Tag Archives: Investing

What is Return on Invested Capital (ROIC)

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Return on Invested Capital (ROIC) is a performance ratio that aims to measure the percentage return that a company earns on invested capital.

The Return on Invested Capital (ROIC) ratio shows how efficiently a company is using the investors’ funds to generate net income. Investors use the ROIC ratio to compute and to understand the value of a company. It represents for investors how well a company has put its capital to work in order to generate profitable returns on behalf of its shareholders and debt lenders.

Fundamentally, ROIC answers the question:

  • “How much in returns is the company earning for each dollar invested?”

Return on Invested Capital is calculated by taking into account the cost of the investment and the returns generated.

  • Returns are all the earnings acquired after taxes but before interest is paid.
  • The value of an investment is calculated by subtracting all current long-term liabilities, those due within the year, from the company’s assets.

The cost of investment can either be the total amount of assets a company requires to run its business or the amount of financing from creditors or shareholders. The return is then divided by the cost of investment.

Net operating profit after tax (NOPAT) is typically used in the numerator because it captures the recurring core operating profits and is an unlevered measure (i.e. unaffected by the capital structure).

Unlike net income, NOPAT is the operating profits post-taxes and thus represents what is available for all equity and debt providers.

  • Return on Invested Capital (ROIC): The numerator is net operating profit after tax (NOPAT), which measures the earnings of a company prior to financing costs.
  • Invested Capital: As for the denominator, the invested capital represents the sources of funding raised to grow the company and run the day-to-day operations.

Capital refers to debt and equity financing, which are the two common sources of funds for companies that are used to invest in cash flow generative assets and derive economic benefits.

A company can evaluate its growth by looking at its return on invested capital ratio. Any firm earning excess returns on investments totaling more than the cost of acquiring the capital is a value creator. Excess returns may be reinvested, thus securing future growth for the company. An investment whose returns are equal to or less than the cost of capital is a value destroyer. Generally speaking,

  • A company is considered to be a value creator if its ROIC is at least two percent more than the cost of capital;
  • A company is considered to be a value destroyer is if its ROIC is two percent less than its cost of capital.

There are some companies that run at zero returns, whose return percentage on the value of capital lies within the set estimation error, which in this case is 2%.

A higher return on invested capital can be considered an indication that a company is required to spend less to generate more profit.

  • Profitable Returns on Invested Capital (ROIC) → Positive Value Creation and Shareholder Returns

The higher the profit margins of the company, the higher the return on invested capital, as the company can convert more revenue (or NOPAT) into profits.

Companies that generate an ROIC above their cost of capital implies the management team can allocate capital efficiently and invest in profitable projects, which is a competitive advantage in itself.

When investors screen for potential investments, the minimum ROIC tends to be set between 10% and 15%, but this will be firm-specific and depend on the type of strategy employed.

ROIC is one method to determine whether or not a company has a defensible “economic moat”, which is the ability of a company to protect its profit margins and market share from new market entrants over the long run.

Warren Buffett

The overall objective of calculating ROIC is to better understand how efficiently a company has been utilizing its operating capital (i.e. deployment of capital).

Generally, the higher the return on invested capital (ROIC), the more likely the company is to achieve sustainable long-term value creation.

References:

  1. https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-roic/
  2. https://www.wallstreetprep.com/knowledge/roic-return-on-invested-capital/

Bonds Getting Clobbered

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“Bondholders are going to be in for some nasty surprises…because the losses are piling up.” CNBC’s Kelly Evans

A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.

When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it “matures,” or comes due after a set period of time.

Just as individuals get a mortgage to buy a house, or a car loan to buy a vehicle, or use credit cards, corporations use debt to build factories, buy inventory, and finance acquisitions. Governments use debt to build infrastructure and to pay obligations when tax revenues fluctuate. Loans help to keep the economy running efficiently.

Whenever the size of the loan is too large for a bank to handle, companies and governments go to the bond market to finance their debt. The purpose of the bond market is to enable large amounts of money to be borrowed.

Bonds can provide a means of preserving capital and earning a predictable return for investors. Bond investments provide steady streams of income from interest payments prior to maturity.

The bond market (also known as the debt market or credit market) is a financial market where players can buy and sell bonds in the secondary market or issue fresh debt in the primary market. Like the stock market, the bond secondary market is made up of investors trading with other investors. The original company that received the money and is responsible for paying back the money, is not involved in the day-to-day trading. The market value of bonds can fluctuate daily due to changes in inflation, interest rates, and fickleness of investors.

The United States accounts for around 39% of total bond market value. According to the Securities Industry and Financial Markets Association (SIFMA), the bond market (total debt outstanding) was worth $119 trillion globally in 2021, and $46 trillion in the United States (SIFMA). The worldwide bond market is almost three times larger than the global stock market.

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 basball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” James Carville

The bond market is more important to the health of the U.S. and global economies than the stock market. And, you prefer for the bond market is not in the news, to be boring and functioning smoothly. Disruption in the bond market is what can get the economy in trouble.

As with any investment, bonds have risks which include:

  • Interest rate risk. Interest rate changes can affect a bond’s value. If bonds are sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.
  • Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.

In aggregate, bond values are down significantly over the past three months–one of the worst quarters the securities have experienced since the 1980s, explains CNBC’s Kelly Evans. According to Natalliance, “government bonds are on pace for their worst year since 1949.”

Famed former Legg-Mason investor Bill Miller warned several years ago that “when people realize they can actually lose money in bonds, they panic”. Going into the inflationary 1970s, he said, “investors had done so well in bonds for so long they viewed them as essentially riskless, until it was too late.”
Investors have been warned for years about a bond crash that never panned out until recently. The chorus of financial pundits have said that the Federal Reserve’s massive quantitative easing and the federal government’s fiscal response to the financial crisis would ultimately cause inflation and crater bonds, it turns out they were right.

As a result, investors are piling out of bonds, which have seen outflows for ten straight weeks. Municipal bonds have seen historic outflows and are about to post their worst quarter since 1994, down more than 5%, according to Bloomberg. Investors have also been fleeing high-yield debt, especially as the Fed has turned increasingly hawkish this month.

You won’t find many financial professionals, other than fixed-income specialists, recommending big exposure to bonds right now. The outlook is just too uncertain.

“Bonds have nowhere to go but down since [interest] rates have nowhere to go but up.” Liz Young, SoFi Chief Investment Officer

Bonds are not expected to rally or perform better if growth slows, unless there is a meaningful dent in the outlook for inflation, and it would take a very deep and lengthy downturn to do so, as economists and financial pundits have warned.

Bonds have sold off and they haven’t served as downside protection within an investor’s diversified portfolio of stocks and bonds. Year-to-date, bonds have returned -8.7% YTD on 7-10-year Treasury bonds compared to a -6.0% YTD return in the S&P 500.

When bonds are in the red and cash is losing value because of inflation, investors turn to the stock market, at least tactically.

In this environment, “real assets” like real estate and commodities have done extremely well tend to do well in a tough investment environment for the long run (gold, metals, energy — along with globally diversified real estate).

As for stocks, Bill Smead, of Smead Capital Management, likes energy and housing market plays; noted investor Bill Miller likes energy, financials, housing stocks, travel-related names, and even some Chinese stocks (he’s also still bullish on mega-cap tech like Amazon and Meta).

The S&P 500 overall has been impressively resilient thus far, hanging in there with drop of less than 5% since the start of January–less than bonds, in other words. As bond losses deepen, don’t be surprised to see the “TINA” (There Is No Alternative) dynamic continue to bolster stocks.

However, there are several good reasons for purchasing bonds and including them in your portfolio:

  • Bonds are a generally safe investment, which is one of their advantages. Bond prices do not move nearly as much as stock prices.
  • Bonds provide a consistent income stream by paying you a defined sum of interest twice a year.
  • Bonds provide diversification to your portfolio, which is perhaps the most important benefit of investing in them. Stocks have outperformed bonds throughout time, but having a mix of both can lower your financial risk.

References:

  1. https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
  2. https://www.themoneyfarm.org/investment/bonds/why-is-there-a-market-for-bonds/
  3. https://www.sofi.com/blog/liz-looks-stocks-vs-bonds/
  4. https://www.cnbc.com/2022/03/28/kelly-evans-its-getting-ugly-out-there-for-bonds.html
  5. https://archerbaycapital.com/bond-market-more-important-to-economy/

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining market equity values.

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