Value Investing Strategies. PART 1

Value Investing.

By ADAM HAYES.

What Is Value Investing?
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices—on sale.


Warren Buffett is probably the best-known value investor today, but there are many others, including Benjamin Graham (Buffet's professor and mentor), David Dodd, Charlie Munger, Christopher Browne (another Graham student), and billionaire hedge-fund manager, Seth Klarman.


KEY TAKEAWAYS.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
Value investors actively ferret out stocks they think the stock market is underestimating.
Value investors use financial analysis, don't follow the herd, and are long-term investors of quality companies.
How Value Investing Works
The basic concept behind every-day value investing is straightforward: If you know the true value of something, you can save a lot of money when you buy it on sale. Most folks would agree that whether you buy a new TV on sale, or at full price, you’re getting the same TV with the same screen size and picture quality.


Stocks work in a similar manner, meaning the company’s stock price can change even when the company’s value or valuation has remained the same. Stocks, like TVs, go through periods of higher and lower demand leading to price fluctuations—but that doesn't change what you’re getting for your money.

Just like savvy shoppers would argue that it makes no sense to pay full price for a TV since TVs go on sale several times a year, savvy value investors believe stocks work the same way. Of course, unlike TVs, stocks won't go on sale at predictable times of the year such as Black Friday, and their sale prices won’t be advertised.

Value investing is the process of doing detective work to find these secret sales on stocks and buying them at a discount compared to how the market values them. In return for buying and holding these value stocks for the long-term, investors can be rewarded handsomely.


 Value investing developed from a concept by Columbia Business School professors Benjamin Graham and David Dodd in 1934 and was popularized in Graham's 1949 book, The Intelligent Investor.
Intrinsic Value and Value Investing
In the stock market, the equivalent of a stock being cheap or discounted is when its shares are undervalued. Value investors hope to profit from shares they perceive to be deeply discounted.


Investors use various metrics to attempt to find the valuation or intrinsic value of a stock. Intrinsic value is a combination of using financial analysis such as studying a company's financial performance, revenue, earnings, cash flow, and profit as well as fundamental factors, including the company's brand, business model, target market, and competitive advantage. Some metrics used to value a company's stock include:

Price-to-book (P/B) or book value or, which measures the value of a company's assets and compares them to the stock price. If the price is lower than the value of the assets, the stock is undervalued, assuming the company is not in financial hardship.

Price-to-earnings (P/E), which shows the company's track record for earnings to determine if the stock price is not reflecting all of the earnings or undervalued.

Free cash flow, which is the cash generated from a company's revenue or operations after the costs of expenditures have been subtracted. Free cash flow is the cash remaining after expenses have been paid, including operating expenses and large purchases called capital expenditures, which is the purchase of assets like equipment or upgrading a manufacturing plant. If a company is generating free cash flow, it'll have money left over to invest in the future of the business, pay off debt, pay dividends or rewards to shareholders, and issue share buybacks.

Of course, there are many other metrics used in the analysis, including analyzing debt, equity, sales, and revenue growth. After reviewing these metrics, the value investor can decide to purchase shares if the comparative value—the stock's current price vis-a-vis its company's intrinsic worth—is attractive enough.

Margin of Safety.
Value investors require some room for error in their estimation of value, and they often set their own "margin of safety," based on their particular risk tolerance. The margin of safety principle, one of the keys to successful value investing, is based on the premise that buying stocks at bargain prices gives you a better chance at earning a profit later when you sell them. The margin of safety also makes you less likely to lose money if the stock doesn’t perform as you had expected.

Value investors use the same sort of reasoning. If a stock is worth $100 and you buy it for $66, you’ll make a profit of $34 simply by waiting for the stock’s price to rise to the $100 true value. On top of that, the company might grow and become more valuable, giving you a chance to make even more money. If the stock’s price rises to $110, you’ll make $44 since you bought the stock on sale. If you had purchased it at its full price of $100, you would only make a $10 profit. Benjamin Graham, the father of value investing, only bought stocks when they were priced at two-thirds or less of their intrinsic value. This was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside.

Markets are not Efficient.
Value investors don’t believe in the efficient-market hypothesis, which says that stock prices already take all information about a company into account, so their price always reflects their value. Instead, value investors believe that stocks may be over- or underpriced for a variety of reasons.

For example, a stock might be underpriced because the economy is performing poorly and investors are panicking and selling (as was the case during the Great Recession). Or a stock might be overpriced because investors have gotten too excited about an unproven new technology (as was the case of the dot-com bubble). Psychological biases can push a stock price up or down based on news, such as disappointing or unexpected earnings announcements, product recalls, or litigation. Stocks may also be undervalued because they trade under the radar, meaning they're inadequately covered by analysts and the media.

Don't Follow the Herd.
Value investors possess many characteristics of contrarians —they don’t follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they’re often selling or standing back. When everyone else is selling, they’re buying or holding. Value investors don’t buy trendy stocks (because they’re typically overpriced). Instead, they invest in companies that aren’t household names if the financials check out. They also take a second look at stocks that are household names when those stocks’ prices have plummeted, believing such companies can recover from setbacks if their fundamentals remain strong and their products and services still have quality.

Value investors only care about a stock’s intrinsic value. They think about buying a stock for what it actually is: a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.

Value Investing Requires Diligence & Patience.
Estimating the true intrinsic value of a stock involves some financial analysis but also involves a fair amount of subjectivity—meaning at times, it can be more of an art than a science. Two different investors can analyze the exact same valuation data on a company and arrive at different decisions.

Some investors, who look only at existing financials, don't put much faith in estimating future growth. Other value investors focus primarily on a company's future growth potential and estimated cash flows. And some do both: Noted value investment gurus Warren Buffett and Peter Lynch, who ran Fidelity Investment's Magellan Fund for several years are both known for analyzing financial statements and looking at valuation multiples, in order to identify cases where the market has mispriced stocks.

Despite different approaches, the underlying logic of value investing is to purchase assets for less than they are currently worth, hold them for the long-term, and profit when they return to the intrinsic value or above. It doesn't provide instant gratification. You can’t expect to buy a stock for $50 on Tuesday and sell it for $100 on Thursday. Instead, you may have to wait years before your stock investments pay off, and you will occasionally lose money. The good news is that, for most investors, long-term capital gains are taxed at a lower rate than short-term investment gains.

Like all investment strategies, you must have the patience and diligence to stick with your investment philosophy. Some stocks you might want to buy because the fundamentals are sound, but you’ll have to wait if it’s overpriced. You’ll want to buy the stock that is most attractively priced at that moment, and if no stocks meet your criteria, you'll have to sit and wait and let your cash sit idle until an opportunity arises.

One-Third.
Value investing guru Benjamin Graham argued that an undervalued stock is priced at least a third below its intrinsic value.

Why Stocks Become Undervalued.
If you don’t believe in the efficient market hypothesis, you can identify reasons why stocks might be trading below their intrinsic value. Here are a few factors that can drag a stock’s price down and make it undervalued.

Market Moves and Herd Mentality.
Sometimes people invest irrationally based on psychological biases rather than market fundamentals. When a specific stock’s price is rising or when the overall market is rising, they buy. They see that if they had invested 12 weeks ago, they could have earned 15% by now, and they develop a fear of missing out. Conversely, when a stock’s price is falling or when the overall market is declining, loss aversion compels people to sell their stocks. So instead of keeping their losses on paper and waiting for the market to change directions, they accept a certain loss by selling. Such investor behavior is so widespread that it affects the prices of individual stocks, exacerbating both upward and downward market movements creating excessive moves.

Market Crashes.
When the market reaches an unbelievable high, it usually results in a bubble. But because the levels are unsustainable, investors end up panicking, leading to a massive selloff. This results in a market crash. That's what happened in the early 2000s with the dotcom bubble, when the values of tech stocks shot up beyond what the companies were worth. We saw the same thing happened when the housing bubble burst and the market crashed in the mid-2000s.

Unnoticed and Unglamorous Stocks.
Look beyond what you're hearing in the news. You may find really great investment opportunities in undervalued stocks that may not be on people's radars like small caps or even foreign stocks. Most investors want in on the next big thing such as a technology startup instead of a boring, established consumer durables manufacturer. For example, stocks like Facebook, Apple, and Google are more likely to be affected by herd-mentality investing than conglomerates like Proctor & Gamble or Johnson & Johnson.

Bad News.
Even good companies face setbacks, such as litigation and recalls. However, just because a company experiences one negative event doesn’t mean that the company isn’t still fundamentally valuable or that its stock won’t bounce back. In other cases, there may be a segment or division that puts a dent in a company's profitability. But that can change if the company decides to dispose of or close that arm of the business.

Analysts do not have a great track record for predicting the future, and yet investors often panic and sell when a company announces earnings that are lower than analysts’ expectations. But value investors who can see beyond the downgrades and negative news can buy stock at deeper discounts because they are able to recognize a company's long-term value.

Cyclicality​.
Cyclicality is defined as the fluctuations that affect a business. Companies are not immune to ups and downs in the economic cycle, whether that's seasonality and the time of year, or consumer attitudes and moods. All of this can affect profit levels and the price of a company's stock, but it doesn't affect the company's value in the long term.

July 25, 2020

Value Investing Strategies PART 2

Value Investing Strategies.

By ADAM HAYES.
The key to buying an undervalued stock is to thoroughly research the company and make common-sense decisions. Value investor Christopher H. Browne recommends asking if a company is likely to increase its revenue via the following methods:

Raising prices on products.
Increasing sales figures.
Decreasing expenses.
Selling off or closing down unprofitable divisions.

Browne also suggests studying a company's competitors to evaluate its future growth prospects. But the answers to all of these questions tend to be speculative, without any real supportive numerical data. Simply put: There are no quantitative software programs yet available to help achieve these answers, which makes value stock investing somewhat of a grand guessing game. For this reason, Warren Buffett recommends investing only in industries you have personally worked in, or whose consumer goods you are familiar with, like cars, clothes, appliances, and food.

One thing investors can do is choose the stocks of companies that sell high-demand products and services. While it's difficult to predict when innovative new products will capture market share, it's easy to gauge how long a company has been in business and study how it has adapted to challenges over time.

Insider Buying and Selling.
For our purposes, insiders are the company’s senior managers and directors, plus any shareholders who own at least 10% of the company’s stock. A company’s managers and directors have unique knowledge about the companies they run, so if they are purchasing its stock, it’s reasonable to assume that the company’s prospects look favorable.

Likewise, investors who own at least 10% of a company’s stock wouldn’t have bought so much if they didn’t see profit potential. Conversely, a sale of stock by an insider doesn’t necessarily point to bad news about the company’s anticipated performance — the insider might simply need cash for any number of personal reasons. Nonetheless, if mass sell-offs are occurring by insiders, such a situation may warrant further in-depth analysis of the reason behind the sale.

Analyze Earnings Reports.
At some point, value investors have to look at a company's financials to see how its performing and compare it to industry peers.

Financial reports present a company’s annual and quarterly performance results. The annual report is SEC form 10-K, and the quarterly report is SEC form 10-Q. Companies are required to file these reports with the Securities and Exchange Commission (SEC). You can find them at the SEC website or the company’s investor relations page on their website.

You can learn a lot from a company’s annual report. It will explain the products and services offered as well as where the company is heading.

Analyze Financial Statements.
A company’s balance sheet provides a big picture of the company’s financial condition. The balance sheet consists of two sections, one listing the company’s assets and another listing its liabilities and equity. The assets section is broken down into a company’s cash and cash equivalents; investments; accounts receivable or money owed from customers, inventories, and fixed assets such as plant and equipment.

The liabilities section lists the company’s accounts payable or money owed, accrued liabilities, short-term debt, and long-term debt. The shareholders’ equity section reflects how much money is invested in the company, how many shares outstanding, and how much the company has as retained earnings. Retained earnings is a type of savings account that holds the cumulative profits from the company. Retained earnings are used to pay dividends, for example, and is considered a sign of a healthy, profitable company.

The income statement tells you how much revenue is being generated, the company's expenses, and profits. Looking at the annual income statement rather than a quarterly statement will give you a better idea of the company’s overall position since many companies experience fluctuations in sales volume during the year.

 Studies have consistently found that value stocks outperform growth stocks and the market as a whole, over the long-term.
Couch Potato Value Investing
It is possible to become a value investor without ever reading a 10-K. Couch potato investing is a passive strategy of buying and holding a few investing vehicles for which someone else has already done the investment analysis—i.e., mutual funds or exchange-traded funds. In the case of value investing, those funds would be those that follow the value strategy and buy value stocks—or track the moves of high-profile value investors, like Warren Buffet. Investors can buy shares of his holding company, Berkshire Hathaway, which owns or has an interest in dozens of companies the Oracle of Omaha has researched and evaluated.

Risks with Value Investing.
As with any investment strategy, there's the risk of loss with value investing despite it being a low-to-medium-risk strategy. Below we highlight a few of those risks and why losses can occur.

The Figures are Important.
Many investors use financial statements when they make value investing decisions. So if you rely on your own analysis, make sure you have the most updated information and that your calculations are accurate. If not, you may end up making a poor investment or miss out on a great one. If you aren’t yet confident in your ability to read and analyze financial statements and reports, keep studying these subjects and don’t place any trades until you’re truly ready. (For more on this subject, learn more about financial statements.)

One strategy is to read the footnotes. These are the notes in a Form 10-K or Form 10-Q that explain a company’s financial statements in greater detail. The notes follow the statements and explain the company’s accounting methods and elaborate on reported results. If the footnotes are unintelligible or the information they present seems unreasonable, you’ll have a better idea of whether to pass on the stock.

Extraordinary Gains or Losses.
There are some incidents that may show up on a company's income statement that should be considered exceptions or extraordinary. These are generally beyond the company's control and are called extraordinary item—gain or extraordinary item—loss. Some examples include lawsuits, restructuring, or even a natural disaster. If you exclude these from your analysis, you can probably get a sense of the company's future performance.

However, think critically about these items, and use your judgment. If a company has a pattern of reporting the same extraordinary item year after year, it might not be too extraordinary. Also, if there are unexpected losses year after year, this can be a sign that the company is having financial problems. Extraordinary items are supposed to be unusual and nonrecurring. Also, beware of a pattern of write-offs.

Ignoring Ratio Analysis Flaws.
Earlier sections of this tutorial have discussed the calculation of various financial ratios that help investors diagnose a company’s financial health. There isn't just one way to determine financial ratios, which can be fairly problematic. The following can affect how the ratios can be interpreted:

Ratios can be determined using before-tax or after-tax numbers.
Some ratios don't give accurate results but lead to estimations.
Depending on how the term earnings are defined, a company's earnings per share (EPS) may differ.
Comparing different companies by their ratios—even if the ratios are the same—may be difficult since companies have different accounting practices. (Learn more about when a company recognizes profits in Understanding The Income Statement.)

Buying Overvalued Stock.
Overpaying for a stock is one of the main risks for value investors. You can risk losing part or all of your money if you overpay. The same goes if you buy a stock close to its fair market value. Buying a stock that's undervalued means your risk of losing money is reduced, even when the company doesn't do well.

Recall that one of the fundamental principles of value investing is to build a margin of safety into all your investments. This means purchasing stocks at a price of around two-thirds or less of their intrinsic value. Value investors want to risk as little capital as possible in potentially overvalued assets, so they try not to overpay for investments.

Not Diversifying.
Conventional investment wisdom says that investing in individual stocks can be a high-risk strategy. Instead, we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors. However, some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks, as long as you choose stocks that represent different industries and different sectors of the economy. Value investor and investment manager Christopher H. Browne recommends owning a minimum of 10 stocks in his “Little Book of Value Investing.” According to Benjamin Graham, a famous value investor, you should look at choosing 10 to 30 stocks if you want to diversify your holdings.

Another set of experts, though, say differently. If you want to get big returns, try choosing just a few stocks, according to the authors of the second edition of “Value Investing for Dummies.” They say having more stocks in your portfolio will probably lead to an average return. Of course, this advice assumes that you are great at choosing winners, which may not be the case, particularly if you are a value-investing novice.

Listening to Your Emotions.
It is difficult to ignore your emotions when making investment decisions. Even if you can take a detached, critical standpoint when evaluating numbers, fear and excitement may creep in when it comes time to actually use part of your hard-earned savings to purchase a stock. More importantly, once you have purchased the stock, you may be tempted to sell it if the price falls. Keep in mind that the point of value investing is to resist the temptation to panic and go with the herd. So don't fall into the trap of buying when share prices rise and selling when they drop. Such behavior will obliterate your returns. (Playing follow-the-leader in investing can quickly become a dangerous game.

Example of a Value Investment.
Value investors seek to profit from market overreactions that usually come from the release of a quarterly earnings report. As a historical real example, on May 4, 2016, Fitbit released its Q1 2016 earnings report and saw a sharp decline in after-hours trading. After the flurry was over, the company lost nearly 19% of its value. However, while large decreases in a company's share price are not uncommon after the release of an earnings report, Fitbit not only met analyst expectations for the quarter but even increased guidance for 2016.

The company earned $505.4 million in revenue for the first quarter of 2016, up more than 50% when compared to the same time period from one year ago. Further, Fitbit expects to generate between $565 million and $585 million in the second quarter of 2016, which is above the $531 million forecasted by analysts. The company looks to be strong and growing. However, since Fitbit invested heavily in research and development costs in the first quarter of the year, earnings per share (EPS) declined when compared to a year ago. This is all average investors needed to jump on Fitbit, selling off enough shares to cause the price to decline. However, a value investor looks at the fundamentals of Fitbit and understands it is an undervalued security, poised to potentially increase in the future.

The Bottom Line.
Value investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” You will probably want to sell your stocks when it comes time to make a major purchase or retire, but by holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (and the price you paid for them).

July 25, 2020

Ten Ways to Create Shareholder Value (part 2).

Ten Ways to Create Shareholder Value (part 2).

by Alfred Rappaport.
Principle 4.
Carry only assets that maximize value.
The fourth principle takes value creation to a new level because it guides the choice of business model that value-conscious companies will adopt. There are two parts to this principle.

First, value-oriented companies regularly monitor whether there are buyers willing to pay a meaningful premium over the estimated cash flow value to the company for its business units, brands, real estate, and other detachable assets. Such an analysis is clearly a political minefield for businesses that are performing relatively well against projections or competitors but are clearly more valuable in the hands of others. Yet failure to exploit such opportunities can seriously compromise shareholder value.
A recent example is Kmart. ESL Investments, a hedge fund operated by Edward Lampert, gained control of Kmart for less than $1 billion when it was under bankruptcy protection in 2002 and when its shares were trading at less than $1. Lampert was able to recoup almost his entire investment by selling stores to Home Depot and Sears, Roebuck. In addition, he closed underperforming stores, focused on profitability by reducing capital spending and inventory levels, and eliminated Kmart’s traditional clearance sales. By the end of 2003, shares were trading at about $30; in the following year they surged to $100; and, in a deal announced in November 2004, they were used to acquire Sears. Former shareholders of Kmart are justifiably asking why the previous management was unable to similarly reinvigorate the company and why they had to liquidate their shares at distressed prices.
Second, companies can reduce the capital they employ and increase value in two ways: by focusing on high value-added activities (such as research, design, and marketing) where they enjoy a comparative advantage and by outsourcing low value-added activities (like manufacturing) when these activities can be reliably performed by others at lower cost. Examples that come to mind include Apple Computer, whose iPod is designed in Cupertino, California, and manufactured in Taiwan, and hotel companies such as Hilton Hospitality and Marriott International, which manage hotels without owning them. And then there’s Dell’s well-chronicled direct-to-customer, custom PC assembly business model, which minimizes the capital the company needs to invest in a sales force and distribution, as well as the need to carry inventories and invest in manufacturing facilities.

Principle 5.
Return cash to shareholders when there are no credible value-creating opportunities to invest in the business.
Even companies that base their strategic decision making on sound value-creation principles can slip up when it comes to decisions about cash distribution. The importance of adhering to the fifth principle has never been greater: As of the first quarter of 2006, industrial companies in the S&P 500 were sitting on more than $643 billion in cash—an amount that is likely to grow as companies continue to generate positive free cash flows at record levels.

Value-conscious companies with large amounts of excess cash and only limited value-creating investment opportunities return the money to shareholders through dividends and share buybacks. Not only does this give shareholders a chance to earn better returns elsewhere, but it also reduces the risk that management will use the excess cash to make value-destroying investments—in particular, ill-advised, overpriced acquisitions.
Just because a company engages in share buybacks, however, doesn’t mean that it abides by this principle. Many companies buy back shares purely to boost EPS, and, just as in the case of mergers and acquisitions, EPS accretion or dilution has nothing to do with whether or not a buyback makes economic sense. When an immediate boost to EPS rather than value creation dictates share buyback decisions, the selling shareholders gain at the expense of the nontendering shareholders if overvalued shares are repurchased. Especially widespread are buyback programs that offset the EPS dilution from employee stock option programs. In those kinds of situations, employee option exercises, rather than valuation, determine the number of shares the company purchases and the prices it pays.

Value-conscious companies repurchase shares only when the company’s stock is trading below management’s best estimate of value and no better return is available from investing in the business. Companies that follow this guideline serve the interests of the nontendering shareholders, who, if management’s valuation assessment is correct, gain at the expense of the tendering shareholders.

When a company’s shares are expensive and there’s no good long-term value to be had from investing in the business, paying dividends is probably the best option.

Principle 6.
Reward CEOs and other senior executives for delivering superior long-term returns.
Companies need effective pay incentives at every level to maximize the potential for superior returns. Principles 6, 7, and 8 set out appropriate guidelines for top, middle, and lower management compensation. I’ll begin with senior executives. As I’ve already observed, stock options were once widely touted as evidence of a healthy value ethos. The standard option, however, is an imperfect vehicle for motivating long-term, value-maximizing behavior. First, standard stock options reward performance well below superior-return levels. As became painfully evident in the 1990s, in a rising market, executives realize gains from any increase in share price—even one substantially below gains reaped by their competitors or the broad market. Second, the typical vesting period of three or four years, coupled with executives’ propensity to cash out early, significantly diminishes the long-term motivation that options are intended to provide. Finally, when options are hopelessly underwater, they lose their ability to motivate at all. And that happens more frequently than is generally believed. For example, about one-third of all options held by U. S. executives were below strike prices in 1999 at the height of the bull market. But the supposed remedies—increasing cash compensation, granting restricted stock or more options, or lowering the exercise price of existing options—are shareholder-unfriendly responses that rewrite the rules in midstream.

Value-conscious companies can overcome the shortcomings of standard employee stock options by adopting either a discounted indexed-option plan or a discounted equity risk option (DERO) plan. Indexed options reward executives only if the company’s shares outperform the index of the company’s peers—not simply because the market is rising. To provide management with a continuing incentive to maximize value, companies can lower exercise prices for indexed options so that executives profit from performance levels modestly below the index. Companies can address the other shortcoming of standard options—holding periods that are too short—by extending vesting periods and requiring executives to hang on to a meaningful fraction of the equity stakes they obtain from exercising their options.
For companies unable to develop a reasonable peer index, DEROs are a suitable alternative. The DERO exercise price rises annually by the yield to maturity on the ten-year U.S. Treasury note plus a fraction of the expected equity risk premium minus dividends paid to the holders of the underlying shares. Equity investors expect a minimum return consisting of the risk-free rate plus the equity risk premium. But this threshold level of performance may cause many executives to hold underwater options. By incorporating only a fraction of the estimated equity risk premium into the exercise price growth rate, a board is betting that the value added by management will more than offset the costlier options granted. Dividends are deducted from the exercise price to remove the incentive for companies to hold back dividends when they have no value-creating investment opportunities.

Principle 7.

Reward operating-unit executives for adding superior multiyear value.
While properly structured stock options are useful for corporate executives, whose mandate is to raise the performance of the company as a whole—and thus, ultimately, the stock price—such options are usually inappropriate for rewarding operating-unit executives, who have a limited impact on overall performance. A stock price that declines because of disappointing performance in other parts of the company may unfairly penalize the executives of the operating units that are doing exceptionally well. Alternatively, if an operating unit does poorly but the company’s shares rise because of superior performance by other units, the executives of that unit will enjoy an unearned windfall. In neither case do option grants motivate executives to create long-term value. Only when a company’s operating units are truly interdependent can the share price serve as a fair and useful indicator of operating performance.

Companies typically have both annual and long-term (most often three-year) incentive plans that reward operating executives for exceeding goals for financial metrics, such as revenue and operating income, and sometimes for beating nonfinancial targets as well. The trouble is that linking bonuses to the budgeting process induces managers to lowball performance possibilities. More important, the usual earnings and other accounting metrics, particularly when used as quarterly and annual measures, are not reliably linked to the long-term cash flows that produce shareholder value.
To create incentives for an operating unit, companies need to develop metrics such as shareholder value added (SVA). To calculate SVA, apply standard discounting techniques to forecasted operating cash flows that are driven by sales growth and operating margins, then subtract the investments made during the period. Because SVA is based entirely on cash flows, it does not introduce accounting distortions, which gives it a clear advantage over traditional measures. To ensure that the metric captures long-term performance, companies should extend the performance evaluation period to at least, say, a rolling three-year cycle. The program can then retain a portion of the incentive payouts to cover possible future underperformance. This approach eliminates the need for two plans by combining the annual and long-term incentive plans into one. Instead of setting budget-based thresholds for incentive compensation, companies can develop standards for superior year-to-year performance improvement, peer benchmarking, and even performance expectations implied by the share price.

to be continued part 3.

July 25, 2020

How to Build a Stock Portfolio

How to Build a Stock Portfolio.

The stock market and its potential for risk intimidates many people. Nonetheless, a well-built stock portfolio is likely to outperform other investments over time. It is possible to build a stock portfolio alone, but a qualified financial planner can help. Knowing your goals and your willingness to take risks in advance, as well as understanding the nature of the market, can help you build a successful portfolio.

Part 1 Designing Your Portfolio.
1. Know what you're willing to invest. As you invest, you'll need to balance your potential risks against your potential rewards. A portfolio's assets are typically determined by the investor's goals, willingness to take risks, and the length of time the investor intends to hold his portfolio. Some of the most important factors to consider in making these decisions are:
The investor's age.
How much time the investor is willing to spend allowing his investments to grow.
Amount of capital the investor is willing to invest.
Projected capital needs for the future.
Other resources investor may have.
2. Decide what kind of investor you'll be. Portfolios usually fall somewhere in the spectrum between aggressive, or high-risk portfolios, and conservative, or low-risk portfolios. Conservative investors simply try to protect and maintain the value of a portfolio, while aggressive investors tend to take risks with the expectation that some of those risks will pay off. There are various online risk assessment tools you can utilize to help assess your risk tolerance.
Understand that your financial goals may change over time, and adjust your portfolio accordingly. Generally, the younger you are, the more risk you can afford or are willing to take. You may be better served with a growth-oriented portfolio. The older you become, the more you'll think about retirement income, and may be better served with an income-oriented portfolio.
Even during retirement, many still need some portion of their portfolio for growth, as many people are living 20, 30 or more years beyond their retirement date.
3. Divide your capital. Once you've decided what kind of investor you'd like to be and what type of portfolio you want to build, you'll need to determine how you intend to allocate (spread around) your capital. Most investors who are new to the market don't know how to pick stocks. Some important factors include:
Determining which sector(s) to invest in. A sector is the category a given industry is placed in.[8] Examples include telecommunications, financial, information technology, transportation and utilities.
Knowing the market capitalization (aka market cap), which is determined by multiplying a given company's outstanding shares by the current price of one share on the market (large-cap, mid-cap, small-cap, etc.).
It is important to diversify holdings across a variety of sectors and market capitalization to lower a portfolio's overall risk.

Part 2 Making Investments.
1. Understand the different kinds of stocks. Stocks represent an ownership stake in the company that issues them. The money generated from the sale of stock is used by the company for its capital projects, and the profits generated by the company's operation may be returned to investors in the form of dividends. Stocks come in two varieties: common and preferred. Preferred stocks are so called because holders of these stocks are paid dividends before owners of common stocks. Most stocks, however, are common stocks, which can be subdivided into the categories below:
Growth stocks are those projected to increase in value faster than the rest of the market, based on their prior performance record. They may entail more risk over time but offer greater potential rewards in the end.
Income stocks are those that do not fluctuate much but have a history of paying out better dividends than other stocks. This category can include both common and preferred stocks.
Value stocks are those that are "undervalued" by the market and can be purchased at a price lower than the underlying worth of the company would suggest. The theory is that when the market "comes to its senses," the owner of such a stock would stand to make a lot of money.
Blue-chip stocks are those that have performed well for a long enough period of time that they are considered fairly stable investments. They may not grow as rapidly as growth stocks or pay as well as income stocks, but they can be depended upon for steady growth or steady income. They are not, however, immune from the fortunes of the market.
Defensive stocks are shares in companies whose products and services people buy, no matter what the economy is doing. They include the stocks of food and beverage companies, pharmaceutical companies and utilities (among others).
Cyclical stocks, in contrast, rise and fall with the economy. They include stocks in such industries as airlines, chemicals, home building and steel manufacturers.
Speculative stocks include the offerings of young companies with new technologies and older companies with new executive talent. They draw investors looking for something new or a way to beat the market. The performance of these stocks is especially unpredictable, and they are sometimes considered to be a high-risk investment.
2. Analyze stock fundamentals. Fundamentals is the term given to the pool of qualitative and quantitative data that are used to determine whether or not a stock is a worthwhile investment in a long-term analysis of the market. Analyzing a company's fundamentals is usually the first step in determining whether or not an investor will buy shares in that company. It is imperative to analyze fundamentals in order to arrive at a company's intrinsic value - that is, the company's actual value as based on perception of all the tangible and intangible aspects of the business, beyond the current market value.
In analyzing the fundamentals of a company, the investor is trying to determine the future value of a company, with all of its projected profits and losses factored in.
3. Analyze qualitative factors. Qualitative factors, such as the expertise and experience of a company's management, various courses of industry cycles, the strength of a company's research and development incentives, and a company's relationship with its workers, are important to take into account when deciding whether or not to invest in a company's stock. It's also important to understand how the company generates its profits and what that company's business model look like in order to have a broad spectrum of qualitative information about that company's stock options.
Try researching companies online before you invest. You should be able to find information about the company's managers, CEO, and board of directors.
4. Look at the price-to-earnings ratio. The P/E ratio can be figured as either the stock's current price against its earnings per share for the last 12 months ("trailing P/E") or its projected earnings for the next 12 months ("anticipated P/E"). A stock selling for $10 per share that earns 10 cents per share has a P/E ratio of 10 divided by 0.1 or 100; a stock selling for $50 per share that earns $2 per share has a P/E ratio of 50 divided by 2 or 25. You want to buy stock with a relatively low P/E ratio.
When looking at P/E ratio, figure the ratio for the stock for several years and compare it to the P/E ratio for other companies in the same industry as well as for indexes representing the entire market, such as the Dow Jones Industrial Average or the Standard and Poor's (S&P) 500.
Comparing the P/E of a stock in one sector to that of a stock in another sector is however, not informative since P/E's vary widely from industry to industry.
5. Look at the return on equity. Also called return on book value, this figure is the company's income after taxes as a percentage of its total book value. It represents how well shareholders are profiting from the company's success. As with P/E ratio, you need to look at several years' worth of returns on equity to get an accurate picture.
6. Look at total return. Total return includes earnings from dividends as well as changes in the value of the stock. This provides a means of comparing the stock with other types of investments.
7. Try investing in companies trading below their current worth. While a broad spectrum of stock investments is important, analysts often recommend buying stock in companies that are trading for lower than they are worth. This sort of value investing does not, however, mean buying "junk" stocks, or stocks that are steadily declining. Value investments are determined by comparing intrinsic market value against the company's current stock share price, without looking at the short-term market fluctuations.
8. Try investing in growth stocks. Growth stocks are investments in companies that exhibit or are predicted to grow significantly faster than other stocks in the market. This involves analyzing a given company's present performance against its past performance amid the industry's ever-fluctuating climate.

Part 3 Maintaining Your Portfolio.
1. Avoid dipping into investments. Once you've invested capital in a stock, it's important to let the stock grow for at least a year without selling your shares. Consider for all intents and purposes that this money cannot be withdrawn and spent elsewhere.
As part of investing for the long term, determine the amount of money you can afford to commit to the stock market for five years or longer, and set that aside for investing. Money you'll need in a shorter period of time should be invested in shorter-term investments such as money-market accounts, CDs or U.S. Treasury bonds, bills or notes.
2. Diversify your portfolio. No matter how well a stock might be doing at the moment, the price and value of stocks are bound to fluctuate. Diversifying your investment portfolio can help you avoid this pitfall by spreading around your money to a number of stocks.
A well-diversified portfolio is important because in the event that one or more sectors of the economy start to decline, it will remain strong over time and reduce the likelihood of taking a significant hit as the market fluctuates.
Don't just diversify across the spectrum of asset classes. Some experts recommend you should also diversify your stock picks within each asset class represented in your portfolio.
3. Review your portfolio (but not too often). Anticipate that the market will fluctuate. If you check your stocks every day, you might end up feeling anxious over the value of your investments as things go up or down. But by the same token, you should check on your investments periodically.
Checking your portfolio at least once or twice a year is a good idea but research has shown that making rebalancing changes (selling the gains from those holdings which have been profitable and buying shares of those which have lost value) more than twice per year does not offer any benefit.
Some experts recommend checking on the quarterly earnings reports of a given company to see if your predictions for that company are holding true. Make changes as necessary, but don't jump ship every time a share reports a minor decrease in value.
Also important to keep in mind is tax implications of selling: if this is an account into which you've invested after-tax dollars (non-IRA or similar type of brokerage account), then try not to sell anything at a gain for at least one year in order to receive long-term capital gains rather than ordinary income tax treatment on your profits. For most people, the capital gains rate is more favorable than their income tax rate.

FAQ

Question : How do I create an imaginary portfolio ?
Answer : Follow these same steps without investing any money. Follow the progress of the stocks you chose.
Question : Where do I go to invest in marijuana stocks?
Answer : Ask a stockbroker who does business in an area where marijuana is legal.
Question : What does a gain or loss mean in a portfolio chart?
Answer : It refers to an increase or a decrease in the value of an investment.
Question : Which sector does better for next 3 years? In this sector, what are the names of the top 2 companies?
Answer : Anyone who tells you s/he knows what a given economic sector is going to do in the next three years is delusional. Your best bet is to invest in most or all sectors and in various companies with strong reputations.
Question : How do I calculate my returns in my diversified portfolio? And will my returns be lesser if I diversify my investments versus investing a lump sum in a single investment?
Answer : The easiest way to calculate total return on a diversified portfolio is to compare the total current value with the total value at the beginning of whatever period of time you're examining. If the value has risen, you would subtract the original value from the current value, then divide the difference by the original value. You would then multiply the quotient by 100 to get a percentage of return. Divide that percentage by the number of years you're considering to arrive at an annual percentage (which is the most commonly used percentage for the sake of comparison). Diversified portfolios often deliver better results than do single investments over a long period of time.
Question : How do I purchase stocks in South Africa?
Answer : Make online contact with any South African stockbroker registered to trade on the Johannesburg Stock Exchange. Ask if they do business with foreign investors.
Question : How do I open an account so that I can buy stocks?
Answer : Go to any local or online broker, fill out an application, and deposit some money.
Question : Will the initial money I deposit to open an account to buy or sell stocks be used toward buying or selling, or is it just the fee for opening the account?
Answer : Typically it is for buying stock. Brokers' terms may vary: some may remove part of your deposit to cover fees if you fail to pay them separately.

Tips.
Be aware of wash sale rules: if you decide to sell a stock or stock fund at a loss and buy into a stock or stock fund which is considered substantially similar within a 30-day period, you will not be able to claim that loss on your taxes.
Consult with a qualified financial planner if you're unsure of how to invest or what stocks are safe to invest in.
Be aware of tax consequences (see comments about long-term vs. short-term capital gains under "Maintaining your portfolio" above), and be aware that you will owe taxes on the dividends you earn on those stocks which pay them to you in the year they are earned, whether they were paid out to you or not.
Warnings.
Be aware that not all common stocks pay dividends. Whether a stock pays dividends should be only one factor in choosing it, not necessarily the only factor.

March 30, 2020

How to Calculate Cumulative Growth

How to Calculate Cumulative Growth.

Cumulative growth is a term used to describe a percentage of increase over a set period of time. Cumulative growth can be used to measure growth in the past and, thereby, to plan for population growth, estimate organic cell growth, measure sales growth, and so on. It is a useful descriptive tool in figuring out how growth has developed over time or how growth will continue to develop. Investors, marketers, and business planners need to know how to calculate cumulative growth, often expressed as CAGR (cumulative average growth rate), because it appears frequently in the financial sections of companies' annual reports. The following article discusses several ways to go about finding and using CAGR.

Method 1 Calculating CAGR Manually.
1. Identify the values needed to calculate CAGR. In order to calculate CAGR, you will need a few essential values. This includes the starting value, ending or finishing value, and the period of time over which you wish to measure growth.
Determine the starting value (SV) of an asset, for example, the price paid for a share of stock.
Determine the ending value (EV) or current market value of that asset.
Determine the period of time (T) you want to study, for example, the number of years, months, quarters, etc.
2. Input these values in the CAGR formula. After you've gotten your information together, input your variables into the CAGR equation. The equation is as follows: CAGR=((EV/SV)^ 1/T)) -1.
3. Solve for CAGR. After your values have been inputted in the CAGR equation, simply solve for CAGR using the proper order of operations. That is, be sure to calculate the (1/T) first, because it is an exponent, then solve for EV/SV and raise that number to the power found in the first step. Finally, subtract 1 from the number you just found. The result will be your CAGR.
For example, if a portfolio of investments had an initial value of $10,000 that grew to $19,500 over 3 years, you would start with CAGR=(($19,500/$10,000)^(1/3))-1 and simplify to CAGR=((1.95)^(0.333))-1 and CAGR=1.249-1. Your final result would be CAGR=0.249, or 24.9%.

Method 2 Calculating CAGR Using a Computer.
1. Calculate CAGR using an online calculator. Perhaps the simplest way to calculate CAGR is to use an online CAGR calculator. These programs allow you to simply input your values for SV, EV, and T and will do the rest of the work for you. In order to find one of these calculators, try searching on a search engine for "CAGR calculator."
2. Calculate CAGR using Microsoft Excel. Another simple way to calculate CAGR is to used Microsoft Excel. Other spreadsheet programs will likely perform this function just as well, but may require different formula structures. See help guides for these programs to learn how to perform these functions. In any case, start by inputting your values (SV, EV, and T) into cells in a new spreadsheet. For example, put SV into A1, EV into B1, and T into C1.
The easiest way to calculate CAGR in Excel is to simply enter the CAGR formula into a fourth cell. This requires entering the following into D1 (or any other cell you see fit): =((B1/A1)^(1/C1))-1. Excel will complete the calculations for you and the result will be presented in whichever cell you choose for the equation.
An alternate method of calculating CAGR in excel uses the POWER function, which calculates equations using exponents. For this calculation, create a cell for the formula and enter: =POWER(B1/A1,(1/C1))-1. Again, the answer should appear in this cell after you press enter.
Additionally, Excel can calculate CAGR by using the RATE function. Input this formula into a new cell by entering the following: =RATE(C1,-A1,B1). Press enter and Excel will display the answer.

Method 3 Using CAGR to Predict Cumulative Growth.
1. Identify the values needed to calculate CAGR. CAGR can also be used to predict future growth based upon a historical CAGR.  This is done similarly to calculating a historical CAGR. In order to calculate future value, you will need a few essential values. This includes the starting value, ending or finishing value, and the period of time over which you wish to measure growth.
Determine the starting value (SV) of an asset, for example, the price paid for a share of stock or the current revenues of a company.
Determine the period of time (T) you want to study, for example, the number of years, months, quarters, etc.
Enter the CAGR percentage as a decimal. For example, the CAGR percentage of 24.9% calculated in method one would be entered here at 0.249.
2. Calculate future value using CAGR. Future values can be calculated using the following formula: FV = SV(1 + CAGR)^T. Simply input the values you have decided on and calculate the future value in a similar way to calculating CAGR. You can either calculate this value by calculator or using a computer.
To calculate this on a computer, use a spreadsheet program and enter the program into an empty cell. For example, a potential calculation in Excel would start with SV in cell A1, CAGR in cell D1, and T in cell C1. To calculate FV, enter the following into an empty cell: =A1(1+D1)^C1 and press enter.
3. Analyze your result. When using your CAGR to predict future values, keep in mind that no historical data can accurately predict the future. However, using a CAGR can serve as a somewhat reliable estimate of future growth. Keep in mind also that this CAGR represents an average of the growth of the represented values and will likely be lower or higher within the given year or period of time that you are trying to estimate.

Tips.

Even though CAGR, as it relates to business, is the primary measure of compound growth discussed here, the calculations also work for a number of other applications in the sciences. The same equation can be used for finding compound growth between any two values over a variety of different time frames.
Understand that this CAGR is a "smoothed" or "rounded" rate; that is, it has been consistent only if you assume there has been a more or less consistent economic history.

April 10, 2020

How to Find Great Companies to Invest In

How to Find Great Companies to Invest In.

Smart investors put their money in reputable companies and investigate new companies thoroughly before committing their money. By carefully considering the qualities of the companies you invest in and incorporating your own knowledge of the market, you can make informed decisions in the hopes of choosing stocks of good quality and value. Be aware, however, this is no small task. Mutual fund companies and the like dedicate entire teams of experts whose full-time jobs are to research and understand how to invest in companies. Be sure you have the time and inclination to do this yourself, as well as the willingness to take the risks of doing so.

Method 1 Buying What You Know.
1. Stay within your circle of competence. If you have a field of expertise, you may be best able to identify quality within that area. Experience can provide you with the insights you need to make more informed choices. For example, if you work in retail, you may be better positioned to determine if you should invest in companies like Walmart, Target, or Best Buy, than you are in evaluating the latest bio-tech company.
Having competence in a certain area doesn't have to come from workplace experience. If you're a techie who spends his time buying and reading about the latest gadgets, you can draw on the information you obtain to help you make decisions on how to invest in the technology sector.
2. Focus on a few industries or markets. These can be either your direct area of competence or other areas that you are interested in investing in. The important thing is to realize that you can't keep track of everything going on in the global economy. Large financial institutions have whole departments for doing this so don't think you can do it on your own. Instead, narrow your focus to include only a few key industries or markets.
This doesn't mean you should avoid focusing on individual companies. You should always investigate every company you plan to invest in individually.
3. Stay up to date on news within that industry. Examples of quality sources for this are online finance websites like Bloomberg and the Wall Street Journal. They'll give you up-to-date information on many of the goings-on in various sectors of the economy and the World. Again, focus your energy on a few key areas and become knowledgeable on the happenings in them. Look for things like trends, mergers, acquisitions, relevant legislation changes, and any global events that may affect your chosen market.
4. Plan ahead. Identify a company that you think stands to benefit from some change or trend in the market. Look ahead for when this change will take place and move around your money to prepare to invest in the company. For example, if you think that a new product being released by your favorite tech company is going to be a huge success, you may choose to invest in the company before the rest of the world realizes this and drives up the stock price.

Method 2 Investing in Companies with Competitive Advantages.
1. Understand competitive advantages. There are some companies that manage to be consistently profitable and successful in their industry over many years. These companies have succeeded in building a "moat" around them to keep their competitors away. This distance from their competitors is also known as a competitive advantage. Competitive advantages allow these companies to make money and retain customers more easily than others. In turn, these companies are able to provide greater value and return to their shareholders.
An investment in one of these companies allows you to participate in their competitive advantage. While they may not grow as quickly as smaller companies, they often can be less likely to fail in economic downturns and can provide consistent growth throughout the years to come.
Blue-chip stocks are examples of large, successful companies with competitive advantages. These companies have provided consistent growth or dividends over many years and are listed on large stock indexes.
2. Invest in trusted brands. Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands, resulting in deeper profits.These companies are so well-known and essential that they are unlikely to lose a significant amount of customers to competitors.
3. Find companies with high switching costs. When was the last time you switched banks? Or cell phone providers? These services retain customers because switching between them is more time-consuming than it's worth. Companies that have high switching costs can be expected to hold on to their customers longer than companies that don't.
4. Search for economies of scale. Companies that are able to make products and sell them at much lower prices than their competition automatically attract customers -- lots of them -- as long as quality is not compromised. In a crowded market, this is generally the result of economies of scale, a phenomenon where a large company is able to experience lower production costs solely due to its size. Walmart and and Dell have perfected this concept to a science.
5. Invest in legal monopolies. Some companies are granted legal (if temporary) monopolies by the government. Large pharmaceutical companies and manufacturing companies with patents are able to bring a truly unique product to market. Companies that own copyrights, drilling rights, mining rights, and other forms of protected property are often the sole producer or service provider in their area. Thus, these companies can raise prices without fear of losing customers, resulting in higher profits.
Be sure to check how long the company's patent or usage rights are in effect. Some of these are temporary and when they go, there's a chance the company's profit will go with them.
6. Look for opportunities for easy growth. Some companies are easily scalable. That is, their products or services with the potential to network or add more users over time. Adobe has become the de facto standard in publishing; Microsoft's Excel has done the same in spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom line.
For a more current example, consider Netflix. As a streaming service, they make more money for each subscriber, even as their costs remain virtually the same. That way, as they gain more users they will continue to grow in profitability, assuming they don't choose to increase costs significantly.

Method 3 Evaluating Company Performance and Valuation.
1. Check the quality of management. How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of any company you're thinking of investing in. Newspaper and magazine articles are good places to get this information.
This doesn't just mean that management has provided good financial results recently. Rather, look for indications of other important qualities like responsiveness, adaptability, capacity for innovation, and organizational ability.
2. Watch for management changes. A good leader can successfully turn around a company that many consider to be a lost cause. Watch the news and financial reports for changes in management positions, especially CEOs. If you believe in the new CEO of a company, based on your research, you may choose to invest in that company. Here, you're essentially putting your faith in the person, not the company.
3. Avoid overvalued stocks. Even a great company can be overvalued. Learn to interpret financial statements and pick stocks with fundamental analysis to find companies the market has overvalued. Know that these companies may be some of the most buzzed-about and invested in companies around, but they are still overvalued and may experience drastic declines in price once their day in the spotlight is over.
One way to determine if a stock is overpriced is to examine its price-earnings-ratio. The price to earnings ratio can usually be found in the company's stock summary on financial websites. Generally, PE ratios are between 20-25, but this varies by industry.
To evaluate a company's PE ratio, search online for the average PE ratio in the company's industry. If the P/E ratio is over the industry average, the company could be overpriced in view of its earnings.
4. Buy undervalued stocks. Undervalued stocks are those that are trading at a lower value than their financial information would indicate. These may be companies that have only started to do well recently. In these cases, the market has not yet caught up with their newfound success. To identify stocks with room to grow in value, you can also use the price-earnings ratio mentioned above and look for companies with low PE ratios compared to the industry average.
You can also look for companies with a price-to-book-value of less than 2. The price-to-book ratio is the price of the company divided by the total value of its assets minus its liabilities and intangible assets. A low ratio may indicate that the company is relatively cheap.

FAQ.

Question : How can I know a company's management?
Answer : A company's stock prospectus will list its management personnel. For suggestions on researching company management, go here: Investopedia.com/articles/02/062602.asp.

Tips.
Start thinking about everyday companies in terms of this new framework.
Learn the basics of reading financial statements. Check the profitability of companies you're interested in. Check their debt position. See if they have been growing steadily.
Visit the company’s website and other financial websites that will give you insight into the stock.
While it may be advantageous to invest in companies you know, do not limit yourself to just one or two sectors of the economy. Try to research companies in a variety of sectors. Doing so further diversifies your portfolio to better insulate it from a downturn in a single sector or company.

Warnings.
Be aware of stock tips: Whether they come from someone you see on TV or someone you meet in person, these are more often not well-researched or are even based on someone's grandiose theory about getting rich quick. They may also be provided by salesmen paid to inflate a stock's price to allow a company to raise as much capital as possible.
Jumping into buying stocks in a company without doing thorough research can be a quick way to lose your money.
Investing always carries risk. Even if you do everything right, there's no guarantee that you'll make money.

April 07, 2020

How to Prepare for Economic Collapse

How to Prepare for Economic Collapse.

An economic collapse means a breakdown of the national economy. It would be characterized by a long-term downturn in economic activity, increased poverty and a disruption of the social order, including protests, riots and possibly violence. In some cases, this collapse would be akin to a deep recession, with society still functioning basically as normal (just with more poverty). However, it could be much worse. You should prepare for the worst, but adjust your actions to the actual severity of the collapse. You can prepare for an economic collapse by preparing financially, stocking up on the essentials, and monitoring the economic indicators.

Method 1 Preparing Your Finances.
1. Start an emergency fund. If you are living paycheck to paycheck and you lose your job during an economic collapse, you are at risk for losing your home and living in poverty. It won’t be easy to find another job and replace your income. Your goal should be to save up enough to cover six months of expenses in your emergency fund.
If you are trying to get out of debt, save up an emergency fund of $1,000 and then apply all of your extra income to your debt. Once your debt is paid off, you can divert more money into your emergency fund.
Keep your emergency fund separate from your checking account so that you are not tempted to use the money. Put it in a low-risk, interest-bearing account such as a savings account, money market account or certificate of deposit (CD).
On the other hand, a complete economic collapse would leave you unable to access your bank account, because of the crash of the financial system. Additionally, your money may become useless or extremely devalued. Consider stocking other commodities that you could barter with in an economic collapse, like alcohol, precious metals (gold and silver), and fuel.
2. Have cash on hand. Depending on where you have it, money in your emergency fund might be hard to liquidate. Bonds, for example, must be sold, and other investments like CD’s might charge fees for early withdrawal. Also, if you have a savings account with an online bank instead of a brick-and-mortar institution, it might take several days to withdraw your money. It’s important to have cash that you can access easily, either from a savings account or a cash box in your home. This can tide you over in an emergency until you can access money in your emergency fund.
3. Generate an additional source of income. Start a home business as a second source of income. If you lose your job because of an economic collapse, it might be difficult or even impossible to find another job. Having an alternative source of income can help you to keep your home and avoid poverty. Choose your business idea based on skills that you have and things that you enjoy doing. In addition, think about how likely it will be that people will require these services in an economic collapse; people may need basic necessities like clean water or food more than they need an interior decorator.
Provide services to people in their homes, such as house cleaning, home organization, meal preparation, or interior decorating.
Sell goods you produce, such as baked goods, custom clothing or jewelry.
4. Get out of debt. In a financial collapse, many people are going to lose their jobs and their homes. To prepare for this possibility, you should make a plan to get out of debt as quickly as possible. This way, if you do lose your job, you don’t have to worry about finding a way to pay these bills. The worst kind of debt to have is credit card debt. Because of the high interest rates that many people have, carrying a balance on a credit card can cost you a great deal of money.
Create a budget in order to track your income and expenses. Make a plan to have a surplus of money left over at the end of the month to apply towards your debt. This means reducing your expenses and possibly finding additional work to supplement your income.
Organize your debt so you can make a plan to pay it off. You can choose from a few different methods for planning how to pay off your debt. Whichever method you choose, it is important to stick with it.
One method is to order your debts from smallest to biggest, regardless of the interest rate, and pay off the smallest debts first. This helps you build momentum.
Another method is laddering, which means paying off the debt with the highest interest rates first. This makes the most sense mathematically because it reduces the amount of interest expense you pay in the long-term.
That said, in a true economic collapse, your creditors would likely have other things to worry about than just finding you and recovering your debts. Additionally, currency may be greatly devalued or completely useless, meaning that the amount stated on your debt balance would be equally depressed or meaningless.

Method 2 Storing the Essentials.
1. Store emergency water. In the event of an economic collapse, it is possible that your power and water supply might be interrupted, or that you will not be able to pay for these things. You will need a supply of clean water for drinking, cooking and hygiene. You can purchase bottles of water or store water in your own containers. If you run out of water, you can take steps to sanitize contaminated water.
Store at least one gallon of water per person for a minimum of three days or for up to two weeks. Don’t forget to include pets in this equation.
If you are storing water in your own containers, wash them first with dish soap and water and sanitize them with a solution of 1 teaspoon of liquid chlorine bleach to a quart of water.
To make water safe, you can boil it and filter it through a clean cloth, paper towel or coffee filter.
2. Stockpile food. The kind of food you store up for an emergency is different from the groceries you purchase each week. You need to get food that is non-perishable, does not have to be refrigerated and will provide you with the nutrition you need to survive. It may be very different from the food you are used to eating, but you will be glad you have it if you ever need it.
Purchase food that does not have to be refrigerated or frozen so you don’t have to worry about power outages. These foods include canned goods, peanut butter and beef or turkey jerky.
Include foods highly nutritious foods that are easy to store, such as dried foods, nuts, beans, canned meat and vegetables and powdered milk.
For comfort foods, avoid snack foods that will quickly expire. Instead, stock up on spaghetti and spaghetti sauce, soups, sugar and honey for canning and baking, dried fruit, coffee and tea and hard candy.
If necessary, stock pile baby food and formula, Don’t forget to include pet food if you have pets.
Keep a manual can opener with your stockpile.
3. Start a garden. A garden allows you to continually have fresh, nutritious food to supplement your emergency food supply. Also, in an economic crisis the cost of living might skyrocket. Having a garden will help you to save money on your grocery bills. It will also allow you to be self-sufficient should a food shortage result from the financial collapse.
If you don’t have a lot of space, consider starting a container garden.
If you don’t have good soil, purchase humus soil or top soil. Add peat moss, composted manure and plant fertilizers.
Choose vegetables and herbs that are easy to grow, including beans and peas, carrots, greens like lettuce, cabbage, spinach and kale, potatoes and sweet potatoes, squash, tomatoes, broccoli, berries and melons.
4. Create an emergency kit. This is a collection of household items you might need in an emergency. In the event of an economic collapse, you may not be able to shop for these supplies, so it’s important to have them on hand. Keep your supplies in a container that’s easy to carry in case you have to evacuate for some reason.
Include an extra set of car keys, blankets, matches, a multi-use tool, maps of the area, a flashlight, a battery-powered or hand-cranked radio, extra batteries, matches and a cell phone and chargers.
Have some household liquid bleach on hand for disinfecting.
Make copies of all important documents, such as proof of address, deed/lease to home, passports, birth certificates and insurance policies.
Have a list of family and emergency contact numbers, Include baby supplies such as baby food, formula, diapers and bottles.
Remember pet supplies like food, collars, leashes and food bowls.
5. Gather first aid and medical supplies. You can purchase a first aid kit or put one together yourself. Either way, make sure it has all of the necessary supplies. Include personal items such as medications for yourself and members of your family. Check the kit regularly to make sure nobody has used any of the supplies. Also, check the expiration dates and replace expired items.
Keep a first aid manual with your first aid kit.
Include dressings and bandages, such as adhesive bandages in various sizes, sterile gauze pads and a gauze roll, adhesive tape, elastic bandages and sterile cotton balls.
Add equipment and other supplies, like latex or non-latex gloves, instant cold packs, a thermometer, safety pins to fasten splints or bandages, tweezers, scissors and hand sanitizer.
Have medicines for cuts and injuries, such as antiseptic solution like hydrogen peroxide, antibiotic ointment, calamine lotion for stings or poison ivy, hydrocortisone cream for itching and an eyewash solution.
Include contact lens solution if necessary.
Other medicines to have include pain and fever medicines like aspirin, acetaminophen or ibuprofen, antihistamines for allergies, decongestants for colds, anti-nausea medicine, anti-diarrhea medicine, antacids and laxatives.

Method 3 Preserving Food.
1. Preserve meat and fish. In an economic collapse, food stores could become dangerously low. If you are going to stock up on meat and fish ahead of time, you will need to know how to cure it. This will allow it stay fresh and edible much longer. Also, it can be stored at room temperature. This will be helpful in the event of a power outage.
2. Salt cure meat. Salt curing means using salt to kill the microbes that would spoil it. For every 100 pounds of meat, you need 8 pounds of salt, 2 ounces of saltpeter and 3 pounds of sugar. Apply the cure mixture directly to the meat. For bacon, allow the meat to cure for 7 days per inch of thickness. For ham, leave the mixture on for a day and a half per pound. After curing, rub off the salt under running water and allow it to dry.
If the outdoor temperature is expected to rise above 40 degrees Fahrenheit, you will need to allow the meat to cure in a meat locker.
If the outdoor temperature is below freezing, allow an extra day for curing.
3. Smoke cure meat. Wood smoking meat not only adds flavor, but it also protects your meat from pests and spoilage. Cold smoking smokes the meat without cooking it. Hang the meat in a smoke house, light the fire and allow the meat to smoke for 10 to 20 hours. You can purchase a ready-made smoke house or plans to build your own.
Use aromatic woods to add flavor, such as hickory, mesquite, apple, cherry, pear or cranberry-apple.
Woods to avoid include all conifers, crape myrtle, hackberry, sycamore and holly.
4. Jerky meat. To make meat jerky, you can use a store-bought dehydrator. However, if you do not have one of those, you can do it in your oven by cooking it at a low temperature for several hours. Choose an inexpensive cut of meat, such as brisket. Trim the fat and slice thin strips against the grain. Season the meat with salt and pepper, and if desired, marinate it overnight with diluted barbecue sauce. Arrange the slices on a cooking grate, and put them in the oven at 170 degrees Fahrenheit for two to six hours.
Line your oven with foil for easy cleanup, Prop the oven door open with a wooden spoon to allow air to circulate.
Partially freeze meat before slicing to make it easier to slice.
5. Can fruits and vegetables. Canning involves heating food in a glass jar to remove the air and prevent spoilage. Choose from two methods to can food: water bath and pressure canning. The method you choose depends on the kind of food you want to can. Water bath canning is for jams, jellies and for acidic foods such as tomatoes, berries or cucumbers in vinegar. For main meal foods such as meat, beans and other vegetables, use pressure canning. To ensure safety, always use tried and true recipes.
6. Can with the water bath method. Gather a deep pot with a lid, a rack that fits into the pot, glass preserving jars, lids and bands and a jar lifter. Check the jars and lids for nicks and scratches which would prevent proper canning and allow spoilage to occur. Heat the jars in a pot of boiling water or in the dishwasher. Prepare your recipe and fill the hot jars with the food. Place the lids on the jars and immerse them in boiling water. Make sure the water covers the jars by 1 to 2 inches. Leave them in the water for the amount of time stated in the recipe. Remove the jars with a jar lifter and allow them to sit for 12 to 24 hours.
The lids should not flex up and down when pressed. If they do flex or if you can easily remove the lid, then the jar did not seal properly.
7. Can with pressure canning. You will need a store-bought pressure canner. As with water bath canning, check the jars for nicks and scratches, and heat them in boiling water or the dishwasher. Prepare the food according to your recipe and fill hot jars with the food. Place the jars in the canner and lock it in place. Vent the steam according to the manufacturer’s directions. Process the jars at the recommended pounds pressure stated in your recipe. Adjust for altitude. When done, remove the jars, allow them to sit for 12 to 24 hours and check the seals.

Method 4 Securing Your Home.
1. Choose your shelter type. A standalone shelter is a separate building that is designed to withstand natural disasters or man-made weapons or attacks. An internal shelter is a room within your home that has been designed to protect you from the elements or other hazards. In an economic collapse, power systems may fail and looters and scavengers may threaten your home. Take precautions to protect yourself.
2. Create two sources of electricity. One source could be solar. Hook it up to your home and then run the system discretely underground. The second source might be an underground generator. You will use this in the event of a total loss of power. Keep your energy sources hidden underground to protect them.
3. Choose the size of your shelter. The size of your shelter depends on how many people you need to protect and the size of your food stockpile. An adult needs 10 cups of water and 1,200 calories per day. In addition, each adult needs 10 cubic feet of natural atmosphere to have enough air to breathe, so you will need an air system that lets in and filters fresh air. If you are planning to stay in the shelter long-term, invest now in making it large and comfortable enough for everyone. If it is only going to be a short-term living space, you don’t have to make it as comfortable.
4. Keep the location of your shelter secret. Protect yourself from others who were not prepared and may want to take what you have. Don’t let your neighbors see you creating a shelter. You can choose a remote location, but it may be difficult to access it later. If you choose to make a safe room in your home, create a secret entrance from within your house. This way others will not be alerted to your shelter.
5. Purchase self-defense tools. Self-defense tools are generally non-lethal. They are used to fend off an attack by rendering the attacker ineffective. You can use everyday objects, such as baseball bats or keys. But these may not be as effective as tools designed for your protection.
Mace and pepper spray can be sprayed into an attacker’s face to give you time to get away.
Hand-held stun guns deliver a large electrical shock to stun the attacker.
Taser devices shoot two small probes a distance of up to 15 feet that transmit an electrical charge to the attacker.
Sonic alarms create a loud noise to let others know that you are in trouble.
6. Set up an alarm system in your home. Wireless security systems are easy and inexpensive to install and maintain. Home alert alarm systems notify you if an intruder is approaching your home. Hidden cameras allow you to see internal and exterior areas in your home where an intruder may be present. Phone dialing alarms can be installed inside or outside your home and allow you to contact authorities with the push of a button. Child monitoring alarms notify you if your child goes beyond a certain perimeter of your home.
7. Purchase weapons. Weapons can be used for either self-defense or for hunting. A crossbow is easy to shoot and aim. It’s also quiet, so it doesn’t alert people or animals to your presence. A long-range rifle allows you to hunt game from a distance. A machete can clear brush or fend off a dangerous animal. A slingshot is good for hunting small animals. Have pistols on hand and teach others to shoot, reload, shoot from cover and work as a team for protection. If you plan to have lethal weapons, be sure to train everyone who has access to them in the proper use of these weapons.
Stockpile appropriate ammunition and arrows for your weapons.
8. Gather necessary tools. Having the right tools on hand can make the difference between surviving and not surviving during any kind of disaster. You not only want to be able to protect your home, but you also need to be able to build anything you might need.
Have a bolt-cutter on hand to cut through fences and wire.
Picks, shovels, axes, chain saws and bow saws allow you dig and gather and cut wood.
Rope and paracords are essential for assembling simple and complex survival systems.
Tarps are necessary as ground covers or for weather-proofing, Stock pile nails and plywood for building and repairs.
Keep large trash bags for waste disposal, Have gasoline for fuel or a fire starter, Get a propane stove for cooking, Have a fishing rod for catching fish.

Method 5 Preparing Your Family.
1. Make sure everyone is aware of the situation. In order to prepare for economic collapse, you will have to make sure that your whole family is on board with your preparations. This means informing them in honest terms what is about to happen and telling them what they should be doing. Make sure everyone takes the situation seriously. Otherwise, they will not be mentally prepared in the event that economic collapse actually occurs.
2. Check that each family member is individually prepared. Inform each other family member of the steps you have taken to prepare your finances, essential supplies, food, and shelter. Instruct them on doing the same. Make sure each family member has also packed a bag of essentials that they can grab if they are forced to leave the house without notice. This bag should contain enough survival essentials to last between 72 hours and a week.
3. Train family members in survival skills. Your immediate family members should be aware of how to handle weapons safely, perform basic first aid, hunt or grow food, and maintain your shelter. If they don't already have these skills, take the time to instruct them thoroughly. You never know when you might have to depend on them.
4. Work with another family or group. In addition to your immediate family, consider including other family members, neighbors, or a community group (like a church group) in your preparations. Make sure that these are people who are reliable and will put in work for the benefit of the group. You will be safer and work more efficiently if you can increase the size of your group.

Method 6 Anticipating a Financial Crisis.
1. Monitor the financial markets. Calm markets tend to go up. But if the market gets choppy, meaning prices swing up and down considerably, it will likely decline. Don’t be fooled if he market soars for one day. Big ups and downs in the markets are a red flag signaling an overall decline.
2. Keep an eye on global 10 year bond yields. Global bonds are bonds that are issued in several countries at once by governments or large multi-national companies. When 10 year global bond yields drop, it is in indicator that investors are withdrawing their money to put it in safer investments. This happened before the financial crisis that happened in 2008. A significant drop in 10 year global bond yields means that investors think a financial crisis is coming.
3. Pay attention to oil prices. The fluctuation of oil prices has a macroeconomic impact. When oil prices increase, the Gross Domestic Product (GDP) goes up too. The GDP is a quantitative measure of the nation’s total activity. If it is increasing, then the value of goods and services is also going up. If periods of high oil prices signal good times for the world economy, then the opposite is also true. If oil prices are on the decline, expect the GDP and the financial markets to also decline.
4. Understand the relationship between inflation and economic growth. Economic growth tends to lead to inflation. As demand increases, prices are driven up and unemployment falls. As unemployment falls, wages increase. As wages increase, people spend more, which leads to inflation of prices. Conversely, when economic activity slows down, so does inflation. Therefore, if the price of goods and services slows dramatically, it could signal a major downturn in the economy.
5. Monitor the price of commercial commodities. Commercial commodities are goods exchanged during commerce, such as gold, lumber, beef or natural gas. Changes in the prices of commodities affect the United States economy and the value of the U.S. dollar. An increase in commodity prices is correlated with an increase in inflation. Increased inflation correlates with economic growth. However, if commodity prices drop, inflation slows, which indicates economic decline.

Community Q&A.

Question : Where can I join a survival group to prepare for the potential economic collapse?
Answer : Facebook groups are the best place to start. Search for survival groups.
Question : Why would I pay off my debt first? If the economy collapses, my creditors' well being will take a backseat to my family's well being.
Answer : If you owe money to creditors, you would be putting your family at risk during such a time if you failed to keep paying back debts. Creditors are enabled by law to come and claim some of your assets if you have stopped paying them in order to protect your family's well being. In a time like this, assets are everything.
Question : Is an investment in gold and/or silver appropriate? If so, what are your recommendations, and why?
Answer : While gold used to be the standard for currency, it is still very valuable during recessions. Purchasing gold or silver can be a great way to diversify your investments.
Question : If I have a high car payment, and my IRA is large enough to pay off the vehicle, should I close the IRA and pay off the car?
Answer : Sell your expensive car and purchase an older, reliable vehicle with cash. One should never finance an item that depreciates in value, and keep your IRA.
Question : When is the economic collapse expected? In 2018 when bond yields drop?
Answer : No one really knows, but we can predict certain fluctuations (presidential elections or new terms, corporations moving out of the country, major world events, etc.) It's just best to be prepared for it with at minimum a month's supply of essentials.
Question : Should I get out of all stocks if preparing for economic collapse? Should I pay off my mortgage if I have the stock to do so?
Answer : No. Hedge your bets by keeping your portfolio 60% in stock index funds and 40% in bond index funds. I recommend Vanguard because of the low fees. Also, do not pay off your mortgage. You need cash flow. In a collapse, you will have the moral authority to defend your home with violence if necessary.
Question : With a low fixed rate mortgage, should I have my house paid off when the U.S. dollar crashes?
Answer : If you can, hold onto the cash needed to pay off your mortgage. When the dollar crashes, it won't be worth much for buying anything, but the bank still has to take it for your mortgage.
Question : What is the best way to reduce my losses on a savings account if the currency is devalued?
Answer : The best way is to not have a savings account at all. You have more liquidity keeping your money in your checking account. So take that money out of your savings account and open up another checking account with a debit card. Do not use it.

June 02, 2020

How to Choose Business Financing.

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.

Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.

Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.[15]

Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

December 19, 2019