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Welcome to Investing for Beginners podcast this is episode 61. We’re going to go ahead and talk a little bit about personal finance today. Andrew has a disclaimer he wanted to discuss before we get started so Andrew why don’t you go ahead and chat a little bit.

Andrew: sure so real quick I know there’s like varying degrees of experience level with people who listen to us so I would say we’re going like super into the basics for the next couple of weeks. I would say if it’s stuff that’s going to kind of bore you or if it’s stuff that you already know I go through our archives and we get in swarmed the nitty-gritty in into the stocks and individual stocks and accounting and stuff like that in those.

But Dave and I had a lot of fun last week talking about some of the basics and personal finance and figured we’d turn it into a little bit of a series. So we’re going to do we’re going to call last week’s personal finance 101, and we’ll call this one 102 and make a couple of episodes that way.

There was a lot of fanfare when we did the back to the basics part 1 through 5 series, so this is going to be kind of similar but for personal finance and we’ll try to throw in some more advanced things, but I would say go through the archives. I know when I check out podcasts and some of the other ones there was a big one that I remember I listened through every single episode in the archive, and that helped me out, and I’ve done that for investing entrepreneurship and whenever there’s like a skill I wanted to learn.

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Welcome to Investing for Beginners podcast this is episode 60. Tonight we’re going to talk about money lessons for our five-year-olds.

Andrew and I both have younger daughters and we’re going to talk a little bit about money and what we would teach our kids if we wanted to teach them more about money and I thought I would go ahead and start off and talk a little bit about some of my experiences with my little girlie and kind of go from there.

Just to kind of give you a little bit of background my daughter’s going to be six here very shortly and we go to Walmart a lot to go shopping and stuff and she always wants toys and she wants Toys Toys Toys more toys.

My wife and I have been discussing about whether we should give her an allowance, whether she should earn it and kind of going back and forth on what we should do. And so I thought that I should have her to help her learn the value of money that I should give her some air quote jobs to earn the money that we give her every week.

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In Joel Greenblatt’s book The Little Book That Beats the Market, he taught a lesson about a magic formula that investors can use to chase higher market gains. That formula consisted of two distinct parts: earnings yield and return on capital.

This post will show you a practical example of how to find and calculate these metrics from a company’s annual report 10-k. There’s also a “2018 stock list” video at the bottom of this post where you can get an example of how to find stocks that fit Greenblatt’s magic formula criteria like this anytime you want in the future.

The place to find high ranking magic formula stocks is a website that Greenblatt owns himself called magic formula investing. One of the first stocks on that list is called Acuity Brands, since the list is curated in alphabetical order. We’ll use their 10-k financials as an example to teach you this valuable investing lesson.

Joel Greenblatt ran the hedge fund Gotham Capital from 1985 – 1995 for an annualized return of 50%. He wrote about this track record in his book, You Can Be ta Stock Market Genius, and shared his “magic formula” in his other book The Little Book that Beats the Market.

The basic premise of the magic formula is to combine a highly profitable and efficient company (and one that can quickly and easily grow), with a low valuation metric based on earnings. Picking only the best stocks that scored well in both areas, Greenblatt was able to produce outstanding returns for his investors and replicate similar results in numerous backtests.

More specifically, Greenblatt combined a high earnings yield with a high return on capital to pick only the stocks with seemingly the best chances for future success.

In addition to looking for stocks with a high earnings yield and return on capital, Greenblatt included the following criteria:

• Market capitalization > $50 million
• Avoid stocks from the utility and finance industry
• Invest only in U.S. stocks
• Buy 2- 3 of the highest scoring stocks each month, for 12 months
• Sell all positions after a one year holding period (selling losers before 365 days to utilize short term tax harvesting, selling winners after 365 days to get long term capital gains instead of short term)

The way Greenblatt defined earnings yield and return on capital (which are somewhat subjective measures) was as follows:

Earnings yield = EBIT / Enterprise Value

Return on Capital = EBIT / (net fixed assets + working capital)

Looking out at today’s market, Acuity Brands (AYI) currently scores high in both of the required metrics and is qualified based on market capitalization and industry/ location.

In a recent podcast episode we talked about the strengths of using both financial metrics in depth, which you can listen to (now or later) here:

Taking a look at $AYI’s recent 10-k (released October 2017) shows how these metrics score for the company currently.  [click to continue…]

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Welcome to Investing for Beginners podcast this is episode 59. Tonight Andrew and I are going to answer some reader questions, he’s gotten some emails and we wanted to go take a moment and read through those. We’re going to read some stories and we’re also going to answer some questions so I’m going to go ahead and start us off.

The first one I’m going to read is from Anthony the letter starts with:

Andrew,

I just wanted to express my gratitude for what you and Dave are doing with your podcast. One of the things you both preach frequently it’s patience and resisting the fear of missing out. This recently saved me a decent amount of money. There was a stock that I really liked because they were selling in a bargain I mean this stock would look great. I invested once a month in research during the time in between about two weeks before I would normally make a purchase I noticed the price kept going up and going up. I felt like I needed to buy in NOW or else I would lose potential gains it took all of my willpower to just hold off and wait until the month was up before buying in.

I’m sure you can guess what happened next they went back down to its original price the next week then I went down a little further by the time I bought it it was actually spent less than it would have been if I had bought it a month prior this just goes to show how little things like having a little patience can help you in your financial success.

Thank you for your time and hard work you put in your effort is truly helping others towards achieving financial freedom.

Thank You,

Anthony [click to continue…]

DRIP stands for “dividend reinvestment plan”, and is the action of buying more shares of a stock that an investor already owns with the dividends the investor has received. It is a fantastic way to earn compound interest, which is the key to long term investing success.

There are many pieces of evidence that DRIP investing can result in serious returns for your portfolio. This blog post will examine 7 of them. Hopefully you will fully appreciate its power and implement with your own investing strategy.

1. DRIP adds “Double Compounding” to Investors

Though not talked about much, DRIPs add an additional layer of compound interest to a stock investment.

Take the average stock, for example. Buying a stock means buying part ownership of the underlying business. That business earns a profit, then uses some of that profit to reinvest in the business. They do that by buying assets. This unlocks the ability to earn even greater amounts of profits in the future, which enable higher reinvestment. Like a snowball, the effect compounds.

But…

Businesses don’t only use profits to reinvest in the business for future growth. They also pay some of their excess cash back to shareholders, in the form of dividends or share buybacks. This allows the shareholder to experience a compound effect in addition the one from profits.

Just like the business reinvests for higher future profits, investors can reinvest into the stocks they already own for higher future gains.

The longer an investor “DRIPs”, the more shares that an investor accumulates over time. As the investor’s overall share count increases, more and more shares are able to be purchased for additional reinvestment– creating an explosive compounding effect.

Combine the two compounding forces and you have a sort of “double compounding”. Having more overall shares means an investor gets a higher return from a compounding/ increasing stock price than one if he never reinvested.

2. Dividend Growth Adds 3rd Power Compounding

There is a third part of all of this compounding talk that is unique to DRIP situations.

When a stock grows their dividend in addition to growing their earnings, the DRIP effect multiplies again.

Remember that each subsequent year of reinvestment means higher and higher levels of reinvestment. The dividend an investor receives in year 1 is going to be less if he only has 100 shares compared to a dividend in year 2 where he might have 103 shares.

The higher potential levels of reinvestment accelerate even faster if the stock dividend is growing. Say a stock pays a $2 dividend, then increases their dividend to $2.20 the very next year.

Well as a dividend investor, you don’t have to do anything to receive dividends. As long as you hold the stock, you’ll get paid a dividend.

What that means is that if the company continues to grow their dividend year after year after year, you’ll continue to get higher and higher levels of dividend payments every single year.

Again, that means higher and higher levels of reinvestment potential. So the investor sees compounding in the share price, in the actual dividend payment, and from the accumulation of additional shares through his DRIP plan.

Sounds great to me.

The massive potential of dividends and a “back to the basics” explanation of dividend paying stocks is covered in depth here:

3. DRIP = Major Portion of S&P 500 Returns

I got the cold, hard facts for this point after being prompted by a great question from a subscriber to The Sather Research eLetter.

Daniel: I think I understand the DRIP concept and how it compounds. Your holding slowly grows with each dividend and each dividend slowly grows based on your holding. But I did not think this would be a serious part of the expected 11% of the total, at least not yet. Am I wrong about that?

Most people don’t know actual contribution that reinvested dividends have towards overall investment returns, hence the poor public misconceptions that dividends are for old people.

There’s a great S&P 500 return calculator on dqydj.com. I ran a scenario investing in the S&P 500 for 40 years– from May 1978 to May 2018. Returns were as follows:

• Without dividend reinvestment: 8.6% CAGR
• With dividend reinvestment: 11.6% CAGR

That extra 3% is 25% of that 11.6% annualized return, which is a serious component of the overall performance.  [click to continue…]

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Welcome to Investing for Beginners podcast, this is episode 58. Tonight Andrew and I are going to talk about financial ratios and we’re going to talk about some ones that we have not discussed before so this will be fun.

We’re going to take a shot at talking about return on assets, return on equity, and return on invested capital as well as maybe a few other tidbits so Andrew why don’t you go ahead and take our first shot at return on assets.

Andrew: okay yeah I could do that. Return on assets so basically the three of these ratios a good way to think about them is they’re kind of like efficiency ratios. They are ways to evaluate whether a business is good at creating cash with what they have.

We’ve talked about some ratios in the past we talked about valuations episode 11 really good for that so we should I think we also talked about the cash flow statement I know we did that we might have done the income statement so we’re trying to piecemeal these lessons here and there.

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Welcome to Investing for Beginners podcast episode 57, Andrew and I are going to take a stab at talking about some of our favorite books.

Books are a fantastic way to learn and as Andrew and I are both self-taught investors we thought we would share some of the books that have helped shape our views and philosophies. So without any further ado, I’m going to turn it over to Andrew and he’s going to talk about his first book.

Andrew: yeah love to talk about them and it’s so crucial right if you want any chance at jumping into the stock market I think it’s important to instead of immersing yourself immediately in the media and in the charts and everything that’s going on the business world. You can build a base and a foundation and get some wisdom from people who’ve done this for decades.

Getting a huge head start on the rest of the investors who are going to they’ll go out and they’ll learn these expensive lessons where you can kind of shortcut all of that and you can really get your skill set get that at a much higher level in the beginning and the only compound from there.

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This is a guest post from Joseph Hogue.

As a financial advisor, I’ve seen the frustration Andrew talks about when he hears people just don’t have money to invest.

It doesn’t help that wages have barely budged over the last decade. The cost of healthcare and education are rising faster than paychecks and many families struggle to pay the bills, let alone have money left over to invest.

Andrew shared some great ideas on finding a little extra to start investing, from starting a side business to developing new skills and creating a budget.

There’s another problem though that is keeping people from the financial lives they deserve, an emergency that most families feel powerless to overcome.

The average American is drowning in debt. Like drowning, we struggle and flail about but just can’t seem to keep our head above that tsunami of bills washing over every month.

Saving your financial life means not just learning how to tread water in all that debt but how to get back to dry land. Only after getting out of the sea of debt will you have enough to invest and reach your financial goals.

How Bad is the Debt Crisis in America?

According to the Federal Reserve, total household debt in the U.S. surged to $12.84 trillion in 2017, jumping by more than half a trillion in just one year. In fact, the average American household owes more than $52,500 not including a mortgage.

It costs the average household a dollar of every $5 earned just to make these monthly debt payments.  [click to continue…]

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Welcome to episode 56 of the Investing for Beginners podcast. In this week’s episode we’re going to talk about something that Warren Buffett dropped in his latest shareholders letter and he was also mentioned on a video on CNBC that was released recently and this is relating to new GAAP figures that are going to potentially inflate earnings figures and we’re going to dive into that.

Andrew is going to start us off and talk a little bit about some of the background and then we’re just kind of go back and forth, so Andrew one should go ahead and start us off there big guy.

• New GAAP accounting rule will affect financial institutions, like banks, insurance companies.
• This new rule could inflate earnings for said companies.
• Isn’t the first times accounting rules have changed
• If you invest in these types of companies you need to be aware as the rule takes effect.

Andrew: yeah sounds good and like my M.O. for this podcast has been kind of to hate on CNBC. I just have to say like they put up a new video series and it’s probably the best thing on YouTube other than my own stuff obviously.

Okay great there they did like three hours with Warren Buffett on Squawk Box and edit it down and I think it’s about an hour to an hour half of the content on their YouTube channel right now and this was back in I think early February’s when they interview him mid-February is when it was released so he’s that’s straight from the Oracle himself talking about some of the stuff we saw with Bitcoin a lot of the market volatility we saw at the beginning the year and most importantly.

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