Many people want to be incredibly wealthy. (How you define “incredibly wealthy” is of course up to you–my “incredibly wealthy” may seem like pocket change to Floyd Mayweather, Jr.) Many people don’t hope to achieve that goal…but many people do. And there’s certainly nothing wrong with that. But you will never become incredibly wealthy by working for someone else. And you will never become incredibly wealthy by living a “safe” (more on that in a moment), “positive work-life balance,” time-clock-punching professional life. If you want to have a certain amount of money in the bank, then you are less likely to have it if you’re working for someone else. Even people with advanced degrees will earn an average income of less than six figures. When you work for someone else, you implicitly accept a limited upside and unlimited downside. Unless you somehow manage to be the employee version of a unicorn, you will never, ever become incredibly wealthy. In 2014, it took $127 million in adjusted gross income to make the top 400. (That sounds like a lot, but it just barely got you in the door. The average income of everyone on the list was $317 million.) Those are fun stats to whip out at parties, but what matters is how the top 400 made their money:
- Wages and salaries: 4.4 percent
- Interest: 4.2 percent
- Dividends: 10.9 percent
- Sale of Capital Assets: 65.2 percent
- Partnership and S Corp Net Income: 16.2 percent
The author points out the way to become incredibly wealthy is to start your own business that can be scaled to a significant size. Unless you’re an actor, or musician, or athlete–in which case you’re still an entrepreneur, because you’re in the business of you–starting a successful business is the only realistic way to become incredibly wealthy. If that is your goal, you’ll need to start yours. Today.
Value investing, and any type of investing, varies in execution with each person. There are, however, some general principles that are shared by all value investors. These principles have been spelled out by famed investors like Peter Lynch, Kenneth Fisher, Warren Buffet, John Templeton and others. In this article, we will look at these principles in the form of a value investor ‘s handbook.
Value investors agree that you should buy businesses and not stocks. Investors should look at the fundamentals of the company and not the trends in the stock price. You wouldn’t pick a spouse based solely on his or her shoes, and you shouldn’t pick a stock based on cursory research. You have to love the business you are buying, and that means being passionate about knowing everything about that company. You need to strip the attractive covering from a company’s financials and get down to the naked truth. Many companies look far better when you judge them on basic price to earnings (P/E), price to book (P/B) and earnings per share (EPS) ratios than they do when you look into the quality of the numbers that make up those figures. It’s best to invest in companies that you understand vs. being attracted to a company’s earnings. To quote Buffett: “look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.” You can get a sense of management’s honesty through reading several years’ worth of financials. How well did they deliver on past promises? If they failed, did they take responsibility, or gloss it over? A good manager will be focused on growing the company and not just its market value. Growth in the company increases the value to the shareholders. If you do happen to find undervalue stocks and if you have the liquidity available, then go ahead and buy as much as you can. Keep in mind that the market only matters when you enter or exit a position. When you sell an investment, you expose your portfolio to capital gains and usually have to sell a loser to balance it out. Both of these sales come with transaction costs that make the loss deeper and the gain smaller. By holding investments with unrealized gains for a long time, you forestall capital gains on your portfolio. The longer you avoid capital gains and transaction costs, the more you benefit from compounding. Value investing requires a lot of patience and discipline, but when you do so, the potential payoff is large. Ask yourself how does this fit into my personal investing strategy? Do I like investing in paper assets, real estate, businesses or commodities? What is my concentration level? What is my exit strategy? Most importantly what is my legacy? When you look at your life through the lens of legacy you won’t lose focus on your vision and goals.
Items in italics are direct quotes from the articles above
For this week, I’ve included Be Powerful –motivational speech video – T.D. Jakes from the Motiversity YouTube channel.
“If you think you know it all, you’re a fool for sure; real survivors learn wisdom from others.” Proverbs