Charlie Munger on Getting Rich, Wisdom, Focus, Fake Knowledge and More.

Charlie Munger on Getting Rich, Wisdom, Focus, Fake Knowledge and More.

“In the chronicles of American financial history,” writes David Clark in The Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway’s Vice Chairman on Life, Business, and the Pursuit of Wealth, “Charlie Munger will be seen as the proverbial enigma wrapped in a paradox—he is both a mystery and a contradiction at the same time.”

On one hand, Munger received an elite education and it shows: He went to Cal Tech to train as a meteorologist for the Second World War and then attended Harvard Law School and eventually opened his own law firm. That part of his success makes sense.
Yet here’s a man who never took a single course in economics, business, marketing, finance, psychology, or accounting, and managed to become one of the greatest, most admired, and most honorable businessmen of our age. He was noted by essentially all observers for the originality of his thoughts, especially about business and human behavior. You don’t learn that in law school, at Harvard or anywhere else.
Bill Gates said of him: “He is truly the broadest thinker I have ever encountered.” His business partner Warren Buffett put it another way: “He comes equipped for rationality… I would say that to try and typecast Charlie in terms of any other human that I can think of, no one would fit. He’s got his own mold.”
How does such an extreme result happen? How is such an original and unduly capable mind formed? In the case of Munger, it’s clearly a combination of unusual genetics and an unusual approach to learning and life.
While we can’t have his genetics, we can try to steal his approach to rationality. There’s almost no limit to the amount one could learn from studying the Munger mind, so let’s at least start with a rundown of some of his best ideas.


Wisdom and Circles of Competence.
“Knowing what you don’t know is more useful than being brilliant.”
“Acknowledging what you don’t know is the dawning of wisdom.”
Identify your circle of competence and use your knowledge, when possible, to stay away from things you don’t understand. There are no points for difficulty at work or in life.  Avoiding stupidity is easier than seeking brilliance.
Of course this principle relates to another of Munger’s sayings: “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
And this reminds me of perhaps my favorite Mungerism of all time, the very quote that sits right beside my desk:
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Divergence.
“Mimicking the herd invites regression to the mean.”
Here’s a simple axiom to live by: If you do what everyone else does, you’re going to get the same results that everyone else gets. This means that, taking out luck (good or bad), if you act average, you’re going to be average. If you want to move away from average, you must diverge. You must be different. And if you want to outperform others, you must be different and correct. As Munger would say, “How could it be otherwise?”

Know When to Fold ’Em.
“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand—you must learn to handle mistakes and new facts that change the odds.”
Mistakes are an opportunity to grow. How we handle adversity is up to us. This is how we become personally antifragile.

False Models.
Echoing Einstein, who said that “Not everything that counts can be counted, and not everything that can be counted counts,” Munger said this about his and Buffett’s shift to acquiring high-quality businesses for Berkshire Hathaway:
“Once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.”

Being Lazy.
“Sit on your ass. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.”
Time is a friend to a good business and the enemy of the poor business. It’s also the friend of knowledge and the enemy of the new and novel. As Seneca said, “Time discovers truth.”

Investing Is a Perimutuel System.
“You’re looking for a mispriced gamble,” says Munger. “That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”  At another time, he added: “You should remember that good ideas are rare— when the odds are greatly in your favor, bet heavily.”
May the odds forever be in your favor. Actually, learning properly is one way you can tilt the odds in your favor.

Focus.
When asked about his success, Munger says, “I succeeded because I have a long attention span.”
Long attention spans allow for a deep understanding of subjects. When combined with deliberate practice, focus allows you to increase your skills and get out of your rut. The Art of Focus is a divergent and correct strategy that can help you identify where the leverage points are and apply your efforts toward them.

Fake Knowledge.
“Smart people aren’t exempt from professional disasters from overconfidence.”
We’re so used to outsourcing our thinking to others that we’ve forgotten what it’s like to really understand something from all perspectives. We’ve forgotten just how much work that takes. The path of least resistance, however, is just a click away. Fake knowledge, which comes from reading headlines and skimming the news, seems harmless, but it’s not. It makes us overconfident. It’s better to remember a simple trick: anything you’re getting easily through Google or Twitter is likely to be widely known and should not be given undue weight.
However, Munger adds, “If people weren’t wrong so often, we wouldn’t be so rich.”

Sit Quietly.
Echoing Pascal, who said some version of “All of humanity’s problems stem from man’s inability to sit quietly in a room alone,” Munger adds an investing twist: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
The ability to be alone with your thoughts and turn ideas over and over, without giving in to Do Something syndrome, affects so many of us. A perfectly reasonable option is to hold your ground and await more information.

Deal With Reality.
“I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”
Munger clearly learned from Joseph Tussman’s wisdom. This means facing harsh truths that you might prefer to ignore. It means meeting the world on the world’s terms, not according to how you wish it would be. If this causes temporary pain, so be it. “Your pain,” writes Kahil Gibran in The Prophet, “is the breaking of the shell that encloses your understanding.”

There Is No Free Lunch.
We like quick solutions that don’t require a lot of effort. We’re drawn to the modern equivalent of an old hustler selling an all-curing tonic. However, the world does not work that way. Munger expands:
“There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.”
Acquiring knowledge is hard work. It’s reading and adding to your knowledge so it compounds. It’s going deep and developing fluency, something Darwin knew well.

Maximization/Minimization.
“In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables—like the discount warehouses of Costco.”
When everything is a priority, nothing is a priority. Attempting to maximize competing variables is a recipe for disaster. Picking one variable and relentlessly focusing on it, which is an effective strategy, diverges from the norm. It’s hard to compete with businesses that have correctly identified the right variables to maximize or minimize. When you focus on one variable, you’ll increase the odds that you’re quick and nimble — and can respond to changes in the terrain.

Map and Terrain.
“At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.”
Plans are maps that we become attached to. Once we’ve told everyone there is a plan and what that plan is, especially multi-year plans, we’re psychologically more likely to stick to it because coming out and changing it would be admitting we were wrong. This makes it harder for us to change our strategies when we need to, so we’re stacking the odds against ourselves. Detailed five-year plans (that will clearly be wrong) are as disastrous as overly general five-year plans (which can never be wrong).
Scrap the plan, isolate the key variables that you need to maximize and minimize, and follow the agile path blazed by Henry Singleton and followed by Buffett and Munger.

The Keys to Good Government.
There are three keys: honesty, effectiveness, and efficiency. Munger says:
“In a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.”
Lee Kuan Yew put it this way: “With few exceptions, democracy has not brought good government to new developing countries. … What Asians value may not necessarily be what Americans or Europeans value. Westerners value the freedoms and liberties of the individual. As an Asian of Chinese cultural background, my values are for a government which is honest, effective, and efficient.”

One Step At a Time.
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.”
An incremental approach to life reminds one of the nature of compounding. There will always be someone going faster than you, but you can learn from the Darwinian guide to overachieving your natural IQ. In order for this approach to be effective, you need a long axis of time as well as continuous incremental progress.

Getting Rich.
“The desire to get rich fast is pretty dangerous.”
Getting rich is a function of being happy with what you have, spending less than you make, and time.

Mental Models.
“Know the big ideas in the big disciplines and use them routinely—all of them, not just a few.”
Mental models are the big ideas from multiple disciplines. While most people agree that these are worth knowing, they often think they can identify which models will add the most value, and in so doing they miss something important. There is a reason that the “know-nothing” index fund almost always beats the investors who think they know. Understanding this idea in greater detail will change a lot of things, including how you read. Acquiring the big ideas — without selectivity — is the way to mimic a know-nothing index fund.

Know-it-alls.
“I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”
Few things have made as much of a difference in my life as systemically removing (and when that’s not possible, reducing the importance of) people who think they know the answer to everything.

Stoic Resolve.
“There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”
While we all make mistakes, it’s how we respond to failure that defines us.


Thinking.
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”
Thinking is a lot of work. “My first thought,” William Deresiewicz said in one of my favorite speeches, “is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom.”

Choose Your Associates Wisely.
“Oh, it’s just so useful dealing with people you can trust and getting all the others the hell out of your life. It ought to be taught as a catechism. … [W]ise people want to avoid other people who are just total rat poison, and there are a lot of them.”

August 07, 2020

Ten Ways to Create Shareholder Value (part 3).

Ten Ways to Create Shareholder Value (part 3).

by Alfred Rappaport.

Principle 8.

Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly.
Although sales growth, operating margins, and capital expenditures are useful financial indicators for tracking operating-unit SVA, they are too broad to provide much day-to-day guidance for middle managers and frontline employees, who need to know what specific actions they should take to increase SVA. For more specific measures, companies can develop leading indicators of value, which are quantifiable, easily communicated current accomplishments that frontline employees can influence directly and that significantly affect the long-term value of the business in a positive way. Examples might include time to market for new product launches, employee turnover rate, customer retention rate, and the timely opening of new stores or manufacturing facilities.

My own experience suggests that most businesses can focus on three to five leading indicators and capture an important part of their long-term value-creation potential. The process of identifying leading indicators can be challenging, but improving leading-indicator performance is the foundation for achieving superior SVA, which in turn serves to increase long-term shareholder returns.

Principle 9.

Require senior executives to bear the risks of ownership just as shareholders do.
For the most part, option grants have not successfully aligned the long-term interests of senior executives and shareholders because the former routinely cash out vested options. The ability to sell shares early may in fact motivate them to focus on near-term earnings results rather than on long-term value in order to boost the current stock price.

To better align these interests, many companies have adopted stock ownership guidelines for senior management. Minimum ownership is usually expressed as a multiple of base salary, which is then converted to a specified number of shares. For example, eBay’s guidelines require the CEO to own stock in the company equivalent to five times annual base salary. For other executives, the corresponding number is three times salary. Top managers are further required to retain a percentage of shares resulting from the exercise of stock options until they amass the stipulated number of shares.
But in most cases, stock ownership plans fail to expose executives to the same levels of risk that shareholders bear. One reason is that some companies forgive stock purchase loans when shares underperform, claiming that the arrangement no longer provides an incentive for top management. Such companies, just as those that reprice options, risk institutionalizing a pay delivery system that subverts the spirit and objectives of the incentive compensation program. Another reason is that outright grants of restricted stock, which are essentially options with an exercise price of $0, typically count as shares toward satisfaction of minimum ownership levels. Stock grants motivate key executives to stay with the company until the restrictions lapse, typically within three or four years, and they can cash in their shares. These grants create a strong incentive for CEOs and other top managers to play it safe, protect existing value, and avoid getting fired. Not surprisingly, restricted stock plans are commonly referred to as “pay for pulse,” rather than pay for performance.

In an effort to deflect the criticism that restricted stock plans are a giveaway, many companies offer performance shares that require not only that the executive remain on the payroll but also that the company achieve predetermined performance goals tied to EPS growth, revenue targets, or return-on-capital-employed thresholds. While performance shares do demand performance, it’s generally not the right kind of performance for delivering long-term value because the metrics are usually not closely linked to value.

Companies need to balance the benefits of requiring senior executives to hold continuing ownership stakes and the resulting restrictions on their liquidity and diversification.

Companies seeking to better align the interests of executives and shareholders need to find a proper balance between the benefits of requiring senior executives to have meaningful and continuing ownership stakes and the resulting restrictions on their liquidity and diversification. Without equity-based incentives, executives may become excessively risk averse to avoid failure and possible dismissal. If they own too much equity, however, they may also eschew risk to preserve the value of their largely undiversified portfolios. Extending the period before executives can unload shares from the exercise of options and not counting restricted stock grants as shares toward minimum ownership levels would certainly help equalize executives’ and shareholders’ risks.

Principle 10.

Provide investors with value-relevant information.
The final principle governs investor communications, such as a company’s financial reports. Better disclosure not only offers an antidote to short-term earnings obsession but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price.

One way to do this, as described in my article “The Economics of Short-Term Performance Obsession” in the May–June 2005 issue of Financial Analysts Journal, is to prepare a corporate performance statement. (See the exhibit “The Corporate Performance Statement” for a template.) This statement:

separates out cash flows and accruals, providing a historical baseline for estimating a company’s cash flow prospects and enabling analysts to evaluate how reasonable accrual estimates are;
classifies accruals with long cash-conversion cycles into medium and high levels of uncertainty;
provides a range and the most likely estimate for each accrual rather than traditional single-point estimates that ignore the wide variability of possible outcomes;
excludes arbitrary, value-irrelevant accruals, such as depreciation and amortization; and
details assumptions and risks for each line item while presenting key performance indicators that drive the company’s value.

Could such specific disclosure prove too costly? The reality is that executives in well-managed companies already use the type of information contained in a corporate performance statement. Indeed, the absence of such information should cause shareholders to question whether management has a comprehensive grasp of the business and whether the board is properly exercising its oversight responsibility. In the present unforgiving climate for accounting shenanigans, value-driven companies have an unprecedented opportunity to create value simply by improving the form and content of corporate reports.

The Rewards—and the Risks.
The crucial question, of course, is whether following these ten principles serves the long-term interests of shareholders. For most companies, the answer is a resounding yes. Just eliminating the practice of delaying or forgoing value-creating investments to meet quarterly earnings targets can make a significant difference. Further, exiting the earnings-management game of accelerating revenues into the current period and deferring expenses to future periods reduces the risk that, over time, a company will be unable to meet market expectations and trigger a meltdown in its stock. But the real payoff comes in the difference that a true shareholder-value orientation makes to a company’s long-term growth strategy.

For most organizations, value-creating growth is the strategic challenge, and to succeed, companies must be good at developing new, potentially disruptive businesses. Here’s why. The bulk of the typical company’s share price reflects expectations for the growth of current businesses. If companies meet those expectations, shareholders will earn only a normal return. But to deliver superior long-term returns—that is, to grow the share price faster than competitors’ share prices—management must either repeatedly exceed market expectations for its current businesses or develop new value-creating businesses. It’s almost impossible to repeatedly beat expectations for current businesses, because if you do, investors simply raise the bar. So the only reasonable way to deliver superior long-term returns is to focus on new business opportunities. (Of course, if a company’s stock price already reflects expectations with regard to new businesses—which it may do if management has a track record of delivering such value-creating growth—then the task of generating superior returns becomes daunting; it’s all managers can do to meet the expectations that exist.)

Value-creating growth is the strategic challenge, and to succeed, companies must be good at developing new, potentially disruptive businesses.

Companies focused on short-term performance measures are doomed to fail in delivering on a value-creating growth strategy because they are forced to concentrate on existing businesses rather than on developing new ones for the longer term. When managers spend too much time on core businesses, they end up with no new opportunities in the pipeline. And when they get into trouble—as they inevitably do—they have little choice but to try to pull a rabbit out of the hat. The dynamic of this failure has been very accurately described by Clay Christensen and Michael Raynor in their book The Innovator’s Solution: Creating and Sustaining Successful Growth (Harvard Business School Press, 2003). With a little adaptation, it plays out like this:

Despite a slowdown in growth and margin erosion in the company’s maturing core business, management continues to focus on developing it at the expense of launching new growth businesses.
Eventually, investments in the core can no longer produce the growth that investors expect, and the stock price takes a hit.
To revitalize the stock price, management announces a targeted growth rate that is well beyond what the core can deliver, thus introducing a larger growth gap.
Confronted with this gap, the company limits funding to projects that promise very large, very fast growth. Accordingly, the company refuses to fund new growth businesses that could ultimately fuel the company’s expansion but couldn’t get big enough fast enough.
Managers then respond with overly optimistic projections to gain funding for initiatives in large existing markets that are potentially capable of generating sufficient revenue quickly enough to satisfy investor expectations.
To meet the planned timetable for rollout, the company puts a sizable cost structure in place before realizing any revenues.
As revenue increases fall short and losses persist, the market again hammers the stock price and a new CEO is brought in to shore it up.
Seeing that the new growth business pipeline is virtually empty, the incoming CEO tries to quickly stem losses by approving only expenditures that bolster the mature core.
The company has now come full circle and has lost substantial shareholder value.
Companies that take shareholder value seriously avoid this self-reinforcing pattern of behavior. Because they do not dwell on the market’s near-term expectations, they don’t wait for the core to deteriorate before they invest in new growth opportunities. They are, therefore, more likely to become first movers in a market and erect formidable barriers to entry through scale or learning economies, positive network effects, or reputational advantages. Their management teams are forward-looking and sensitive to strategic opportunities. Over time, they get better than their competitors at seizing opportunities to achieve competitive advantage.
Although applying the ten principles will improve long-term prospects for many companies, a few will still experience problems if investors remain fixated on near-term earnings, because in certain situations a weak stock price can actually affect operating performance. The risk is particularly acute for companies such as high-tech start-ups, which depend heavily on a healthy stock price to finance growth and send positive signals to employees, customers, and suppliers. When share prices are depressed, selling new shares either prohibitively dilutes current shareholders’ stakes or, in some cases, makes the company unattractive to prospective investors. As a consequence, management may have to defer or scrap its value-creating growth plans. Then, as investors become aware of the situation, the stock price continues to slide, possibly leading to a takeover at a fire-sale price or to bankruptcy.

Severely capital-constrained companies can also be vulnerable, especially if labor markets are tight, customers are few, or suppliers are particularly powerful. A low share price means that these organizations cannot offer credible prospects of large stock-option or restricted-stock gains, which makes it difficult to attract and retain the talent whose knowledge, ideas, and skills have increasingly become a dominant source of value. From the perspective of customers, a low valuation raises doubts about the company’s competitive and financial strength as well as its ability to continue producing high-quality, leading-edge products and reliable postsale support. Suppliers and distributors may also react by offering less favorable contractual terms, or, if they sense an unacceptable probability of financial distress, they may simply refuse to do business with the company. In all cases, the company’s woes are compounded when lenders consider the performance risks arising from a weak stock price and demand higher interest rates and more restrictive loan terms.

Clearly, if a company is vulnerable in these respects, then responsible managers cannot afford to ignore market pressures for short-term performance, and adoption of the ten principles needs to be somewhat tempered. But the reality is that these extreme conditions do not apply to most established, publicly traded companies. Few rely on equity issues to finance growth. Most generate enough cash to pay their top employees well without resorting to equity incentives. Most also have a large universe of customers and suppliers to deal with, and there are plenty of banks after their business.

It’s time, therefore, for boards and CEOs to step up and seize the moment. The sooner you make your firm a level 10 company, the more you and your shareholders stand to gain. And what better moment than now for institutional investors to act on behalf of the shareholders and beneficiaries they represent and insist that long-term shareholder value become the governing principle for all the companies in their portfolios?

July 25, 2020

Personal finance: How to manage money during the pandemic | Managing Your Finances During a Pandemic

Personal finance: How to manage money during the pandemic | Managing Your Finances During a Pandemic.

Times of crisis can bring uncertainty for many reasons, and the current coronavirus pandemic is no exception.

Whether you have experienced a change in your financial situation because of layoffs, reduced hours or wages or through increased medical expenses, it is important to take stock of where you are and make a plan to ensure financial success now and in the future.

Many organizations are offering support to those impacted by the coronavirus. Knowing where to go for help, what to ask, and how to document your situation is key to successfully managing your finances and recovering once the crisis is over.

Steps to help you manage your money during and after a pandemic.

1. Analyze Available Resources.

If there is one upside to the current situation, it’s that many programs are being offered to help consumers stay healthy, both physically and financially. Identify all available resources and take advantage of those that fit your needs. Beyond any savings you may have put aside for emergencies, community resources, like the ones below, could help you bridge a temporary income gap:

Military relief societies are offering grants or zero-interest loans for service members affected by coronavirus. Contact Army Emergency Relief, Air Force Aid Society, Navy-Marine Corps Relief Society, or Coast Guard Mutual Assistance for more information.
Depending on your situation, you may qualify for unemployment benefits. Check with the Department of Labor in your state for eligibility criteria.
Many banks and financial institutions are offering to help consumers impacted by the coronavirus. Contact your individual lenders to find out what is available to you.
Many school districts are providing free meals for children at school pick-up locations or bus stops. Contact your local school to find out whether this is an option where you live.
National and local service providers have a variety of assistance options, from payment plans to free services. Visit 211 from United Way and scroll down for available resources.

2. Create a Priority-Based Spending Plan.

Once you’ve identified resources you qualify for, evaluate your budget and create a priority-based spending plan. Consider all sources of available income and make a realistic list of your expected monthly expenses, prioritizing the "must-haves."

These are things like rent or mortgage, food, utilities, insurance, transportation and medication. Then, do the math. If your adjusted income adds up to less than your total monthly expenses, anything that is not a priority item will need to be deferred as much as possible until the crisis is over and your financial situation changes.

3. Contact Your Creditors.

If you cannot meet all of your financial obligations, contact your creditors to ask for assistance. Some programs are already in place to help stop evictions and foreclosures, so whether you are a renter or homeowner, contact your landlord or mortgage servicer right away to ask for help.

The same goes for providers of automobile, student and personal loans, including credit cards. Creditors might offer reduced payments and fees, deferred payments through forbearance, or other hardship plans.

When you talk with your creditors, be sure to take notes. Write down.

The date and time of your call.
The name of the representative you spoke with.
What you were offered.
How information will be reported to the credit bureaus.
The plan you ultimately agreed on.

Once you agree on a plan, put together a letter summarizing your discussion and mail it to the creditor. Then, monitor your monthly statements to be sure you are receiving the assistance you discussed.

4. Recover Strong.

Although it is difficult to think about future emergencies when you are in the middle of a crisis, consider making a financial recovery plan for once things get back to normal so that you are prepared to handle the next emergency that may arise.

Once you are back on your feet, revisit your monthly budget and commit to regular savings to build or rebuild your emergency fund. Start gradually and set a goal to save $1,000, then keep saving until you have three months of your living expenses put away to handle future emergencies.

If you have debt, consider implementing a rapid repayment plan to pay it down or consider talking with a credit counselor to see if a debt management plan is right for you.

And please remember, these are unprecedented times, and although you may feel alone, everyone is affected by the current pandemic. Take steps to safeguard your physical, emotional, and financial health, and reach out if you need assistance.



big think,bigthink.com,bigthink,big think live,faster smarter,edu,education,educational,educational videos,videos,lifelong learning,sallie krawcheck,sallie krawcheck interview,sallie krawcheck big think,sallie krawcheck podcast,sallie krawcheck speaker,personal finance,personal finance tips,personal finance for beginners,personal finance explained,covid 19 financial,finance corona,finance coronavirus,personal finance coronavirus,personal finance corona

July 16, 2020

Everything You Need to Know About Finance and Investing in Under an Hour

Everything You Need to Know About Finance and Investing in Under an Hour 

Uses a lemonade stand example to provide an overview of the financial aspects of a business (revenue, profits, valuation, growth, pricing, balance sheet, income statements).
Concentrates on investing, including the following key points
In the example, the owner starts with $750, with $250 of that coming from a loan.
Here's an income statement tracking the healthy growth of the lemonade business. By year five, the company has seven stands, supported by an increased margin on products, and makes a profit of $2,311 (earnings before tax).
With some compound interest examples, he highlights the importance of starting early so your money can grow early over time).
He tweaks return assumptions to show how long-term outcomes are impacted by changes in how much your investments return.
Save $10,000 and earn 10% each year, you would have $602,000 after 43 years.
Earn 15% per year, you would have over $4 million after 43 years.
Importance of not losing money as drawdowns can have significant negative effects on returns.

A business owner can take money from a lender, who profits from interest on his loan, or an equity investor, who buys shares in the company. An equity investor stands to make much more money than a lender due to the level of risk involved — if the company doesn't make money, neither does the investor.

What are keys to successful investing?

Invest in companies that are listed on the stock market (liquid, well-known).
Avoid investing in start-up businesses where prospects are not well known.
Invest in businesses that you understand.
Invest at a reasonable price.
Invest in company that could last forever.
For instance, an investor makes a small amount of interest from government bonds because the risk is low — the US government is more secure than any corporation. An investor makes a large amount of interest from loans to business owners because the risk is high.
What kind of businesses last forever? (Examples: Coca-Cola, McDonalds, candy business).

Equity is a "residual claim" because debt must be paid off before investors can profit. Shareholders may make money from company profits called "dividends."

When a company has grown significantly, its owner can sell it for a typically large sum of money, in exchange for control of the business and a shot at future profits.
Sell a product that people need.
Sell a unique product (not a commodity).
Elicit brand loyalty that consumers are willing to.
Find a company with limited debt.
High barriers to entry.
Immune to extrinsic factors.
Has low reinvestment costs.
Generate high amounts of cash flow.
Avoid businesses with controlling shareholders (one shareholder holds majority of company stock).
Instead of growing a business further, an owner can pay himself dividends to put cash in his pocket rather than in the company.
At a moment of strong growth, the business owner can either share profits with a private investor or go public.
When a business files for an initial public offering (IPO), its owners offer a portion of it to the general public, which raises cash, and the company gets listed on an exchange. It requires being transparent and, in the US, reporting to the Securities and Exchange Commission.


When are you ready to start investing?

When you have money you won’t need for 5-10 years.
After paying off credit card debt and student loan debt.
Have 6-12 months of emergency funds set aside.

Psychology of investing.

How to withstand volatility.
Be financially secure.
Don’t get spooked by short-term fluctuations.
Do your own research.
Invest at a reasonable price.

If you don't have the time or desire to invest in individual stocks, you can invest in mutual funds, large pools of funds managed by a professional investor.
Mutual fund companies.
Pros.
Portfolio diversity, even for small investment amounts.
Managed by professional investor.
Cons.
Choice: Over 10,000 to choose from.
Research is required to pick a good manager.

You can also outsource your investing to a money manager.
Reputation for integrity.
Easily explain investment strategy (“the two minute test”).
Has a value approach.
Long-term track record.
Consistent approach.
Invests own money in the fun.

July 11, 2020

How to Stop Being Broke

How to Stop Being Broke.

If you're sick of being broke, it's time to take control of your finances! Whether you need to work on your spending habits, learn how to save, or find ways to earn more money, you can find a way to stop being broke. Follow these steps to start working towards financial freedom and better peace of mind.

Part 1 Getting into the Right Mindset.
1. Set goals. If you want to change your financial situation, you need to get specific about want you want to accomplish. Think about exactly what you want your finances to look like and what you can do to achieve those goals.
Setting short-term goals in addition to long-term goals can help keep you motivated by providing you with a sense of accomplishment.
Create a budget for non-essential items and hold yourself accountable for it each month. If you go over-budget one month, tell yourself that your budget for the next month is reduced as a result.
2. Stop comparing yourself to others. If you're spending beyond your means because you feel that you need to keep up with your friends or show others that you can afford a certain lifestyle, you're not doing yourself any favors. Stop worrying about what others can afford and think about how you can live within your means.
Stop equating your self-worth with your ability to buy things. This kind of thinking will make you extremely unhappy in the long run and will probably get you stuck in debt forever.
3. Track your expenses. To understand exactly where all your money is going, keep careful track of every dollar you spend. You can do this with a pen and paper or electronically if you use a card for everything, but make sure to account for everything. This simple habit will help you spend more wisely.
Try categorizing your expenses and adding them up on a monthly basis. For example, you could create categories for food, housing, transportation, utilities, insurance, entertainment, and clothing. Then calculate what percentage of your income you are spending on each category. You might realize that your expenses in some of these categories are way too high.
To understand how much you can afford to spend each day, subtract your fixed expenses from your monthly income and divide the remaining amount by 31.
4. Make a plan for getting out of debt. If you are broke because you have credit card debt, a car payment, or student loans, think about what you can do to pay off these debts faster.
Making even a few extra payments each year can help you pay off your debts much faster.
5. Start saving. This may seem impossible if you are always broke, but planning for the future will help you get out of this cycle. Start small by just putting $50 in an emergency fund each month.
Don't forget to save for retirement! Take advantage of the 401k offerings at your company or open an IRA account.

Part 2 Avoiding Money Traps.
1. Avoid lending to others. While you may want to help out your loved ones who are in need, you really shouldn't be lending money if you can't afford to pay your own bills.
2. Avoid payday loans. While they may seem like a good solution if you're strapped for cash, the interest rates are ridiculously high, so they will only get you further into debt.
3. Understand how much it will really cost. Before you take out any kind of loan or finance any purchase, be sure to calculate what your monthly payments will be, how long it will take you to repay the debt, and how much you will be paying in interest.
In some cases, paying interest may be worth it. For example, most people cannot afford to purchase a house without taking out a mortgage, but depending on the price of the house and the average cost of rent in your area, you might still be saving a significant amount of money by choosing to buy with a mortgage instead of renting.
Be especially wary of high interest rates for depreciating assets like vehicles. If you decide to sell your vehicle after you have owned it for several years, it may be worth less than what you owe on it. This can also happen with real estate when the market conditions are poor.
4. Avoid impulse buys. If you always have a plan for what you will buy, you will have a much easier time managing your finances.
If you have a hard time controlling your purchases when you go to the mall, try to avoid going to the mall at all.
Write out a list when you go shopping so you will always know exactly what you need to buy.
5. Use credit cards wisely. If you have a harder time keeping track of your expenses and sticking to your budget when you use a credit card, stop using it.
Paying with cash instead of a credit card will allow you to visualize how much of your available funds you are spending on a given purchase.
If you are able to stick to your budget when using a credit card, look for one that has no annual fee and will reward you with cash back or other incentives. Just make sure you always pay your bill on time or these incentives will not be worth the price you are paying in interest.

Part 3 Spending Less.
1. Assess your daily or weekly spending habits. Once you have a solid grasp on what you are spending your money on, you can start cutting out expensive habits.
2. Buy used items. You can save on everything from your next car to furnishings for your home by buying gently used items.
You can sometimes find really great clothes that have barely been worn at thrift shops for a fraction of the price.
3. Look for monthly expenses that can be cut. If you pay for monthly memberships or subscriptions, carefully assess how much they cost, how much you use them, and whether you could give them up.
Make sure you're not paying for services that you never use. For example, if you have premium cable channels that you never watch, you can cancel them without feeling like you are making any sacrifices. The same goes for your cell phone bill if you are paying for more data than you ever use.
4. Compare items or brands when shopping. If you're on a tight budget, you want to make sure you're always getting the best deal on absolutely everything. Take some time to compare prices for items you purchase regularly and for large purchases.
If you've had the same auto insurance carrier or cable company for a long time, there might be better deals out there, so be sure to comparison shop regularly.
Shopping for necessities online can be cheaper in some instances, but make sure you take shipping charges into account.
Use coupons to save some extra cash. Keep in mind that many retailers accept competitors' coupons.
5. Ask for a better deal. You can always ask your service providers for better deals, especially if you've been a loyal customer. The worst they can say is no.
Try this with your cable and internet providers, insurance companies, and cell phone carriers.
6. Spend less on entertainment or at restaurants. Whether it's dining out or going to amusement parks, entertainment can eat up a big chunk of your budget. Look for less expensive ways to have fun.
Learn to cook at home and keep the fridge well stocked with ingredients for things that you know you can cook from scratch when you come home late and don't have much time to whip up a grand meal.
Instead of going out to eat with friends, invite them over for a potluck.
7. Do more yourself. It may be convenient to use a laundry service or to have someone else shovel your driveway, but if you're physically capable of doing these things yourself. Think about the money you can save.
If you're not very handy, try to teach yourself to do more around the house. If you need a simple repair done, you may be able to watch a video online or take a class at a local home improvement store to learn how to do it yourself.
8. Save money on energy. Go green around the house to save money on your utility bills each month.
Sealing up air gaps can reduce your heating and cooling bills. If you own your home, investing in a properly insulated attic can make a huge difference.
Turning your heat down just a few degrees in the winter can make a big difference in your energy bills as well. A programmable thermostat will let you automate the temperature of your house so you won't spend money on heating the place to a comfortable level when you're not at home.
9. Avoid bank and credit card fees. Choose your bank and credit card providers wisely in order to avoid unnecessary fees.
Make sure to only use the ATM at your bank if you will get charged for using outside ATMs.
10. Aim to have a few no-spend days a month. After a while, it becomes a game: "How can I run my life today without writing anything down in my little blue book?" "How ingenious can I be to make do with the things, food, and resources I already have at my disposal?" See how often you can turn this into a habit.

Part 4 Earning More.
1. Get a better job. If spending less is just not enough, it may be time to get a better job that will allow you to make more money. Start by updating your resume, searching for listings online, and networking with other professionals in your field.
Don't forget to look for advancement opportunities within your company.
2. Do something else on the side. Using your skills to provide freelance or consulting services is a great way to earn additional income. If this won't work with your profession, get a part-time job or find creative ways to make some extra cash on the side.
You can make some extra money by performing jobs like mowing lawns, cleaning houses, or even walking dogs for people in your neighborhood.
3. Sell stuff you don't need. You probably have at least a few possessions that you no longer need or want, and you can turn those items into extra cash by selling them to people who do want them.
If you have lots of unwanted items, try having a yard sale.

Community Q&A.

Question : My family barely has any money. My dad has his own company, but it hasn't gotten any business in a long time. I have some money saved up, and I was think of leaving a little in my dad's wallet. What do you think?
Answer : Definitely do. Work as much as you can and give and much as you can. Also putting your family's money in a good, interest-bearing account can help a lot.

Tips.

To always have money in the bank to pay regular bills, add them up for the past year and divide by 52. Round up to the next 25, 50, or 100 dollars. Remember to add in quarterly or annual bills, too.
Buy clothes that can be used for several different occasions instead of only one-time events.
Use coupons on items whenever you can.
Start a Christmas Club account, but put in more than you expect to spend on gifts. The excess is great for a mini-vacation or special purchase.
Get a jar to collect your spare change. When it's full, take it to the bank. (Don't take it to one of those coin counters, as they charge for counting your change.)
Take it a day at a time. Start small, set goals, reward yourself (not with any type of shopping, of course) and enjoy playing the game.

July 02, 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 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 Create a Profitable Property Portfolio

How to Build a Diversified Portfolio.

“Don’t put all your eggs in one basket” is sound advice in life as well as in finance. Diversifying an investment portfolio can help cushion the ups and downs of the market and the broader economy. You can diversify by investing simultaneously in different asset classes. These classes include stocks (or "equities”), bonds, the money market, commodities, precious metals, real estate, gemstones, fine art and any of several other valuable assets. Because most growth in wealth comes from owning stock, equities also represent the most risk in a portfolio, so you will want to diversify your stock holdings. The following article presents a number of commonly acknowledged steps in building wealth through a diversified investment portfolio.

Method 1 Diversifying in Stocks.
1. Invest in many different companies. When you buy stock, you buy a share of the ownership of a company. You can buy stock in individual companies by using an online broker, such as E-Trade, Charles Schwab or TD Ameritrade (among many others). Do not, however, commit a large portion of your money to any single company. If such a company were to get in trouble, you could lose most of your money.
For example, Snap Inc. received a lot of press when it went public in March 2017 with shares priced at $27. However, by the following August the stock price had fallen to $11 per share. That's a drop of about 60%, which would have really hurt someone who had invested a large amount of money at the opening price.
To avoid such a disaster, limit your investment in any one stock to 5% or (preferably) less of your total portfolio.
2. Invest in different sectors. Entire industries often rise and fall as a unit. If the price of oil surges, most oil-related stocks will rise as a group. When the price of oil dips, oil-company stocks tend to fall together. You can protect yourself against this risk by investing in several different industries or sectors of the economy.
Major sectors include technology, health care, financial services, energy, communication services, utilities and agriculture.
The industries or sectors you choose should have a low correlation to each other. That is, invest in various sectors whose stock prices tend to fall at different times.  For example, technology and communication services might be too closely related. On the other hand, energy and health care are not closely related and might be expected to rise or fall separately.
3. Look at foreign stocks. As the economy in one country falters, the economy in other countries might be doing well. For this reason some experts recommend that you diversify by buying foreign stocks in addition to the domestic stocks you own.
Buying stock in multinational corporations automatically exposes you to international markets. For example, if you buy McDonald’s stock, you are already investing in foreign markets, since McDonald’s has expanded into more than 100 countries.

Method 2 Investing in Other Assets.
1. Diversify with bonds. When a company or government need to raise money, they may borrow it by issuing bonds to the public. A bond is a promise to repay borrowed money, accompanied by a certain amount of interest. Owning bonds is a good way to hedge against equity risks, because bond values tend to move in a direction opposite to stock values in general.
You can buy individual bonds or invest in a bond mutual fund. A bond fund holds a portfolio of many different corporate or government bonds. Research a fund to see how diversified its holdings are before buying shares. As with equities, bond diversification is very desirable.
Bonds are rated based on the issuer’s creditworthiness. Find bond ratings at Moody’s or Standard & Poor’s credit-rating services. A highly-rated bond will offer a lower interest rate but a higher likelihood of repayment. Choose bonds or bond funds that reflect your tolerance for risk. An aggressive investor (whose risk tolerance is high) might choose bonds with a higher interest rate but a lower safety rating.
2. Invest in U.S. Treasury bonds or bills for increased safety. U.S. Treasuries are the safest securities you can own. You lend money to the U.S. government and receive a promise for repayment. Treasury bonds often rise when the stock market falls, so they are a good way to diversify your portfolio.
3. Consider money market funds. Such a fund is similar to a savings account. The fund invests money in low-risk vehicles such as certificates of deposit and government securities. You can buy CDs and government bonds yourself, but a money market account can be more convenient, because it will do the investing for you at a nominal fee.
As an added benefit, some money market accounts let you write checks (or use a debit card) on the account. However, you will be limited in the number of withdrawals you can make per year.
4. Forget commodities. Some experts recommend diversifying by buying commodities such as oil, wheat, gold, and livestock. These commodities have no correlation to the stock market, so the value of these commodities should be unaffected if the stock market collapses. However, commodities are a poor bet if you are looking to buy and hold investments. Commodities are meant to be traded regularly and are therefore considered speculation (gambling) rather than investment.
5. Invest in real estate. One way to do this is to buy an apartment building and rent it to tenants. However, you may not have the time or energy to involve yourself in what can be a complicated endeavor. Instead you might invest in REITs, real estate investment trusts. With this option you invest in companies that own real estate. In exchange for your investment, you receive a share of the companies' income.
Many REITs charge very high fees, so they might not be the best way to diversify your portfolio.
Another option is to invest in a mutual fund that invests in REITs. This can save you a lot of research time by letting the fund managers do the research for you. You do pay for that service, of course, but it may be worth it to you if you value your time.

Method 3 Investing in Mutual and Other Funds for Diversity.
1. Diversify easily with mutual funds. A mutual fund is a portfolio operated by a fund manager. Buying into a mutual fund is a great way to diversify because each portfolio can hold multiple equities and other assets. For example, a mutual fund might hold stocks and/or bonds from 40 companies in various sectors. By buying into a fund, you can get instant diversification.
However, mutual funds are not automatically diversified. Everything depends on the assets held in the portfolio. Carefully analyze the individual holdings in the portfolio. Some mutual funds will be better diversified than others.
If you invest through an employer-sponsored plan (such as a 401k or an IRA), chances are you are investing in mutual funds.
2. Invest in an exchange traded fund (ETF). An ETF is like a mutual fund, except you buy it on a stock exchange, not from a fund. ETFs generally have lower fees than mutual funds, so they are a good option for investors.
As with mutual funds, an ETF is not automatically diversified. For example, you might buy an oil ETF, which is concentrated in one industry. Carefully analyze the underlying investments to make sure the ETF has the necessary diversity.
3. Consider an index fund. An index fund is a mutual fund designed to track an index, such as the Standard & Poor’s 500 Index or the DJ Wilshire 5000, which tracks the entire U.S. stock market. It is an easy way to get broad market exposure and thus diversify.
Remember that you want to diversify across asset classes. Don't forget bonds, Treasuries and the money market. Some funds do invest in these other assets.
Remember, too, that all mutual funds and ETFs charge fees for their service. Investigate the size of those fees before committing money. There are many good funds that charge total fees of less than 1% of your account balance, so there is no valid reason to pay more than that.  If you do your research, you should be able to find funds that are properly diversified.
With respect to equities, aim to hold at least 20 stocks spread across various sectors. You can invest by picking individual stocks, or you can more easily diversify by investing in a fund that contains hundreds of stocks and/or bonds.
4. Get expert advice. Every person’s situation is different, and there’s no one right diversification approach for everyone. Instead, you should meet with a "fee-only" financial advisor who can help you analyze your situation. Look for an advisor who is a certified financial planner (CFP). To earn this designation, candidates must meet certain experience, education, and ethics standards. The advisor should also be a fiduciary, someone legally bound to work primarily in your best interests. (Just ask, "Are you a fiduciary?" If you don't get an immediate "yes" for an answer, find another advisor.)
You can find a fee-only financial advisor through the National Association of Personal Financial Advisors. A fee-only advisor is one who does not earn a commission by recommending the purchase of specific financial products.
Discuss your investment goals with your advisor. Many people invest for retirement, and what qualifies as a well constructed portfolio will change over time. As an investor gets older, they will want to increase the ratio of bonds to stocks in their portfolio in order to diminish risk. (Some mutual funds can do that for you automatically.)

Method 4 Buying and Selling Intelligently.
1. Analyze your risk tolerance. How comfortable are you in taking financial risks? The more aggressive an investor is (the larger the rewards they hope to achieve), the larger the stock portion of their portfolio -- and the greater their risk tolerance -- will have to be.
A conservative portfolio might have only 20% in equities, 70% in bonds and 10% in cash and cash equivalents (including certificates of deposit, banker's acceptances, treasury bills and other money-market instruments).
A person more tolerant of risk might invest 70% in equities, 20% in bonds, and 10% in cash or cash equivalents.
2. Invest on a periodic basis. Let’s say you have $6,000 to invest in a year. If you invest all of that money at once, you might inadvertently buy into the market at a moment when equities are priced relatively high. A better option is to invest $500 a month. You would invest the same amount of money in a year's time, but as prices rise and fall, it's likely you would acquire a larger number of shares by year's end.
This type of investing is called “dollar-cost averaging,” and it allows you to take advantage of the inevitable price dips that regularly occur in the market.
3. Avoid market timing. You might dream of getting into the stock market at a price bottom and then selling at a peak. Many people who try to "time" the market in this way end up losing money, because recognizing a market peak or bottom isn't possible until after the fact.
4. Choose appropriate assets based on when you plan to withdraw investment income. For example, if you have 40 years before you plan on retiring, you can ride out peaks and valleys in the stock market. There’s less reason to worry if the market falls when you are in your 30s, because you have plenty of time to recoup your losses. A younger person can afford to be more aggressive in their investing than an older person.
5. Rebalance your portfolio when necessary. Building a diverse portfolio is not a one-time event. Instead, you may need to rebalance your portfolio periodically. Review your investments once a year, and see if they still align with your investment goals.
You might need to rebalance if some assets outperform others. For example, your equities might be on a hot streak for six years. Although they were 50% of your portfolio when you started investing, they now make up 70% through price appreciation. Assuming you still want stocks to form 50% of your portfolio, you’ll need to sell some stocks and replace them with bonds or other assets in order to maintain your preferred ratio.
Rebalancing might trigger tax consequences or transaction fees. Carefully analyze the process with your financial advisor before going ahead.
If you invest through a "balanced" mutual fund, they will typically do this rebalancing for you automatically. (A "balanced" fund invests in both stocks and bonds.)

Warnings.

Diversification can manage risk, but it cannot completely eliminate it. Diversification won’t save you if the entire market goes into a tailspin, as it did in 2008 and 2009. Nonetheless, diversifying is a critically important tool for all investors

April 01, 2020