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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 15,000+ 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.
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.
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.
A Tactical Asset Allocation plan is a plan that can allow
you the opportunity to have a ton of success if implemented properly, but it
takes a lot of knowledge and understanding of what is going on in the market
and some serious market discipline.
So, what exactly is a Tactical Asset Allocation plan?
Essentially, you’re going to focus on investing more on
asset classes than actual investment selection.
For instance, you would be focusing on investing in stocks, bonds, cash
and potentially commodities.
In essence, your goal when implementing this plan is to
take advantage of the gains of certain asset classes while the others aren’t
performing nearly as well. Let me show
you how it works:
Announcer: 00:00 You’re
tuned in to the Investing for Beginners podcast. Finally, step by step premium
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decode industry jargon, silence crippling confusion, and help you overcome
emotions by looking at the number, your path to financial freedom starts now.
Dave: 00:36 All
right folks, we’ll welcome to Investing for Beginners podcast episode 130
tonight. Andrew and I are going to try a little experiment. Well, Andrew is
going to test some stuff out on me so he had a great idea for the show and I
don’t know exactly what we’re going to do. I do, but what’s going to happen is
that Andrew is going to read some information from a tank K and some footnotes,
and we’re going to talk about a possible value trap. And so I’m going to be a
little bit of his Guinea pig tonight, so it is like if you, and he and I were
talking to you guys as listeners, I’m going to be kind of the listener tonight,
so this should be kind of fun. So without any further ado, I’m going to turn it
over to Andrew and he’s going to do some pocket.
Andrew: 01:18 Yeah,
let’s do it. I wanted to give like kind of a fresh perspective where you’re
somebody who has no idea what’s going on, kind of a thing, and you can
interject on when you have ideas or thoughts and see where the conversation
goes from there.
Andrew: 01:35 Basically,
what I’m going to do in today’s episode is I’m going to do like, like let’s sit
down as if we were going to try to find a stock today. So we’re going to use a
screener, we’re going to use some, some financial metrics. So for you to
understand where this conversation is going, you’re going to want to know the
basics of that. So like I say, over and over and over again, if you haven’t
already, you can go back to the archives. We have lots of intro stuff. And so
get that foundation first and then maybe come back and listen to this one. But
you know, we’re going to, we’re going to do that now. And so it’s like, let’s
take stock or a group of stocks today, run a through a screener. I tried to
find good stock.
Andrew: 02:22 I’m
going to show you one that looks like a great stock, has all the right metrics
but is a value trap. And that I will show you why and we’ll see what that
discussion kind of, if it takes off or if it’s just completely boring, you’re
just going to have to listen anyway. But, you know, if you’ve been following
the market at all. Recently, I’m recording this on December 20, 19, so many
different stories. A sort of big one and one that I see just kind of over and
over and over again is surprisingly, or maybe not surprisingly, biotech is
still really huge right now. So there’s a lot of huge jumps in stocks. Like
we’re talking about these biotech stocks that will jump 15% in a matter of
minutes or drop 10% in a matter of minutes. And this is all kind of par for the
Have you ever heard of AAA?
Back when I was a kid, my parents had AAA (pronounced triple A) and I
absolutely loved the service, but as an adult, I find myself now wondering is
AAA worth it?
They would always include us on their plan when we first started driving and I honestly used it a ton of times. When I first started driving, I had a really bad issue with locking my keys in my car. Like I did it three times the first year of owning my car.
I would always open my trunk, put my keys in there so I could grab my golf bag out, and then just shut the trunk. Turns out that didn’t work so well as I only had one set of keys!
Some of my other uses with them included:
Getting a new battery when I went out to start
my car and my battery just completely died on me from being old
Getting gas brought to me when I ran out of gas
on the highway in the middle of winter
Getting my car towed when I was rear ended
You might be reading this and be like, “damn, Andy, you’re
an awful driver.” Honestly, after
reading all of these I’m starting to question myself, but many of them happened
when I was in high school or early in college.
But now that I am older, I find myself wondering if AAA is
really worth it. So, the question is –
what does AAA even provide?
In my area, AAA has two different types of options – the Basic and the Plus plan:
Debt is a powerful tool a company can use to help leverage return on assets but it needs to be used responsibly. While debt-to-asset ratios tell a good deal to investors, they can be a bit deceiving because they mention nothing about the profitability of the business and ability to service the debt.
Enter coverage ratios (also commonly referred to as debt-service coverage) which investors can use to help determine how tight a company is towing the line in terms of fixed payments. The higher the coverage ratio, the better, as it shows the company has a greater safety net to pay interest payments and other fixed obligations if times get tough.
This article will go through some of the main types of interest coverage
ratios, such as operating income, free cash flows from operations, and EBITDA.
We will also touch on the nuances of being sure to include fixed obligations
such as operating leases into the coverage calculation as we look at two
companies, retail behemoth Walmart, and auto supplier giant Magna
Ratios – As can be seen in the various formulae below, to
get an coverage ratio, one needs to look at how well operating income, before
any fixed expenses, can cover the same mandatory cash expenses that are being
added back to the operating income measure. As the calculation concerns
fulfilling obligation, interest coverage ratios can also be referred to as debt
service coverage as previously mentioned. Let’s dive into some of the different
Recently I have been reading and reviewing the ‘What Works
on Wall Street’ book by James O’Shaughnessy and it really has been completely
eye opening to me as newer investor.
Quite often we hear people talk about the things that they look for and it usually involves something along the lines of P/E and then looking speculatively about the future opportunities that the company might have.
While I do think that it is important to know the P/E of a company and to look at some of the qualitative factors, like new products or processes that the company has, that is by no means an end all be all.
Essentially, he is just trying to identify a stock that has a low price to some very important financials of the company as book can identify the company’s assets that they have, cash flow is simply just cash which can show the opportunity for them to continue to make investments or be able to make it through tough times, and sales can show you how the company is continuing to grow their revenue stream.
Understanding what stage of the life cycle an industry is in can help investors assess the valuations, risks, economics, and competitive forces that are being seen in individual companies and the industry as a whole.
Company growth prospects and valuations tend to be effected by the various animal spirits seen throughout the cycle which can all have a big effect on the risk reward trade-off seen at different stages.
This article will discuss the stages of the industry life cycle while also using the cannabis industry as a real world example for some fun.
1) EMBRYONIC – During this pioneering stage in the industry life cycle, the industry’s product or service is in its infancy and just being introduced for sale or still being developed. As demand for the industry’s product or service is not yet fully established, economies of scale are weak and companies will be at their least profitable point. Revenues might be slowly ramping up or not yet meaningful at all.
Chances are that if you have been investing for any period of time, you have heard about the extreme importance of diversification.
While I do agree for the most part, I also think that sector diversification is one of the most overrated rules of investing for the average investor.
For starters, diversification is essentially spreading out your investments into many different groups that theoretically shouldn’t have a huge impact, or any impact at all, on your different investment groups.
For instance, you might invest in financials because if your tech investments are hit with major, industry wide concerns (such as the China trade tariffs) then the financials should help keep the rest of your portfolio from being hit with these same issues.
Diversification could mean anything – it could mean
investing in bonds vs. stocks, or domestic investments vs. foreign investments,
or anything at all that won’t be correlated with other investments.
That being said, typically when people are talking about diversification, they’re referring to spreading their investments out among the 11 different sectors in the stock market. Those 11 sectors include:
Have you ever heard of Walter Schloss? I’m guessing not, but by the end of this
article you’re going to be referring to him as Walter BOSS!
Walter Schloss was one of the lucky few that was able to learn directly from Benjamin Graham, but he has maintained a relatively low amount of recognition when compared to the amount of success that he has had with his investing methodologies.
In the words of Walter Schloss, his investing method really comes down to this quote, “Basically, we try to buy value expressed in the differential between its price and what we think its worth.”
The article goes on to talk about his upbringing and
learning from Graham and some of his success stories and his view of some of
the important things to look for, such as P/E and liquidity of a company.
In the past, Andrew has had Tobias Carlisle on his podcast to talk about value-investing and the importance of taking a contrarian view on thing, more specifically trying to zig when others zag, and zag when others zig.
Tobias Carlisle also has an excerpt on Walter Schloss on his website, The Acquirer’s Multiple, that talks about how to invest stress-free for 40 years. The main takeaway that I got from reading this can be summarized with the Ben Graham quote, “a stock well bought is half sold.”
That really sums up the mindset of some of these value-investors. They’re always looking for the bargain buy. The stock that is very under-valued and being sold at a discount to its intrinsic value. And Walter Schloss is no different.
Some of the key factors that Walter Schloss evaluated are:
As technology increases and goodwill and intangibles continue to get more common on the balance sheets of companies, it becomes ever more important to understand the accounting category. It is essential to be able to differentiate between what is healthy goodwill and intangibles and what is toxic goodwill and intangibles that are not being supported by cash flows.
This article will go over what goodwill and intangibles represent, how they are created, as well as how to spot potentially toxic balance sheets.
Intangibles on the
balance can either be internally generated or created through an acquisition.
Examples of some intangible assets would include a company’s brand name and
trademarks (ie. Coke), patents, licenses, customer relationships and lists, and
other proprietary technology.
essentially a catch-all figure created only through the process of purchasing
another business. Goodwill could be considered to represent the reputation,
human capital, and growth potential of the business being purchased and thus
the reason why the purchase price was greater than the net identifiable assets
of the company.
How Are Goodwill and Intangibles Created?
generated intangibles can be capitalized on the balance sheet under both IFRS (IAS 38) and U.S. GAAP (ASC 350) but as always, U.S. GAAP has more specific rules-based standards. Like
all asset capitalization, costs incurred in the research phase should be
expensed and only when the project enters its development phase can costs
potentially begin to be capitalized.
Under IFRS, internally developed intangibles can be capitalized only if
1) it is probable that the expected future economic benefits of the assets will
flow to the entity and 2) the cost of the asset can be measured reliably.
Under U.S. GAAP costs should generally be expensed when incurred and not
capitalized with certain exceptions for computer software intended to be sold,
website development, computer software developed for internal use, among other
Goodwill: Can only
be created on the balance sheet when a company purchases another existing
business and the purchase price paid is greater than the net identifiable
assets (including intangible assets) of the business being acquired. The amount
by which the purchase price is greater than the net identifiable assets of the
company represents the amount to be considered goodwill. There are two methods
to calculate the amount of goodwill to be recognized during the purchase of
another company. The full goodwill method is mandatory under U.S. GAAP but
IFRS allows the choice of either the full or partial goodwill method.
Full Goodwill (U.S. GAAP & IFRS): Under the full goodwill method, the amount
of goodwill recognised on the balance sheet will always be more than the amount
recognized under the partial goodwill method as the non-controlling interest’s
portion of goodwill is being recognized as well.
Full Goodwill = Total Fair Value
– Net Identifiable Assets
Partial Goodwill (IFRS Only): Under the partial goodwill method, only the acquirer’s
share of goodwill is recognized. As such, goodwill under the partial goodwill
method is always less than the amount recognized under the full goodwill method
as only the purchaser’s share of total goodwill is being recognized.
Partial Goodwill = % Purchased x
(Total Fair Value – Net Identifiable Assets)
Example of Full vs Partial Goodwill: Company
ABC is acquiring 80% of Company XYZ for $100M. Company XYZ currently has total
assets of $100M and total liabilities of $40M on the balance sheet. As part of
Company ABC’s due diligence, it was discovered that Company XYZ has a lucrative
10 year contract with a supplier to purchase in bulk at a 20% discount. Company ABC estimated the present value of
savings from this contract is worth $5M. However, it was also discovered that
$1M of accounts receivable currently on Company XYZs balance sheet are from a
customer who recently filed for bankruptcy.
Solution: Company XYZ’s total
fair value is $125M given that Company ABC is willing to buy 80% for $100M. The
total fair value of Company XYZ’s assets are now $104M given the initial book
value of $100M plus the $5M intangible contract asset less the $1M accounts
receivable write-down. The net identifiable assets are $44M as calculated by
the $104M new fair value of assets less $60M fair value liabilities. The detailed journal entries that would need
to be made under each method of accounting for goodwill can be seen below.
Side Note: In our example, the company being
purchased was being valued at 1.95x price-to-book value ($125M purchase price/
$64M net identifiable assets) which resulted in the creation of goodwill.
However, the situation can arise where a company is purchased for less than the
value of its identifiable assets in what is referred to as a “bargain
purchase”. In a bargain purchase, both IFRS and US GAAP require the difference between the
fair value of the acquired net assets and the purchase price to be recognized
immediately as a gain in profit or loss.
Under U.S. GAAP,
intangible assets are measured at historical cost and amortized over their
useful life with the carrying value also needing to be tested for impairment.
Impairment testing under U.S. GAAP is done at the level of the reporting
unit which can be an operating segment or one level below. Goodwill is not
amortized, as it is assumed to have an indefinite lifespan, but is tested for
impairment at the level of the reporting unit which can be an operating segment
or one level below. An asset is impaired if the carrying value exceeds the
expected future cash flows to be derived from the asset on an undiscounted
basis. Unlike IFRS impairment testing, U.S. GAAP looks at the future value of
cash flows on an undiscounted basis so that changing discount rates do not have
Under IFRS (IAS 36), intangible assets can be measured at
historical cost less accumulated amortization similar to U.S. GAAP or,
alternatively, intangibles can be measured using a revaluation model as
permitted in certain instances. Impairment testing under IFRS is done at
the level of the cash-generating unit (CGU) which is the lowest level that is
monitored for internal management purposes. Goodwill is not amortized, as it is
assumed to have an indefinite lifespan, but is tested for impairment at the level
of the reporting unit which can be an operating segment or one level below. An
asset is impaired if the carrying value exceeds the expected future cash flows
to be derived from the asset on an discounted basis.
Either way, the
important take away is that both intangible assets and goodwill need to be
tested annually for impairment or more frequently if events or circumstances
arise that indicate potential impairment.
The Hint a Write-down is Coming
Goodwill and intangibles need to be tested annually for impairment by analyzing their future cash flows. To get a smoke signal of upcoming impairments, we can look at profitability ratios (such as return on invested capital) to see if the assets of the company (which includes goodwill and intangibles) are generating a sufficient return. Here are a couple articles from myself and site founder, Andrew Sather, using the presence of unsupported goodwill and intangibles to point out frothy balance sheets in Kraft Heinz and General Electric.
Below is an ugly graph of General Electric’s declining free cash flows per share which left the company’s inflated balance sheet looking increasingly at risk. Ultimately, General Electric would see tens of billions of dollars in write-downs.
Keeping an eye out on profitability ratios and the composition of the balance sheet can help investors avoid being caught up in asset impairments.
Have you ever heard of Hormel (HRL) before? Hormel is very
well known in the grocery store space, but they’re equally, and maybe even more
so, well known for an extremely impressive HRL dividend throughout the
Chances are that you have even if it isn’t ringing a bell for you right now. Hormel is a Fortune 500 company that has been around for over 125 years, so they must be doing things right.
They are a company that owns over 30 food brands with some of the more popular brands being Jennie O’s, Spam and Justin’s. Not going to lie, I eat their Jennie O’s ground turkey at least once a week and I didn’t even know that it was a Hormel Brand.
But that’s not what I am writing about!
I am writing about the HRL dividend. I told you that it is extremely well known in the investing community and it’s well known for a great reason – they are a dividend king!
You’ve likely heard the term Dividend Aristocrat which identifies a stock that is in the S&P 500 and has experienced 50+ straight years of annual dividend growth. A Dividend King is very similar except instead of 50 years, the company has experienced 25+ years of annual dividend growth. That is such an impressive feat.
When you really think about it, it takes a very impressive company to have that sort of safety to be able to continuously grow their dividend and never need to stop the growth or even eliminate the dividend due to some financial hardships that the company is going through.
Below shows the dividend history that HRL has experienced since they implemented their dividend for the first full year in 1990.