Value Investing Part 3: Stock Selection

In part one of this value investing string, I discussed some pitfalls of self investing, primarily buying high /selling low, leaning too heavily on past performances to make stock selections, and most importantly not being prepared to to make value selections.

Part two went into a little more detail of the value of compound investing. I gave a more tangible example of the perks of long term investing by maximizing the benefits of compounding, as well as giving specific examples of how this makes your money work for you.

Finishing up this series, I will review some of the thought processes that I go through when I am researching stock options. Before I go any further, I should explain my thoughts on value investing.

Value, in my opinion, is buying anything that you find useful at a cost below the generally accepted price of that item. Value does not mean cheap, nor does it mean “good to have.” In order to have true value in something, it must be something that you genuinely need, and not simply want. Value does not mean buying something just because it is cheap nor does it mean buying an inferior product simply because it is low cost. Mr. Buffett has been quoted yet again “It’s far better to buy a wonderful company at a fair price, than buy a fair company at a wonderful price.”

For example, lets say I found a terrific deal on widgets. I was able to buy ten of them for 40% of their accepted value. I am able to use one of them leaving me with nine remaining. The first widget was purchased at a great value because I have a use for it. The remaining widgets were not a value because I now have nine very expensive pieces that offer no value to me because I can’t use them. Sure, I can try to resell them at 60% of their value and make a nice profit, but without a plan prior to the purchase, what do you think the odds are of me actually reselling all of these and making money. It certainly sounds like I may have purchased an item or items at a great price, but of no value to me. If I owned a widget shop, this story has a totally different meaning, because this purchase now has value to me.

Value investing is purchasing a stock (mutual fund, ETF, etc.) with a price below the intrinsic worth of that stock. Another term that is often used to identify these types of stock is one that is undervalued. Some may say that a low P/E Ratio is a good indicator of a value stock, and I would agree in some respect, but this is only part of the story. Remember Warren Buffett says “Price is what you pay, value is what you get.”

One of the most popular, and often misunderstood ratios is the P/E ratio, so lets start there. The P/E Ratio values a company by measuring its current share price relative to its earnings. Currently the P/E Ratio for the S & P 500 is roughly 19 – 20. It would therefore make sense that any stock with a P/E Ratio below 20 is a good value. Well, not necessarily. When trying to assess the true value of a P/E Ratio, we must also take into consideration the industry average as well. For a more detailed explanation please review this article on Generally speaking I love to see a company’s P/E Ratio in the single digits as this typically is equivalent to a bargain basement price, but do remember to make some exceptions for certain securities as long as it is below the industry average and/or below its historical average. In my opinion, a forward P/E is much more valuable than the current P/E, looking retrospectively.

When I research a  potential company to invest in, I pay particular attention to the P/E Ratio as it gives a wealth of information, but it is not the only parameter that I review. I will identify what I feel are the some of the more important considerations when evaluating stocks. I will attach a link to the Investopedia site defining each parameter, simply because they do a much better job at defining and explaining these terms than I ever could. Here is a list of other considerations that I use to identify value stocks (in no particular order):

(1) Debt Ratio (D:E):  I’m looking for low leveraged companies here. The lower the debt the better. The NYU Stearn School of Business posted the average sector debt ratios for stocks based in the U.S. as of January 2016. As you can see, these ratios vary greatly depending on sector, so it is important to distinguish the sector that your stock is in to guide your evaluation.

(2) Current Ratio: The current ratio is used to measure the ability of a company to pay back its liabilities. Generally speaking a current ratio less than 1 is not good, as this infers that the liabilities outweigh the assets of that company. I look for companies with a current ratio above 1.5.

(3) Earnings (EPS): This is probably the easiest parameter to review but is often the most over looked. At the most basic level, I do not invest in companies that do not make money (show consistent earnings) Companies that do not make money go bankrupt. Graham expands on this further saying he looks for companies that have progressive positive earnings quarter after quarter. I am not so rigid in this category as I like to see upward trends, therefore a hiccup now and then doesn’t bother me as long as I can explain the reason for the drop and that it is a rarity, not the norm.

(4) Book Value (P/B): The book value of a company can help determine if the stock is over or under-priced based on assets that a shareholder would receive if the company were liquidated. I have seen some estimates that call for P/B’s below 1.20, but I feel this is too restraining. I like to look for values under 2.

(5) Dividends:  I love dividends. If used correctly, dividends can be your friend, if used incorrectly they can be a nightmare. Essentially, dividends are good for the value investor because you are purchasing these companies at a rock bottom price and they may take some time, often feeling like an eternity, to have their share price start moving up. While you are waiting you can be collecting dividends on a fairly safe investment. I like to see at least 2.5% but anything over 2% has significant value. Be wary of high dividends with elevated payout ratios, as they may be purposely set high to attract investors and mask deeper issues within the company. Companies that pay dividends, in my opinion, are considering the investor’s stake in the game as well.

There are other advantages to dividends, especially consistently performing dividends. Do your own research on dividend aristocrats, I think you will find it interesting. A great read regarding the benefits of dividends is Shareholder Yield, A better Approach to Dividend Investing by M. Faber.

(6) Return on Equity (ROE): ROE is the amount of net income returned as a percentage of shareholder equity. It tells how much money a company has turned by the use of shareholders funding. My favorite podcast Investtalk likes to use 17% as a base measurement, and I would tend to agree.

(7) Price Earnings to Growth Ratio (PEG): Some would actually say that the PEG may be a better indicator of a companies value than the P/E Ratio. I wouldn’t agree, nor would I disagree, it’s the same only different. The PEG evaluates price and earnings but adds growth to the mix as well. I like the PEG to be less than 2 as a value indicator.

(8) Price to Sales Ratio (P/S):  A price to sales ratio compares the companies stock price to its revenue.  I like to see a P/S less than 2 as a general indicator, but I also like to compare this to the sector average as well. For my evaluations price to P/B and P/S are minor indicators.

(9) Chart Technical Data: A true value investor should not be concerned with the actual price of a stock, but they should understand when is the best time to buy. I look at a few technical aspects of the charts to make a decision when to buy, not if to buy.

I like buying when the chart is sideways or starting an uptrend. There are also some consideration regarding simple moving day averages and when to pull the trigger. If I have decided to wait until an uptrend to purchase, a 10 day sMA is a good place to start, with a decision likely around the 20 day sMA and I would hope to make a decision before it hits the the 50 day sMA otherwise you will see a lot of profit go out the door.

The bottom line though is, don’t buy on the down-slope, otherwise you are catching a falling knife. Don’t be afraid to wait for a pull back or a dip in the market. Technical data should never be used to determine value of a stock, however it does help you decide when to buy. I also like to use MACD, RSI and OBV as indicators of when to buy.

(10) Moat: The moat is the story behind the company you are considering. What makes it special when compared to all of the others, a competitive advantage as Warren (yes we’re on a first name basis now) calls it. The economic moat is literally the body of water (competitive advantage) surrounding the castle (stock) protecting it against invaders (volatility). The wider the moat, the safer you are.

I certainly did not invent or create this concept myself. I did my due diligence in research and looked to the masters of value investing, Warren Buffett and Benjamin Graham. All I do is simply apply their work and adapt it to suit my needs, experience and resources. There are many other fundamental aspects to consider like ROI, ROA, Revenue, Growth, most certainly the balance sheet, etc., but these 10 elements are what I use to get me started, all of the other stuff is fine tuning a decision.

I’ll end this series with another quote from, you guessed it, Warren Buffett “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” I like to think that I hang out with Warren and Benjamin on a daily basis, they get absolutely nothing from me, but I have learned a great deal from them.

Garden Plan 2016: Seed Stock

This is the time of year that the seed catalogs have been read thoroughly, multiple times in my case, and the orders have been put in. It just so happens that I actually got my order in early this year and my seeds have arrived!

I actually save a good bit of my seed from year to year, as I usually only grow open pollinated varieties, most of which are heirloom. The only exception to this “rule” would be sweet corn. I have yet to find an open pollinated variety that tops Bodacious, but I keep trying. Bodacious is a hybrid variety, non GMO, corn that is fantastic right off the cob, and freezes very well. Last year we processed 43 dozen!

Generally speaking, I plant lots of tomatoes, potatoes, corn and peppers. These are staples for almost everything we prepare in the kitchen and store very well for future use. We eat the tomatoes fresh, dry them for flakes, and make a ton of sauce and salsa with them.

I always grow Yukon Gold potatoes. If you have never eaten a Yukon Gold or a homegrown potato for that matter, do yourself a favor this year and try growing them. They are easier to grow than you think, dig a hole, place in the seed potato, cover the hole with half the soil, and wait for the greens to get 8-12 inches tall then mound up more soil. Hill them one more time and then wait for 2/3 of the greens to die back in the middle of summer and dig them up. If you don’t have the room, grow bags would be a good substitute, I would imagine (I have never tried it before).

If you do grow these spuds, you will never be able to eat a store bought potato again. My favorite way to eat a Yukon Gold is mashed with the skins on or baked. They are fantastic, you almost don’t need any butter, they are so flavorful. They are heavy feeders though, so make sure you mix in lots of compost.

I grow a variety of peppers as I like to dry them and process them into flakes for cooking. We’ll also eat them fresh as part of meals (think stuffed peppers), in salsa and canned for use over the winter as well. Hot, mild, sweet, I show no prejudice when it comes to peppers, well except for green bell peppers. How anyone can eat a green bell pepper, Ill never know, I always wait for them to mature and turn orange or red, the flavors are fantastic.

Aside from these staples I also grow a variety of others vegetables such as peas, beets, cauliflower, drying beans, green beans, carrots, cabbage, cucumbers, muskmelons, watermelon, onions, a variety of lettuces, garlic, broccoli, and herbs.

I have about a dozen fruit trees but only a few of the apple and cherry are ready to produce fruit this year. My plum, chestnut, pear, and peach trees are a few years away from any significant yield.

I’m going to try brussel sprouts again this year, but I’m not holding my breath. This is one of those things that I just do not have much luck with, I’m just not sure why. That’s a shame though, I love them fried in butter!

This is a bad time of year for me, sitting here looking at these seeds staring me in the face screaming “lets get moving!” It’s way to early for that, I won’t even think about starting broccoli and cabbage until the end of February. The peas, beats and potatoes will go in as soon as I can work the ground.

Until then, I’ll just sit back and relax, or try to at least. I have been considering growing some lettuce in the basement under lights, maybe that will satisfy my appetite to start growing something.


Growing Organic: My Take on the Subject

organicI had been asked the other day if I am an organic gardener. I actually had to think about this for a moment, because I really hadn’t put much thought into it. The simple answer is yes, I would be considered an organic gardener. The complicated answer still yes, but I don’t want to be considered an organic gardener.

Let me explain:

I do not use non-organic pesticides or chemical fertilizers. Pesticides are bad news on multiple levels, and you simply can’t escape them. I do not see the need for chemical fertilizers given the fact that I can grow my own compost in bulk, as I have demonstrated many times in this blog. I use compost primarily, but will supplement with fish emulsion, liquid kale, and Epsom salt (sparingly) and a small amount of Plant Tone or Garden Tone when I transplant.

I like to make my own seed starter mix as well with coconut coir or shredded leaves, worm castings, and crushed egg shells. This mix has worked quite well over the years, although it is a bit of work. Fortunately for me the time is spread out over the year continuously crushing our used egg shells and processing the worm castings. When I am ready to start my seeds, its just a matter of mixing it all together.

I like to handle pest management with hand picking when I can, although admittedly is not as often as I would like it to be.

I have become a firm believer in neem oil. I have struggled with pest control for years until I discovered the mighty neem, and have been very happy with it. It’s not perfect, but I am harvesting a lot more than I have in the past, so it’s a win for me. When I am able to identify a specific pest I can have a more narrow spectrum with the control, such as Bt for most types of caterpillar, i.e. cabbage worm.

I am really happy with the way my pest management plan is going because I believe “nature” is keeping it in balance. I found a total of two tomato horn worms last year, not bad for over 75 plants, and this was one of them.

See those white spots on the hornworm? That is “nature” taking care of my garden, the parasitic wasp. There is no way this would happen of I used pesticides and salt based fertilizers.

I’m fairly confident that staying away from the harsh pesticides allows beneficial insects like the Braconid wasp to do their job. The Braconid (parasitic wasp) is a non stinging wasp that is the arch nemesis of the tomato horn worm. It will lay its eggs on the back of the tomato horn worm (see above) and as they mature, they will eat the caterpillar from the inside out. I let this guy alone and tucked him away, back into the tomato plant, knowing the little he will eat, will be peanuts compared to the benefit of letting these all of these eggs mature.

The one pest that is driving me nuts is the Japanese beetle on my cherry trees. The neem oil just isn’t effective. These beetles have skeletonized my cherry trees for the last two years. They are only 4 years old, with two of those years on my property and I am concerned they will eventually be killed by the beetles. I have a plan next year for neem oil and diatomaceous earth (DE).

I practice organically, however should I ever choose to sell my harvest at the local farmers market I cannot sell any of it under the “organic” label, because I am not “certified organic.” I understand the thought process that goes into this certification, and the reason for it, but unfortunately the government has once again stepped in and undermined it, using it for some sort of revenue generation charging hundreds to thousands of dollars to obtain and maintain this certification.

The USDA criteria for organic certification can be found here. A general reading of this site makes you all warm and fuzzy, organics are saving the world. The real truth can be found here, here and here.

A pilot study testing organic crops was completed in 2012 and the results were startling. This study revealed that only ~82% of the broccoli samples were found to be pesticide free. Only 67.2% of the apples were found to be pesticide free, as well as only 65.5% of the tomatoes. If this wasn’t bad enough, these data also showed that only 16.4% of the sampled organic potatoes were found to be pesticide free. Of the 571 organic samples that were studied, conducting more than 110,000 individual analytic tests, only 57.3% were found to be pesticide free.

Granted some of these pesticides are likely on the approved organic list, but my point is, the organic tag is not all it’s cracked up to be, and we have all been deceived. Take methyl bromide for example, it is not on the approved organic pesticide list, however it is allowed to be used by a select few organic farmers with special approval by the government, we’ll call it the less toxic cigarette. Just ignore the fact that methyl bromide is classified as a “highly acute toxic” substance by the EPA, or that methyl bromide is highly volatile and almost all releases of it are into the air, which by the way has a half life of about a year.

Another example of the organic hypocrisy is Bt (Bacillus thuringiensis) that is so widely used as an effective organic insecticide used to kill caterpillar type pests. I have admitted to using it myself, and it is effective. The issue I have with this product is the same people that are using it for their organic gardens are crying foul to the use of Bt in GMO (genetically modified organism) products such as corn.

Either you are organic or you aren’t, you simply can’t have it both ways. In the past I have chosen to stay out of the organic argument simply because, just like they do when they get their hands on most things, government entities have ruined the spirit of the movement.

Having said that, will I chose organic products over non-organic when given the choice? Absolutely, especially when considering the “Dirty Dozen.” Does this mean I will fall into the organic trap and close my mind to the reality of it all?  No way, the only way to know what goes into your food is to grow it yourself, and that what I am trying to do every day.


Zone 6B Garden Calendar: January

The Farmers Almanac tells us that in zone 6B, the month of January falls 12 – 16 weeks before the last frost date (April 23).

First thing first, I realize we discussed the frost dates in the introductory post and I stated that the Farmers Almanac is calling April 23rd the last frost date (LFD) for my area, however as I review several websites searching for planting guides, I noticed some significant discrepancies regarding this date. I have noticed LFD’s from as early as April 23rd to as late as May 15th.

Take it for what it is worth, with almost a month of varying dates, it is wise to simply pay attention to the weather and consider the adage of better safe than sorry. Transplanting seedlings in 50-60 degree weather for a few extra weeks, doesn’t give much advantage in my book, and the risk of losing a significant amount of your hard work due to frost is simply not worth the risk.

The Urban Farmer suggests that the first week of March is the earliest time to start seedlings indoors for cold hardy plants such as broccoli and cauliflower, so this being January we have plenty of time to prepare.

January is the month that I take inventory of all my gardening supplies, seed starting supplies, and seed stock. I will order any seed I need for the upcoming year that I haven’t saved from the previous season. I grow mostly heirloom and open pollinated vegetables so I save quite a bit. I do, however, incorporate fresh seed into the mix every 3-4 years as I am not the best at isolating my seed stock.

This is also the time that I run a few germination tests on my saved seed. I like to hit an 80% germination rate, if I don’t, its time to get fresh stuff. The last thing I want to do is waste my time starting a bunch of seeds that have no chance of producing for me.

There are generally a few days right after the new year that are not terribly cold, so I try to take this time to work on garden tools that are in need of repair and get my machinery up and running. Oil changes, general cleaning and sharpening are in order. This is the best time of the year to do these things, as there is little else going on and the last thing I want to do in the spring is stop what I am doing and tune up engines or sharpen tools.

I generally check my compost pile around this time of year as well with a compost thermometer. If it is still in the cooking range, generally around 120, I let it go for a few more weeks. If it is borderline or on the downtrend, I’ll turn it and check it again in another month or so.

I may actually consider starting herb seeds this year under my grow lights. I have always struggled with herbs as when it comes time to plant the seed, I usually get busy with other spring chores and lose sight of this task. I eventually end up directly sowing the seed in the spring and don’t give myself enough time to actually enjoy these herbs before they bolt in the summer.

This is also a good time to do any building for the spring planting. I have a goal to build a small cold frame for my uncle so he can start his seeds a little earlier as well. I would like to build a solar dryer for preserving vegetables as well, but we will see how it goes.

I will likely get to one of these projects but not both, because winter is generally the time of year where I can get out to the wood shop on a consistent basis, and I don’t want to spoil that time.

January is a relatively lazy month, when it pertains to gardening, so I will enjoy the rest. It won’t be long before I start asking myself where did all the time go….




Tired of High Prices at the Pump? Don’t Blame Big Oil.

Are you tired of the ever increasing price we pay at the pump for gas? I know I am. I have certainly enjoyed the slight reprieve over the last year as the big oil companies of the western hemisphere and middle east duked it out.

If you are as bothered as I am about this, don’t blame big oil, at least not totally. As of October 2016, U.S. residents paid approximately 30% in taxes on regular gasoline, and diesel was even higher.

With 2017 upon us, the government ran up the tax rate another 8 cents per gallon in Pennsylvania, who just so happens to have the highest fuel tax rate in the country anyway. In case you were wondering the national average is just over 48 cents a gallon, my fellow Pennsylvanians now pay about 78 cents a gallon simply for the right to buy it.

Where does this money go you ask? Apparently these funds are used for bridge and road repair as well as paying our State Police salaries. Don’t get me wrong, I’m a supporter of our State Troopers, but really? Is the government that strapped for cash that they have to rob the residents simply to pay for police support?

If you have ever been to Pennsylvania, you will likely have noticed that the roads significantly degrade as you cross from any of the bordering states. In fact it is so obvious, I would suggest the government save a little money by not having any of the “Welcome to PA” signs that are placed at our borders, the change in road quality will let you know you crossed long before the sign ever does.

Oh well, if this theft of taxes gives us better roads and bridges then so be it, it’s a small price to pay for these much needed upgrades. At least our turnpike fees are stable, oh yeah, they went up another 8% as well this year….

Maybe the government elites should simply tighten their belt a little as we all have done recently, and stop the pet projects and frivolous spending, it’s really getting old.


Zone 6B Garden Calendar: Introduction

Winter gives the homesteader time to catch up on things and to prepare for the next growing season. Just as the soil and vegetation enjoys the resting phase, so do I. Personally I enjoy the break, but by February, I am usually chomping at the bit to get started again.

I thought it would be interesting to chronicle the activities I complete, or plan to complete, during each month of the year from a growing perspective.

Any timeline needs to have a starting and stopping point. I am not at all suggesting that the homesteader ever has a stopping point, but the growing season does to some extent. Currently I do not grow in greenhouses or cold frames (hopefully this will change someday) over the winter months (3 season garden) so I base my calendar according to the expected first and last frost dates for my area (Zone 6B).

I think it is important to mention that the frost date (either first or last), or as it is officially known as, “the average frost date for zone (Insert your zone here)”, is just that, an average frost date. Why is this important you ask? Because whatever date this falls on in your region, there is a 50% chance that you may have a significant frost event after the last frost date in the spring and before the first frost date in the fall.

Frost dates should be used as a guide and not gospel. According to the Farmers Almanac my zone’s (6b) last frost date is April 23rd and the first frost date is October 19th, giving me 179 frost free growing days. Remember this is an average frost date. I won’t consider planting cold sensitive vegetables until well after the last frost date in April. Even then I evaluate how the season has been going thus far (average day and night temps, rainfall, etc.) and make the decision to plant or hold off another week. Generally this him-hawing around has me planting around June 1st.

To be perfectly honest, I have been burned too may times by planting cold sensitive vegetables too early simply because I have been impatient and want to get something in the ground. For this reason, I generally do not plant any cold sensitive transplants before Mothers Day and I plan direct sowing by ear. Beats, lettuce, peas, potatoes, etc., go in as soon as I can work the soil. Something like corn, will usually wait until the end of April, and then get planted every two weeks for two or three sessions.

So, I guess that’s were we stand for now. I’ll try to post these articles in a timely manner, but I want them to be interactive as well, with actual pictures and descriptions of what I am doing so this will likely not be a “do this now” series, but more of a “look what I just did” perspective.


Personal Finance: Retirement Savings

In the last several posts, I have been discussing methods of personal finance, the basics as I see it anyway. I have tried not to make this series into a playbook of financial freedom, or even worse some kind of “Financial Freedom in Three Minutes per Day” foolishness. I tried to write about what I thought were the most basic of concepts, and what I thought were the most frequent mistakes that people choose to rob themselves of financial security. Financing a car (or worse leasing), depending on social security, living beyond ones means, etc., are the pitfalls I see most often with friends and family who do not own financial security for themselves.

What I would like to show with this post is that people do not need to be born with a silver spoon in their mouth, or make a six figure income to become financially secure. Being dedicated to financial freedom and treating debt like the four letter word that it is, is half the battle. Appreciating that you don’t need the latest and greatest gadget that just hit the store shelves (that will eventually be lost in a corner in the basement in 6 months) is just the first step in recognizing the downward spiral that is making you a slave to debt.

You have to start somewhere, and becoming debt free or never entering into serious debt is a key concept for future investing. If you haven’t read my Get Debt Free post, you may want to start there. Once debt freedom is achieved, investing will be less of a burden on you and your finances, and give you little excuse not to do it. In all honesty, investing toward your financial freedom will be fun in the respect thou you will get to watch your hard work turn into your future security.

Lets start off with a few simple illustrations of what money saved now can do for your future. I’m not saying that investing can’t start when you are very young (remember your piggy bank?), in fact it should,  but I want to show a more realistic example of somewhere that we all have been, and where we all can be.

Let’s imagine you are finally out of school (military, trade school, college, whatever) and have a few years of working under your belt. Hopefully you are living with minimal debt, but lets assume that you are not.  What does $100 a month do for you in the future.  Well, lets first define what does $100 mean in a practical sense other than 5 Andrew Jackson’s in your wallet.  As of today, $100 will buy you:

1. 4-5 new books

2. A few shirts or a couple pairs of jeans

3. 2-3 video games

4. 100 songs for your iPOD

5. A tattoo, a small one I imagine, I have no relevant experience here.

6. A few dinners out with friends

7. A handful of movies in the theater, DVD’s, or downloaded from pay per view

8. A pair of shoes

9. Several Starbucks lattes

10. Gym membership for a year that you will never use

11. A year of Netflix or Amazon Prime

12. The latest gadget “that you just neeeed.”

13. All of the great accessories for you iPhone

14. Cable for 3/4 of a month

15. I’m really struggling now, so I’ll just end with that, but you get the point.

So what I am not asking you to do is give up eating out every month or never buying a pair of shoes again.  What I would suggest is a few less dinners out, books from the library instead of buying, coffee brewed at home, and a few less iPOD songs per month and BAM!  $100 in your pocket with really very little sacrifice.  Obviously this would be a recommendation for the person who is not already saving, and is trying to work the excuse that they can’t afford to invest right now.

Now, lets put that $100 to work for you.  A simple compounding calculator will Show that $100 a month invested properly (Roth, IRA, etc.) from age 25 – 65 with a reasonable rate of return (8% – 12% on average per year) will make you a lot of money at retirement.  At 8% you will accumulate over $320,000 and at a rate of 12% you will be very close to $1,000,000.  The average rate of return of the S&P 500 since 1926 is 11.69%. By the way, this time frame includes the great depression, two of the worst recessions this country has ever seen…yada, yada, and it still averages almost 12%.

If you were to put that $100 into a Roth IRA, your money grows tax free for you to withdraw at 59 1/2 years old. No taxes, no penalties, $300,000 – $1,000,000 for you to spend at retirement for just giving up a few lattes, and a couple of extra meals out every month.

Lets say that you can afford a little more, or that you added a little extra each month with bonuses, salary raises, birthday money from Grandma, whatever.

$200 a month @ 8% = $620,000

$200 a month @ 12% = $1.84 MILLION

$300 a month @ 8% = $932,000

$300 a month @ 12% = 2.76 MILLION

$400 a month @ 8% = 1.24 MILLION

$400 a month @ 12% = 3.68 MILLION

Here is a novel thought, just save $25 a week, and put it in a jar, at the end of the year, invest it or even better sign up for automatic deduction into a Roth IRA, etc.

The cold reality of it all is that if you do not retire a multi-millionaire, you really have no one to blame but yourself.

Personal Finance: My Thoughts on Investing (Part 1)

In a previous post, I referenced a few links and told my personal story about how I made the decision to secure my own financial freedom. Today, I will discuss my thoughts on how to actually get there.

Philosophy #1: Debt Freedom

Everything starts with working toward debt freedom.  It is my opinion that compound investing is the single most important investment tool to carry in your financial toolbox, second only to debt freedom. If I were 20 years younger I would sit myself down and have a discussion. I would say “Self, you’re a fool. Do you really need that $1,000 stereo that you just bought?” It wasn’t the fact that had a little money in my pocket and decided to spend it, it was how I spent it. I paid for that brand new stereo with credit. In fact I paid for it with store credit @ 23% interest. Making the basic $18 payments I would have been able to pay this stereo off in, oh, about 18 years. When considering the total money spent, this stereo would have cost at least 2.5x the original price.

Philosophy #2: Compounding Investment

Understanding compound investing forces the investor to think about every dollar that they spend. Compounding investment and debt freedom work hand in hand, just like peanut butter and jelly. The more one can invest at a younger age, the greater the reward when it is actually achieved. The amount available to invest at this age is based on ones freedom from debt.

If I am 20 years old and I blow $200 a month on things that I can’t even remember 6 months later, I have put a serious dent in my financial freedom. Investing $200 a month when I am 20, can likely be worth at least $900,000 when I am 65. This is a conservative figure based on an 8% interest rate. I am fairly confident that the smart investor can achieve better than indexing average growth on their money with a little work and common sense. By the way, a 12% return on that same $200 a month is 3.2 million dollars. I understand that to a 20 year old $200 is a lot of money, but it is a lot more money to that 65 year old that had been able to grow their $200 over time with an excess of 3 million dollars in the bank when they retire. I’m making no promises of profits, but the average return over the last one hundred years of market data would suggest this to be true.

Philosophy #3: Know How to Make Your Money Work

Understand the very basics of investing and saving. If the investor is on track with Philosophy #1 and #2, then they are almost there. The very basics will tell them to start early and invest. Since I am still speaking to my 20 something self, I would have said “Self, take that money and put it in a good Roth IRA” I like Roth IRA’s for the investing naive. I like Roth IRA’a for the wise, I like Roth IRA’s for everyone that that is eligible. I like Roth IRA’s for everyone to invest their first $5,500 dollars of every year. Is it that obvious that I am biased toward the Roth?

It is my opinion that the Roth IRA is the best thing that has ever happened to personal investment. This is money that grows tax free to be available to the investor when he/she reaches 59 1/2 years old. There is no penalty for removing funds early from a Roth, as long as they are funds that you have personally invested and not accrued interest. In fact, early on in my investment quest, I used a portion of my Roth as an emergency fund savings vehicle. This is a little risky to do, but I simply couldn’t watch a sizable portion of money just sitting in a savings account, making 0.2% interest and suffering from inflation.

Philosophy #4: Have a Plan

A Roth IRA should be the first investment choice for anyone without an employer retirement plan. If an investor has an employer sponsored investment vehicle with a contributing match, this should be the first line of investment. I like to contribute the minimal amount required to my employer sponsored IRA in order to obtain the matching contribution. For example if your employer matches 3% for the first 6% invested by you, then invest at least 6% to maximize the match. This is free money that the employer is giving away. Do the math and work out 3% of your salary invested for the next 40 years. Why would you give up free money?

I always recommend that the minimal amount invested should be at least 15%. If the investor contributes 6% to the employer sponsored retirement (401k/403b for example) then he or she should then return to the Roth IRA and contribute the remaining funds until the maximum Roth amount is invested. If there are allotted retirement funds remaining after the Roth is maximized, then these funds may be invested into the employer sponsored program or personally invested by you in another vehicle such as an online brokerage account, laddered CD’s, or the investment of choice. I happen to like the tax deferred route as it reduces the overall tax burden.

Investing 15% does not mean putting money under the mattress, in a savings account, financing a friends business, or giving it to that brother-in-law, that we all seem to have, to “invest for you.”

Truth be told, I like to place these remaining funds (beyond the match contribution and Roth IRA) into my employer IRA program for several reasons: (1) My employer IRA plan is a good one and I maintain it through a self directed account (2) Using pre-tax dollars for investments decreases the tax liability and may even place the investor in a lower tax bracket.

Pensions do not count in this calculation unless there is an employee contribution amount, as this may be accounted for in the 15% investment vehicle. Relying on Social Security does not count in this exercise either, this should be considered icing on the cake after the investor has baked his or her 15% or more for the appropriate time and temperature. If we are striving for independence and investing for our future and financing freedom, then I do not place either Pensions or Social Security into the equation.

I would suggest treating pensions like Social Security, as a nice to have, but don’t count on it. I like to put at least 15% of my income into investments, outside of pensions or Social Security. Sadly, I can count a number of people that I have known, who thought they had a pension, only to have the company go bankrupt and watch their pension go with it. If you live anywhere near Detroit, I’m sure you know of a few of these people yourself.

What about pension insurance you ask? Most employers will have some form of pension insurance these days. However it has been my experience, from discussing this with those that lost out, the insurance may likely only cover a small portion of the pension itself, giving the retiree pennies on the dollar if anything at all, as well as being held up in the courts for quite a long time.

Lets just assume that I am completely out of line regarding pensions and Social Security. Fine, then when you retire (and hopefully invest 15% of your income) your pension and/or S.S. check will be icing on the cake, the cake that you baked with your 15%. If these personal investments aren’t made, and the pension isn’t quite what we thought it was, at least we have Social Security to fall back on (that was sarcasm Sheldon Cooper).

Philosophy #5: Don’t Make Spontaneous Decisions

Every significant investment or purchase deserves thoughtful planning and consideration. My wife and I have a few unwritten tenants (1) If we purchase something more than a few hundred dollars, we talk about it (2) We rarely buy anything on the spot and (3) We always consider these decisions overnight.

Retailers are betting on consumers seeing something for the first time and falling in love with it. This (insert frivolous item here) is a can’t live without item, only to find it buried in the basement or garage under a few more can’t do without items purchased last month. I can honestly say my wife and I are both victims of this, but we do it a lot less by simply “sleeping on it.”

I have always taken issue with the “I am not trying to pressure you but someone was just here looking at this earlier” sales approach. These are classic shady salesman tactics. Whenever I am considering a purchase (or investment option) and hear this, I am inclined to turn around and walk out, often without saying a word. When I choose to ignore this tactic one of two things will happen, either I escape a pressure sale, or I get an offer for an additional xx% off for walking out, and then I go home and sleep on it.

There have been numerous research articles to show that when the customer is allowed to leave the store without a purchase, they will not likely come back to get it. I know it and the salesman knows it, and I will win that battle every time. I can think of a number of times that I walked out and never missed that item the next day. It is rare that, after additional consideration, I went back for an item and it was actually gone.

Philosophy #6:  Trust Your Gut

If it sounds too good to be true, 99% of the time it usually is. Gut instincts and common sense trump a pressured decision or a hurried investment every time.  On the few occasions that I have suffered buyers remorse, I distinctly remember ignoring that gut feeling that told me otherwise. Don’t ignore common sense and your instincts, it’s not often that you will come out on the losing end of that decision.

Personal Finance: My Thoughts on Investing (Part 2)

Investing in the stock market is not difficult, the challenge is doing the research and making informed decisions that are not based on emotion. In my quest to be financially free, I have decided to use the stock market as one of the avenues to get there, with the cornerstone being debt freedom. I will share some of the thought process that I go through prior to making any decision to buy or sell in the market.

This is not a step by step process to purchasing funds. I have developed my own method for entering the market as every investor should. Everyone has different criteria, risk tolerance, screening criteria, personal bias’s, etc. If we appreciate the basics, we will then be able to make our own choices in these areas and make the best selection for our specific needs. There are plenty of Youtube videos, podcasts and websites out there, each giving their personal preferences and instructions for buying and selling, and some are better than others, I am always cautious of “free advice.”

As we go along you may see specific criteria that I look for as a general philosophy, but these criteria are dependent on too many factors to be black and white options on a blog. Remember, I am just like you, an average Joe trying to establish myself and my family in financial freedom, sharing what I discover along the way.

First lets circle back and review my process of investing. I have taken advantage of my employer 401k plan by placing enough funds to maximize my employer match. Investing in my employer program does not meet my 15% investment criteria so I place any remaining funds into a Roth IRA and work towards contributing the maximum allowed, currently $5,500 per year.

Any remaining funds required to reach my 15% investment goal will give me several options that I like to employ. I prefer re-entering my employer fund and increasing my contribution or entering the stock market through my online broker and purchasing stock, ETF’s or mutual funds. Since I have selected a self directed account through my employee plan, either choice will allow me to personally select my investment options.

In my opinion, it doesn’t matter what online investment broker you go with as long as it is established and credible, and suits your needs. Most of the bigger name accounts like ETrade, TDAmeritrade, Scotttrade, will offer some sort of fund screener to use for identifying and ultimately purchasing any stock, mutual fund or ETF. There are actually some free trading sites as well that seem interesting, but I haven’t tried them as of yet.

Look at all of the options and choose one based on your own opinion and preferences. Don’t forget to take a look at whatever offers they may have on the table as well, but don’t base an opinion soles based on freebies. Browsing these three sites show that there are multiple offers for multiple free trades with a minimum investment and in some cases offer a cash bonus for using their company. I personally don’t think you can go wrong with either Scott, ETrade or TD Ameritrade.

There are other fund screener options that are free as well. Two that I have used in the past and found to be very helpful are MFEA and Finviz.

MFEA is a screening tool for mutual funds. It is very simple to use but offers a wealth of information. It allows you to seek funds based on fund category, Morningstar rating as well as Morningstar risk.

Finviz is a free stock screening tool that allows you to explore stock choices based on a large number of criteria in the descriptive, fundamental and technical filters. They also offer a host of other screening and information tools like insider trading information, chart evaluation, sector analysis, etc. There is literally more information than I could ever use. Check out this overview.

I have a few thoughts on mutual funds:

1. Load vs. No Load funds. Generally speaking a loaded fund means the purchasing agent will take a fee (load) from your initial investment. If their load is 5% then it will cost you $250 for every $5,000 that you invest. If you deposit $5,000 then you will have the ability to purchase $4,750 worth of mutual funds. If you hold this fund long term and double your money in 5 years, this load would have ultimately cost you $25 dollars a year or 2.5% of your money, not including management fees, which are usually in the 1% – 2% region.

I do not like loaded funds, simply because there are plenty of no-load funds that are just as good or better than most loaded funds. Generally speaking I like no load Vanguard funds as they appear to be the least expensive fees around and have some outstanding value. I have seen some Vanguard funds for as little as .05% but most under 0.5%.

2. Mutual funds are purchased primarily by dollar amount. Stocks are purchased by the specific number of shares. When purchasing mutual funds, you are purchasing X number of dollars worth of that fund and the shares are calculated accordingly. For instance if you have $500 dollars and you purchase stock A that sells at $12 a share, you will end up with 41 shares and $8 remaining, not including purchase fee. If you invest $500 in a mutual fund for $12 a share you will buy 41.66 shares of mutual fund X with no remaining money.

3. Mutual fund transactions are made after the market closes. A bid for X number of dollars of a fund is submitted and a confirmation of how many shares purchased will be distributed, usually the next business day. The buyer will know the price per share generally speaking at the close of market.

4. Diversity. Mutual funds are generally diverse within reason, meaning that they offer a portfolio multiple stocks usually based on a sector, group or philosophy (value, etc.). This is the real advantage of the mutual fund, diversity without the significant amount of money needed to achieve the same goal through stock options alone.

I do use mutual funds, only because I am forced to do so via my current employers IRA. If I had a choice, I would simply index with ETF’s as they are easier to use, easier to research individual stocks in the portfolio, and generally much cheaper.

Personal Finance: Getting Started with the Basics

I ran into some great articles on Investopedia. Rather than summarize some rather succinct work by the folks at Investopedia, I will embed a few links for you to read. I really suggest looking through these, they offer far more insight than I would attempt to explain here.

Investing 101 is a tutorial for the total beginner. Even the person who is somewhat familiar with their personal finances and investing may get something out of this series, I know I did. Pay particular attention to the chapters on the Concept of Compounding and Knowing Yourself.

Any monkey can throw money into an online brokerage like ETrade or TDAmeritrade. The monkey may make a few dollars but the smart investor will make a secure retirement. The beginning investor will know at least the basic fundamentals and technicals of investing, but the wise investor will know themselves better.

Once upon a time, I was the guy who went to work everyday, and had a percentage of my earnings placed into an investment vehicle established by my employer. Don’t get me wrong, this is a fine vehicle for those who want to save for their future and are investment naive or are not ready to take control of their financial security immediately.

I had been this guy for the first half of my working career not only because I was naive, but also because I was ignorant. Naive and ignorant have two very different meanings my mind. Naive is the person with no relevant experience or insight in a particular matter. The ignorant person is someone with a vested interest but doesn’t care, they suffer from “someone else will take care of me syndrome.” Putting away a percentage of my my money into one of those targeted investment funds, you know the funds that are labeled 2025, 2040, etc., was my mantra.

For me the third time was a charm, the third time I lost a significant amount of my hard earned money in the market due to some financial breakdown was the straw that broke the camels back. My first experience losing big was in September 2001 with the terrorist attack on the US. Now, no one could have predicted this event, and some people lost a lot more than “just money” so I really do consider myself one of the lucky ones here. The second time started in October 2007 when the Dow, Nasdaq and S&P 500 lost 20% in the market, and took two years to recover. The third time was the “Flash Crash” of 2010 when the Dow lost 1000 points during intra-day trading.

It was then that I made a decision to read, watch, talk to anyone that would listen to me about investing and the stock markets. Something must have paid off in the long run because the last tick in the market (January 2016-one of the worst ever) dropped it by 10%, and my investments were Still in good shape. I still lost money, but it wasn’t nearly as much as others. I simply got tired of losing 10% – 20% every few years and people telling me “don’t worry about it, you will make it up over time.” Don’t get me wrong, I am not suggesting that I time the market and predict crashes, this simply does not work. What I am suggesting is there are sound ways to take advantage of these opportunities as well as maintaining a presence in the market and growing your investments.

I wanted to add a few posts to this personal finance series to gear up toward trying to motivate anyone reading this to take the time to learn about personal investing, it does make a difference. It is my opinion that you have two choices to get out of the 2030-something retirements funds and start a path toward greater financial growth, hire a financial adviser, or do it yourself. I prefer the latter.