Successful Investors are Patient

“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

Long Term Investing is about Your Behavior

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/

Build Wealth in 2022: Dave Ramsey

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

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

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

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

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

Here are the five keys to building wealth:

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

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

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

2. Get Out (and Stay Out) of Debt

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

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

3. Live on Less Than You Make

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

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

4. Save for Retirement

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

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

5. Be Outrageously Generous

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

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

How to Build Wealth at Any Age

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

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

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

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


References:

  1. https://www.ramseysolutions.com/retirement/the-national-study-of-millionaires-research
  2. https://www.ramseysolutions.com/retirement/how-to-build-wealth
  3. https://www.ramseysolutions.com/retirement/the-national-study-of-millionaires-research

Inflation – The Elephant Affecting the Economy

Historic inflation and interest rates hike fears are sinking many high growth technology stock prices. Inflation in 2021 was the consequences of rapidly rebounding demand in a supply-constrained world.

The fear of inflation and the the fear of subsequent Federal Reserve interest rate hikes are creating concern and panic among some investors. Rising interest rate and skyrocketing inflation worries are pressuring stocks. And by the Fed signaling raising rates in the future, it unsettles and sends both Wall Street and Main Street into a panic.

But, what is inflation?

Inflation is when consumer prices rise, goods and services become more expensive, and money loses value. Inflation reduces your purchasing power, eats away at your investment returns, and chips away at your wealth. Currently, Americans are experiencing the pernicious effects of inflation, especially in the areas of escalating food and energy prices.

2021 was one of the worst years for inflation that Americans have seen recently, with a 7% increase, the highest since 1982. For consumers, this means $1 at the beginning of the year was roughly worth only $0.93 at the end. While the impact might seem small when examining it on a dollar level, it represents a change in the purchasing power of retirement savings from January 2021 to December 2021. The Wall Street Journal’s Gwynn Guilford writes: “U.S. inflation hit its fastest pace in nearly four decades last year as pandemic related supply and demand imbalances, along with stimulus intended to shore up the economy, pushed price up at a 7% annual rate.”

American economist and Nobel prize laureate Milton Friedman opined that: “Inflation is always and everywhere a monetary phenomenon.”  In other words, inflation is invariably a case of too much cheap money and capital chasing too few goods, services and assets.

In the last twenty years, the United States witnessed a large accumulation of federal public debt under Presidents Bush, Obama, Trump, and Biden administrations. Federal debt climbed from 55% of GDP in 2002 to 105% in 2019. Additionally, the U.S. has also endured a decade plus of loose monetary policy overseen by the Fed which has pumped up asset prices.

As a result of the escalating public debt and loose monetary policy, the Federal Reserve most important immediate task, of its dual mandates, must be to get inflation under control and reduced. Since 1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”—what is now commonly referred to as the Fed’s “dual mandate.”

The Labor Department stated that the consumer-price index — which measures what consumers pay for goods and services — rose 7% in December from the same month a year earlier, up from 6.8% in November. That was the fastest growth in inflation since 1982 and marked the third straight month in which inflation exceeded 6%.”

Three sectors–energy/materials, financials and technology–may be viewed as inflation beneficiaries or, at the very least, inflation-agnostic assets:

  • Energy and materials are commodity-based, and oil, gas, and most commodities rebounded from prices that had fallen to a fraction of their pre-pandemic levels.
  • Financials, especially banks, are often viewed as inflation hedges since interest rates historically climb when inflation heats up. This reflects the eroding effect of higher prices on a currency’s value in the future, which is remedied by rate hikes on debt.
  • Technology is a more nuanced winner in the inflation game. The large tech players and most software companies have tremendous economies of scale. As their revenues scale, their costs, particularly labor, do not grow at nearly the same degree, cushioning profit compression from wage escalation.

In a book called “The Great Inflation”, the authors wrote, “Inflation is not an Act of God…inflation is man-made and can be started, prevented, regulated and stopped by human action.”

“To think that a stimulus of this magnitude wouldn’t cause inflation required believing either that such a huge adjustment was possible within a matter of months, or that fiscal policy is ineffective and does not increase aggregate demand. Both views are implausible”, says Jason Furman, former chair of President Obama’s Council of Economic Advisers.

Thus, slowing down in aggregate federal debt growth per capita, tightening monetary policy, and raising interest rates could be effective tools in stemming runaway inflation.

“If I was Darth Vader and I wanted to destroy the US economy, I would do aggressive spending in the middle of an already hot economy… What are you going to get out of this? You’re going to get a sugar high, the higher inflation, then an economic bust.” — Billionaire investor Stanley Druckenmiller, July 23, 2021


References:

  1. https://www.cnbc.com/2021/12/13/op-ed-these-3-market-sectors-shone-even-as-investors-grew-weary-of-hearing-about-inflation.html
  2. https://www.americanthinker.com/blog/2021/12/is_joe_manchin_right_about_inflation.html
  3. https://seekingalpha.com/article/4479557-how-to-better-understand-inflation-and-predict-its-direction
  4. https://www.marketwatch.com/story/why-did-almost-no-one-see-inflation-coming-11642519667

Nearly 22 Million Americans are Millionaires

There are nearly 22 million individuals in the U.S. with financial and real assets to fit the definition of being a millionaire, according to a 2021 Credit Suisse Global Wealth Report. Overall in 2020, total global wealth grew by 7.4% and wealth per adult rose by 6% to reach another record high of USD 79,952, according to the report.

Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts.

The core reasons for asset price increases which have led to major gains in household wealth are a result of significant monetary and fiscal intervention by governments and central banks, like the U.S. Federal Reserve. Many governments and central banks in more advanced economies have taken pre-emptive action to prevent an economic recession in two primary ways: first, by organizing massive income transfer programs to support the individuals and businesses most adversely affected by the pandemic, and second, by lowering interest rates – often to levels close to zero – and making it clear that interest rates will stay low for some time.

There is little doubt that these interventions have been highly successful in meeting their immediate objectives of countering the economic impact of the pandemic. However, they have come at a cost. Public debt relative to GDP has risen in the U.S. and throughout the world by 20 percentage points or more, according to a 2021 Credit Suisse Global Wealth Report.

In essence, there has been a huge transfer from the government coffers to household net worth, which is one of the reasons why household wealth has been so resilient. In one respect, these transfers generously compensated households.

Generous payments have meant that disposable household income has been relatively stable and has even risen. In combination with restricted consumption opportunities, this has led to a surge in household saving, which has inflated household financial assets and caused household debts to be lower than they would be otherwise. This increase in savings was an important source of household wealth growth last year.

The lowering of interest rates by central banks has probably had the greatest impact on the growth in household wealth. It is a major reason why share prices and house prices have flourished, and these translate directly into our valuations of household wealth.

However, there are inflation implications in the long term from lowering the interest rates and also increased equity market volatility linked to expected future rises in interest rates. However, these were deemed relatively unimportant at the time compared to the more immediate economic challenges caused by the pandemic.

Household wealth appears to have simply continued to grow, paying little or no attention to the economic turmoil that should have hampered progress. Effectively, financial assets accounted for most of the gain in total household wealth accumulation.

The wealth of those with a higher share of equities among their assets, e.g. wealthier households in general. And, home owners in most markets, on the other hand, have seen capital gains due to rising house prices.

Wealth is a key component of the economic system. It is used as a store of resources for future consumption, particularly during retirement. Wealth also enhances opportunities when used either directly or as collateral for loans. But, most of all, wealth is valued for its capacity to reduce vulnerability to shocks such as unemployment, ill health, natural disasters or indeed a pandemic.

The contrast between those who have access to an emergency buffer and those who do not is evident at the best of times. Household wealth has played a crucial role in determining the resilience of both nations and individuals

Roughly 1% of adults in the world are USD millionaires.

Global household wealth may well have fallen. But aggressive governments and central banks to intervene help mitigate the economic impact of the pandemic. These have led to rapid share price and house price rises that have benefited those in the upper wealth echelons. In contrast, those in the lower wealth bands have tended to stand still, or, in many cases, regressed. The net result has been a marked rise in inequality

In many countries, the overall level of wealth remains below levels recorded before 2016. Some of the underlying factors may self-correct over time. For example, interest rates will begin to rise again at some point, and this will dampen asset prices.


References:

  1. https://www.cnbc.com/2021/12/22/heres-how-22-million-americans-became-millionaires.html
  2. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-report-2021-en.pdf
  3. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

Price-to-Free Cash Flow Ratio (P/FCF)

Free Cash Flow (FCF) – The cash left after making investments in capital assets

The price-to-free cash flow ratio (P/FCF) is a valuation method used to compare a company’s current market share price to its per-share free cash flow.

Free cash flow (FCF) measures a company’s financial performance. It measures how much cash a business can generate after accounting for capital expenditures such as buildings or equipment. In other words, FCF measures a company’s ability to produce what investors care most about: cash that’s available to be distributed in a discretionary way.

FCF is calculated with the formula below:

Free Cash Flow = Operating Cash Flow (CFO) – Capital Expenditures

Most information needed to compute a company’s FCF is on the cash flow statement. As an example, let Company A have $22 million dollars of cash from its business operations and $6.5 million dollars used for capital expenditures, net of changes in working capital. Company A’s FCF is then computed as:

FCF = $22 – $6.5 = $15.5m

Free cash flow relies heavily on the state of a company’s cash from operations (CFO). The cash from operations deals with the cash inflows and outflows directly related to the company’s primary activity: selling a good or service. Cash from operations is heavily influenced by the company’s net income (excluding depreciation).  

The presence of free cash flow indicates that a company has cash to expand, develop new products, buy back stock, pay dividends, or reduce its debt. High or rising free cash flow is often a sign of a healthy and growing company that is thriving in its current environment.

For investors, free cash flow measures a company’s ability to generate cash, which is a fundamental basis for stock pricing. This is why some people value free cash flow more than just about any other financial measure out there, including earnings per share or book value per share.

Investors should understand that companies can manipulate their free cash flow by lengthening the time they take to pay the bills (preserving their cash), shortening the time it takes to collect what’s owed to them (accelerating the receipt of cash), and putting off buying inventory (preserving cash). Also, companies have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the free cash flow of different companies.

Since FCF has a direct impact on the worth of a company, investors should hunt for companies that have high or improving free cash flow but low correlated market share prices.

Low P/FCF ratios typically can mean the shares of the underlying company are undervalued. Thus, the lower the P/FCF ratio, the “cheaper” and better value the stock remains. 

The best, most successful investors are continually learning and continually honing and expanding their skills at making money in the financial markets.


References:

  1. https://investinganswers.com/dictionary/p/price-free-cash-flow-ratio-pfcf
  2. https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-free-cash-flow-fcf/
  3. https://investinganswers.com/dictionary/f/free-cash-flow

Growing Your Money

When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.

It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.

People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.

But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.

As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.

Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).

Stock’s Value vs. Price

Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.

A company’s stock price has nothing to do with its value, because the share price means nothing on its own.

The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.

The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.

Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.

Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.

Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,


References:

  1. https://www.thebalance.com/the-complete-beginner-s-guide-to-investing-in-stock-358114

Best Investment Advice – Mark Cuban

“You can’t buy health and you can’t buy love.” Warren Buffett

“The best investment you can make is paying off your credit cards, paying off whatever debt you have.” Mark Cuban

Cuban lived for years on the budget of what he referred to as “a broke college student”, driving lousy cars, eating lousy food and saving, saving, saving. He believed that overspending can be an unnecessary cause of stress, and he advocates for living like a student if that’s all you can truly afford. “Your biggest enemies are your bills,” Cuban wrote. “The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. The cheaper you can live, the greater your options.”

A forward-thinking investor and notorious taker of calculated risks, he built his wealth slowly over time and he derived as much pleasure out of saving as he did spending.

Here is top investing advice from Mark Cuban to builde wealth and achieve financial freedom:

  • Pay Off Debt, Then Invest – Paying off debt before you invest delivers the best returns for your money (capital). “The best investment you can make is paying off your credit cards, paying off whatever debt you have. If you have a student loan with a 7% interest rate, if you pay off that loan, you’re making 7%, that’s your immediate return, which is a lot safer than picking a stock, or trying to pick real estate, or whatever it may be,” Cuban said.
  • Never Invest To Get Out of Trouble – Just like you should never gamble if you absolutely have to win, the same rules apply to investing as a remedy for financial trouble. “If you are buying because you need the price to go up and solve a financial hole you are in, that is the EXACT WRONG time to trade,” Cuban commented. “And we all have to respect people who choose to sell because they need to. Bills don’t care what the market does. Get right and come back later.”
  • Don’t Invest In the Stock Market – Cuban disagrees with investors who think capitalism’s greatest wealth-generation machine is the stock market. “Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.”
  • But If You Invest in the Stock Market, Buy an Index Fund – Avoid picking your own stocks or buying into expensive mutual funds — buy an index fund. “For those investors not too knowledgeable about markets, the best bet is a cheap S&P 500 fund,” according to Cuban.
  • Buy a Stock You Believe In and Hold on for Dear Life – Ignore short term volatility and market gyrations. “When I buy a stock, I make sure I know why I[‘m] buying it. Then I HODL until … I learn that something has changed,” using text-slang acronym for “hold on for dear life.”
  • Take Risks — But Play It Safe 90% of the Time – Without risk, there can be no reward, and the bigger the risk, the bigger the potential payout. Cuban suggests that investors to go for broke and swing for the fences — but only with a sliver of their investments. “If you’re a true adventurer and you really want to throw the hail Mary, you might take 10% and put it in Bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money,” Cuban commented. “It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes. It’s a flyer, but I’d limit it to 10%.”
  • If One of Those Risks Is Crypto, Stick With the Big Boys – If you’re considering jumping on the cryptocurrency bandwagon, you’d be wise to place your bets on the biggest names in the game because Cuban sees way too many similarities to 1999 for comfort. “Watching the cryptos trade, it’s exactly like the internet stock bubble. exactly. I think Bitcoin, Ethereum, a few others will be analogous to those that were built during the dot-com era, survived the bubble bursting and thrived, like AMZN, EBay, and Priceline. Many won’t,” commented Cuban
  • If You Don’t Understand an Investment, Walk Away –  Investing fundamentals dictates against investing in things you don’t understand. “If you don’t fully understand the risks of an investment you are contemplating, it’s okay to do nothing,” Cuban wrote. “No. 1 rule of investing: When you don’t know what to do, do nothing.” Always invest in what you know.
  • Knowledge Is the Best Investment – The best way to avoid investing in something you don’t understand is to understand whatever you’re invested in. “At MicroSolutions it, “knowledge advantage”. gave me a huge advantage. A guy with little computer background could compete with far more experienced guys just because I put in the time to learn all I could. I read every book and magazine I could. Heck, three bucks for a magazine, 20 bucks for a book. One good idea that led to a customer or solution paid for itself many times over.”

You must be able to earn, save, and manage your spending, then you can start investing and building wealth.

Cuban was influenced by a book called “Cashing in on the American Dream: How to Retire by the Age of 35.”“The whole premise of the book [Cashing in on the American Dream] was if you could save up to $1 million and live like a student, you could retire” Cuban said. “But you would have to have the discipline of saving and how you spent your money once you got there. I did things like have five roommates and live off of macaroni and cheese and really was very, very frugal. I had the worst possible car.”


  1. https://www.gobankingrates.com/money/wealth/millionaire-money-rules/
  2. https://www.gobankingrates.com/investing/strategy/mark-cubans-top-investing-advice

The National Study of Millionaires

“Anyone in America can build wealth. The only thing holding you back is you. Get out of debt. Save consistently. Keep your spending in check. Let time and compound interest do their magic. If you’re willing to work hard and keep the long-term goal in mind, you’ll reach the million-dollar milestone.” Chris Hogan

Summary

  • “The National Study of Millionaires” is the largest survey of millionaires ever with 10,000 participants.
  • Eight out of ten millionaires invested in their company’s 401(k) plan.
  • The top five careers for millionaires include engineer, accountant, teacher, management and attorney.
  • 79% of millionaires did not receive any inheritance at all from their parents or other family members.

The National Study of Millionaires by Ramsey Solutions concluded that millionaires successfully accumulated wealth through consistent investing, avoiding debt like the plague, and smart spending. No lottery tickets. No inheritances. No six-figure incomes.

Thus, according to the survey, there is positive news for Americans who may have lost hope that they can ever accumulate wealth. “The people in the study became millionaires by consistently saving over time. In fact, they worked, saved and invested for an average of 28 years before hitting the million-dollar mark, and most of them reached that milestone at age 49.”

The study’s results demonstrated a dramatic difference between how Americans think wealthy people get their money and how they actually earn and spend their money.

In a nutshell, regular, consistent investing over a long period of time is the reason most of the people in the survey successfully accumulated wealth. And, even when millionaires don’t have to worry about money anymore, they remain careful about their spending. Ninety-four percent of the people studied said they live on less than they make. By staying out of debt and watching expenses, they’re able to build their bank accounts instead of trying to get out of a financial hole every month.

Small-Cap Stocks

“Growth is greatest in the early stages of a company’s development.” Cabot Wealth

There is a common perception among investors that over the long term, small-cap stocks outperform large-cap stocks. In exchange for more risk, you get more reward.

As it turns out, this is mostly untrue, according to Seeking Alpha. The best small-cap stocks offer more explosive upside potential, but as a group they don’t really outperform large-cap stocks, subject to a few caveats.

The best possible investing scenario is to identify a top small-cap stock that will go on to become a large-cap stock over the coming years, and go up in value by 10x or 100x.

Unfortunately, for every massive winner that does that, there are multiple losers. Both Russell and Wilshire data show that small-cap stocks don’t really outperform as a group. They’re not bad, but over four decades they don’t really stand out either. Mid-cap stocks are a potential sweet spot, that investors can benefit from either by directly investing mid-cap fund or investing into an equal weight large-cap fund which tends to have a lot of overlap with the mid-cap space.

A 2017 study by Hendrik Bessembinder that analyzed virtually all U.S. public stocks over the past 90 years found that small-cap stocks have much higher performance variance. A smaller percentage of small-cap stocks provide positive long-term returns compared to the percentage of large-cap stocks that provide positive long-term returns. As a consequence, small stocks more frequently deliver returns that fail to match benchmarks.

Conversely, while the absolute best-performing small caps outperform the best-performing large caps over a given period, small caps as a group also have much higher rates of catastrophic loss.

Anytime you buy shares of a small, lessor-known company, there are a plethora of unknowns. Thus, it’s impossible to take the risk completely out of small-cap investing. But there are ways to minimize those risks without sacrificing potential profits.

The defining characteristics of small-cap stocks are that many are young, attractive investments and tend to be highly volatile. This volatility can be absolutely maddening for those who are new to small-cap investing (and even to those who aren’t).

Don’t let this volatility drive you away from small-cap stocks if you’re inclined to invest in them. Volatility comes and goes, and over the long-term small caps tend to beat the market.

FIVE SIMPLE RULES FOR SUCCESS WITH SMALL-CAP STOCKS

It’s important to set up a clearly established set of rules ahead of time, and stick to them. The simple rules that can increase your odds of success, especially during uncertain markets, are:

Rule #1: Commit To The Long Term: One of the more frequently quoted Warren Buffett quips is, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

You don’t need to own every small-cap stock you buy for the next decade. But you do need to look out at least a year or two if you expect to have significant success.

There are select examples of investors making money trading in and out of small caps in the short term. But very few can do it week in and week out, year after year. All the studies say the same thing; your odds of making money go up the longer you stick with small-cap stocks.

A study from Ibbotson, a financial research firm owned by Morningstar, found that investors have a 70% chance of making money with small-cap stocks if they stay invested for one year. That probability goes up to 82% after three years, 86% after five years and 98% after 10 years. The percentages aren’t all that different for large caps.

Rule #2: Dollar Cost Average Your Cost Basis: Small-cap stocks can be irrational in the short term. That’s why you never do anything too drastic. Don’t go all in on an individual stock on a big pullback, or a big breakout. Instead, average into a position by buying shares at different prices and on different days. The strategy helps to reduce the risk of buying a full position in a stock at an unlucky time, which is bound to happen occasionally.

The period over which you average in should be dictated by your holding time horizon. If you’re investing for just a year or two, you’ll probably average in over a week or two, maybe a month. If you’re in it for three or more years, you can average in over a year, or more.

Rule #3: Take Partial Profits: If averaging in makes sense, then averaging out should too. Consider selling a quarter or a half position on the way up, and especially if a gain has surpassed 100%. This doesn’t have to mean giving up on the stock. It’s simply a risk-mitigation strategy. The original capital can be allocated to a lower-risk investment.

Also, it’s fine to average back into a position even if you sold shares at an earlier date. Sometimes, especially during corrections, investors are forced to dump some shares to protect their gains. Months later, the stock might be doing just fine. If the growth story is intact and the market is trending up there’s no reason you can’t build up your position again.

Rule #4: Use a Stop Loss: For small cap stocks, many advisors advocate a 15% to 30% stop loss for large caps. The reason is that you often see quality small caps drop 20% or so during market corrections. Often, these are the times to average down if and when the stock has stabilized, assuming the stock’s growth story is intact,.

That said, it can also be a time to sell a partial, or full, position to protect gains, or help avoid catastrophic losses. How close you are to your desired position size will usually determine if you’re averaging in, or out. The underlying reason for using stop losses is that the bigger the loss, the bigger the return you need to get back to break even (see table below). Don’t go below the red line!

Rule #5: If You’re Not Sure What To Do, Do Nothing: Just because the market is open doesn’t mean you need to participate in it. If you’ve had a streak of losses, or things just don’t feel right, take a break. Focus your attention on a few stocks you’d like to own eventually and read up on those so you’re ready to go when the stock’s margin of safety improves, and your confidence returns.

As Warren Buffett said, “I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

Investing in small-cap stocks is a good way to earn huge returns. Consequently, there are two major ways to outperform the market.

  • You can take advantage of short-term price dislocation versus a company’s intrinsic value, or
  • Use long-term compounding to achieve market outperformance.

References:

  1. https://seekingalpha.com/article/4287533-small-cap-performance-gap-doesnt-exist-why
  2. https://cabotwealth.com/category/daily/small-cap-stocks
  3. https://cabotwealth.com/daily/small-cap-stocks/small-cap-stock-warren-buffett/