Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

Let’s find YOUR path to financial freedom…

  • The median age in the U.S. is 36.8
  • The median income in the U.S. is $51,939
  • The average 401k match is $1 for $1 up to 6%

A 36.8 year old investing 10% of their $51,939 income with a $3,116.34 match:
With just average stock market returns of 10% would have $1,114,479.31 by retirement.

Join 13,800+ other readers who have learned how anyone, even beginners, can easily make this desire a reality. Download the free ebook: 7 Steps to Understanding the Stock Market.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market

Welcome to this 7 step guide to understanding the stock market. I’ve created this easy-to-follow Investing for Beginners guide to simplify the learning process for entering the stock market.

By leaving out all the confusing Wall Street jargon and explaining things in simple terms, I’m hoping you’ll find this as the perfect solution, if you are willing to learn.

Before we get started, here is a breakdown of the 7 categories for the official Investing for Beginners guide.

1. Why to Invest?
2. How the Stock Market Works
3. The BEST Stock Strategy and Buying Your First Stock
4. P/E Ratio: How to Calculate the Most Widely Used Valuation
5. P/B, P/S: The Single Two Ratios Most Correlated to Success
6. Cashing In With a Dividend Is a Necessity
7. The Best Way to Avoid Risk, and Putting it all Together!!

Why is investing so important?

Let’s imagine a life without investing first. You work 9-5 for a boss all your life, maybe get a couple raises, a promotion, have a nice house, car, and kids. You go on vacation once a year, eat out regularly, and attempt to enjoy the finer things in life as best you can.

Now since you haven’t invested, you get old, become unattractive for hiring, and live with a measly social security allowance for the rest of your life. You might’ve made good money when you were young, but now you have nothing to show for your lifetime of work.

Now let’s say you did save some money for retirement, but again this money wasn’t invested and won’t be invested.

Let’s even stay optimistic and assume you saved $1400 a month for 26 years. This would leave you with $403,200 to live on, which on a $60,000 a year lifestyle would only last you 6.72 years. You’re retiring at 65 only to go broke at 71 and you’ve been a good saver all your life.

Well then what’s the point of saving you may ask? Now let me show you the same numbers but add investing into the equation.

The Power of Saving + Investing

Again, lets say you saved $1400 a month for 26 years. BUT, this money was invested continuously as part of a long term investment plan, solid in the fundamentals you learned from this investing for beginners guide.

Now, including dividends in long term stock market investments, I can confidently and conservatively say that you can average a 10% annual return on these investments.

The same $1400 a month compounded annually at 10% turns your net worth into $2,017,670.19 in 26 years!

But the story gets even better.

With this large sum of money at your retirement, again conservatively assuming a 3% yield on your dividends, you can collect $60,530 a year to live on WITHOUT reducing your saved amount.

investing for beginners

Answer: Compounding Interest

By letting the power of compounding interest assist you in saving, you leverage the resources available in the market and slowly build wealth over time.

It’s not some mystified secret or get rich quick shortcut; this is a time tested method to become wealthy and be financially independent, and it’s how billionaires like Warren Buffett have done it all their life.

For those who don’t want to think about tomorrow, I can’t help you. But tomorrow will come, it always does.

Would you rather spend the rest of your life with no plan, dependent on others and unsure of your future? Or would you rather be making progress towards a goal, living with purpose and anticipating the fruits of your labor you know you will one day reap for years after you sow?

The choice is yours, and only YOU will feel the consequences of that choice.

[continue reading…]

The Dave Ramsey Plan (Snowball) vs. the Debt Avalanche Method

For people trying to take control of their money and get out of debt, the Dave Ramsey plan is a very popular and useful way to finally get results with your personal finances.

There are debates on whether the Debt Snowball method made popular by Dave Ramsey is the best way to do it or not, and contributor Andy Shuler discusses the pros and cons of it here.

woman facing debt avalanche better than debt snowball

Personally, I am a big fan of Dave Ramsey and what he is doing.  I think that he is really doing great things by motivating and teaching the common folk how to get out of debt and become financially independent. 

One thing that Dave Ramsey does, though, is that he takes very extreme opinions on things. 

Dave Ramsey’s Debt vs. Investing Advice

For instance, one thing that he often says is that you should completely eliminate your debt before doing other things with your money.  I disagree with that statement. 

If your debt is on a 2.5% interest student loan, instead of paying that off as fast as you can, put it into the stock market to realize the beauty of compound interest as the S&P 500 averages 11% annualized returns since 1950. 

I get why he says the things that he says. 

If you’re teaching someone that’s not financially savvy or new to understanding their finances, it’s much easier to explain to someone to “pay off all your debt first” rather than “pay off your debt unless the interest level is very low. 

[continue reading…]

Cost of Debt Calculator for Stocks and Personal Finances (Excel)

The Cost of Debt that a company has is essentially how efficient a company is at paying off their debt. Having a cost of debt calculator such as the one presented in this post can be a valuable tool towards learning which stocks have better debt situations than others, and can have stronger long term financial performance (or not).

cost of debt calculator

For instance, a company that has a lower cost of debt would be one that is a more efficient lender of money as compared to a company that might not have as low of a Cost of Debt being a less efficient lender. 

Cost of debt might not inherently seem like a big deal, but it is extremely important to think about, and the calculation is very simple to understand.  Not only does the actual cost of debt number matter when you’re looking at the balance sheet for your stock evaluation, but it’s also very beneficial to compare that cost of debt to direct competitors to potentially show you how “savvy” the company might be from a financial side.

Calculating the Cost of Debt is actually a very simple formula.  To do so, you simply need to know the Effective Interest Rate of all outstanding debt and the effective tax rate.  Your formula looks like this:

cost of debt formula

For instance, let’s imagine a company has the following outstanding debts:

  • $1,000,000 at a 6% interest rate
  • $500,000 at a 9% interest rate
  • $250,000 at an 8% interest rate

For this example, we’re also going to imagine that the company’s tax rate is 40% (I just picked a simple, round number).  So, the first step is to calculate the total interest expense for the company. 

To do this, you will simply take the total outstanding amount and multiply it by the interest rate – see below:

[continue reading…]

Ally Bank Stock Analysis

This in-depth analysis on the Ally Bank stock will hopefully serve as a good example of how investors can look at a company’s qualitative factors and combine it with quantitative financial data to make good stock purchases.

Ally Financial (Ally), one of the most popular online banks, just recently released their 2nd Quarter results and they were quite remarkable.

The 2nd quarter results showcased several of the ongoing strengths of this bank, with increasing strength in their auto loans division and the exploding growth in their consumer deposits.

As more and more people do their “stuff” online, it just makes sense that they would do their banking online, which has led Ally Bank to being voted the best online bank for the third year in a row, according to Kiplinger’s.

Let’s take a look under the hood and see what is driving the Ally Bank stock and company towards success.

Overview of the Ally Bank Stock

Ally Financial was founded in 1919 and is headquartered in Detroit, Michigan. They were formerly known as GMAC Inc and changed their name to Ally Financial in 2010. Ally Financial is one of the growing numbers of online-only banks and has been voted the best three years running.

Ally boasted revenues of $1.56 billion last quarter, which was a 6% growth year over year, with an adjusted EPS of $0.97 for the 2nd quarter 2019, compared to the $0.83 adjusted EPS of the 2nd quarter of 2018, which shows a year over year increase of 17%.

Return on equity of 16.6% was up 597 basis points YoY, compared to 10.65% from 2018. Additionally, Core ROTCE of 12.4%, which was down 45 bps YoY. Ally’s efficiency ratio was 46.1%, which improved 160 basis points, year-over-year, which is an outstanding number and indicates a very profitable bank.

Net income improved to $381 million during the 2nd quarter, compared to the net income of $349 million in the second quarter of 2018 an increase of 9.1% over the previous year, all of this driven by higher net financing revenue.

Net financing revenue improved to $1.2 billion, which was up $63 million from a year ago, driven by asset growth and deposit growth. Net financing revenue was $25 million higher quarter-over-quarter, primarily due to higher retail auto portfolio yields.

Chart courtesy of Ally Financial 2nd Quarter Earnings Call Slides

Net interest margin or NIM was 2.66%, which was down 2bps YoY. Additionally NIM was down seven bps YoY, primarily due to the growth of lower-yielding, capital-efficient assets such as mortgages and securities. The lower NIM was “driven by ongoing diversification and elevated premium amortization in our mortgage and investment security portfolios as benchmarks declined, and prepayments increased” per Jenn LeClair, CFO.

Noninterest expense increased $42 million YoY, driven by higher weather-related losses and additional costs associated with the growth of the bank. On a year-over-year basis, weather losses increased by $18 million as loses during 2018 were much more moderate.

All in all, the major metrics we like to look at in regards to banks are all showing very positive signs of a bank that is growing and doing the right things for us, the shareholders.

The Ally Bank Growth Story

Speaking of growth, let’s take a look at what is driving the growth for Ally.

The first section you have to talk about in regards to Ally is their continued focus on loans, particularly auto loans.

Chart courtesy of Ally Financial 2nd Quarter Earnings Slides

As we can see a few highlights of the performance per auto finance, there was growth YoY of consumer originations from $9.6 billion Q2 2018 to $9.7 billion in Q2 2019, all this while decisioning a record 3.3 million applications during the quarter. All of which was up 8% YoY and the highest level every for Ally.

Ally has also grown their dealer relationships this quarter to over 18,000 dealerships, which was the 21st consecutive quarter of growth in dealerships, which helps confirm Ally’s position as one of the leading auto lenders in the US.

“Risk-adjusted margins increased during the quarter as new origination yields of 7.6% expanded 56 basis points year-over-year, resulting in another quarter of increasing portfolio yields and declining loss rates.”

Per Jeff Brown

Ally’s credit trends remain solid as retail auto net charge offs declined nine bps from 95 bps compared to the prior year, this helps showcase the strength of Ally’s underwriting and credit risk management, which they have seen a decline of net charge offs over the last six quarters.

For a more in-depth look at Ally’s auto loan performance, check out this fantastic article from Gary J. Gordon.

Turning to deposits as a means of growth for Ally, after all, deposits are the bread and butter of all banks and raw material that allows them to lend out money to their customers.

From Jeff Brown, CEO from the 2nd Quarter earnings call earlier.

“Deposit customers of 1.9 million grew by 100,000 quarter-over-quarter, a 23% increase year-over-year, or 350,000 new customers. A majority of inflows continue to be sourced from traditional banks highlighting the ongoing trend among consumers who are seeking increased value and convenience from their bank. These are the cornerstones of our nationwide, always-on, digital bank, evidenced by Ally being named the best online bank for the third consecutive year by Kiplinger’s earlier this month.”

As the direct deposit market continues to grow by an average of 15% since 2008,  which represents around 10% of all total retail deposits, Ally as the largest online-only bank is well situated to take advantage of this continued growth in direct deposits.

As more and more people spend their lives online, it only makes sense that they would gravitate towards online banks. Frankly that is what drew me to them as a customer.

Chart courtesy of Ally 2nd quarter earnings slides

As we can see from the chart above, there are a lot of great things going on with the deposit growth. First, we can see that total deposits of $116.3 billion were up 18% YoY, and that customer retention is 96%, which is very stable over the last YoY.

Ally grew it’s retail deposit customers by 23% YoY, to a total of 1.87 million customers. Also, it’s retail deposits were up $16.9 billion YoY, for a total of $98.6 billion.

Ally has grown its retail customers from 1.10 million customers in 2016 to the current total of 1.87 million, a growth of 70% over a little of two years. Looking over their balance sheets from the 10-ks, you can see the growth of deposits from $66.4 billion in 2015 to $106.1 billion in 2018, a growth of 59.7% over those three years.

Growth like that is what is going to take Ally to the next level and continue to give it the raw material to help grow their auto loan segment as well. It just makes sense that more and more people are going to move towards online banking, as our lives move more and more towards the internet, which you can see illustrated by the continued focus of the brick and mortar banks on the digital arena.

Deposit growth like the one that Ally is seeing is only going to continue to grow and this I believe is what is going to see this bank grow into the future, as the deposits grow the raw funds for the growth in lending, particularly auto lending will lead to greater profitability.

As seen by the large banks like Wells Fargo, JP Morgan, and so on, deposit growth has fueled their growth through the years and has enabled banks like Wells Fargo to weather their latest storms. After all, banks have a certain “stickiness” to them; I have heard it said that leaving your bank is harder than leaving your significant other.

Ally Bank Stock Risks

Ok, we have spent a fair amount of time talking about all the good stuff, now we need to focus on potential areas that could lead to Ally being an unwise investment.

The first discussion, of course, will be about the Fed and their discussions of the potential for raising rates. In this era of abnormally low interest rates, any rate increases have been a boon for banks as this is the primary driver for profitability.

Likewise, any cuts in interest rates could be a cause for a decrease in profitability as the margin between the bank’s rates and the cutting of the rates they borrow, leaving less money on the table for the borrowing bank.

And speaking of rate cuts, on July 31st there was a rate cut of 25 basis points, which the Fed deems as an appropriate action to sustain the continued economic expansion.

While not being a large cut in rates this could lead to a cut in profitability for all banks, at this time we will have to wait and see how this affects Ally over the next quarter or two.

Another potentially very large risk is the amount of long-term debt that Ally is currently carrying, their debt to equity ratio is quite high at 3.07 TTM, much higher than I like to see as this always makes me nervous.

Comparing this to much larger banks like Wells Fargo which is currently 1.74 TTM, and JP Morgan 1.33 TTM, likewise smaller banks with a similar market cap like Citizens Financial Group, carries a debt to equity of 0.52 TTM.

Ally’s current long-term debt is sitting at $42.3 billion, with a rate of 4.01%, which yielded an interest of $419 million for the 2nd quarter. Of the long-term debt, $30.1 billion is secured debt, with the payments for the debt $9.57 billion are due within one year, the balance of $32.73 being due after one year.

All things being equal Ally easily has the cash-flow to make those debt payments in the next year, and for the foreseeable future. And Ally has done a fantastic job of reducing their long-term debt over the last five years, from a high of $66.2 billion to the current level of $42.3 billion.

My concern with such high debt levels compared to their equity could be a recipe for disaster if not left unchecked and efforts are not made to bring that more under control, which Ally’s management has done. After all, out of control debt is the major cause of most bankruptcies and leads to the ruin of most companies.

Ally Bank Stock Valuation

What is Ally worth? That is the question we will tackle in this section by examining some key metrics and looking at a dividend discount model.

The current PE for Ally is 8.38 as of March 2019, which is below the industry standard of 11.80. The low PE shows that Ally is currently underpriced by the market in comparison to its potential for growing earnings.

Next up is tangible book per share, which currently is at 35.80, which is over the current market price of Ally of $33.35 as of July 31st, 2019 — also indicating a slight undervaluation in comparison to Ally’s book value.

Instead of doing a DCF for Ally, I like to use a dividend discount model, and for Ally, I will use the following inputs:

  • Current annual dividend $0.68
  • Expected growth of 8%
  • Risk-free rate of 2.2%
  • Estimated market return of 5.68%
  • Beta of 1.29

I like to use more conservative numbers when plugging in growth rates; this helps me build in a margin of safety in my calculations, in case I make an error in enthusiasm or if I am drinking too much of the “Kool-Aid.”

Based on the numbers that I have plugged into my calculator, I come up with a valuation of $48.09 for Ally, which I feel is a little high but not out of the realm of possibilities, a valuation closer to $42 to $45 I feel is a lot more realistic.

As with all calculations, remember that it is better to be approximately right versus precisely wrong, and the formula is only as good as the estimates that we plugin.

Final Thoughts

Overall all I think Ally is a strong bank with a lot going for it. Their online model is perfect for today’s consumer and how we live on the internet.

Additionally, eliminating the brick and mortar model has helped them lower costs and enable them to offer much higher interest rates on both their check and savings accounts, which has helped attract more customers, giving them growing deposits which in turns helps them offer more loans.

Ally’s management has done a fantastic job of managing its capital and has been buying shares to the tune of almost 1 billion dollars with a plan for an additional $1.25 billion more, along with a growing dividend, albeit only for the last five years. Ally’s management has demonstrated that they are looking out for their shareholders and are looking for additional ways to continue to grow both their profits as well as equity.

I am currently a shareholder of Ally Bank stock; I was lucky enough to buy in at $22.16 almost eight months ago, but I still feel that Ally is undervalued and I will continue to add to my portfolio.

Dividend Reinvestment Calculator to Plan Your Expected Returns (Excel)

One of the most powerful forces behind building wealth in the stock market comes from the compounding effects of reinvested dividends. As investors, it’s great to be able to know what to expect from those returns when planning for the future.

In this post, contributor Andy Shuler introduces a simple dividend reinvestment calculator to roughly estimate how much return to expect from a given dividend reinvestment rate and starting yield, so that you can make these determinations for yourself and your financial planning.

dividend reinvestment calculator

If you have ever listened to any of the Investing for Beginners podcast episodes, then you likely have heard from Andrew or Dave about the value of dividend reinvestment and DRIP. I mean, Andrew is the (self-proclaimed) DRIP King lol.  DRIP, or Dividend Reinvestment Plan, is really a pretty simple concept. 

In essence, when you receive a dividend payment from owning a stock, you can either receive that as a cash payment or you can have it DRIP into your current position. 

Let me help explain this with an example. 

[continue reading…]

IFB114: Buying a Home vs Investing in the Stock Market

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, welcome to Investing for Beginners podcast. This is episode 114 tonight, Andrew, and I are going to discuss a listener question. We got this great question from Jack, and I’m going to take a moment to read the question and then Andrew, and I will do our little back and forth and have some discussion about it. So starting we have, Hello Andrew. I’m thinking about buying a home monthly mortgage costs are currently cheaper than renting in my area, and my family would be able to pay the down payment for me in cash. Do you have any insight into the financial advantages and disadvantages of buying a home? In this case, I have read the buying a home is not a great investment unless you are renting it out due to the hidden costs of home buying. And the fact that a house is a liability until you pay it off. Do you think I should put the money I would use on buying a house to instead invest in a stock market? I’d appreciate any insight you have into this topic. So Andrew, what are your thoughts?

Andrew:                              01:30                     You want to open this candle warm?

Dave:                                    01:32                     So yeah, apparently, yeah, let’s crack it open.

Andrew:                              01:35                     Maybe let’s, yeah, let’s talk about the biggest financial decision that most middle-class Americans make and how that relates to their finances. It’s a very obviously emotionally charged topic. , and there’s a lot of different things and kind of like we mentioned in the personal finance series, it’s very personal. So try to listen through the whole thing without making the concluding decision on it for your own life. , I’m going to try to just kind of think about all of the things I know about it and maybe it will help shine some light for people who are considering this. Maybe it helps if I talk about maybe where I’m coming from with the context of it, I would consider myself the furthest thing from an expert on mortgages and homes that you can find.

Andrew:                              02:29                     I mean, I still don’t know, like I know there’s like multiple agents when it comes to closing and then all this blah blah blah. And I like, that’s all just like [inaudible] I have no idea. I was talking to like a home stager the other day, and she was trying to explain to me how she works with a type of real estate agent. I was just like, Huh. So I don’t know about that aspect. What I do know is the financial aspect of it. And I also know that it’s something that a, I’ve been considering him for quite a while, like in the like half a decade. , B, it’s something I’ve, I’ve run a ton of numbers and spreadsheets I should come to. Nobody’s surprise about the different kinds of ramifications behind it. , I have, I’ve researched some of the historical data too. And so the, there’s a, I think I can help somewhat.

Andrew:                              03:22                     The first thing I guess that comes to mind is you want to think, so for me the, these are some of the benefits I see for buying a home in general because my kind of weird take on it being somebody who’s 29 in that millennial category that I shudder just with that word millennial. But I, I’m in the millennial category, and you know, the typical kind of American dream picture story was always to buy a home, own it and live in it. And retire in it. , and as all the news outlets and internet blogs and websites will love to tell you I’m homeownership is down among millennials. It’s been trending in the opposite direction, and they want to blame either Avocados or student loan debt or Airbnb, I don’t know, pick, pick, pick your poison. Right? So there’s, it’s an evolving and moving landscape.

[continue reading…]

How Dupont Analysis is an Essential Tool to Measure Profitability

The DuPont model is a classic tool for any investors toolbox and many even consider it an essential part of any analysis. The DuPont Analysis equation breaks a company’s Return on Equity (ROE) down into three core elements; Profit Margin, Asset Turnover, and Financial Leverage.

As readers will come to learn, it is not enough to simply say that a company has a high ROE and therefore is a good business. The DuPont method teaches us that it is crucial to understand how the company achieved that ROE through dissecting its components.

dupont method roe formula

The name for the method originates from its creation in 1912 by Donaldson Brown while he worked at DuPont. The formula’s strengths and mathematical precision give many accountants and financial analysts a strong admiration for the formula and its young creator.

This article will discuss the DuPont formula calculation and its interpretation as we use Dupont analysis on three high profile businesses operating across different industries as well as compare two different tire manufactures operating within the same industry.  

The Beauty in the Dupont Analysis Numbers

The way the DuPont formula comes together is a beautiful thing. Below you will see how the formulae of three different financial metrics is reduced to the ROE formula itself. This is crucial because it allows one to analyze how a business is generating returns for shareholders; whether it be Profit Margin, Asset Turnover, and/or Financial Leverage.

Using the DuPont method, investors and management can isolate important similarities and differences between a business and the competition as well as establish how returns are being generated within a business across various segments and projects.

Let’s take a look at the breakdown and math behind the DuPont method analysis of ROE.

[continue reading…]

A Convenient Rule of 72 Calculator to Help Investors Plan for Retirement

The Rule of 72 formula is a quick way to quantify how much return turns into how much money. You can use this to track your progress to retirement, and Andy Shuler has created a nice Rule of 72 calculator in Excel (which you can download for free) that investors can use to do just that.

money doubling from rule of 72

The Rule of 72 is a very simple rule of thumb that people will use to determine how quickly that they can double their money.  In essence, all that you have to do is take the interest rate/72 = Years for your money to double.

rule of 72 formula

For instance, if your interest rate is 7%, it would take you 10.29 years for your money to double, and your equation would look like this:

rule of 72 example

Honestly, this is one of the easiest rules that you are likely to ever come across, but it is a really good rule of thumb to help you quickly prepare for your savings/investments and make sure that you are on track. 

I literally was at the gym this weekend and was thinking about retirement (only about 30 more years to go for me lol) and trying to make sure that we were on track to retire.  In my head, I was trying to back into a retirement number. 

For instance, if you assume you are going to get an 8% interest rate (which is my assumption for the S&P 500 as the CAGR since 1950 has been 11%) then based on the Rule of 72, your money should double every 9 years. 

So, in my case, since I am 28 years old, if I want to build my retirement until age 65, then I would have just under 37 years, or let’s say 4 different 9-year periods of doubling my money with that 8% interest rate.  For instance, see below. 

I’ve listed various situations, where if someone was to invest for 36 years at an 8% return, essentially their investments would double by year 9, 18, 27 and 36, so…

Your $1000 in Year 1 doubles to about $2000 in Year 9, then…

Doubles again to ~ $4000 in Year 18, then…
Doubles again to ~ $8000 in year 27, then…
Doubles again to ~ $16,000 in year 36.

[continue reading…]

Compelling Chart Exposes How Investing Early Changes Lives

Everyone knows that investing early can dramatically change your future, right?  Duh, Andy.  But, how much can it actually change?  The answer is a lot…

I know a lot of people that don’t think that they need to invest now. I frequently hear people say that they’re going to spend their 20’s just spending money, not really saving anything, and then figure the rest out later. 

And when I say that I hear people say this, I don’t just mean my friends – I mean like actual people in the financial community that are younger. 

Excuse my language, but what the hell??  Like you honestly couldn’t say something any dumber than that.  Ok, maybe you can, but as someone IN THE FINANCIAL COMMUNITY, what are you saying?!?! 

I mean, this is compounding 101.  Think about it – let’s assume you make 10% on your investment every year.  If you invest $1.00 in Year 1, you will have $1.10 in Year 2 (110%*$1.00).  In Year 3, you will have $1.21 (110%*$1.10). 

So, by putting your money if you put your money in for only two years, you earned $.10 but the third year you earned $.11, so that extra year was worth an additional $.01.  Yes, who cares – it’s a penny. 

But, you’re likely investing more than $1. 

To keep this example going, if you did invest $1 this year and you earned 10% each year, do you know how much you would have in 2075?  Guess.  Seriously, take a second and guess.  Don’t do the calculation, just guess what you think it would be.

You would have $207.97.  Holy crap.

I’m no mathematician, but that’s a big freaking return.  Now let’s imagine you decided to invest $2000 right now and are going to retire by 2060, and on average you receive an 8% return (CAGR since 1950 is 11%, so 8% is very conservative). 

In 2060, that $2000 would have turned into $46,924.97! 

That’s pretty awesome! 

Now, let’s imagine instead of investing this $2000 in 2019, you had decided to invest that same amount in 2014, just 5 years earlier.  Your new retirement amount would be $68,948.17!  That’s 47% more than you had investing in 2019!

Below I’ve outlined a chart that will show you exactly what kind of impact that starting early can have on your financial goals.  The thing that stands out to me is just how drastic the money grows towards the end of the chart, and that’s the beauty of compound interest. 

[continue reading…]

IFB113: Charlie Munger’s “Invert, always Invert”

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome to Investing for Beginners podcast. This is episode 130 tonight, Andrew, and I are going to talk a little bit about they called an inversion. I came across this great blog post from a gentleman named James Clear who talks a lot about habits and developing different patterns and ways that we can think better and work better with our minds and how we can set ourselves up to have better processes in our lives. And he talked about inversion. So if those of you who are not familiar with inversion, inversion means that you take something and you turn it upside down, and you look at it from a different angle or a different way. And I’ve talked a little bit about this in the past. And Charlie Mugger is a big fan of a; I’m a big fan of Charlie monger. I was going to say; he’s a big fan of mine. That’s so not true. , I’m a big fan of Charlie Munger and the way he thinks. He’s a very, very deep guy.

Dave:                                    01:33                     And he talks a lot about inversion in his blog posts, in his books, in his speeches that he gives. And he’s always quoting this term, invert, always invert. And you got that from a mathematician named, Carl Jacobi and this is a German mathematician, and he was famous for figuring out very, very hard problems by inverting them. And by, what he meant by this was that he would take a math problem and look at the answer and try to work backward to try to figure out how to solve the problem as opposed to looking at the problem and then moving forward trying to figure out what the answer would be. And he felt like that that was a powerful way for him to look at the roadblocks and figure out backward how to look at things. And this is something that I do myself when I’m trying to figure out how to work with different formulas and things that are a little bit above my pay grade so to speak is I will look at the answers and then try to figure out how they come to that conclusion.

Dave:                                    02:39                     And that helps me learn how things work. And you may have heard of Marcus Aurelius, he’s a famous stoic philosopher, and he was famous for this as well. And his exercise, the things that he liked to do was to always look at the negative aspects of something that could happen to you in life. And then think about all the different ways that could come about. And when he would do this, it would help him organize it in his head a to get over the fear of some of these possible things happening, whatever it may be, let’s say losing your job or was in, you know, a child or any of these other negative things. And if you look back from those things and figure out what could go wrong for those to happen, then you could work towards trying to avoid any of those things happening in the future to you.

[continue reading…]

The H-Model Discovered – CFA Level 2

As a type of Dividend Discount Model (DDM), the H-Model is a valuation tool that has its core methodology based on discounted cash flows, which are approximated here with dividends. The end result is a Net Present Value (NPV) calculation of the future dividends of the company. 

The H-Model is a popular variation of the classic Gordon Growth Model (GGM) that allows for short-term growth rates in the dividend to be factored in on top of the regular terminal value as calculated with the GGM and its assumed growth rate in perpetuity.

Unlike a two-stage DDM which instantly changes growth rates, the H-Model DDM allows for a more realistic gradual transition from the short-term growth rate to the long-term sustainable growth rate.

h-model graph representation

This lesson will discuss the reasons for using the H-Model as well as the calculation and inputs used in the formula.

We will then jump into a real-life example using United Postal Service (UPS) who is currently experiencing outsized growth due to the boom in deliveries associated with e-commerce.

The Importance of Short vs. Long-term Growth Rates

While investors should give a company credit for strong growth in the short-term, it is hard to justify using a growth rate above potential GDP growth in the long-term.

The H-Model is a perfect tool for transitioning from a period of high growth in the short-term to a sustainable long-term growth rate. 

[continue reading…]