INTRODUCTION
The years 2020-2022 will be remembered as a tumultuous and highly volatile period for the Global financial markets. Some factors that have contributed to the market turbulence for investors, and will probably trigger a recession, are the coronavirus, Russian invasion of Ukraine, energy, and high inflation. Recession and Inflation are intrinsically linked because high inflation puts tremendous pressure on Central Banks to tighten their monetary policy and increase key interest rates substantially. Business will react to higher cost of borrowing by reducing production and causing high unemployment. Therefore high inflation usually indicates an impending recession. There have been 12 recessions in the 20th century, including the Great Depression, which was the longest, lasting from 1929 until 1941.
Poverty is one of mankind’s worst diseases as there is a dynamic relationship between poverty and poor health. Currently the total Global World population is about 8 billion people with China the most populated of 1.426 billion, followed by India with 1.417 billion. The total Global Wealth is approximately $418 trillion with wide disparities of wealth between rich and poor nations and people.
The top 1% of the households own more wealth than the bottom 50%.
The top 2% of the households own 20% of all personal wealth.
The 10% of households own 44% of the wealth.
The 50% of the households own around half of the wealth.
Money does not usually bring happiness, but it provides financial security and personal freedom.
SUMMARY
In this article I will summarize my investment ideas, strategies and techniques that I have applied for years in investing.
*Poverty is one of mankind’s worst diseases, as there is a dynamic relationship between poverty and poor health, yet the fact remains that the richest 1% of the World’s population of about 8 billion own 48% of the world’s $280 trillion total wealth, whereas the poorest 50% own only 1%. Money does not usually bring happiness, but it provides financial security, personal freedom and a sense of mobility.
*Many years of experience has taught me that the best way to acquire wealth is to invest in stocks and apply the contrarian approach, going against the general trend.
*The U.S. stock market historically has returned 12% per year on average. All other forms of investment, such as fixed income securities which include treasury bonds, corporate bonds, certificates of deposit (CDs) and preferred stocks, deliver a low rate of return that does not even cover inflation and taxes. Real estate and business, usually privately owned, can be good investments, but location is critical, and they can be risky and illiquid (unsellable) at times.
*To predict the direction of the stock market is an elusive goal because it is affected by many variables and the psychology of investors. When investors become very optimistic they develop herd-like behavior and push stock prices to unrealistic levels, which creates a bubble. However, when pessimism spreads, investors exit the market in droves, creating a sell-off and causing the bubble to burst. When investors are irrational, stock market prices are driven by greed and fear.
*Stock markets are highly volatile and capital gains are hard to realize. To mitigate volatility risk, one may develop an investment strategy of buying low- risk growth and income stocks that have a consistent increase in earnings and dividends, and holding them for a long time, some forever.
*An excellent source of financial data on approximately 1700 stocks is VALUE LINE. It tabulates on one page a wealth of information for each stock for a 10 year period. I select stocks from Value Line and analyze the following for each stock: Increase per Share of Revenue, Earnings, Cash Flow, Dividends, Capital Spending, Book Value, Operating Margin, Return on Shareholders’ Equity, Decrease of Common Shares Outstanding, Long-Term Debt, and Average Annual Price per Earnings Ratio (P/E).
*In order to evaluate whether the price of a stock is under or overvalued, I compare its price to earnings (P/E) ratio with the average P/E of its peers. This method excludes the annual earnings per growth rate (EPS). A stock with a relatively high P/E ratio is not necessarily considered expensive if its EPS is high as well. I divide P/E by EPS to obtain the price to earnings growth (PEG). This is a more realistic picture of the value of a stock. The lower the PEG, the more the stock is undervalued.
*I prefer to invest in a stock that has a return of invested capital of at least 10%, that maintains a conservative balanced ratio of debt to capital of less than 50%, that has a payout ratio below 60%, that increases revenue or earnings per share steadily year after year, that has an operating margin and return on shareholders value of at least 10%, that steadily decreases the number of common shares by share buybacks, and that has a PEG value of less than two.
*A good start is to study the U.S. Dividend Aristocrats. They have increased their Dividends for many consecutive years and have consistently outperformed the S&P 500 Index during the past 30 years.
*Successful investment requires knowledge, experience, perseverance, patience, discipline, an analytical mind and focus. Playing the market leads to failure. If you are not happy with the performance of your investment portfolio, invest in the Dividend Kings, a list of 50 U.S. large stocks that have raised their dividends for at least 50 consecutive years. A $100,000 investment in the Kings List in 1991 would have been worth $3,246,000 by the end of 2017, whereas the same amount invested in the S&P 500 stocks would have only reached a value of $1,370,000. One may also buy a low-cost INDEX FUND (IF) or a low-cost growth and income EXCHANGE TRADED FUND (ETF), though the total return is much lower.
*A novice investor should build a portfolio of 30 stocks and pretend to purchase shares in each, without using any money, and follow these over a period of 5 years. Then he/she should compare his/her performance to that of a comparable ETF or INDEX FUND. If it is worse, the novice investor is not ready to invest without financial advice. It would be a great help if novice investors had some basic knowledge of investing. This could be accomplished if it was mandatory for all senior high school students to take a one semester course in financial matters.
*Avoid Investing in actively managed Mutual Funds because of their high management fees and hidden charges. Most of them underperform the ETF and INDEX FUNDS.
*Refrain from using the services of so-called financial advisors and ignore all the noise generated daily by the financial experts and the media.
*Invest only in a stock whose business you are familiar with, and which you want to buy-and-hold as a long-term investment. Do the research and buy it only when you think it is a good price, and never at its 52-week high. Buying a stock without doing the research is like buying a lottery ticket.
*When you choose to invest in a stock, research first how the company has performed at good and bad times, relative to its peers, and how the dividend has been affected.
*Select and invest in one or two stocks from each industry, in companies that have a history of growing their stock price and their dividend, regardless of by how much. Dividends are very important in investing because studies have shown that in the past 80 years, dividends contributed to 44% and capital gains to 56% of the total return of the S&P 500 stocks.
*Do research on companies with good business, low competition and little or no debt. Their Management should be competent, intelligent, honest, and should itself own a large number of the company’s shares. It should be friendly to shareholders by distributing profits in the form of dividends and share buybacks.
*Avoid buying a stock at its initial public offering (IPO) and wait until it shows some earnings before you make a decision.
*An excellent time to buy a stock is during an economic recession, a market correction, or a short-lived calamity of a particular good growth and income stock.
*Learn not to procrastinate when making a trade, since there is always something to worry about. When you have done the research and made sure you understand why you want to buy or sell a particular stock, go ahead and make the transaction.
*There is not a single formula for knowing when to sell a stock. However, consider selling in any of the following cases:
-if the stock does not meet your buying criteria anymore and performs poorly in comparison to its peers.
– if its earnings have been slowing down.
-if it stops increasing its dividend.
-if its price has reached an unrealistic level relative to its earnings.
-if you have found a better buy and you need the cash to buy it.
*Conservative investors should always have 5-10 percent cash in their portfolio in order to buy stocks when the opportunity arises. Never borrow money to buy a stock. It is a losing game.
*Studies show that the average investor underperforms the overall stock market index largely due to emotional decisions. Therefore, learn to stay rational and keep your emotions in check when investing, and to believe in yourself and learn from your mistakes. Establish investment criteria and stick to your policy. This approach can help you buy low and sell high.
*One must learn to manage fear and greed when deciding to buy or sell a stock. It is important to develop discipline, to avoid taking risks, and to patiently wait for the opportunity to arise to buy a good stock at discount.
*Consider the Magic of Compounding in Investing: it requires reinvesting the earnings of the investment portfolio (capital appreciation and dividends) and giving the investment time to grow. The basic mathematical formula for annual compounding is:
F= I(1+r)^n
F = final amount of investment, I = initial amount of investment, r = average
annual rate of return (decimal), n = number of years invested, the symbol ^ means to the power of. For example, if you invest (I) = $100,000 with 12% average annual rate of return (r = 0.12) for 20 years (n), you will amass a total amount (F) = $964,629. Thus, your initial investment will have increased by $864,629 over 20 years.
*There is also the RULE of 72 to be considered: if you divide 72 by a known investment portfolio percent earnings (E), you can estimate the number of years (Y) it will take for the portfolio to double in value. Assume E=12%, then Y=72/12=6 years. Also, to find the number of years (Y) it takes for inflation (IN) to cut the value of your investment portfolio (purchasing power) in half, divide 72 by inflation (IN). If IN=4%, then Y=72/4=18 years.
*Nowadays, investing in the stock market is an inexpensive and easy process. Stocks are bought and sold using computer algorithms (automatic trading). Investors can independently place a trade in seconds and pay relatively low commission. Using algorithms, a transaction takes only 5-10 microseconds. It takes the eye 350,000 microseconds to blink. There are 1,000,000 microseconds in one second.
*Always remember that you have two silent, passive partners who share your wealth: inflation and the taxman. For example the purchasing power of $1.00 in 2000 is equivalent to the purchasing power $1.53 in 2020, an increase of $0.53 over 20 years. In other words the dollar had lost half of its value due to inflation.
Here are some statistics showing how the cost of living has increased in the United States over the past 20 years (2000-2020). Most of the changes are due to inflation.
The GDP per capita was $36,335 in 2000 and $63,416 in 2020.
The national median household income was $42,148 in 2000 and $67,521 in 2020.
The Federal hourly minimum wage was $6.15 in 2000 and $7.25 in 2020.
A liter of regular gasoline was 38 cents in 2000 and 54 cents in 2020.
A liter of milk was 23 cents in 2000 and 83 cents in 2020.
A dozen of eggs was 93 cents in 2000 and $1.49 in 2020.
The average new car price was $21,850 in 2000 and $38,000 in 2020.
The median value of single-family home was $119,600 in 2000 and 329,000 in 2020.
The Dow Jones Industrial Average index closed 10,729 in 2000 and 36,338 in 2020.
*Creating wealth by investing is a difficult undertaking, but keeping it for generations to come is a challenge. Studies show that the first generation works hard to create wealth; the second generation indulges itself in reckless spending; and the third generation, with no role model to follow, spends extravagantly what remains of the wealth, leaving their children to start all over again. Statistics show that 90% of the wealthy families fall into this pattern.
Christos P. Tsonis 