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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 21,000+ 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.




GAAP Accounting Rules: The 4 Basic Principles Investors Should Know

Accounting is often thought of as this dry profession that we only need to consider around tax time, but if you are an investor, understanding how accounting works on a basic level is important if you are going to analyze businesses on any level. GAAP accounting rules are the primary force behind financial accounting, and today we will learn more about this exciting topic!

I took several semesters of accounting in college, and to be frank, I don’t recall much about the classes except for the pretty girl that sat in the desk right in front of me. In hindsight, I wish that I had paid more attention to the teacher as it would have come in handy in my investing life.

Part of becoming a better investor is understanding the business that you want to buy, and part of learning that business is understanding the language that business speaks, which is financial accounting. Part of understanding that language is having a foundation in GAAP accounting and the rules surrounding GAAP.

Buffett and Munger both have strong opinions on the understanding of businesses and the language of business, which is accounting.

“You need to know how figures are put together, but also have to bring something else. Read a lot of business articles and annual reports. If I don’t understand it, it’s probably because the management doesn’t want me to understand it. And if that’s the case, usually there’s something wrong.”

Warren Buffett

“Asking Warren what good books he knows about accounting is like asking him what good books he has on breathing. You start with basic rules of bookkeeping, and then you have to spend a lot of time to really become knowledgeable.”

Charlie Munger

Topics we will discuss in today’s post:

  • What is GAAP Accounting?
  • What are the Four Principles of GAAP?
  • Compliance with GAAP
  • GAAP versus Non-GAAP: What’s the Difference?
  • GAAP versus IRFS

Ok, let’s dive in and learn more about GAAP accounting rules.

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How to Calculate Invested Capital for ROIC (the right way)

Do you know how to calculate Invested Capital the right way? Did you know there’s two different equations for the same Invested Capital formula, and they mean two different things?

I’ve seen the words Invested Capital tossed around lightly many times online, and while the intentions are good, the execution is not. Oftentimes, I hear Invested Capital referenced as the denominator for ROIC, especially among investors.

When Invested Capital is being referenced, it could mean two things:

  1. Operating Invested Capital
  2. Invested Capital for equity holders (investors)

As investors who are trying to use ROIC to find good investments, you might think that we’d want to use the Invested Capital formula for equity investors (#2) to make our best apples to apples comparison.

But that’s not the case– if you’re trying to use ROIC to find a great business model.

ROIC is often used to help identify businesses who have a very high cash flowing, or efficient, core business. In other words, great operations.

Because like Warren Buffett once said,

“I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

We have to understand that there’s several distinct parts of a great business:

  1. Great capital allocations (CEO)
  2. Great financing decisions (CFO)
  3. Great operations (COO)

Let’s dive into all 3, because they are each critical but distinct, and we need to understand each to understand how to calculate Invested Capital properly and instinctively know which is best to use.

This works really well for evaluating businesses as stock picks, by the way.

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4 Tips to Strengthen Your Risk Appetite for Investing in the Stock Market

Have you ever heard that the stock market is risky and that you’re going to lose all of your money?  I know that I have heard that a billion times and friends, I am here to tell you that it’s just not true.  As long as you know your risk appetite and you stick to it, then you’re going to be just fine.

I’m not going to lie – investing can be extremely stressful.  If you’re anything like me and you refresh your investing app frequently then you’re going to see it go up and go down; go up and go down, nonstop, over and again.  Oh, 5 more minutes is up?  Let’s refresh it again!

I was like that when I started investing and while I don’t think that was a healthy habit of mine, I do think that looking at your portfolio daily is a good thing to be honest.  So how do you determine your risk appetite?

I think you just really need to do a good self-evaluation of yourself.  Can you stomach losing half of your money in the span of a few months?  It can absolutely happen.

A stock market crash will happen.  It’s not like a “what if”.  It’s a guarantee.  It’s part of investing.  Investing is very volatile but it only becomes risky when humans get involve and start to mess everything up.

Vanguard has a pretty cool risk appetite questionnaire, and I know this sounds ridiculous, but almost think you should ignore the results.  I think that the questions are great questions, such as:

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Should Dividends Be Reinvested? Handy Andy’s Lessons!

If you’re asking me, “should dividends be reinvested?” then I am telling you that the answer is always a resounding YES!

Now, if you’re asking me if those dividends should be reinvested back into the same stock that earned those dividends, that is a much different question! But don’t worry, I’m here to help cut through some of the nonsense and get you an answer that will help you properly invest your dividend income!

Have you ever heard that “time in the market beats timing the market?”  Well, it’s 100% true, and the numbers show it.  Statistically speaking, when you have money that you want to invest, you should try to get that money into the market as fast as you can!

I’m telling you right now that you should NEVER dollar cost average if you’re seeking maximum returns.  I know that might seem like a hot take but it’s true.

I mean, think about it – the stock market has historically gone up over time, on a fairly reliable business, so wouldn’t it make sense to put your money in as fast as you can? 

Of course, sometimes it will backfire, but the odds say that if you were to put your money in today then it’ll be at a lower price than what it would be if you invested tomorrow.

When comparing lump sum investing vs. dollar cost averaging you can see that it’s a no brainer that you should get your money into the market as soon as you possibly can, and the same remains true for dividends. 

So, as soon as you get those dividend payments, put those funds back into the market so you can continue to capitalize on compound interest!

Is the DRIP Program Still Relevant?

Now, chances are that you are asking this question because you have heard about DRIP, or Dividend Reinvestment Plan, and you’re wondering if this is applicable to you.  Well, to be totally honest, I don’t know if DRIP really is that applicable anymore…

DRIP essentially is that when you earn a dividend, that money then is automatically invested right back into that same company that paid you the dividend in the first place.  So, let’s imagine this scenario:

You’re invested in one of the greatest dividend kings of all time in 3M (MMM) and you own 10 shares of that company.  On 5/21/20, MMM paid its quarterly dividend of $1.47/share, and since you own 10 shares, you received a total payment of $14.70. 

You can either receive this as just cash in your account or you can enroll in DRIP, meaning that you will instantly get more shares of MMM for the equivalent of that dividend payment.  Let me help explain below:

As you can see, that $14.70 in dividend payments is enough to get you .1008, or just over 10% of 1 more share.  You now own 10.1008 shares instead of the original 10, meaning that the total value of your stock is at $1,472.80, or $14.70 over the amount of your initial investment (which is the same as the dividend that you received).

The beauty is that you could just keep this going, quarter after quarter, because 3M has one of the most sustainable track records of growing their dividend over time that you don’t have a lot to be worried about with them cutting their dividend, but is this actually the best strategy for you?

DRIP really provided (note that this is past tense) three main benefits to the common investor:

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IFB163: Dividends, Diversification, and Reflections on the Approach

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 episode 163. Tonight, we are going to answer a listener question. We got a great question from David recently, and Andrew and I are going to take part, his question. It’s quite extensive, and there’s lots of great stuff in here. So we’re going to go ahead and answer that for David on air. So I’m going to go ahead and start and say, hi, Andrew. Thank you for all the resources you put together as a 25-year-old, who had no foundational understanding of stocks, your podcast has been immensely helpful. Hoping you could fill in some gaps. I currently have. The first thing you’d like to talk about is dividends. So do a little rapid-fire here. So dividends, are they pay out quarterly yearly or variable? Andrew?

Andrew (01:22):

Yeah, it depends on the company. Most are quarterly.

Dave (01:26):

Perfect. What is the period between when a company determines a dividend versus when it is paid?

Andrew (01:33):

It depends. So what I like to do for a stock is I’ll Google. Let’s say I want to look at Apple’s dividend history. So I’ll just put in the ticker APL dividend history. And I like to use the NASDAQ website because it will show you the dates that they’ve announced, the dividend payout, the date, you have to hold the stock, buy to get the dividend payout, and then the date that you will receive the dividend in your brokerage account. And so, you know, that website has it, some other websites do have it. So there’s not like this golden period between those different deadlines, I guess. And you know, sometimes it could be a couple of days later, a couple of days early with announcing and everything like that.

Dave (02:17):

But that’s just the general thing with dividends, correct me if I’m wrong, but every company is on their schedule, correct?

Andrew (02:27):

I mean, I know that’s, I’ll get like groups of dividends and in my email any given day. So it seems like some might be on similar schedules, but yeah. It’s pretty random, for the most part.

Dave (02:40):

Okay. Right. So Wells Fargo is going to pay their dividend regardless of when JP Morgan or bank of America or it’s not really dependent on each other.

Dave (02:49):

Yeah. Okay, perfect. Alright, next question. How long must you hold a stock before you’re entitled to a dividend? And is this determined by the time you hold the stock or the time between stock purchase and dividend announcement?

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Unqualified vs Qualified Audit Opinion: Auditor Report in the 10-k Explained

Accounting scandals can be a death knell to investors of a public company. There’s various ways to sniff out accounting “shenanigans”, but one of the easiest ways is to scan the auditor’s report of the 10-k. Essentially, you want to determined whether there’s a qualified or unqualified audit opinion, by looking for a few keywords.

This post will:

  • Define the basics (which at first sound counter-intuitive).
  • Give examples directly from recent company 10-k’s.
  • Shortcut for quickly sifting out the audit opinion when reading a 10-k.

The Basics of Audit Opinions

An unqualified audit opinion is a “clean report”. This means an auditor believes that all GAAP metrics and accounting policies seem to be fairly presented. The auditor doesn’t need to “qualify” the audit (make an exception for), it seems that the annual report is transparent and compliant.

On the contrary, a qualified audit opinion is one that needs further explanation or a disclaimer, not to say that the annual report is deceptive, but that there is an issue(s) with the representation. So a qualified report is not clean, and will outline exceptions or disagreements between the auditor and the report.

Audit Opinion: Sports Metaphor

Think of it this way—in a sports tournament, you might see a “qualifying” round. In qualifiers, a team needs to prove their worth, they are not allowed to play “as-is”.

So if the opposite of qualifying is “unqualifying”, then a team not in qualifiers doesn’t need to prove their worth to be in the tournament—like a financial statement that doesn’t need further “qualifying” (explanation) on why it is adequate.

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Global Equities Momentum (40y Track Record Outperforming the S&P 500)

Did you get tired reading that title?  If so, I’m sorry – but I wanted you to know that this entire article is showing you how Global Equities Momentum (GEM) has absolutely dominated the S&P 500 over a 40-year period.

I’ve been reading the book “Dual Momentum Investing” by Gary Antonacci over the last few weeks and I feel like it’s been a slow build to this chapter where we finally got to see things come to fruition and get a tangible plan of action of how to put this plan to work!

We’ve touched on a few key topics before that I suggest you read up on to really understand why momentum investing works:

Essentially, GEM all boils down to this, which I want to quote directly from the book:

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Industry Map of the S&P 500: 11 Major Sectors and 50 Businesses

Creating an industry map shouldn’t be an arduous task with some basic research, especially with all of the tools available on the internet today. Here’s an example industry map using the S&P 500, with a break-out into 11 major sector components, followed by more detail industry markets.

To create the major sector components map, I’m simply going to start with the sectors defined by finviz, which creates a good overall picture of what currently moves the market.

You can’t ignore these big players, as their large market size and market share often go hand-in-hand.

Here are 11 major sectors of the S&P 500 that nicely describe a general market industry map:

  1. Technology
  2. Healthcare
  3. Financial
  4. Communication Services
  5. Consumer Cyclical
  6. Consumer Defensive
  7. Industrials
  8. Energy
  9. Real Estate
  10. Utilities
  11. Basic Materials

I tried to make the list in descending order of market size (as defined by current market capitalization), which has its own faults, but we’ll try to be vaguely correct here instead of precisely wrong.

Here’s a nice illustration of the industry map I defined with the 11 major sectors above, again from the same source in their mapping function:

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Convertible Preference Shares – Great Alternative to Buying Bonds

Preferred shares are the red-headed stepchild of the investment world; they are relatively unknown among most investors. But investors such as Warren Buffett use them to invest in companies such as Occidental, as recently as May 2019. Preferred shares come in many different flavors, and today’s article will uncover the magic of convertible preference shares.

Most investors are familiar with the hierarchy of investments according to who is in order of preference for repayment in the case of a bankruptcy.

  • Bonds – First
  • Preferred Shares – Second
  • Common Shares – Last

But how many of use, in fact, know much about preferred shares or the different options available? I will be frank; I wasn’t until I became more enlightened after reading about some preferred shares that Buffett purchased preferred shares of Bank of America.

As we will discover, this unknown class of shares offers some unique benefits to investors that may be of benefit to you someday, or now.

In today’s post, we will learn:

  • What Are Convertible Preference Shares?
  • How the Conversion Ratio for Convertible Preference Shares Works
  • Understanding the Conversion Premium of Convertible Preferreds
  • How do Investors Invest in Convertible Preferreds

Ok, let’s dive in and learn more about the convertible preference shares.

What are Convertible Preference Shares?

Investopedia describes convertible preference shares as:

Convertible preferred stocks are preferred shares that include an option for the holder to convert the shares into a fixed number of common shares after a predetermined date. Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company, or issuer, to force conversion. The value of a convertible preferred stock is ultimately based on the performance of the common stock.”

All stocks are considered ownership of a business, but the stock comes in different flavors. Common stock is what is generally issued to most investors, thus the name “common stock.” But another class of shares are the preferred shares, which also have several different levels.

  • Cumulative preferred
  • Callable preferred
  • Participating preferred
  • Convertible preferred

Preferred stock is generally given to investors in young companies, such as venture capitalists. When those investors start with young companies or startups, one of the ways those companies will entice investors is by giving them preferred shares that carry special benefits that common shares don’t have.

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VHDYX is “Closed to New Investors” – What Do You Do Now?

As you know, Andrew, Dave and I are major dividend lovers!  We all think that dividend paying companies are one of the best ways to reap the rewards of compound interest, but what if you don’t want to invest directly in stocks?  Can you still reap the rewards with an ETF like VHDYX?

The reason that I started investing in the first place is because the power of compound interest spoke to me.  Like, if you invest $1000 when you’re 22 and don’t touch it, you realistically could have $16,000 at age 58 by only achieving an 8% annual return! 

That was literally all that it took to get me hooked.

Many will choose not to invest because they don’t think they’re smart enough or that it’s too complex/time consuming, but this is just not true.  It can be number oriented if you really want it to be, and fortunately for me, I am a huge numbers an Excel nerd, so I absolutely love digging into companies and trying to find the best place for me to put my money, but I know everyone isn’t like that. 

Many investors will turn to an ETF or Mutual Fund to try to gain some sort of exposure to the market while also allowing them to stay an arm’s length away from some of the risk, and I totally get that, so how do you still gain some great exposure to these dividend paying stocks?

VHDYX, or the Vanguard High Dividend Yield Index Fund, is simply a fund made of up high dividend yield stocks.  Unfortunately, VHDYX is closed to new investors, but instead you can invest in VYM and still get some amazing exposure!

Personally, I think that investing in individual stocks is the best way to go, but I do understand the draw of wanting to invest in an ETF.

So, what is VYM?  VYM is the Vanguard High Dividend Yield ETF and it essentially tries to mimic the returns of great dividend companies.  Per the Vanguard website, VYM “seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.”

Personally, when I am looking at an ETF, I like to look at a few different criterium:

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