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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.

IFB115: How to Make Money with Dividends When It’s Just Pennies

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:                                    00:37                     All right folks, we’ll welcome to Investing for Beginners, the podcast. This is episode 115 tonight we’re going to go ahead and take some more listener questions. We’ve got some fantastic questions that Andrew and I wanted to answer on the air. So we’re going to go ahead and talk about those. So without any further ado, I’m going to turn it over to my friend Andrew, and he’s going to go ahead and read the first question for us.

Andrew:                              00:59                     Perfect. So I have a question here from Camberley. She says I have some questions regarding IFB episode four the eight or the fine stock indicates a failing business. , I guess let’s go through these questions one by one. Number one. If you don’t know this, a falling stock until it’s too late, whether the options is the only option just to sell right then and accept your loss. So if you don’t mind, Dave, I’m going to take this one first. Absolutely. Go for it. So that’s, it’s tough, right? Because if we could figure out how to avoid falling stocks, we would do it. We would all do it, and we would all be very, very wealthy. The, so she did mention she listened to the episodes. So I did try to explain how you need to figure out the difference between a stock that is falling because the business is bad and a stock that is falling because of temporary sentiment that is negative in the stock market. I think a, and it goes really to what we try to teach.

Andrew:                              02:08                     To understand that very important difference, you have to understand the financials of a company. And so that’s why a tool like the value sharp indicators spreadsheet can be very useful in understanding the financials. So as an example, if you look at a stock and let’s say, the perfect example is like some of the recent developments we’ve seen, which I find this comical yesterday. Um, you know, we’re recording this podcast format, so people who might be listening monthly there. So it’s, it’s Kinda tough to do news on the podcast, but I’ll tell you we’re, we’re recording this at the very beginning of August 2019, and so there was like two, there’s like two or three big news themes. One of them is the Federal Reserve just in another rate cut, um, in a time where rates are arguably, really low already. Um, that’s a separate issue.

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Tobin Q Ratio – CFA Level 3

The Tobin Q ratio is an asset-based valuation model that has found its way into many value investor’s playbooks due to its economic logic based around replacement value in attempting to judge whether a company, or the market as a whole, is over or under-valued in the financial markets.

The ratio was popularized by Noble prize winning economic James Tobin in 1969 from who it draws its name.

tobin q noble prize

The Tobin Q ratio can be used to draw conclusions at the company level for investment purposes and also at the overall macroeconomic market level to assist in decision making for tactical portfolio asset allocations.

The Tobin Q Formula

The formula is calculated as shown below and closely resembles the formula of price-to-book value with one twist.

Instead of book value as taken from the company’s financial statement, the formula uses replacement value in an attempt to more accurately capture the economic costs it would take to reproduce the business.

tobin q formula

What is Replacement Value?

Replacement value is not to be confused with book value. Unlike book value which is a more informal term for the accounting figures which would be in the financial statements or “books” of the company, replacement value is a more subjective estimate of the amount of money it would take to reproduce a company’s assets.

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Wealth Accumulation in Action in the Stock Market (with practical examples)

Winning in the stock market requires the right wealth accumulation mindset, and ironically, most people who build wealth successfully do it with great help from the stock market.

So today, let’s consider how most people think about accumulating wealth, and how you should do it, by…

  1. Tracking the right wealth accumulation metrics
  2. Finding the right investments to build sustainable wealth
  3. Being patient for a long enough time to allow for compounding

Your First Hurdle: Focusing on the Wrong Results

If you pull up your online brokerage account, you’ll tend to see a few things. It should look like your online banking account, with balances prominently displayed. As the market moves, as prices go up and down, the balances on your investment accounts also move.

fixated on stock price instead of building wealth

If the market goes up 4% in a day and your account increases by $1,000, many investors feel as if they “made” $1,000. It’s hard to not think this way when that’s how our accounts are displayed.

However, the reality is that you didn’t “make” $1,000. You only make money when you sell.

This fixation on current balances and current prices motivates investors to seek short term profits and feel disappointed when they don’t come. 

An investor might have a wealth accumulation goal in mind:

  • $100k
  • $250k
  • $500k
  • $1 million

Especially that $1 million mark. People want to be able to boast that they are a “millionaire”. But that stuff doesn’t matter. The balance in your brokerage accounts doesn’t matter at all.

What does matter is the freedom that your account can provide you.

Here’s the other problem…

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How the College Investor Has a HUGE Compounding Advantage!!

When it comes to money, sometimes young adults don’t realize just how lucky they have it. By becoming a college investor rather than a “young professional” investor, a huge (life-changing) amount of money can be made.

Just because of the great compounding effects of a few years added by starting early.

Contributor Andy Shuler wants to show you just how powerful this early compounding can be, and how just a little hard work can make for truly life-changing results. The best part: anybody who is college-age can do it.

college graduate investor

If you have ready any of my recent posts, you know that I have been on a bit of a Compound Interest kick lately, and it’s not going to stop with this post.  In essence, the components of compound interest really consist of three things:

  1. Amount of money put into the account
  2. Interest Rate/Return
  3. Time

That’s it, really – and by no means are those listed in order of importance.  In fact, the case can be made that they’re actually in the opposite order, but that’s neither here nor there.  

The earlier you start investing, the greater amount of time that you have to take advantage of compound interest and maximize your financial gains. 

That sentence is likely not a shocker to anyone reading, but exactly how much of an advantage is it to start early?  Well, it can truly make or break your retirement – but we will get to that later. 

The beauty of starting early is that it doesn’t take anything extra – it’s all effort

What I mean is that it doesn’t take a higher income, or it doesn’t take you having to make sure that you’re picking the right stocks, or anything like that – it’s just the effort and self-restraint to not spend all of your money and instead invest it in the market.

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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. 

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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:

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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.

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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. 

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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.

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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.

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