Here is a link to the PowerPoint slides (KP Investment Club Meeting Slides). I added additional details in order to convey a similar message to the one presented at the meeting.
Thanks. Matt.
Showing posts with label Matt. Show all posts
Showing posts with label Matt. Show all posts
Thursday, April 13, 2017
Recap: KP Investment Club Meeting
During our last meeting, we talked about stocks vs. other investments, investment vehicles, and market timing. Next on the agenda is portfolio diversification.
Here is a link to the PowerPoint slides (KP Investment Club Meeting Slides). I added additional details in order to convey a similar message to the one presented at the meeting.
Thanks. Matt.
Here is a link to the PowerPoint slides (KP Investment Club Meeting Slides). I added additional details in order to convey a similar message to the one presented at the meeting.
Thanks. Matt.
Monday, March 13, 2017
Investing in Real Estate and Warren Buffett
The other day, I saw an article shared on Facebook titled “Warren Buffett’s Best Investment.” The article was referring to a vacation property that Buffet purchased in 1971 for $150,000. Today, the home is listed for $11,000,000. People are astonished. People commented about how this exemplifies the profitability of investing in real estate. Due to my general disbelief that real estate is a good investment over the long haul, I decided to do a simple opportunity cost analysis. Granted, Buffett purchased this home for vacations not necessarily as an investment to grow his portfolio. Nonetheless, what if Buffet invested the same $150,000 in his company or the S&P 500?
Here is what I found:
Buffett’s Berkshire Hathaway, from 1965 to 2015, earned an average annual rate of return (with dividends reinvested) of 19.6%. If he invested the $150,000 at that rate over the same time period he owned the home (46years), the present value would be over $550,000,000. This exponential growth from $150k to $550 million exemplifies the power of compounding. Investing early, even small amounts pays huge dividends down the road.
Nevertheless, a 19.6% return is a remarkable feat. Here is a more realistic comparison:
It would take an average rate of return on the 150k of 9.8% for 46 years to equal 11-million-dollars. The average rate of return of the S&P 500 over the same period, with dividends reinvested, was 10.34%. At this rate, the 150K would be worth almost 14-million-dollars. That is three-million-dollars more. It is worthy to note that the 0.54% return over the course of 46 years made a three-million-dollar difference. This demonstrates how large an impact fees can have on an individual’s retirement portfolio. Be conscious of fees.
Was this Warren Buffett’s greatest investment? No, but a 9.8% return is great. Warren Buffett acquired this home for living. The point of this post is to encourage people to think twice before investing in real estate. It isn’t a sure bet, and you should consider the opportunity cost of choosing another investment vehicle. Once you throw in the various costs of ownership such as property taxes, maintenance, etc., other investment vehicles look even better. Further, owning physical property presents a problem of liquidity.
Personally, I believe homes are for living. From 1900-2012 the U.S. real estate index has returned 3.4%. This barely beat the average annual rate of inflation. I think the attractiveness for most people centers on tangibility, less volatility, feeling more in control, and the common “my parents purchased this home 40 years ago for 100K now it is worth 300K.” Of course, there are always exceptions, and people have made great livings investing in real estate.
That is my take.
Thanks. Matt.
Buffett’s Berkshire Hathaway, from 1965 to 2015, earned an average annual rate of return (with dividends reinvested) of 19.6%. If he invested the $150,000 at that rate over the same time period he owned the home (46years), the present value would be over $550,000,000. This exponential growth from $150k to $550 million exemplifies the power of compounding. Investing early, even small amounts pays huge dividends down the road.
Nevertheless, a 19.6% return is a remarkable feat. Here is a more realistic comparison:
It would take an average rate of return on the 150k of 9.8% for 46 years to equal 11-million-dollars. The average rate of return of the S&P 500 over the same period, with dividends reinvested, was 10.34%. At this rate, the 150K would be worth almost 14-million-dollars. That is three-million-dollars more. It is worthy to note that the 0.54% return over the course of 46 years made a three-million-dollar difference. This demonstrates how large an impact fees can have on an individual’s retirement portfolio. Be conscious of fees.
Was this Warren Buffett’s greatest investment? No, but a 9.8% return is great. Warren Buffett acquired this home for living. The point of this post is to encourage people to think twice before investing in real estate. It isn’t a sure bet, and you should consider the opportunity cost of choosing another investment vehicle. Once you throw in the various costs of ownership such as property taxes, maintenance, etc., other investment vehicles look even better. Further, owning physical property presents a problem of liquidity.
Personally, I believe homes are for living. From 1900-2012 the U.S. real estate index has returned 3.4%. This barely beat the average annual rate of inflation. I think the attractiveness for most people centers on tangibility, less volatility, feeling more in control, and the common “my parents purchased this home 40 years ago for 100K now it is worth 300K.” Of course, there are always exceptions, and people have made great livings investing in real estate.
That is my take.
Thanks. Matt.
Wednesday, July 27, 2016
Financial Success: The Marshmellow Test, Time, and the Rule of 72
This is my second post in a series on financial
planning. In my first post, I talked about
investing in yourself, which you are all doing by taking an interest in this
page. Today’s post will cover saving, time, and compounding, which Einstein
called the 8th wonder of the world.
Saving is a fundamental prerequisite for successful investing. By
saving and investing early and regularly, one can reap huge rewards down the
road. Saving isn’t about making a lot of money. It is about the willingness to
sacrifice or delay certain immediate gratification now for long term
results. This applies not only to investing but being successful in all life’s
endeavors. Consider this test which was
conducted in the late 1960’s by Walter Mischel, a psychologist at Stanford
University.
Professor Mischel called this experiment “The Marshmallow Experiment.” In his experiment, he placed children between the ages of four and six in a room with no distractions. He then offered them a treat of their choices such as a marshmallow or Oreo. He told the children he would be back in 15 minutes with another treat of their choice if they waited and did not eat their treat until he returned. The sample size was 653 children. At the end of the test, the majority ate the marshmallow within the 15 minutes. Roughly a third waited for the second reward. These results, nonetheless, are not the most interesting part of the test. The most interesting part of the experiment came from the data collected after reconnecting years later with these test.participants. Mischel, along with some help, was able to collect data on 185 of the original test participants. Ninety-four of them provided their S.A.T scores. Professor Mischel found that the people who deferred the immediate treat scored on average 210 points higher on the S.A.T than those who ate the treat in the original experiment. He also found correlations to obesity, response to stress and career success as a whole.
Professor Mischel called this experiment “The Marshmallow Experiment.” In his experiment, he placed children between the ages of four and six in a room with no distractions. He then offered them a treat of their choices such as a marshmallow or Oreo. He told the children he would be back in 15 minutes with another treat of their choice if they waited and did not eat their treat until he returned. The sample size was 653 children. At the end of the test, the majority ate the marshmallow within the 15 minutes. Roughly a third waited for the second reward. These results, nonetheless, are not the most interesting part of the test. The most interesting part of the experiment came from the data collected after reconnecting years later with these test.participants. Mischel, along with some help, was able to collect data on 185 of the original test participants. Ninety-four of them provided their S.A.T scores. Professor Mischel found that the people who deferred the immediate treat scored on average 210 points higher on the S.A.T than those who ate the treat in the original experiment. He also found correlations to obesity, response to stress and career success as a whole.
Early this month, Robert Cook, who
was a successful CEO and investor and a person that I consider one of my mentors,
shared this article.
The article revealed that most Americans are filled with regret when it comes
to financial matters:
Fully three
in four, in fact, admit they harbor financial regrets, according to a survey of more than 1,000 adults by Bankrate.com.
Their
biggest regret: not saving for retirement early enough (nearly one in five
Americans put this in the No. 1 spot). What’s more, among those 65 and up, 27%
said this was the biggest regret, compared with 17% of those aged 30 to 49.
Learning to sacrifice certain luxuries now and
save pays huge dividends. If a person saves $500 per month starting at age 23,
assuming a 7% return on investment, they will have $1,486,659 at the age of 65
despite only saving $246,000. On the other hand, if that same person waits
until 35 to start saving the same amount, he or she will only have $612,438 at
the age of 65. The person who starts at 35 will have to save over double ($1100)
per month to have the same amount of money at retirement.
How is this possible? Compounding. As stated previously,
Einstein called compounding the eighth wonder of the world. It is the Rule of
72 at work. The Rule of 72 is a simple rule with which every investor should be very familiar. This
general rule tells investors how often their money will double. If you take the
number 72 divided by the average rate of return on investment (interest rate),
you will get the number of years required for your money to double. For
example, if an investor earns and average annual rate of return of 8%, it will
take nine years for your initial investment to double.
Mr. Cook stated the following about the compounding
and the Rule of 72:
Accordingly, knowing enough not to panic when markets drop ~10% or so every few years is one fundamental aspect of personal investing success. And knowing how the rule of 72 can help you accumulate lots of assets down the road is also a fundamental aspect of long term oriented successful individual investing.
When Warren Buffet was asked for the single most powerful factor behind his investing success, he responded, “Compound interest.” It is what has made him a billionaire.
Summing Up:
Start saving early and often, buy solid blue chip companies that pay dividends, stay to course, and allow compound interest to work wonders.
Sunday, July 24, 2016
Fundamental Indicators
Focusing on certain metrics is one of the best ways for value investors to out preform the market as a whole. There is no exact way to analyze a company’s strength. Numbers aren’t everything and can be misleading at times. However, it is always a good idea to use fundamental analysis rather than solely gut instincts. Additionally, it is important to understand the significant difference between fundamental analysis and technical indicators. At the most basic level, fundamental analysis uses financial statements to judge the quality and price to own a business while technical analysis uses charts and figures to judge how other investors and traders view the business.
Expounding further, fundamental analysis looks at the balance sheet, cash flow statement, and income statement to determine a company’s value (intrinsic value). By using this method, investors can make determinations if the current trading price of the stock is above or below its intrinsic value. If the current price is below the intrinsic value, the stock is considered a good investment. Value investors are not as concerned about the supply and demand (fluctuations) of the stock market. They choose stocks based on their overall potential as a company. Consider this quote from Ben Graham:
But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.
On the other hand, technical traders believe that the strength of the company is reflected in the stock price. Therefore, they believe that the information that is most important can be found by analyzing charts. Value investors, including Warren Buffett, call this approach speculation. Ben Graham stated the following:
There is a lot of juggling with figures that can be done now as always; but none of these methods in itself gives a dependable results. To a great extent the figures selected are determined by the general attitude of the man who is selecting them, and that general attitude is very often determined in turn by what the stock market has been doing. When the stock market is at 750 you take an optimistic attitude and use some favorable figures; but if it should have a severe decline most people would jump back to the older and more conservative evaluation methods
Now, with respect to stock market forecasting as such, as a separate occupation or amusement, I don’t there is any good evidence that a recognized and publicly used method of stock market forecasting can be relied upon to be profitable. Let me illustrate what I mean by reference to the famous “Dow Theory”…I found that when I studied the record from 1898 to 1933, a period of about 35 years–the results from following this mechanical method were remarkably good…in the 1920’s and early 1930’s, the public’s interest in the Theory increased enormously…The Dow Theory became extremely popular after 1933. I studied the consequences of using exactly the same method in the market after 1933, and I found peculiarly enough that in no case in the next 25 years did one benefit through following the Dow signals mechanically.
I, along with Buffett and Graham, believe in value investing, and a good place to start is by looking at the metrics listed below. But, first, as a disclaimer, these metrics are extremely useful but by no means paint the entire picture. A former student of Graham recalls a story in this video where Graham spent an hour comparing companies “A” and “B.” The class determined that company “A” appeared cheaper than company “B” only to find out that that the two companies were in fact the same company. The important lesson here is to use the metrics below while keeping in mind the overall context of the company, industry, and historical data.
Finally, consider this quote by Graham, which is also in the link above. Graham said,"If you want to make money on Wall Street, you must have the proper physiological attitude. No one expressed it better than the Philosopher Spinoza. ‘You must look at things in the aspect of eternity.’”
*The links below lead to general definitions of suggested metrics to consider. In future posts, we will go into more detail about how to use these metrics.
Expounding further, fundamental analysis looks at the balance sheet, cash flow statement, and income statement to determine a company’s value (intrinsic value). By using this method, investors can make determinations if the current trading price of the stock is above or below its intrinsic value. If the current price is below the intrinsic value, the stock is considered a good investment. Value investors are not as concerned about the supply and demand (fluctuations) of the stock market. They choose stocks based on their overall potential as a company. Consider this quote from Ben Graham:
But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.
On the other hand, technical traders believe that the strength of the company is reflected in the stock price. Therefore, they believe that the information that is most important can be found by analyzing charts. Value investors, including Warren Buffett, call this approach speculation. Ben Graham stated the following:
There is a lot of juggling with figures that can be done now as always; but none of these methods in itself gives a dependable results. To a great extent the figures selected are determined by the general attitude of the man who is selecting them, and that general attitude is very often determined in turn by what the stock market has been doing. When the stock market is at 750 you take an optimistic attitude and use some favorable figures; but if it should have a severe decline most people would jump back to the older and more conservative evaluation methods
Now, with respect to stock market forecasting as such, as a separate occupation or amusement, I don’t there is any good evidence that a recognized and publicly used method of stock market forecasting can be relied upon to be profitable. Let me illustrate what I mean by reference to the famous “Dow Theory”…I found that when I studied the record from 1898 to 1933, a period of about 35 years–the results from following this mechanical method were remarkably good…in the 1920’s and early 1930’s, the public’s interest in the Theory increased enormously…The Dow Theory became extremely popular after 1933. I studied the consequences of using exactly the same method in the market after 1933, and I found peculiarly enough that in no case in the next 25 years did one benefit through following the Dow signals mechanically.
I, along with Buffett and Graham, believe in value investing, and a good place to start is by looking at the metrics listed below. But, first, as a disclaimer, these metrics are extremely useful but by no means paint the entire picture. A former student of Graham recalls a story in this video where Graham spent an hour comparing companies “A” and “B.” The class determined that company “A” appeared cheaper than company “B” only to find out that that the two companies were in fact the same company. The important lesson here is to use the metrics below while keeping in mind the overall context of the company, industry, and historical data.
Finally, consider this quote by Graham, which is also in the link above. Graham said,"If you want to make money on Wall Street, you must have the proper physiological attitude. No one expressed it better than the Philosopher Spinoza. ‘You must look at things in the aspect of eternity.’”
*The links below lead to general definitions of suggested metrics to consider. In future posts, we will go into more detail about how to use these metrics.
Friday, July 22, 2016
Invest In Yourself
I am starting a series of posts related to financial planning from the perspective of a ‘youngster.' But, first, I want to touch on the most important investment anyone of us will ever make. That is the investment in ourselves.
Ben Franklin stated, “An investment in knowledge pays the best interest.” Despite what people say, we have no idea what is going to happen with any of our tangible investments or the economy in general. The one thing you can control is the development of your personal brand. Your personal brand starts at a young age and is constantly changing. It includes far more than the school you attend, a discipline of study, and grades you earn. A personal brand is the perception others have about you; it is lasting and not necessarily dependent on external circumstances. If Bill Gates went broke and homeless, he could walk into nearly any building on Wall Street and receive a job paying at least six figures due to his technical expertise and intangible skill set.
A great place to start investing in yourself is education. This does not necessarily mean pursuing higher education. It doesn’t mean subjecting yourself to thousands of dollars of student debt. Higher education can be a profitable route assuming we are selecting degrees that have the best returns on investment, but there are other alternatives. For example, the internet and apprenticeships are powerful tools which can be used to build human capital and expertise.
Building a valuable personal brand is straightforward but not easy. It often requires delaying immediate gratification with the future in sight, resulting in long-term benefits. For example, setting down the video game controller and preparing for the S.A.T. will result in higher scores. Choosing to sacrifice eating desert and exercising instead results in weight loss. Saving a portion of your pay check for retirement rather than buying the latest new gadget will create a larger “nest egg” for retirement.
With that said, it is needs to be clear that making the appropriate choices is just part of the overall key to success. One should pursue their passions and not let their background be a hindrance. How a person is raised, the wealth of their family, their ethnicity, and other similar factors play an only a small role in being successful. In the book Outliers, author Malcolm Gladwell argues that it takes roughly 10,000 hours of practice to achieve mastery in a field. As Gladwell began to study violinists; he found that the elite violinist emerged around the age of 20 after 10,000 hours of practice. The average violinist only had roughly 4,000 hours of practice. One would expect those "naturally gifted" rise to the top faster. Yet, none of the statistical data gathered supported this view. Gladwell then began to study the lives of successful people such as Bill Gates, the Beetles, and Tiger Woods. In the case of Bill Gates, he was a college drop-out who most people probably credit his success to his natural "smarts." Yet, Gladwell found evidence pointing to another conclusion. Gates was able to acquire 10,000 hours of programming practice at a younger age than nearly anyone in the world. By the time he and his friend Paul Allen were ready to launch Microsoft, they both were experts in the field. Granted, there were outlying factors. Mainly, Paul Allen and Bill Gates had access to a computer terminal at their school, which was extremely rare in 1960s. However, both young men made the choice to pursue their interest in computers and to spend their time working with computers and programming. Gates would even sneak out of his house after bedtime to spend more time on the computer at school.
The bottom line is there is no substitute for hard work and there are no shortcuts. It should be comforting to know that natural ability, as well as other factors, play only a minor role in determining career success. The best part of being young is the ability to develop sound habits and mold yourself into the person that you want to become. When speaking to a group of college students, Warren Buffett told the class to look around the room and pick a person that they would want to invest 10% in and then think about the qualities of that person. Do they make the best grades, have the highest IQ, and have the most energy? Typically, the person you would select is a combination of intellect, motivation, and integrity. They are the leaders who can motivate other people to action. On the flip side, Buffet asked them who they would short 10%? What qualities do they have? He concluded the speech by telling them that the best part of them is they are young and able to implement any of these qualities in their life, and then said “the best part is you own 100% of you.”
Success starts with a choice. Robert Cook, the founder of this blog and successful CEO of multiple billion dollar corporations regularly reminds me of this fact, “I wish it were more complicated sometimes, but it’s not. Decide what you want to do, then get in position to do it, spend time on task, and develop a habit of improvement.” Set goals. Track progress, and continually reevaluate and move forward. We will all fail and make mistakes. The key is to acknowledge the error, analyze what went wrong, and learn from the experience. There is luck involved in success, however, luck favors those who work hard and prepare.
Along the way, keep this quote from Teddy Roosevelt in mind:
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.
Ben Franklin stated, “An investment in knowledge pays the best interest.” Despite what people say, we have no idea what is going to happen with any of our tangible investments or the economy in general. The one thing you can control is the development of your personal brand. Your personal brand starts at a young age and is constantly changing. It includes far more than the school you attend, a discipline of study, and grades you earn. A personal brand is the perception others have about you; it is lasting and not necessarily dependent on external circumstances. If Bill Gates went broke and homeless, he could walk into nearly any building on Wall Street and receive a job paying at least six figures due to his technical expertise and intangible skill set.
A great place to start investing in yourself is education. This does not necessarily mean pursuing higher education. It doesn’t mean subjecting yourself to thousands of dollars of student debt. Higher education can be a profitable route assuming we are selecting degrees that have the best returns on investment, but there are other alternatives. For example, the internet and apprenticeships are powerful tools which can be used to build human capital and expertise.
Building a valuable personal brand is straightforward but not easy. It often requires delaying immediate gratification with the future in sight, resulting in long-term benefits. For example, setting down the video game controller and preparing for the S.A.T. will result in higher scores. Choosing to sacrifice eating desert and exercising instead results in weight loss. Saving a portion of your pay check for retirement rather than buying the latest new gadget will create a larger “nest egg” for retirement.
With that said, it is needs to be clear that making the appropriate choices is just part of the overall key to success. One should pursue their passions and not let their background be a hindrance. How a person is raised, the wealth of their family, their ethnicity, and other similar factors play an only a small role in being successful. In the book Outliers, author Malcolm Gladwell argues that it takes roughly 10,000 hours of practice to achieve mastery in a field. As Gladwell began to study violinists; he found that the elite violinist emerged around the age of 20 after 10,000 hours of practice. The average violinist only had roughly 4,000 hours of practice. One would expect those "naturally gifted" rise to the top faster. Yet, none of the statistical data gathered supported this view. Gladwell then began to study the lives of successful people such as Bill Gates, the Beetles, and Tiger Woods. In the case of Bill Gates, he was a college drop-out who most people probably credit his success to his natural "smarts." Yet, Gladwell found evidence pointing to another conclusion. Gates was able to acquire 10,000 hours of programming practice at a younger age than nearly anyone in the world. By the time he and his friend Paul Allen were ready to launch Microsoft, they both were experts in the field. Granted, there were outlying factors. Mainly, Paul Allen and Bill Gates had access to a computer terminal at their school, which was extremely rare in 1960s. However, both young men made the choice to pursue their interest in computers and to spend their time working with computers and programming. Gates would even sneak out of his house after bedtime to spend more time on the computer at school.
The bottom line is there is no substitute for hard work and there are no shortcuts. It should be comforting to know that natural ability, as well as other factors, play only a minor role in determining career success. The best part of being young is the ability to develop sound habits and mold yourself into the person that you want to become. When speaking to a group of college students, Warren Buffett told the class to look around the room and pick a person that they would want to invest 10% in and then think about the qualities of that person. Do they make the best grades, have the highest IQ, and have the most energy? Typically, the person you would select is a combination of intellect, motivation, and integrity. They are the leaders who can motivate other people to action. On the flip side, Buffet asked them who they would short 10%? What qualities do they have? He concluded the speech by telling them that the best part of them is they are young and able to implement any of these qualities in their life, and then said “the best part is you own 100% of you.”
Success starts with a choice. Robert Cook, the founder of this blog and successful CEO of multiple billion dollar corporations regularly reminds me of this fact, “I wish it were more complicated sometimes, but it’s not. Decide what you want to do, then get in position to do it, spend time on task, and develop a habit of improvement.” Set goals. Track progress, and continually reevaluate and move forward. We will all fail and make mistakes. The key is to acknowledge the error, analyze what went wrong, and learn from the experience. There is luck involved in success, however, luck favors those who work hard and prepare.
Along the way, keep this quote from Teddy Roosevelt in mind:
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.
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