic growth, make acquisitions, pay down debt, or return it to shareholders through dividends or stock buybacks.

    Using dividends to pay your expenses and allow you to reinvest to get more income. You can achieve this by investing in excellent dividend-paying securities now and letting those dividends reinvest as you work towards your retirement.

    References:

    1. https://www.investor.gov/sites/investorgov/files/2019-03/OIEA_Financial_Capability%20Checklist.pdf
    2. https://www.fool.com/investing/dividends-income/2006/09/19/the-secret-of-dividends.aspx
    3. https://advisor.morganstanley.com/christopher.f.poch/documents/field/p/po/poch-christopher-francis/WhyDividendsMatter.pdf

    Long Term Investing is about Future Cash Flow

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    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:

    1. https://ignorethestreet.com/cash-flow-statement-fundamentals/
    2. http://www.momentumcapitalfunding.com/cash-flow-fundamentals-business-owners/
    3. https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-flow/
    4. https://www.powerofpositivity.com/make-you-rich-quotes/

    Long Term Investing is about Your Behavior

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    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:

    1. https://acquirersmultiple.com/2021/11/morgan-housel-investing-behavior-is-inborn/
    2. https://www.msn.com/en-us/money/topstocks/how-to-prep-for-a-bear-market-morgan-housel/vi-AAThrqT
    3. https://acquirersmultiple.com/2020/09/morgan-housel-the-importance-of-remaining-calm-through-punctuated-moments-of-terror-in-the-market/
    4. https://www.cmcmarkets.com/en/opto/investing-psychology-with-morgan-housel
    5. https://acquirersmultiple.com/2020/08/morgan-housel-the-only-thing-that-you-can-control-in-investing-is-your-own-behavior/