Tag Archives: Stocks

Owning a Successful Business Is the Single Best Way to Accumulate Wealth

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Successful investing for the long term and accumulating wealth are about owning a portion of a successful business. It is the single best way to accumulate wealth.

It is extremely difficult for individuals to accumulate wealth by earning income and slugging their way through a 9 to 5 job. It’s very hard to get truly wealthy by renting out your time. Bottomline…you can only work so many hours. 

Even high earners like corporate executives, doctors and lawyers don’t typically earn millions of dollars a year. Instead, the path to amassing vast fortunes is paved by owning assets like stocks of a successful business and allowing the assets to to appreciate in value and work for you.

The single greatest wealth-building secret on the planet and the path to amassing vast fortunes is paved by owning a successful business through investing for the long term in stocks. Controlling vast sums of stock market wealth is a common thread among the world’s wealthy.

That doesn’t mean you have to create and build the next Tesla, Amazon or Walmart. You can “piggyback” on billionaire CEOs like Bezos by buying shares of their companies on the stock market.  This is the playbook many wealthy folks follow.

Recent data from investment bank Goldman Sachs shows the wealthiest 1% of US households own more than half the stocks in America. At the end of 2019, they controlled $21 trillion in stock market wealth.

Over long term, ownership of companies through stocks have outperformed bonds and most other asset classes. This makes sense when you think about it. Stocks are riskier than bonds, so you expect to earn a higher return on capital. 

When you save for the future by paying yourself first and invest for the long term your capital in a successful business, you accumulate assets that earn money while you sleep. For example, by owning Amazon shares, every time the stock soars, your net worth increases.

When Amazon crushes earnings, you win, too. Think of it as a second income that often brings in more than your main job.

References:

  1. https://www.forbes.com/sites/stephenmcbride1/2020/08/19/why-owning-stocks-is-the-single-best-way-to-get-rich/#6ede923248ec

It’s a Stock Market Bubble | Barron’s

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Excerpts from Barron’s article entitled:Yes, It’s a Stock Market Bubble. That Doesn’t Mean Trouble for Investors Just Yet.

By Ben Levisohn, September 12, 2020

“Every stock market bubble begins with a story.”

“”The story began easily enough, if not with “once upon a time.” A virus forced the country to shut down and accelerated the gains in a select few technology stocks that are uniquely capable of thriving with everyone stuck at home. A central bank took quick action to prevent financial markets from seizing up, pushing interest rates about as low as they could go. That helped lift the stocks of companies that are growing, including chiefly the aforementioned tech stocks, even if some have no profits. These stocks were among the first to rally once the stock market bottomed in March.”

“Now, get ready for the plot twist: Good investment ideas can stop being good ideas if the story goes on for too long. The tech trade—including tech companies that aren’t officially labeled as such—went too far before correcting suddenly in the past two weeks.”

“The forces that drove stocks such as Apple and Amazon.com to astonishing heights remain firmly in place. They include the companies’ continued growth, the Federal Reserve’s determination to do whatever it takes to keep the economy afloat, retail investors’ newfound interest in trading, and maybe even a bit of fiscal largess.”

Stocks will remain volatile, but the tech bubble will continue to inflate.

“For an investment bubble to occur, there has to be a widespread belief that a new paradigm has taken hold requiring an adjustment in valuations far beyond what previous fundamentals would imply. This belief needs to engage the imagination of investors beyond Wall Street, and there must be plenty of capital available to chase stock prices higher. The Covid-19 crisis has unlocked all three prerequisites.”

“Consider how the world has changed in the past six months. Social distancing is now the rule, and working from home is encouraged, when possible. Movie theaters are half-empty, and attending school now means opening a laptop at home for many students.”

“Companies that bring us a taste of our previous lives—such as Zoom Video Communications (ZM) and Peloton Interactive (PTON)—have seen their share prices soar. Shares of tech titans Apple, Microsoft (MSFT), Amazon, Alphabet (GOOGL), and Facebook (FB) have risen because the businesses are growing far more than most, and investors know that bigger is better in today’s world.”

“Some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks.”

“At the same time, near-zero interest rates have encouraged investors to pay up for growth, while some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks, trading through online brokers like it’s 1999.”

“As a result, Apple, Amazon, Microsoft, Alphabet, and Facebook now account for nearly a quarter of the value of the S&P 500 index, a level of concentration rarely seen in the benchmark. And that might understate the influence of Big Tech. Add Amazon and the S&P Information Technology and Communication Services sectors constitute 45% of the benchmark index, according to J.P. Morgan data, compared with 40% during the dot-com bubble.”

“Even as the biggest tech names have seen market caps swell, some formerly small companies have graduated to the big leagues. Zoom, for one, jumped 41% in a single day after reporting sales that more than quadrupled the previous year’s, a consequence of the video service’s widespread adoption beyond a business audience. Zoom stock, having zoomed 465% in 2020, is now worth more than $100 billion. Peloton has a market cap of $25 billion after gaining 209% this year, as its stationary bikes replaced gym memberships.”

“Zoom trades for 50 times 2020 sales, and Peloton, 9.3 times. Both are priced as if future growth is unlimited—a risky bet, especially if the postvirus world looks not all that different from the previrus world.”

The Fed has pumped trillions of dollars into the economy

“Behind the scenes, meanwhile, the Fed is operating the bubble-making machinery. It has pumped trillions of dollars into the economy, expanding its own balance sheet to more than $7 trillion from $4.1 trillion at the start of 2020. This time around, its asset purchases have included not only Treasuries and mortgage-backed securities but also investment-grade and high-yield bonds. All of this demand has served to lower interest rates to near zero.”

“The Fed typically has burst past bubbles, including the dot-com bubble of the late 1990s and the housing bubble of the mid-2000s, by raising interest rates. Don’t count on that now, or at least not yet. Fed Chairman Jerome Powell has effectively promised to keep rates low for years, which means there should be plenty of cash sloshing around to keep the bubble growing.”

“Perhaps the biggest reason to keep betting on tech—and the stock market—is that things aren’t nearly as frothy now as they were during, say, the dot-com bubble. Even in August, the market never reached the sustained frenzy that characterized the late 1990s, when the major indexes went parabolic and stayed that way for months, says Katie Stockton, managing partner of Fairlead Strategies. Stockton thinks the market’s recent pullback will create another buying opportunity, “A bubble would be characterized by prolonged upside momentum,” she says. “The market doesn’t have that.””

To read more: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Source: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Top Americans by Wealth own Most of U.S. Equity Stocks

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Top 10% of Americans by wealth own 87% of all U.S. equity stocks

The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to research from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009.  Fed researchers say the increase in wealth among the top 10% is largely a result of that cohort obtaining a larger concentration of assets. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.

The percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, according to an April Gallup poll, down from a high of 67% in 2002.

“The middle class has essentially been left out of the stock market surge,” said Edward Wolff, an economics professor at New York University. “The rich have taken off from the rest of society.”

S&P 500 and NASDAQ indexes have closed at all time highs

The S&P 500 and NASDAQ have soared to a new high, wiping out its losses since the worst of the coronavirus-induced downturn in March. Stocks continue to shrug off historic unemployment rates and other economic warning signs.

The S&P 500, the benchmark U.S. stock index, has surged more than 50% since bottoming in March and is back at record levels, largely thanks to the unprecedented stimulus programs enacted by the Federal Reserve and Congress.

Although the stock market has erased its losses suffered during the pandemic, the economy appears to be telling a different story. It contracted at the sharpest rate on record in the second quarter, and the unemployment rate remained above 10% in July, after reaching nearly 15% in April.

The current disconnect between the stock market and the economy is extremely unusual.  The economy is not confirming the stock market’s strength. The stock market has surged since March 2020 lows, with the S&P 500 and NASDAQ indexes eclipsing all time highs in August 2020.

FOMC acknowledged that after the initial surge in job losses and plunge in economic activity, things have started to improve. According to the statement, “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”

U.S. Economy and Stock Markets are Highly Disconnected

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“The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector of the economy.”  -Janet Yellen, former Chair of the Federal Reserve

We remain in the midst of a global crisis as the impact of COVID-19 infections continues to spread. As a result, we are experiencing an income crisis for a wide swath of the working population. The labor market decline was most catastrophic on low-end age earners. Those jobs have been the slowest to recover and many of those jobs have been loss permanently.

financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.

The U.S. economy is highly consumer-driven according to economists; our Gross Domestic Product (GDP) levels are guided primarily by consumer spending. The “V-shaped” recovery in retail sales data has been a boon to the bull market narrative. There is, however, legitimate concern over the potential impact if the Congress and Executive branch are unable to hammer out a compromise on extended unemployment benefits.

Causes of the disconnect

“Financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.” Vanguard Investments

Hope-ism and federal intervention are buoying up the stock market. “Hope-ism” is the wishful thinking that makes investors believe that the economy will not only recover quickly, it will snap back with vigor as the virus is quickly vanquished.

Federal intervention has been stratospheric over the past decade plus. Coming into the pandemic, the Fed had injected $5 trillion in Quantitative Easing (QE) from the 2008 recession. Now it has added another $3 trillion in the first round of COVID-19 relief and will likely add at least another $2 trillion, bringing the total to a whopping $10 trillion.

The two, the U.S. economy and equity stock markets, will reconnect again. Either the economy will recover, as the stock market predicts, or the stock market will reprice and crash. In the following we discuss the causes of the disconnect and what investors should be concerned about as the disconnect corrects.

Investors should expect a stock market correction. Greed will give way to fear. FOMO (fear of missing out) will become FOLO (fear of losing out). Also, there are plenty of other threats to the economy and stock market including a global debt crisis, cyber crime and terrorism, trade wars and socioeconomic unrest.

References:

  1. https://www.marketwatch.com/articles/the-disturbing-reality-fueling-this-bull-market-51598004009?mod=mw_more_headlines
  2. https://seekingalpha.com/article/4368901-stock-market-will-reconnect-economy-what#:~:text=There%20are%20two%20reasons%20that%20the%20stock%20market,other%20way%20to%20reconnect%20is%20a%20market%20crash.
  3. https://www.barchart.com/story/options/146523/inside-volatility-trading-august-25-2020

Most explosive stock market rally in history

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We’re witnessing the most explosive stock market in history. We’re seeing a spectacular stock market rally.

We’ve witnessed the greatest 50-day rally in the history of the S&P 500. The S&P 500 has increased 37% over the past 50-days.

Ten weeks ago, March 23, 2020, the Dow dropped all the way to 18,591 points. The biggest gain ever in such a short timeframe. Today, June 4, 2020, the Dow Jones index has peaked above 26,274 points.

Why…T.I.N.A. (There is no alternative to stocks)

There are fewer publicly traded companies to invest in today than thirty years ago. In the 1990’s, there were about 8,000 companies listed on American stock exchanges. Today, there are about 4,000 publicly traded companies on American stock exchanges which represents a fifty percent cut.

Furthermore, there are fewer shares of company stocks available to be traded. Share buy-backs by U.S. companies have taken 20% of companies’ shares off the market.

Essentially, the number of available shares have been dramatically cut, yet the demand for share have been vastly increased the demand for shares. The market is awash in cash from the Federal Reserve loose monetary policy and trillions of dollars from 401K plans.

Economics 101 reveals that cutting the supply of stocks while increasing the demand for stocks cause the price of stocks to go up.

And don’t forget about investor psychology, the economy has entered the return to work phase and the economy is on the move again. Animal Spirits are on the rise again.

Regarding the S&P 500 index, 159 stocks in the index are up for the year an average of 13% / 350 are down year-to-date an average of 20%. And, there are $4 trillion still sitting on the sidelines in money market accounts.

FOMO (Fear of missing out)

Fear of missing out can be extremely expensive. When the equity market has explosive moves where it goes up this high and this fast, an investor can feel that they’re “being left out and left behind”. As a result, they start paying top dollar for expensive and overbought stocks. That is no longer investing…investors are buying high hoping for higher.

Sources: CNBC and Fox Business News

3 tips to avoid locking in losses | Mass Mutual

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By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Apr 13, 2020

After a huge market downturn and a major loss of value in your investment portfolio, the temptation to do something — anything — may be hard to resist.

But in many ways, the best action may be to take no action. Why? An investment plan is a long-term project and making changes to it based on short-term considerations is often ill-advised. That’s why financial professionals encourage people to stay calm during market sell-offs and think about long-term objectives.

“It is a tough and scary time, and not locking in losses by panic selling is critical,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri.

But even if you did resist the initial impulse to flee during a market retreat, you still need to keep some discipline about your portfolio as you wait for a market recovery. Here are some traps to avoid….Read more: Avoid Locking in Losses

Markets, as a whole, have historically bounced back from downturns with time, as the following chart illustrates.

Source: Bloomberg. The S&P 500 is an equity index that consists of the stocks of 500 large U.S. companies measured by market capitalization. The results here include the effect of reinvested dividends. You cannot invest directly in an index.

It’s best to be invested.

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The global financial crisis of 2008 proved no one can consistently predict how the market will perform. Thus, it is best for investors to stay invested in the markets.

“You always have to remember the markets are forward-looking, and you don’t know when they’re going to take off—just like you don’t know when they’re going to tumble. So it’s best to be invested than to try to time it, because it’s close to impossible.” Tim Buckley, CEO, Vanguard Investments

If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg. 

Market Timing

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“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” Jack Bogle

During the 2008 financial crisis and economic uncertainty, global financial markets were melting down and Lehman Brothers filed for bankruptcy protection.  The resulting economic recession and global slowdown brought unemployment rates in the U.S. as high as 10 percent.  And, the U.S. stock market lost trillion of dollars in value as the S&P 500 experienced a single day drop of 90.17 points, nearly 9.04 percent.

Americans, and specifically American investors, believed inherently that the global economy and financial markets were collapsing.  Fear and panic selling took hold worldwide.  Both professional and retail investors started to sell and it didn’t matter what they sold.  Yet, Warren Buffett was buying stocks that were rapidly falling in price when everyone else was panic selling and sprinting to cash.

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Warren Buffett

According to Buffett, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” he wrote in the NY Times.

Additionally, Buffett wrote in his 2018 shareholder letter.

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

There are several valuable lessons investors learned from the 2008 financial crisis that can be applied towards today pandemic driven crisis.  The lessons are based on the same principles that allowed Buffett to invest so effectively during the crisis. To sum them up:

  • Don’t panic and sell stocks simply because the market is crashing. When times get tough, Buffett is invariably a net buyer of stocks. For this reason, he keeps billions of dollars in cash on the sidelines — so he can take advantage during times of investors’ fear and panic selling.
  • Focus on best-in-breed companies trading at discounts. A great example was Buffett’s investment in Bank of America and Goldman-Sachs.
  • Don’t try to time the market. Just because the market has crashed doesn’t mean it can’t go down more. It certainly can. Instead of trying to invest at the absolute market bottom, focus on stocks you want to hold for the long term.
  • Understand that no stock or industry is completely immune. Back then, many investors had a disproportionate amount of their portfolio in financial stocks because they were thought to be safe.  Essentially, no stock or industry are safe.

Warren Buffett believes intrinsically that “it is a waste of time and hazardous to investment success trying to time the market”.  In a 1994 annual letter to shareholders, Buffett wrote:

“I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good.  If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do. … If you’re right about the businesses, you’ll end up doing fine.”


Bottom line: As long as investors keep a level head and maintain a long-term perspective as Buffett does, investors should come out of it just fine, if not stronger than they went in.

Sources:

  1. https://www.cnbc.com/2018/09/14/warren-buffetts-rule-for-investing-during-the-financial-crisis.html
  2. https://www.fool.com/investing/2018/09/23/10-years-later-warren-buffett-and-the-financial-cr.aspx
  3.  https://www.cnbc.com/2018/05/08/warren-buffett-says-he-never-tries-to-time-stocks-i-never-have-an-opinion-about-the-market.html
  4. https://www.cnbc.com/2018/02/24/highlights-from-warren-buffetts-annual-letter.html

3 mistakes to avoid during a market downturn | Vanguard

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Following a decade-plus of generally rising markets, a meaningful downturn in stocks may finally be here. We don’t know how bad it will be or how long it will last.

We do know that some investors will make costly mistakes before prices rise again. Here are 3 common errors worth avoiding.
— Read on investornews.vanguard/3-mistakes-to-avoid-during-a-market-downturn/