Money Equals Work


 

Mushrooms

What is money?  I don’t mean the bills and the coins, or the little numbers on the screen when you log into your bank’s electronic banking website.   mean what is it really, and why do people want it so much?

Money = Work

Money is a little IOU that you get for some work that you have done.  (OK, it may also be an IOU for something you find on the ground, if you’re lucky enough to find a chunk of gold just sitting there, but most people aren’t that lucky.  Usually, even getting gold often takes substantial work as well).  For example, if you are a farmer, you spend several months growing corn  – a few weeks plowing the fields, a few days putting seeds in the ground, a few months from sun-up to sundown pulling weeds, spraying for pests, and fixing fences, hoses, and equipment, and then several days picking it, and several days packaging it.  Then you bring it to market, and someone who wants that corn to eat gives you a dollar for five ears or something else you both agree is reasonable.

You can then take that IOU and give it out to someone else to do work for you, such as cut your hair, make a pair of shoes for you (or you buy a pair they have already put the time into making), or maybe make a cup of coffee for you while you sit in the air conditioning and listen to cool jazz.  You have used your work to produce corn, but you can trade the results of your work for the results of the work of other people.  The beauty of this system is that people get to concentrate on the work they do best.  Many people would simply die if they had to grow and preserve their own food, find and gather their own water, build and maintain their own shelter, gather resources to produce their own heat, and make their own clothes.  With a free enterprise society, they can simply paint people’s nails and in exchange have all of these things done for them.  When everyone is doing what they do best, everyone does better.

Money does not come from your boss or your company.  They just create an environment where it is easy for you to trade your work for money and take a small amount of the value of the products you produce in exchange.  Note that if you produce something worth $15, like maybe an hour of service at a counter, taking orders, your company may keep $2, use $5 to pay for the building, lights, and inventory, and pay you $8.  (How exactly would they be able to pay you $15 per hour in this case, even if you really needed it, to live where you live?)

Money does not come from the government.  Many people think that the government can just pay for things, as if they have an unlimited amount of money.  But all of the money they have is from taking a portion of the work people in the country produce, or wealth given to them by other countries or taken in wars.  Sure, the government can print more money, but if there is no work behind those bills, where exactly do you think that the goods will come from that you want to buy with those bills?  If there is one bushel of corn, will printing vouchers for two bushels of corn allow two people to get a bushel each?

Money and Retirement

So you’re ready to retire and you still want to eat and have a roof over your head,  You also might want to take a cruise to Alaska and drive around the country in an RV.  How exactly do you pay for these things when you are not working?  The answer is that the younger you is working for you in retirement (unless you don’t save enough, in which case you are then having the government go out and forcing other people to do work for you).  When you were younger, you had the ability to do more work than you needed to simply meet your needs at that time.  If you were wise, you stored up those extra IOUs you collected to exchange for work when you were older and couldn’t provide for yourself anymore (or didn’t want to provide for yourself anymore).

You could have also used some of those IOUs to buy things called assets that cause others to trade you some of their work.  These are things like apartments, which others pay you to use, shares of stock, which support companies others work in and provide you a portion of the work they do in exchange for an efficient way to trade labor for money, or you let others use your money directly in a loan in exchange for them paying you back and giving you a little extra money for use of your money. 

If you use assets to save for retirement in addition to your own labor, it means you don’t need to do all of the work for both your younger self and older self.  You can actually exchange your work for more work than you did.  Start when you’re 18 and you can get others to do about 16 hours of work for each hour you did! 

Assets also help protect you from the effect of what happens when the government does print more money than they take from those who work – inflation.  If you simply trade an hour’s worth of work for cash when you’re 18 and stick it under your mattress, you’ll be lucky to trade it for half an hour when you retire.  Buy shares of stock with it, and the price of the stock will increase with inflation so you’ll still get your hour back, even if the company in which you invest does not grow.

So remember, money is just an IOU for work.  You collect IOUs when you’re young and able to do more work than you need to provide for yourself when you’re old an unable to work.  If you collect money from the government, you’re having the government go out and take work from other people to provide for you.  Finally, you can purchase assets with some of the IOUs you collect, and other will willingly trade their work of use of those assets, such that you can receive many hours of work from other in exchange for a few hours of work you do yourself. 

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Your Feedback, Please


Buy the SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy at https://www.createspace.com/4306997
Buy the SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy at https://www.createspace.com/4306997

I wrote The SmallIvy Book of Investing Book 1: Investing to Grow Wealthy to provide readers with the information needed to use stock investing to reach financial independence.  It could be used by people of any age who are interested in investing and setting up a healthy personal cash flow, but it would be perfect for someone just graduating from high school who hasn’t made costly financial mistakes yet.  Investing also favors the young since they have time on their side.

Given that this is my first book, I’d love to hear some feedback from anyone out there who has read it.  I might create a second edition after I finish Book 2, which will cover stock picking.  One thought that I have is moving the investment option descriptions further back (or maybe put it as an appendix) and start with the investing plan.  I’m sure that there are other suggestions.

Have you read it?  Or did you put it down after a chapter because it was too difficult to get through?  Are there things that were missing?  Things that you would take out or move?  Do you have some tips from the book you found useful?  Or useless?  Would you like to provide a review of the book for others (I’d be happy to put it in as a guest post)?

If you have any feedback, please let me know.

Got some feedback on the book (or the blog)? Please leave a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

If I Had a Million Dollars


Million DollarsPerhaps you’ve heard the Barenaked Lady’s song, “If I Had a Million Dollars.”  If you haven’t, listen to it now – we’ll wait…..

Back?  O.K.

So obviously many of the things mentioned in the song would be nice to have.  With the exception of the green dress, the Elephant man, and the Kraft dinner, I think I would like to have many of the things in that song, especially the tree fort.

But if you went out and bought all of those things, your million dollars would be gone.  With the exception of the house (and the fir coat, if they had bought a real fir coat), most of the things purchased would be worthless.  Their $1 Million would be gone after their little spending spree.

If they had chosen more wisely, they would be able to buy stuff and still have the million dollars.  They would have assets that would continuously replenish their funds as they spent a portion of the money, provided they didn’t spend too much.  If I had a million dollars, here would be my list:

1) $12,000 in bank assets.  This would include $6,000-$7,000 in a money market fund and the rest in CDs.  I would use this fund to cover the float – the money needed until my next paycheck or interest payment comes in, little emergencies that come up, and other events.  If I had to spend some of this money I would replenish it before I did anything else.

2) A $250,000 house.  Where I live, this would be nice house.  Get anything much bigger and it would cost a ton to heat and cool, plus I’d spend all day working on the yard or cleaning the floors, and who want’s to do that?  Paying cash for a house means that no matter what else happens, I have a roof over my head.  I know, the tax man can take it away, but you get the idea.

3) $500,000 in interest and dividend paying assets.  Things like bonds, bank and utility stocks, REITs, and the like.  I would try to get an average return from interest and dividends of something like 6%.  This would mean I’d have $30,000 in income coming in each and every year to buy things like Kraft dinner and pay my property taxes so that the government wouldn’t take away my home.  Note that I probably wouldn’t buy bonds at the current time due to the low-interest rates and the likelihood that they will get hammered when the Fed starts raising rates, but during normal times I would.  I would also only buy this many income stocks if I needed the income.  Otherwise I’d invest this money in stocks until I needed the income.

4) 200,000 in stock mutual funds and ETFs.  This is money that would grow over time so that I would be able to increase my income and keep up with inflation.  As I said above, I’d invest a lot more in stocks if I didn’t need the income right now.  I could also invest in stocks and sell a portion of the portfolio each year to raise money, but I would be taking the risk that I could lose a lot in a market downturn if I couldn’t afford to stay pat and let things recover.

5) $38,000 in individual stocks.  I’d have a small portion in 2-3 companies that I thought had great long-term prospects.  If I picked the next Microsoft or Home Depot, I’d have another million dollars in ten years or so.

What would you do with your million dollars?

 Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Paying Tuition to the Markets


Everyone, from new investors to seasoned pros, make mistakes when investing.  Losing money at times it a part of investing.  Some lessons individuals will not believe, no matter how many times they are told, until they personally lose money.  I call this “paying tuition to the market.”  Other people might call it “stupid tax.”  Whatever you decide to call it.  An individual with the right temperament for investing will accept these mistakes, learn from them, dust himself off, and then move on.

I have taken my personal share of losses and made my share of mistakes.  As I’ve said, some things you cannot learn without losing money personally, but maybe some of my readers out there will take these lessons to heart and therefore not need to lose money-making the same mistakes I did.

1)  Stocks will go down and stay down much longer than you will expect them to.  At times I’ve had a great stock that I was following fall out of the sky.  Sometimes I have rushed in to buy shares, thinking that there was no way that they could go lower.  Some of these times the stock dropped to an even lower price and then sat there for years.  The lesson to learn here is that stocks do not fall for no reason.  Just because you may not see the immediate cause does not mean that the whole world except for you has had a momentary lapse of judgment.  A stock may have had a great quarter but issued guidance that future sales may slow.  There may be some shenanigans going on at the company that you have not heard about.  Markets tend to be very good at setting prices based on current news.  If one of your favorites tumbles, even if the price seems unbelievable, it is best to give it a little while to wait for the other shoe to drop.  If you must buy in, buy about half as many shares as you are planning to buy so that you can buy more later if prices continue to drop.

2) Stocks will stay up far, far longer than you expect them to.  It is amazing how some of the Wall Street Darlings, for example, Krispy Kream, Outback Steakhouse, and more recently, Google, can rise to astronomical prices.  Then, when you think that they can rise no more, they continue to rise higher.  Even worse, in cases like Snapple or AOL, they are bought out by another company for those astronomical prices and then give the company that bought them out heart burn.  Always be careful when looking to short stocks.  Just because the price is high does not meant that the price cannot go higher.  I was short Golden West financial in 2008.  Then, just before the mortgage bubble began to burst, they were bought out, causing me to lose about $10 per share in one day.  The fact that the company that bought them out later regretted the decision was of little solace to me since I’d already realized the loss.

3) To make $1 million in options, start with $10 million.  Buying options is for the stupid.  I repeat, buying and selling options is for the stupid – you will lose your money.  In college I thought I could play the options game.  I took up positions in equity options and index options.  Within three months I had lost all that i intended to risk and about 4 times more!  In buying options, the odds are stacked against you because you do not only need to be right about the direction, but also the timing.  Even when you are right the spreads and commissions will kill you.  Every time you make money the fees reduce your winnings.  Every time you lose money the add to your losses.  If you want to gamble, head to Vegas.  At least you’ll get free drinks.

4) Never buy stock in a buy-out candidate.  I bought shares of a stock called stop-and-go back in the 80’s, hearing that they might be bought out.  Sure enough, a buy-out was announced — for $2 per share less than I had paid!  Once the rumors are flying, you will be too late to get in at a decent price.  Find some other stock to buy.

5) When management changes in a long-term successful company, watch out.  Citizen’s utilities (now citizen’s communications) was once an untouchable company.  They owned all of the utilities (telephone, water, electricity, waste water) for rural communities all over Arizona.  The company had not missed increasing earnings for a quarter for decades.  A person who had bought 1000 shares in the 1970’s would be a millionaire by the 1990’s.  Then, management changed and an individual who was fond of starting telecom companies was installed as CEO.  He changed the character of the company into that of a wireless phone company, sold off the other assets, and the steady earnings increases stopped.  At that point the stock price, which would go up and split like clock-work, stalled and dropped by 50%.  Whenever a company that has done well under a certain manager or groups, it is generally a good idea to think seriously about leaving if that manager departs.

6) If you’ve got a profit and are ready to sell, sell — don’t fool around.  It was around 2000 and we were caught up in the middle of the dot-com bubble.  I had purchased shares of a small internet company at $4 per share and seen the shares climb up over $20 per share in a short period of time.  I was reading the yearly report at the airport and the realization came to me — this was just a pile of fluff and marketing.  There was nothing of substance there.   I called my broker from a pay phone.  The stock had dropped a couple of dollars from its high, but I figured it would return so I set a limit near the old high.  The stock never returned and proceeded to fall through the ether.  If I had simply put in a market order I would have been out.  As it was I don’t remember if I even made a profit.

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Price-Earnings Ratio Can Be Used to Predict Stock Prices


Every stock has a fundamental value, called the intrinsic value.  The price at which it trades is a combination of that fundamental value with a lot of noise heaped on top of it.  The intrinsic value of a stock, which is really what an investor should focus on, is based on expected future earnings and dividends, risk, and the current rate of return of other investment options.   Kind of like saying that a can of Coke should sell for about 50 cents, so if you see it for 25 cents on sale you scoop it up, but if you see it for $3 at a festival you think twice.  You know when it is a good deal and when it is not.

The market price of a stock tends to follow the intrinsic value of the stock, at least over long periods of time, but at any given time there will be other factors that cause the stock price to exceed or lag that value.  Like the price of a can of Coke, depending on where you are and what’s going on, the market price may be somewhat higher or lower than the price dictated by the intrinsic value of the stock.  Eventually, however, the price will return to the intrinsic value. This means that if the intrinsic value doubles, the market price will eventually double as well.  Because the future intrinsic value is easier to predict than market price, one should find those stocks whose intrinsic value can be predicted to rise at a rapid rate with a reasonable degree of certainty.  These are stocks with both a good earnings growth rate and good earning predictability.

Earnings predictability is determined by how stable and solid the market sector and company is.  We are looking for stocks that both have predicted earnings growth rates in the range of 10-30% per year and that have had consistent earnings growth in the past.  For example, finding a company that has had earnings increase over the last five to ten years and has a business that is still expanding.   A company that has seen earnings increase year-after-year obviously has a good management team in place and a concept that is working.  As long as neither is expected to change in the foreseeable future, and the company has room to continue to grow, one can expect the earnings growth to continue.

Luckily, these stocks are fairly easy to spot because their price trend tends to follow earnings growth.  If earnings have been climbing at a steady pace for the last several years, the price trend should be a nice, steady increase (note the crash in 2008 has caused an interruption in that line for most stocks, so it should be ignored if the stock recovered since then).  Stocks that seem to be going straight up should be avoided because these tend to be bubble stocks.  Typically the straight up pattern is followed by a straight down pattern, forming a bell curve shape in the price chart.

Another factor to look at when looking for stocks with good growth prospects is the Price Earnings ratio, or PE.  This is just the price of the stock divided by the earnings.  PE is used sometimes as a measure of price by value investors.  For example, they may find stocks with low PEs relative to traditional levels or stocks in a sector with a PE lower than that of its peers.  It’s value is compared with it past average value and the stock is considered expensive if PE is higher than average or cheap if it is lower than average.   They would buy a stock while the PE is low and then sell if it reached its average or some percentage above its average.

The PE can also be used to predict future prices because a stock will tend to trade within a certain PE range.   Therefore, one can do a reasonable job of predicting future price simply by multiplying the expected future earnings by the average PE ratio for the stock.  For example, if earnings are expected to increase by 50%, the future intrinsic value, and therefore the price, can be expected to also increase by about 50% if the stock is currently trading at the average PE.  If the stock is trading 10% above its average PE it may only increase by 30-40% since some of the future earnings growth is already priced into the stock.  Likewise, if it is trading at a below average PE, because the whole market is down or some other reason, the stock price may increase by more that 50%.

Another use of PE is to spot the prime stocks in a business.  If one of the stocks in a business segment, restaurants, for example, usually has a PE above that of its peers, it usually means that it is the dominant player in the sector.  This is the company that is gaining the most market share and increasing earnings most rapidly, so investors are willing to pay a premium for the stock.  As long as the company’s earnings are growing faster than those of the rest of the sector, this premium in PE can be expected to continue.  One must be careful, however, because if the management changes or the company just peaks out for some reason and earnings growth slows, its price will fall until the PE is in line with its peers.

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Can You Beat The Markets?


leverage

Professional money managers cannot beat the markets over long periods of time.

The above statement has been proven out many times,  There are a few money managers who will beat the markets for a few years or even a decade, but eventually they are swallowed up, just as the break-away riders in a bike race eventually get swallowed up by the pack. (Sorry, just thinking about the movie American Flyers, but I digress.)

Individuals can and do beat the markets over long periods of time.

The second statement is also true, yet it seems to contradict the first.  If a professional money manager, who has all of the education, all of the experience, all of the fancy tools, the assistants, the research staff, and the time to devote to picking stocks and tracking the markets cannot beat the markets over long periods of time, why can an individual who works forty hours a week doing other things and whom has none of the advantages beat the markets?

A money manager gets billions of dollars to invest and is constantly under the gun to perform.  If he makes 13% and the markets go up 15%, investors may pull their money out and into other funds that did as well as the market or beat it.  This both encourages the money manager to aggressively target short-term gains and forces him to pull money out of stocks at just the wrong time to raise cash to pay those redeeming their shares.

In addition, because he has so much to invest, he cannot just buy the stocks he most believes in.  If he were to put a billion dollars into one stock, he would move the price way up and get a bad cost basis.  He would end up taking over the company.  Instead, he must buy several stocks he doesn’t fully believe in just to be fully invested.  He may like Coke, but need to buy Pepsi too.  If he is not fully invested and the markets go up, he will make less than the markets and people will sell out.

The individual investor, on the other hand, doesn’t have such constraints.  He can pick just a hand full of stocks in which to invest.  He can invest without worrying about moving the share price up, and can sell out without worrying about moving the share price down.  He can also hold on for years and years, waiting for the market to realize the value of the company and bid the price up accordingly.

So the strategy that allows you (but that won’t ensure that you will) to beat the market(but that won’t ensure that you will) (but that won’t ensure that you will) is the following:

1.  Select the best stocks from a few different sectors.  Find the stock in the restaurant industry that has the best prospects for growth.  Find the internet stock that has great potential.  Find the retailer that is well run and opening up new stores in new markets.

2.  Buy in over a period of time, buying on dips and being patient.  Understand that you will not get the perfect price most of the time, but know that you’ll get a good price by putting money in a little at a time.

3.  Plan to hold the stocks for many years – a decade or more.  Give the company time to grow and expand.  Don’t worry about the stock price – you wouldn’t sell you home just because the price went down during a quarter, would you?

But wouldn’t you be better off just buying index funds and ETFs?  Buying individual stocks, you could pick badly and lag the markets.  You could also have a stock go bankrupt, or just go nowhere.  Emotions could also take over and you could end up selling out at just the wrong time.

The answer is, there is no reason to not do both.  Buy index funds in your IRA and 401k where you can defer taxes on distributions and dividends.  Buy long-term growth stocks in your taxable account.  If you do well picking stocks and have some big winners, trim back your holdings a bit and add some ETFs to your taxable account.  Preserve the gains you make while still letting your winnings grow in proportion to the size of the risks you are willing to take.

You can beat the markets, over long periods of time, through stock picking, even if the professional cannot.  But it takes a lot of patience, and it doesn’t hurt to hedge your bets.

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Countdown to Freedom Starts, Balance: $300


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About a week ago I initiated what I’m calling the Countdown to Freedom, where I’m starting the process of saving and then investing to reach financial freedom.  This is similar to blogs where people are paying down their debt, but in this case I’m going the other way, starting with some contributions to a money market account and some small investments and going towards financial freedom.  That is the state where your investment income is equals your work income, allowing you to live without working anymore if you so choose.  In actuality I’ve already made this journey, but thought people might like to see how it is done to inspire them to make the same journey.  You’re invited (and encouraged) to do same and let everyone know how you’re doing.

I’m planning to put at least $200 per month into a money market fund.  This is money I’ve budgeted after already making payments into 401K IRA.  On good months, like July which has an extra paycheck, I may put more.  If I get a raise I my increase the amount.  That is how you chip away at the stone – little by little.

I made the first payment last week.  I put in $300 for the month, which is now parked comfortably in a money market account, earning something like 0.3% interest.  Note that these first several posts will be like watching grass grow.  Those getting out of debt start with large numbers, which makes it a bit more exciting.  When you go the other way, it starts really boring, with small amounts being put into money market accounts that pay essentially nothing, so all of the growth you see is due to your own payments into the fund.  (But hey, that means I get to increase my balance by 100% next month – woo hoo!) I’m probably about 8 months to a year away from making the first investment.  But stay with me – it starts slow but then grows like you won’t believe near the end.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.