Tag: Compounded Wisdom

Are you an investor or a speculator?

Are you an investor or a speculator?

If Buffett is the father of value investing then Benjamin Graham was the Godfather but what is the composite of a true investor? Graham wrote Security Analysis, the old testament of value investing along with Intelligent Investor.

Find out how the Godfather fared in the stock market crash of 1929, here.

According to Graham there are two types of investors and spotting your principles early will save you a lot of money in the long run.

Investing vs speculating

The two types of people Graham noticed in the market were investors and speculators. What’s the difference between the two? An investor sees the stock for what it is: ownership of a business which they believe will give them a return in the future. An investor will decide to invest only after performing a fundamental analysis of the intrinsic value of the business. The speculator looks at the price of a stock and decides to invest based on the assumption that someone will be crazy enough to pay more in the future.

How to spot if you are a speculator

Here are some of the traits of a speculator:

  • Speculators only invest in hot new issues or business trends. Snapchat and Tesla spring to mind.
  • A Speculator doesn’t analyse the businesses at all.
  • They do not consider risk or loss of their principle and instead focus on their potential return.
  • And they don’t look at financial reports. If they do, they don’t look at the financial sections in the annual reports and they’ll sell if it sounds like bad news.
  • All speculators focus on the next day, week or month.
  • Most speculators are nervous about their decision and they look to the market for validation. “My stock has gone down 10%, I was wrong, I need to sell ASAP.”
  • They buy and sell based on no new information.
  • Some Speculators try to time the market and are obsessed with what the finance media says.
  • Most speculators have massive FOMO (fear of missing out) and jump in at the wrong time.

There are many people who make a career out of the above but they are usually very skilled traders with a unique set of abilities. The intelligent speculators usually profit from the stupid money though.

How to spot if you are an investor

  • Investors have no problem with being a contrarian and will happily invest in unloved businesses/ industries.
  • True investors can’t analyse a business enough, furthermore they are looking for hidden assets and liabilities and evaluating the fair value.
  • They are seeking opportunities to buy high quality shares with strong historical earnings growth and good future potential at undervalued prices relative to long-term fundamentals.
  • Most investors put quarterly and annual report dates into their calendar and enjoy reading them – regardless of the content.
  • You won’t sell based on one, two or even four bad quarters but you will reassess the fair value of the stock and only act after thought, analysis and careful consideration.
  • They look to hold a stock for more than 5 years.
  • Investors are calm about their decisions because they are based on sound fundamental analysis. They are willing to be patient and wait for the price to reflect the businesses intrinsic value.
  • Investors avoid investments that do not offer an acceptable risk-adjusted return and may risk the principle.
  • They continue to buy when their stock choice has fallen by 10%, 20% or even 50%.
  • Investors consider market gyrations and are ready to poise if the market is out of kilter and speculators are panic selling. They will consider the market and economy but it will have little effect on their investing decisions.
  • Investors observe financial ratios such as price/earnings, price/book, ROE, EV and dividend yields.

Price is what you pay - investor warren Buffet

Next time we will look at whether you are an active investor or a passive investor. If you scored highly on the speculator front then this blog will certainly aim to guide you away from such behaviour. It’s so important to take advantage of this advice now whilst time and compounding is on your side.

Speculating £1,000 today and losing it all is costing you £117,000 if you had placed it into a low-cost index fund which tracked the market at 10% with reinvested dividends for 50 years…

Not a difficult decision when you look at it like that.

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Undervalued stocks can still lose 70%

Undervalued stocks can still lose 70%

My portfolio consists of many undervalued stocks which I could argue were worth at least double their current prices. Despite this, I always wondered how they might fare in a 1929 type crash.

If you hadn’t guessed by now, I’m a value investor. Why? It’s a time-tested strategy and it has made people from Graham and Doddsville an awful lot of money. Its methodology is intelligent and based on fundamental business analysis. I urge all Money Generation XYZ readers to follow this system of investing and ignore everything else. Forget binary trading, overlook Fibonacci retracements and don’t time the market. Just focus on companies with fortress-like balance sheets, strong historical earnings and a durable economic moat trading at a discount to fair value.

Discover whether you are an investor or a speculator, here.

Undervalued stocks during a crash

To see how value investing performed during 1929 I had to turn to the old testament of value investing: Benjamin Graham’s and David Dodd’s Security Analysis. Here’s a window into the life of a value investor in 1929.

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Graham was convinced that, because his stocks were worth less than the cash on the companies’ balance sheets, he couldn’t be harmed by the impending crash which he foresaw. So much so, that he used leverage to amplify his potential returns. In 1929 Graham lost 20% of his partnership’s capital – pretty impressive all things considered – another 50% in 1930, 16% in 1931 and 3% in 1932. A cumulative loss of roughly 70%.

“I blamed myself not so much for my failure to protect myself against the disaster I had been predicting, as for having slipped into an extravagant way of life which I hadn’t the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions.”

– Benjamin Graham.

There are tons of lessons here. It certainly shows that a large margin of safety cannot protect against a crash. Here are a few tips to counter the mistakes that Benjamin made back in 1929.

 Live within your means

Ask yourself, if my portfolio dropped by 70% tomorrow then I would I care? I wouldn’t. I’m still entitled to the same earnings as before and my ownership of the company hasn’t changed. I am mentally and financially well placed to cope with such market extremities but they will certainly be testing times if you aren’t.

Before you invest, set aside capital to cover between 3-6 months of bills in the event that you lose your job. For me, this buffer is £3,600. This sounds like a lot now but as you grow your net worth it’ll be a smaller proportion. Save like a pro and you’ll have that money in no time. Try not to buy a car on finance either, it’s a sure-fire way to erode your potential savings and adds an extra layer of risk to your situation.

 Never use leverage

Leverage no doubt amplified Graham’s losses. Debt masquerades itself as the answer to bountiful returns when times are good and reveals itself as the devil in disguise when times turn bad. Times will always turn bad. Investing on a margin will drive you to make really irrational investment decisions. See what Warren Buffett says about leverage here. If you want no assets, then leverage up baby!

Warren Buffett leverage quote

Materialism isn’t the answer to happiness

Buying that car on finance, that expensive watch or that big house with a 5% deposit is fine but it will offer very little satisfaction in the long run. When things go belly up they will cause a strain on the important things in life such as your relationships and mental well-being.

Money can certainly play a role in happiness and stop a poor standard of living but there is a threshold according to behavioral economists. Focus on living comfortably and drawing happiness from the people and the world around you.

Collect moments not things - materialism

Don’t time the market, position yourself

Look, what’s the point in standing on the side-lines of the market in the case of a crash? One day you will be right but you would have been wrong every day for the last 10 years. Graham predicted a market crash but he did not protect his portfolio or his personal finances. That’s where he went wrong. A crash may destroy the value of your portfolio regardless of whether it’s undervalued or not.

To be fair to Graham, he didn’t know that his undervalued stocks would crash just as hard as everything else. He had an excuse – we don’t…

Ned stark meme "brace yourself"

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Guru Lessons – 9 quotes from Warren Buffett to make you rich

Guru Lessons – 9 quotes from Warren Buffett to make you rich

Warren Buffett has guided my own financial principles and people who emulate him will no doubt become wiser and richer.

Buffett is one of the richest men in the world and started from nothing, just like you and me, so his words carry the weight of gold in the investing domain.

Here are some of his top quotes.

Investing is easier, when you know what you’re investing in

“Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

Buffett doesn’t do tech investing (although he is getting warmer to the idea with his trades in Apple and IBM) because he doesn’t believe that they fall in his circle of competence. Who blames him? How many people get that Taptica drives revenues through PPC and other online advertising devices? It doesn’t mean that tech is a bad investment, just make sure you understand how the business makes its money!

Rising stock prices equates to less of a discount

“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. … Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

Remember, a market crash is like a great big fire sale. Think about going to your favourite store which is holding a sale with 50% off all items and you have £100 to spend. What happens? You get double the amount of items.

News agencies tend to misunderstand that lower prices today equates to higher returns tomorrow. Instead, they strike fear and can paralyse an otherwise intelligent population.

Are you an investor or a speculator? 

“Consciously paying more for a stock than its calculated value — in the hope that it can soon be sold for a still-higher price — should be labeled speculation (which is neither illegal, immoral nor — in our view — financially fattening).”

fundamental analysis is key here. Don’t worry, I’ll teach you my methods of evaluating a stock throughout this blog. However, If you are investing in Tesla because EVs are taking off then you wouldn’t have noticed how fundamentally overvalued it is. In fact, it’s due a major correction. The price may rise further but only because other speculators are more ignorant than you.

Debt is financial suicide 

“I will guarantee if you run up big credit card debts, you will be in trouble probably the rest of your life in terms of your financial situation. On the other hand, if you get ahead of the game, even on a modest scale, so that money is coming in from investing and people owe you money or equities owe you ownership, you’ll be way ahead of the game as opposed to you owing your creditors every month. So my advice to you is: if you can’t pay for it, don’t buy it.”

If, like many other Millennials, you are already in debt then fear not because there is a way out but it will require a little dedication and discipline. I’ll aim to create a debt guide for you guys in due course. Just remember, interest rates can only get higher which will make your situation worse so act now.

Imitate the habits of the people who you admire

“Chains of habit are too light to be felt until they are too heavy to be broken. … At your age you can have any habits, any patterns of behavior that you wish. It’s a matter of what you decide.”

Beautifully articulated, no further comment.

Trade regularly if you want to lose your returns 

“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to ‘time’ market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s toolkit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator — and definitely not Charlie nor I — can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”

I owned a fundamentally strong portfolio when Brexit happened, I owned the same portfolio when Trump happened. According to economists my portfolio should have been obliterated in both instances. Instead it gained 27%. Stop trying to time the market – a position is only a loss if you sell it. Just make sure you have enough personal cash on the sidelines for a market downturn and a portion to buy the bargains of course!

Make money whilst you sleep, literally!

“Our portfolio shows little change: We continue to make more money when snoring than when active. … Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market.”

If you picked 5 of your favourite stocks based on sound quantitative and qualitative reasoning for the next five years and never looked at them until year 5 I can assure you that you’d be presently surprised when you reviewed them 5 years later. I found an old dummy trade account that I opened in 2012 with £100,000 – 3 years later it had a value of £250,435 sitting in it. It’s now worth £390,890. A 58% CAGR and exactly the same stocks.

Investment managers don’t beat markets

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds. … My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.”

Who needs to look for the next Amazon when you could have it by investing in the whole market and still beat most of the managers around! Admittedly, Buffett has historically beat the market so purchase some Berkshire Hathaway B shares too! (Only buy them when they are trading at a P/B ratio of 1.20)

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

 Prosperity always prospers

“Who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see.

“Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket). The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.”

So stop worrying and think of the bigger picture. We are advancing quicker than we can comprehend and productivity, the key driver to economic growth, will only boom with technological advancements such as robots, free energy and artificial intelligence. Trust me on this.

Forecasters are fortune tellers in suits

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

You may assess the long-term market forecast because an overvalued market will impair your long-term return. You should continue to scour the market for undervalued issues in any circumstance. You’ll naturally find fewer opportunities in an overvalued market and will therefore buy less. If someone tells you that there will be a crash tomorrow, rejoice and prepare yourself for the bargains.

Buy his book which I rated 5 ⭐️ here.

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Money makes the world go round

Money makes the world go round

Welcome to Money Generation XYZ

This is the blog which will enable you to compound your wisdom at an annualised rate of 24%. I have studied the theory of making money since I was 13 and have put this theory into continual practice. This relentless pursuit in understanding how the financial markets work, how to analyze businesses and how to make money make more money allowed me to emerge from the financial fog richer in both knowledge and wealth.

I now want a platform to teach others

Why pursue money? One thing I have learned is that money really does make the world go round. We are absolutely controlled by finance. Central bankers don’t pull levers for no reason, they pull interest rate levers to make you spend or save, politicians pull fiscal levers to guide your financial decisions. This is not some grand conspiracy, we are all participating in a finely tuned machine and it is beneficial to society and the advancement of humanity (most of the time). Who wants to be at the mercy of the above? We need to take back control.

My desire is to be a free financial spirit

Making money has been a pursuit since childhood. It started when I began collecting coins. I managed to hijack collecting coins by purchasing a job lot of coins off eBay. I’m impatient like that. Who’s got time to wait for your parents to bring you a dollar from America anyway? I then moved onto selling multi-pack sweets individually on the playground. Fast forward twelve years – I am a successful Ebay and Amazon seller, a Finance Analyst and a side hustler.

Having a 9-5  job is rather like coin collecting – too slow

If I collect an average UK wage of £27,600 with a 2% pay rise each year and save 27% of that income after all expenses (my FY17 personal savings rate) I’ll be earning £60,000 and I’ll have saved circa £480,000 by the time I was 65. Sounds great, however that means I save £11,700 on average per year. Average UK house prices will have grown from £216,000 to £631,000 (assuming that house prices follow the 100 year annualized historical increase of 2.79%). Notice the key word here? Average.

Freddos will cost 65 pence!

£480,000 buys me 1,920,000 freddos today however in future I’ll only be able to purchase 738,461 freddos with the same amount. This is called the time value of money and this is a fundamental axiom of making money. It is why people who have worked all their life are still working. I’ll teach you all about it on our journey where I intend to hijack the art of collecting paychecks by earning more on the side through investing and money-making projects. I think you should too.

This blog needs to act as a sanity check

My fear is not failing to make enough money, it’s that I’ll never know when to stop. Afterall when is  enough, enough? We all admire Warren Buffet but he isn’t free. Warren Buffett has been shackled to the complex of money-making all of his life and I get the impression that he regrets the opportunity cost of his time with his family. Just read The Snowball: Warren Buffett and the Business of Life for more on that.

That’s where you come in. You can be my guide, you can tell me when enough is enough.

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