The Biggest Mistakes New Investors Need to Avoid

For this week’s podcast, I talk about some of the biggest mistakes that I have made in my investing career and how you can avoid them. Making mistakes in investing will happen and it would be wrong to assume that you are the perfect investor and will never mess up. The goal is to learn from those mistakes so that you don’t make them over and over again. I hope that you can learn from some of the mistakes that I’ve made so you can avoid them for yourself. If you like the podcast make sure to subscribe and leave a review!

The 4 Mistakes Mentioned in the Episode

  • Investing in a company you know nothing about
  • Panic selling
  • Taking on too big of a position in a single stock
  • Buying at the wrong price

Episode 2

For this week’s episode, we take a look at how the market is being affected by the coronavirus quarantine. We also look at some companies which have been destroyed by the market sell-off and look at some which will likely come out the other side unscathed. Remember, I am not a financial adviser. Nothing in this podcast should be taken as investment advice and this is for entertainment purposes only. Enjoy!

How to Value Stocks During a Market Crash

COVID-19 is running amuck through the global economy. You can say the fear is overblown and it’s “just the flu bro”, but regardless of how you feel about the way our government and the global economy are reacting to this virus, it’s happening.

We haven’t seen this kind of volatility since the 2008 financial crisis when greedy bankers took a dookie all over the hard-working people of America. The VIX index a.k.a the “fear index”, is a measure of the volatility of the market.

These crazy big swings in the market strike fear into investors and as people panic, they sell out of their positions. Imagine It’s times like these that really make you learn what type of investor you are and how you are able to handle volatility. As long term investors, we shouldn’t worry about what the market is doing in the short term. On the contrary, we should try to keep a level head and refrain from doing anything stupid. If you panic everytime stocks drop, you are going to lose money. DO NOT PANIC!

Value Investing

There are two main types of long term investors. The first is value investing and the second is growth investing. Value investing has been around forever and has been made popular by the greatest investor of all time, Warren Buffet. We’ll touch on growth investing in later posts, but these are exciting times to be a long term value investor.

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. The intrinsic value of a stock is the amount that the stock is actually worth, and may be higher or lower than what the stock is actually trading for. Learning how to determine the intrinsic value of a company is probably the most important skill you can learn. You know that lady at the supermarket with 9000 coupons who is stoked because she saved 35 cents on veggie patties? That’s going to be us but with stocks.

Think about it this way… How do you know if something is a good deal or not when you go to a store? Let’s say you go to a shoe store looking for a new pair of sneakers. If you saw a pair of Nike running shoes for $500, would you buy them? You obviously know how much a normal pair of shoes cost, so seeing that price tag would make you not buy them or at the very least, would make you have some questions as to why they cost so much. Unless you are one of those weirdo sneakerheads who will spend their life savings on Yeezys or whatever the kids are buying these days…

You go back a week later and now the shoes are $2,500 dollars. You really want the shoes but this is such a ridiculous price to pay. They are damn running shoes, not a computer. Also, how is it that the price went up $2000 dollars? Did the value of the shoes change? Or are people just willing to pay that much? You wait a month and now the shoes are on the clearance rack for $75. The shoes themselves didn’t change. They are not less valuable than they were a month ago, they just cost less. Obviously these crazy price swings don’t happen in retail stores but they CAN happen in the stock market.

The Market is Irrational

This is something you need to accept. I’m not saying there no reason for stocks to be dropping right now because, at this point, the Coronavirus will without a doubt affect the short term earnings forecast for the vast majority of public and private companies alike.

However, fear is very powerful and can make investors make really stupid decisions. Think about it this way, every time you buy a stock, there is a person on the other end of that trade that is selling the shares to you. As an investor, you want to be on the winning end of that transaction. In a market like this, people will start giving away great companies at ridiculously low prices. As a buyer, you can set yourself up for success by taking advantage of these fearful and panicked sellers by buying shares at 50% off.

Let’s take a little trip down memory lane to the 2008 financial crisis. Stocks got absolutely WRECKED from 2007-2008. People didn’t want to touch publicly traded companies with a 10 foot pole. If you sat on the sidelines with $10,000 and bought shares of SPY (ETF which tracks the S&P 500) at the bottom of the recession, you would now have over $36,000 (369% return). At the bottom of the recession, you can basically throw darts at a wall with the top companies and make money.

It seems so simple, buy low and sell high. The issue is that no one is going to tell you when it is time to buy. Just because stocks have dropped to what seems like a lot in the past month, that doesn’t necessarily mean that they are cheap. We want to buy when they are cheap not just when they drop. This is a super important distinction and takes a tremendous amount of patience and discipline.

How do I figure out intrinsic value?

The best method I’ve found for calculating the intrinsic value of a company is the Discounted Cash Flow equation (DCF). I’ll be completely honest, I thought about trying to type this out but I’m going to steal Investopedia’s youtube video instead.

Super simple right? Definitely didn’t make you want to jump off a tall building right?

The point is, people a lot smarter than you or I came up with this stuff and let’s just roll with it. The DCF method runs off the assumption that a dollar today is worth more than a dollar tomorrow. I’m going to be giving out a free Excel sheet with the DCF model which will allow you to plug in some numbers and let the formula do its work. Let’s take a look at an example. I’m going to walk you through calculating the intrinsic value of Nike (NKE).

Here’s what the spreadsheet looks like.

EPS Growth Rate

The first step to calculating the intrinsic value of Nike is to determine the EPS growth rate per year, for the next 5 years.

EPS stands for Earnings per Share. This is the amount of earnings retained by the company divided by the total number of shares. If you see a negative EPS, that means that the company is losing money. You don’t have to worry about calculating EPS because this is always calculated for you. Nike earned $2.26 per share for the last twelve months.

You’ll hear people talk about EPS a lot because this tells you how much money company is making per share. A good company is able to consistently grow the amount they earn over time. Earnings are reported once per quarter and usually the stock will make a big move if they beat or missed the analyst estimates.

As investors we want to invest looking forward, not looking back. Let’s see what the analysts are projecting the EPS growth rate to be per year, for the next 5 years – I use Yahoo Finance so that’s where we’ll be getting all of the data to plug into our formula.

Click on analysis
scroll down to the bottom to get the “next 5 years EPS growth rate”.
Plug the number into the formula under EPS growth rate.

You can see that the formula has reduced the growth rate down to 15%. Throughout this process, you’ll see that everything will be reduced to give us a more conservative estimate of the value. The worst-case scenario is the company exceeds expectations and we could have bought it earlier but its always better to be safe. In this case, the analysts are predicting growth to increase compared to the last 5 years. This is also an area where you can use your own judgment. If you wanted to be even more conservative, you can cut the projected growth rate in half but for the purpose of this example, we will leave it as is.

Price Earnings Ratio

Often referred to as a P/E ratio, this is a quick easy way to see how much people are willing to pay for a stock. This ratio tells us how much people are willing to pay for each dollar of earnings. If a stock is trading at 100 dollars and has an EPS of $2.00, the P/E ration would be 50. This means that people are willing to pay $50 dollars for every dollar the company earns. The P/E ratio can give insight into how expensive a stock really is. Just keep in mind that the P/E ratio doesn’t tell the whole story and P/E ratios can vary widely depending on the industry.

You need to get it out of your head that the stock price tells you how expensive a company is. A $10 a share stock can easily be more expensive than a $1,000 stock.

Example:

AutoZone (AZO) is currently trading at $1,012 a share. I know so many new investors and look at that and say, “holy shit that’s expensive, I’m going to find a cheaper company because that one is clearly overvalued”. They go and sift through companies at random based on the current stock price and find Under Armour (UA) which is currently trading at $9.48 a share. “WOW it’s only $9 a share they are practically giving shares away for the price of a burger. I AM THE WOLF OF WALLSTREET. I WILL MAKE MILLIONS.” Then they buy a shitload of shares and spend the rest of their time thinking about what color Lamborghini they are going to buy with their profit.

AutoZone has an EPS of $65.55 and a P/E ratio of 15.45. This means that investors only are paying $15 for each $1 of earnings. Under Armour on the other hand only earns $0.20 a share and has a P/E ratio of 46.70. This tells us that from a valuation standpoint Under Armour is 3 times more expensive than AutoZone. Without even diving into the number, I can already tell you that AutoZone would be a better value play than Under Armour.

Lets get back to the Nike example. Complete the P/E ratio section by using the projected forward P/E ratio found on Yahoo finance.

Click Stats
Find the Forward P/E ratio
Enter the P/E ratio into the formula

You can see that the P/E ratio was further reduced by 15%. This is a conservative measure to assume a discounted price on the stock in the future. If you want to be even safer, take the current P/E ratio and cut it in half. This is basically saying that you think people will only be willing to pay half as much for shares as they are right now.

Beta, VIX, and TYX

This section will discount the price further based on the current volatility of the market, how the volatility of the individual stock relates to the market, and the return you would get on a 30-year treasury bond.

Beta

The beta of the stock is a measure of its volatility in relation to the overall market. The S&P 500 has a beta of 1. Anything that is more volatile than the market will have a beta greater than 1 and anything less volatile will be below 1. For our purposes, the formula will place a higher discount for stocks with high betas and a lower discount for those with low betas. You can find the beta value of any particular stock on the summary tab in yahoo finance. If you buy a stock with a super high beta, that means that if everyone else gets boned by a market collapse, you will get boned twice as hard. Most people don’t invest with the intention of getting boned in the butt and I try not to either.

ViX

As mentioned before, VIX is the ticker symbol of the Volatility Index which tracks the volatility of the market as a whole. The higher VIX is, the higher the volatility is at that time. The formula will discount the stock price more if VIX is high at that moment. This is assuming that being in the market when VIX is high comes with more risk than being in the market when the VIX is low. This is also known as the Market Risk Premium. If the VIX is high that means the market is having a temper tantrum and your risk of having money invested is high.

To find the current VIX value, simply type “^VIX” into yahoo finance, and enter the value into our formula.

TYX

This is the yield for a 30-year treasury note. Bonds are considered risk free so when yields are higher on bonds, that means you would need higher expected returns on stocks to make them worth it. When the bond yield is low, it would make more sense to accept some extra risk on stocks with the hope of getting a higher return. This is also known as the Risk-Free Rate. If you are under 40, don’t buy bonds. I mean come on, I want to be safe as much as the next guy but you have time on your side. If you made a mistake on a purchase, usually you can just wait it out and eventually the stock will go back up (assuming you bought a good company).

To find the TYX value, type “^TYX” into yahoo finance and enter the value into the formula.

Base on the beta, VIX, and TYX, our expected annualized rate of return would be 7.9%

Current Stock Info

Okay, we are at the home stretch here – I know I’ve been going on forever but stay with me. The last box is where you will enter the current stock price, the current earnings per share (EPS), and the years of projected growth. The stock price and the EPS can be found on the summary tab in Yahoo Finance for the particular stock. As you can see, I was lazy and took two weeks to write this, so the stock price already dipped well below the previous screenshots.

We used 5 years of expected growth when we calculated the EPS growth rate, so we will use 5 years for projected growth at the bottom of the formula. Here’s everything filled into the formula for Nike (NKE).

Margin of Saftey

You’ll often here value investors talk about what’s called “Margin of Safety”. A margin of safety is an important principle of investing where you only purchase stocks when their current price is below their intrinsic value. This helps to minimize the downside risk of an investment. The bigger the margin of safety is, the less risk the investment theoretically has. We are assuming that eventually, the market will price this stock accordingly and closer to its intrinsic value. It’s the same concept of only buying clothes on sale. If you are the type of person that always shops in the clearance rack and loves searching for good deals, you will be a great value investor.

Everyone has different rules for how much margin of safety they require before purchasing a stock. My personal rule is 25%. In this case, I wouldn’t buy Nike just yet because it doesn’t meet my requirements. The formula is showing that Nike is truly worth $88.06 per share and is trading at $67.45, which truly is a good deal but not good enough for me. But hey, you do you.

Art vs. Science

When I first learned about all this I got way too hung up on plugging number thinking that they tell the whole story. It’s super important to know all of this to be a great value investor but don’t just mindlessly plug in these number for random companies and think its a good investment because its cheap.

Use your head here. If you are obsessed with cars lets say, you already have insight on different auto manufacturers and brands. I know jack shit about cars, so you and I could look at the same company and you already have an edge over me. Start using your own skills to gain insight over other investors. Start thinking about where you think the world will be in 10 years. This will help you make intelligent investing decisions that go past what you see in the numbers.

Subscribe to Invest for the Rest to get the Intrinsic Value Calculator! Simply click the link in the welcome email to get the google docs page with the calculator.

Coronavirus: Navigating the Markets During the Sell-Off

Unless you’ve been living under a rock for the past month, you’re probably aware that Coronavirus is ravaging the stock market. The Dow Jones threw up all over its self, losing 12% of its value in a week. The S&P 500 jumped off a bridge and erased nearly all of the gains from the past 12 months.

This weekend some dude died in Washington State, Pope Francis has a “mysterious illness”, and China is shutting down. People are shitting their pants and I don’t think we’ve seen the end of the crash.

This is the gnarliest drop in the markets we’ve seen since the 2008 collapse so I think at this point it needs to addressed.

Who’s getting fucked the hardest?

Pretty much everything under the sun saw brutal losses last week. If you are holding securities that didn’t get hit hard, then you are one of the lucky ones. Here’s where we stand after this past week:

A lot of these are going to be common sense. Over here in America, it’s easy for us to look at the stats on Coronavirus and say that its barely worse than the seasonal flu, but Chinese workers are staying home, factories are shutting down, etc. It’s become clear that this is no longer a small scare that will blow over in a short period of time. This is the market correction that we all knew was coming. So who are the losers? How long will they lose for?

Hotels, Resorts, and Airlines

I know this may come as a surprise, but it turns out people are a little bit hesitant to travel internationally with a contagious virus ravaging the world. Being in an airtight tube on your way to Asia with people coughing everywhere is straight-up nightmare fuel. Delta, American, and United suspended all flights to and from China through late March. To give you an idea of the financial impact this may have, in 2017 there were 140 million inbound trips into China. That big-time revenue for these major airlines that’s going to be flushed right down the toilet.

I’m not saying that this massive fear and panic is justified, but people are legit canceling their international travel plans because of Corona. The tourism industry is trying to assure people that they will be fine as long as their destination is not affected by the virus, but fear is a motherfucker and people are not willing to take risks. Stocks in these sectors are going to continue to get slammed. When it comes to the stock market, you need to think about how institutional money will move to prevent losses. If hedge funds have billions of dollars in airline stocks, why the fuck would they hold them while it tanks. They are responsible for people’s retirement portfolios and 64-year-old Joe is not going to be too happy when they tell him that he just has to wait five more years for his portfolio to recover. The sell-off will continue in these industries until it hits a rock bottom. Below is a list of stocks that have been, and will continue to get face fucked by the sell off.

I’m all about buying low but I would stay away from these for now.

Apparel and Footwear

Apparel and footwear companies are also going to get boned. According to John Kernan, an analyst at Cowen, these companies source about 30% of their goods from China. China has become the supplier to the world over the past whatever amount of decades. With factories closing down, the supply chain is all screwed up which means that companies like Nike are going to have a hard time getting their products into America or anywhere else.

Stocks in this industry are ones that I would keep on your watch list to see if you can nab them at dirt cheap prices once this all blows over. Keep in mind that most of these companies were trading well above fair value before all this went down so they likely will get hit even harder because of that.

  • Nike (NKE)
  • Foot Locker (FL)
  • V.F. Designs (VFC)
  • Nordstrom (JWN)
  • Under Armour (UA)
  • Columbia (COLM)
  • Urban Outfitters (URBN)

Technology

Tech stocks already took their hit with the rest of the market during the past week. Big tech stocks lost more than 200 billion dollars in a single god damn trading session last week. Apple already warned investors that they expect to fall short of their revenue forecast for this quarter. Coronavirus is forcing tons of stores to close in China and is fucking up their supply chain. Think about all of those little microchips in your iPhone. Where do you think those are made?

Unlike the Airline and Entertainment industries, Tech will likely bounce back fairly quickly. These are some companies that took hits but will likely rebound. If you are looking to own some big Tech companies now may be your chance.

Just like I mentioned with the apparel stocks, many of these have been trading way above their fair value over the past year so they may have to drop even more to get a solid value play out of them. I see all of these as being great investments if you can get them at a good price.

What to do with your current holdings?

Okay so you are holding stocks currently. Should you sell them? Should you buy more? Should you hold?

I’ll give an example. I’ve been holding Apple stock for about 6 years now. I bought it right around $115 a share and am sitting on about 150% in gains. Why the hell would I sell Apple right now? It’s something that I’m going to hold for another ten years, maybe more. In 2018, Apple lost nearly 50% of its value and I held on. I’m glad I did. Admittedly this once at a point in my life when I completely forgot I owned stocks so I wasn’t checking my portfolio. If I had sold, I would have hated myself forever so I’m not going to make that mistake this time.

If you have stocks in your portfolio that you have been holding long term which are solid companies with great fundamentals, don’t be an idiot and sell because of this event. Let compound interest works its magic.

How much cash do you have?

If you are not sitting on any cash right now then I think you should probably fix that. If you just made some investments within the last year and all of your gains have been erased by this market sell off, then it may be a good idea to unload some shares at no gain to have ammo at the ready.

The last thing you want is to have to sit on the sidelines holding on to stocks that are deep in the red while everything is going on sale. Don’t let yourself fall into this tough spot. If you have no cash on hand and you have a few stocks with -3% to +3% return, it may be a good move to take a small gain or a small loss and wait to see how this all plays out. If you are still confident in the company after all of this blows over, you may be able to get right back in at a better price.

Hedging your bets with Options

If you don’t want to sell your stocks. It may be a good idea to buy some Put options for the securities that you are currently holding. A Put option is a contract that gives you the right to sell 100 shares of a stock at predetermined price any time prior to the expiration date. The worse thing that can happen is the stock goes up and the Put expires worthless. But who cares because that means your made capital gains on the underlying equity.

This way if your stock tanks, you still have the option to get out at a higher price. With all the uncertainty in the market, I highly recommend buying some insurance.

What’s coming next?

WHO THE HELL KNOWS. People will try to act like they can predict the market but they can’t. All of these predictions are based on what we’ve seen this past week coupled with the breaking news that has been coming out all weekend. My prediction is that the market either opens in a continued downward spiral picking right up where we left off, or we see a small rebound in early trading followed by a downward spiral.

Here’s what I will be doing for the forseeable future:

  • creating watch lists
  • saving money
  • trading options

Good luck out there.

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How to Make a Budget

“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”
-Joe Biden
 
My stance on budgets is probably a little different than what the experts say. To be honest with you, I don’t actually know what the experts say but they probably get a hard-on for budgets. A budget is really a tool that is best used in the beginning while you get used to working on your saving habits.
 
I’m more of a “throw me into the fire and I’ll figure it out” kind of guy, so I believe auto deposits are still the most important thing. Trust me auto deposits from your paychecks into your savings while make you develop a budget real quick because if you fuck up your spending you’ll end up on the streets.
 
On the other hand, I always talk about treating your life like a business and businesses have budgets soooo I guess you should too.
 
Once you get your habits down you probably won’t need a budget to tell you when you can go out to eat or what you can buy. Being good with money becomes a lifestyle so you won’t even think about your budgets once you get good and start saving money like a mad man (or woman).
 
Making budgets was probably hard as fuck 20 years ago but now everything is digital and all of your transactions can be accessed right from your bank app (unless you are a weirdo who still uses cash). Some banks have better spending tracking and budget features than others so I recommend using Mint.
 
 
Mint allows you to log into your bank account so all transactions and income can be tracked. It will show you your cash flow and even make suggested budgets for you. We are going to talk about some spending categories in this post and Mint will automatically categorize your spending for you. I know when I opened Mint for the first time I got slapped in the pee pee by the amount I spent on food. It definitely didn’t take a financial adviser to see what my issue was.
 
 
 
 
 
Income
 
The first place to start is to calculate your monthly income. This should be pretty easy for most people who get two paychecks a month (just add em up). If you are someone that has variable monthly income, it will be a little more challenging but it shouldn’t be too hard to figure out your average monthly income. For this example, we are going to use our friend Steve.
 
Steve’s monthly income is $4000 from working as a potato farmer. Steve is 25 years old and enjoys hangin’ with friends and traveling around Idaho to hike. Let’s see how we can help Steve save money.
 
Expenses
 
After we have our income we need to categorize our expenses with my patented 3 Tier Expense System. I didn’t actually patent it but I did invent it.
 
Tier 1- Expenses that are necessary and recur ever month. This is where you spend money to keep the lights on and live a comfortable life. We won’t be adjusting anything in the Tier 1 category when we look at ways to save money.
 
Tier 2 – These are things that you spend money on every day that are necessary but are also variable. Things like gas and food. You need to eat food, but how you do it can have a big impact on your bank account. We can definitely make some guidelines for these to help save some dough. Use your common sense here, if you are spending $200 every time you go to the grocery store then that should be a red flag.
 
Tier 3 – In Tier 3 we have all the expenses that we could cut out completely or reduce dramatically without having a big impact on our lives. These are things like amazon purchases, entertainment, bar tabs, subscription services, etc.
 
 
Tier 1
 
It’s important to differentiate a necessary bill from a bill that you could eliminate if you wanted to. For example, Internet is something that no one is ever going to cut out but your Hulu and Netflix accounts are things that we will leave in Tier 3 expenses. I’m not saying that we are going to get rid of these things, we just don’t want to count them as necessary right now.
 
When starting out, think about the big stuff first. If you get a coffee once a week, don’t try to get rid of that first to save 20 bucks a month.
 
Steve’s Tier 1 expenses:
 
Rent: $1000
Internet: $50
Phone: $100
Car Payment: $200
Car Insurance $150
Health Insurance: $100
Student Loans: $400
Total: $2,000
 
This is pretty average for a lot of people. Nothing particularly wrong with this. All stuff that everyone needs to get by. Your Tier 1 expenses should always be the bulk of your expenses and if your Tier 2 and 3 expenses are more than Tier 1, then you have a big problem.
 
 
Tier 2
 
Don’t get it twisted, Tier 2 expenses are often just as important as the tier 1 expenses. The only difference is that the dollar amount changes every month and you can make a conscious effort to save on these expenses. You can try all you want but you aren’t going to be able to convince Verizon to cut you a break on your phone bill.
 
The biggest expenses in Tier 2 are usually food and gas. I’m not a huge fan of creating a million little micro categories for expenses because it gets hard to keep up with, however, I do think it’s important to separate groceries from restaurants. I also lump in household stuff into groceries because I think it’s stupid to have a separate budget for toilet paper.
 
Here’s Steve’s Tier 2 expenses:
 
Gas: $250
Groceries/Household: $400
Restaurants/Take Out: $160
 
Total: $810
 
Tier 3
This is the category for discretionary spending and usually what kills people whether they know it or not. You gotta be real with yourself when differentiating between in Tier 2 and Tier 3. Do you need the expense to live or is it a luxury?
 
Here’s Steve’s Tier 3 expenses
 
Cable TV: $100
Bar: $150
Netflix and Hulu: $26
Clothes: $50
Shopping: $200
Entertainment: $200
 
Total: $726
 
Total monthly expenses: $3,536
 
Cash Flow = Income – Expenses
 
$4000-$3,536 = $464
 
With Steve’s current expenses, he would be saving about 500 bucks a month. The easiest way to start saving money is to see if you can cut Tier 3 expenses in half. Once you get all your expenses laid out, see if you can start with chopping off the stuff you don’t need. For example, if you spend $200 bucks shopping every month life Stevie does, set your budget at $100 in Mint. Mint will then tell you that hit your budget and then it’s on you to have the self-control to stop spending.
 
If we cut entertainment, shopping, and bar expenses in half, then we can now save an extra $350 a month. Cut out cable and we would be at just about 1000 a month (do people still pay for cable?).
 
You really won’t be able to tell what needs to be cut out until you lay everything out. Don’t cancel your Netflix subscription to save 15 bucks a month when you can shave expenses on your high spending categories.
 
Current savings per month: $950
 
Then we move to Tier 2. Maybe Steve could try saving 50 bucks a month on groceries, and 60 bucks a month on eating out. This could be as simple as skipping lunch with co-workers 1 day a week and only buying the items that are on sale at the grocery store.
 
What I’m trying to get at is that most of these changes will barely affect your life.
 
The idea is to just get yourself to start thinking about each purchase every time you take out your card. I’m really not a fan of setting hard budgets because that means you need to be extremely self-disciplined to keep them. That doesn’t work for a lot of people. It’s all about forming new habits.
 
By cutting down the Tier 3 expenses and shaving a little off the Tier 2 expenses we got Steve saving $1060 a month compared to $464 a month. Don’t make budgeting complicated. It really doesn’t have to be. All it takes is for you to sit down and look everything over so you have an idea of what you need to change.
 
Why is this important?
 
Obviously, I was gonna tie investing into this one way or another. Once you start stacking good months on top of one another it has a powerful effect when combined with compound interest.
 
Let’s say the original Steve who puts away $464 a month starts investing and gets an average annual return of 10% per year. Steve is 25 years old and plans on retiring when he’s 65. Over 40 years, Steve would end up with $2.7 million by investing $464 a month.
 
Now let’s look at new and improved Steve who is saving $1060 per month. Steve would end up with $6.1 million after 40 years of investing at 10% return. By going to the bar half as much, cutting out some lunches, and shopping less, Steve would have increased his net worth $3.4 million.
 
All of this shit seems little but I’m telling you it adds up over a lifetime and nothing is going to change unless you make it change. Budgeting is kind of like training wheels, it can get you started and keep you on track, but once you learn how to save you won’t have to continuously make budgets.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4 Steps You MUST Take Before Investing

If you’ve been following this blog for the last few posts, you’re probably fired up to start investing.  You’re probably saying to yourself “Jesus Christ man enough with this shit, teach me how to invest already.” I WILL! But if we are going to do this, we are going to do it right. Once you invest, you will probably not be touching that money for the next 5-10 years. This isn’t an ATM. Investing is something you need to put a lot of thought and effort into to be successful.

Because of this, you NEED to make sure that your finances are in check before putting any money into a long term investment. Warren Buffet is one of the greatest investors of all time and the investing strategies you will learn here, come from the lessons that he taught me (not like personally…but I read a lot). When it comes to long term investing, Buffet is king. When asked about his investment horizon Buffet said, “Our favorite holding period is forever”. You need to be okay with letting this money sit forever. That means when your ’09 Civic blows a tranny, you better not be in a position where you need to sell an investment to pay for it.

Saving will always beat investing until you really start stacking up cash. Investment returns start to get juicy the more GREEN you can put into them. Please refer to my previous post on saving tips to help you cut out unnecessary expenses which will help get the first part of your finances in order.

Emergency Savings

This is probably the most important thing to get in order before investing. It’s going to be really annoying, but I’m going to keep beating this into your head. Until you have a boatload of money, saving money will always beat investing money. Look at it this way:

 

How much should I save?

A lot of experts recommend saving up 3-6 months of expenses. This is a great opportunity to take a deep dive into what your expenses are. If you’re thinking to yourself “fuck me… how am I going to save $15,000 as a cushion” you might be spending too much money. I’m telling you, cutting out stupid purchases and paying yourself first is where you need to start.

This is also great practice for what it takes to be a great investor. When we start investing in businesses, there is going to be a great deal of thought and analysis that goes into it before pulling the trigger. You need to put the same kind of thought into any financial decision you make, even something as small as buying that coffee every morning before work.

The emergency fund that you are going to create is for emergencies ONLY.

What is an emergency?

Let us define what an emergency is NOT –  An emergency is not your friends hitting you up for a “once in a lifetime” trip to Cancun that will set you back $1,500. FOMO is a real thing but it’s not an emergency. An emergency is not the new iPhone coming out, and you upgrading even though your iPhone 7 is working perfectly fine because the new one has three fucking cameras. THREE!

An emergency is something that is unexpected, necessary, and urgent.

Please, please, please work on creating an emergency fund before putting any money into an investment of any kind. At the same time, don’t let this stop you from continuing to invest in knowledge. Knowledge is free.

 Clear Out Debt

Debt is a baby back bitch. Always has been, always will be. If you’ve already built a solid emergency fund, then I don’t think it’s necessary to eliminate debt entirely before investing, but let’s focus on high-interest debt. In one of my previous posts, I have my weird orgy analogy of how compound interest is the shit. Guess who else knows that compounding interest is dope??? Your credit card company. When you let your credit card debt build-up, you have to start paying interest on that. Then, you gotta pay interest on the interest and this continues on and on until you are living on the street.

If you have unpaid credit cards, then pay that shit off before even thinking about investing. What the hell is the point of getting awesome returns in the stock market if you have the same power of compound interest working against you at the same time? 

 If you have crippling credit card debt you are by no means in the minority:

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Just because you are in the majority doesn’t mean you’re right. A lot of people just see that little minimum payment and think “okay cool I paid it, now it says there’s no payment due”. Uhhh yeah, no shit bro there’s nothing “due”. Banks love this shit. They will keep collecting interest on that new flat-screen TV you bought. Don’t just pay the minimum. Pay the entire statement balance on your card at the end of each billing cycle. If you can’t pay the statement balance, then you are doing something wrong and can’t handle a credit card. If something comes up where you have to put a lot of money on your credit card, then paying that off moves to the top of your list. 

Not all debt is bad.

Some debt is just a necessary evil, such as a 4% school loan, which is not as much of a concern. Make your payments, but don’t feel like you need to pay off a $30,000 school loan before you can put any money into the stock market. Debt like this is very easy to factor into your budget. 

When taking on debt, always ask yourself if what you are purchasing with that debt will decrease in value. For example, let’s look at a car loan. A new car loses it’s value as soon as you drive it off the lot, then continues to lose value at about 15% a year.

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You will still be paying for the full price of the car plus interest even though the car is now worth half of what you paid for it. Taking on debt to cover the cost of liability is never a good idea. On the contrary, a college diploma will still have value for the rest of your life. Yes, college is expensive and the debt is probably killing you, but hopefully, that degree increased your value as an employee.

The same thing goes for mortgage payments. You will be paying off the purchase price of your home for 30 years, however, more often than not, the price of your home will appreciate in value. You are paying for something that is actually increasing in value the more time passes.

Debt for assets = Good ι Debt for liabilities = Bad

Roth IRA

Do you know what else is a baby back bitch? Taxes. Luckily, Uncle Sam created a few loopholes to help us finesse the system. Basically, you get taxes taken directly out of each paycheck, which sucks ass, but it is what it is. If you were then to invest that pre-taxed money into the stock market with a traditional brokerage account, you would eventually have to pay additional taxes on any money that you gain once you sell the asset. This is called the capital gains tax

The US government never wants you to make money without them getting a little piece of the pie. We’ll discuss how to limit your tax liability in a later posts but a Roth IRA is probably the most important weapon in fighting the war against taxes. 

The cool thing is… A ROTH IRA IS INVESTING! Finally, we can hop into the markets in the easiest and smartest way possible.  

A Roth IRA retirement account allows you to invest money without ever paying federal taxes. You can put money in every single year while you wait for the freedom of retirement and when you take the money out, YOU GET TO KEEP ALL OF IT. All of those sweet and delicious capital gains are all yours. Obviously, the government doesn’t want you to get too carried away with this loophole, so they limit contributions to $5,500 per year. 

How much can I make with a Roth IRA?

Let’s take a look at the benefit of the Roth IRA account. If we break down the max contribution into monthly investments, it comes out to $458 per month. This may not be possible for everyone, but this is your goal. The average return for a Roth IRA account is 7-10%. The chart below shows how your money will compound over time if you maxed out your Roth IRA account from age 25 to 65 (assuming 7% return).

 

After 40 years, your $458 monthly investments come out to 1.2 MILLION DOLLARS, all yours. Nothing to the government. If you simply put that into a savings account every year, you wouldn’t even get a quarter of that. 

I personally use Vanguard, but there are tons of different options out there for opening your very own Roth IRA account. So do your research and pick which one is best for you. I really think it’s bananas to open up a personal trading account before having your Roth IRA locked down. So get that done. Even if you can’t hit the maximum, please just open the account and start contributing what you can. 

 Educate Yourself

This one should be common sense, but I feel like a ton of people focus too much on the “get rich quick” aspect without properly educating themselves. As I said before, knowledge is free and it’s also what will pay off the most long term. It’s important that you know what you are doing before you make an investment. 

I’ll be honest, I didn’t follow this advice when I first started and it bit me right in the dick. I had an account when I was in college and just watched The Wolf of Wall Street. I found some hot stock pick from a guy on Reddit, I believe it was a company called Amtrust Financial. I tossed a ton of money into it without knowing anything about the company…legit nothing. I sorta forgot about it for a while and checked my account and was down $6,000. Because I didn’t know anything about the company or investing, I had no idea why this had happened. Should I sell? Should I buy more? Should I just keep holding? I didn’t know the answer. So as any panicked newbie would do, I sold and took the loss. 

The more knowledge you have, the more confident you become. Now, it’s easy for me to look for buying opportunities and I know the difference between a solid company and a sketchy one. 

Remember when you were in chemistry class in high school thinking why the fuck am I learning this? I’m never going to use this in real life. Well, whenever you are learning about investing it’s the complete opposite. I mean what better way to spend your time than learning skills that will actually make you money, right? You already found yourself at Invest for the Rest so you are on the right path!

The 4 Worst Excuses for Not Investing

Investing is the act of allocating funds to an asset or committing capital to an endeavor (a business, project, real estate, etc.), with the expectation of generating an income or profit. –Investopedia

Investing is a part of every financially successful person’s life. Everyone wants to invest in stocks or real estate right off the bat, but I encourage you to broaden your view on investing. Start thinking about how you invest your time and energy before you even think about investing money.

The fact that you stumbled across this blog, shows that you are an investor–even if you’ve never bought a stock or property. You are investing in yourself through knowledge which is one of the most powerful investments of all.
Unfortunately, knowledge alone won’t make you money. You need to take that knowledge and turn it into action.

Almost everyone and their grandma are aware of what investing in the stock market is… buy shares low, sell high. It gets a wee bit more complicated than that, but if you are able to buy great companies at a discount, then you will make money.

Invest for the Rest’s Money Orgy


What if I told you I had a magical money love machine? You put some money in the magic machine and forget about it. The money in the machine has a money orgy. Everyone’s bangin’ each other left in right, just absolutely wild unprotected coitus day in day out. Then all your money gets pregnant and has little money babies who also bang each other and repeat the process. Now the babies are smashin’ and making more little babies. This goes on for the next 30 years and every month you toss more of your hard earned cash into the sex machine.

When you go to retire, there’s a big ass money family. All grown up and ready for spending.

That’s investing. So why the hell aren’t you doing it?

Excuses for Not Investing

1.  I don’t have enough money to invest. You need money to make money right???

Right and wrong. Yes, to start a money orgy of your own you do need money. If you followed my saving advice from my previous post, you should already be growing your bank account. If you don’t have your saving habits down, then I suggest starting there. Don’t use your rent money for the orgy.

In the past, maybe people had a point saying, “how can I afford to invest when amazon is $2000 a share?”, but a lot of brokerage accounts offer fractional share investing now. This allows you to invest any amount of money in any company. Instead of spending money on that funny shower curtain that has a sloth dancing in the rain on it, you can profit off the stupid people that bought it.


I mean honestly, you’ve been saying you don’t have enough money to invest for the past 5 years when your money could have been smashing and making money kids. If you still don’t have money after all of this time of saying you can’t afford it, then obviously whatever you’re doing isn’t working.

You can’t afford to invest??? Bitch, you can’t afford to NOT invest.

2. Investing is risky. I don’t wanna lose all my money.

I’d be lying if I said there weren’t risks to investing. Of course there are risks. Sorry to break it to you but anything that’s good in life has some sort of risk. Not investing because you are worried about risk is like saying “oh well I’d better not go to college because there’s a risk of not getting a job after”. Or oh maybe I shouldn’t get married because there’s the risk of a messy divorce if things don’t go well. You make those decisions based on the proven track record of college grads making more money than those with just a high school education and the fact that there are happy marriages.

The historical return on the stock market is 10%. You can’t argue that. That’s just a fact. There were down years, and there were up years but the average is 10 percent. Ten times the average high yield saving account. In later blog posts I’ll teach you how to be smart and safe when entering the markets and we will match or beat this return over the long haul.

Success comes from taking smart calculated risks.

I’ll say this once and I’ll say it again…THINK LONG TERM. Just like life, there are ups and down to investing but if you put in the work, you will end up on top.

3. Investing is complicated and I don’t understand it. That’s why I haven’t been investing.

This might be the dumbest one of all. With this mindset you’re basically saying that you have reached the peak of your life. Anything that you don’t understand in your 20s and 30s, you will never understand. BIG DUMB.

That being said, the fact you are reading this blog shows that you are willing to learn something new. WOW what a novel concept.

Learning something that you don’t understand is how you got to where ever you are right now. “Hey we are going to promote you to manager because you are doing so well how does that sound?” Uhhhh well… I actually don’t understand management, so I’d rather not, thank you though.

Commit to growing as a person and welcoming new opportunities.

4.  I will get around to it eventually. I’m just really busy right now. I’ll get around to it once XYZ happens.

If there is one thing you shouldn’t procrastinate on its saving and investing. When it comes to these two things, time is your best friend The more time you have in the market, the more money you will make and the less “risky” things become.

It’s really funny what people prioritize over investing. There are 168 hours in every week. For the average person, 40 of those hours are spent working and 96 of those hours are spent sleeping (if you get 8 hours a night). That leaves 32 hours left of free time. I get it, life can get hectic. But to sit here and tell me you can’t find 30 minutes a day to learn a skill that will help set up not only your future, but your kid’s futures? That’s just a lie. The only person that gets hurt by this lie is you.

The best part about investing is that once you learn the skills, you never have to learn them again and the time that needs to be put in reduces dramatically.

Everyone always thinks that they are busier than everyone else and that they for some reason, have less hours in the day then other people. That’s the great thing about time; it’s a level playing field. Warren Buffet, Elon Musk, and Bill Gates all are given the same hours in the day that you have. They just choose how they use those hours differently than you do.

This is the exact reason I’m making this blog. There are aspects of investing that are confusing, no doubt. But the general principle is something everyone should be able to understand. We aren’t going to be diving into PE ratios and EPS any time soon, but you don’t need that right now. I promise this will not be as painful or confusing as you think it will be.

Stay tuned for future posts where we will actually start learning the first steps, but in the meantime, please just take a good hard look at your life and what you spend time on. I guarantee you are not as busy as you think you are.

5 Tips to Build a FAT Savings Account in Your 20’s

“Rich people don’t work for money, they have money work for them.”

This is something that is mentioned in just about every book on investing or wealth creation out there and it’s 100% true. But that’s easy to say when you have money to start with. Before jumping headfirst into the stock market or any other business venture, it’s important to first build financial habits that will help you grow your savings account.

I often hear people say “if my boss would just give me a raise then I could start saving” or “I can’t save right now because ________” I used to say shit like that too to help me rationalize why I wasn’t saving that much. It doesn’t matter how much money you make. I know that sounds like bullshit, but it’s true. You’re nuts if you think there aren’t surgeons out there who make $300,000 a year and live close to paycheck to paycheck.  Think about saving in terms of percentages instead of dollar amounts.

For example:

Joe makes $100,000 a year and ends up saving $10,000

Bertha makes $50,000 a year manages to save $7,500.

That means that Joe is saving 10% of his income while big Bertha is saving 15%. Even though Joe saves more money than Bertha, he’s actually worse at accumulating wealth. Good on ya Berthy.

I’ll give a personal example to show you how I fell into the spending trap. Two years out of college, I was doing well in my field and got a raise to 100k a year. I had never made that kind of money in my life. It started off with little shit like eating out way too much… actually, I shouldn’t even say eating out because what I really mean is ordering Uber Eats so my fat ass wouldn’t even have to leave my house. I had it down to a science. I would start my commute in LA traffic, toss on a podcast, and time my order perfectly so that the Uber Eats dude would be pulling up to my apartment right as I got home from work. I would sign up for dumb ass subscriptions I didn’t need and have amazon prime packages at my doorstep weekly, all because I could. I ended up doing a deep dive through my finances and found out I had spent $70,000 in a year. No kids. No mortgage. Virtually no responsibilities outside of work. I spent the majority of my salary (after taxes) and had nothing to show for it. Don’t fall into this trap.

The steps listed below will help you to start changing your mindset when it comes to saving your money.

1.  Auto deposits

This should be a no brainer but it shocks me how many people don’t do this. Any bank will allow you to set up automatic transfers from you checking to your savings. Set an automatic transfer for every two weeks (or whatever frequency you get paid) so that a predetermined amount goes right from your checking into your savings.

STOP USING YOUR CHECKING ACCOUNT TO STORE ALL OF YOUR MONEY.

Promise yourself that your savings account will not be touched unless you have an emergency or you plan to buy assets with that money. Also, yeah I know you are already contributing to a 401k. This is in addition to that.

If you have $10,000 in your checking account, you will convince yourself that you have no problem affording that $300 watch you want. “I got ten racks to blow I’m gooooooooddd” While if you only had $3000, you would really think about that purchase because spending too much could impact your bills and your rent.

This is the classic pay yourself first mentality. Be fucking selfish about it. See your life as a business. You’re the owner. If you owned a business and it ran into cash problems: Are you going to cut your own salary first? Or are you going to look for ways to cut the costs of goods?

If the company you work for had cash flow issues… would you want them to cut your salary to help keep the business afloat? Or would you want them to lay off Steve from accounting?

Deuces Steve ✌️

2.   Ease your way into it

If you’ve never paid yourself first, don’t get all hyped after this blog and try to save half your paychecks. It’s going to stress you out and you are probably going to fail miserably. You’ll do it for the first couple months and then its gonna stress you the hell out and you will give up. Start with 5%. Maybe 10% if your feeling bold.

Paycheck is 1500 biweekly? Save 75

Easy.

Okay, now try 100 a check.

I get it. Life’s expensive. But life being expensive is not an excuse not to save. Just because saving $75 a check doesn’t seem worth it, doesn’t mean you shouldn’t do it. Start slow and work your way up. In my opinion, if you can get to a 1/3 of your monthly paycheck, you’ve made it.  I realize that this isn’t possible for everyone, but do what you can.

3. Focus of recurring purchases

When you start getting up there in percentages you may start to notice some cash flow issues. Remember, as I mentioned before, this doesn’t mean stop paying yourself.

This is when you gotta take a deep dive into that credit card statement and find out what you are spending your hard earned cash on. When I say recurring purchases, I don’t just mean your netflix, hulu, spotify, amazon prime, tinder plus, and whatever else subscriptions. I mean that burrito you get everyday or that trip to the 7/11 across the street from work that has the spicy beef jerky and those little rainbow fruit belt candies that surprisingly go really well with the berry prickly pear and mango pineapple frappuccino from the starbs that’s conveniently located next the 7/11. It’s this kind of stuff that can do dirty things to a bank account when left unsupervised.

Most bank apps these days can give you a breakdown of your spending and you can even set budgets for each category. If your bank doesn’t offer this, just download the app Mint (Hey mint exec reading this: first ad is free) We are creatures of habit. At first it’s going to be hard to stop buying certain things everyday, but pretty soon you won’t be able to imagine spending $15  a day on coffee and snacks.

4. Pretend you didn’t get a raise

This one is big. Once you master the first three, don’t let getting a raise at work change any of the things you have been doing. This is the easiest way to get stuck in the rat race. You will get used to making 50k a year and living paycheck to paycheck. You crush your powerpoint presentation at work and they bump you up to 60k and the process starts all over again.

If you were living off 50k a year and you get a raise, then all that money just goes back into savings. I never understood how someone can make 50k a year and live perfectly fine, not saving money, but still living fine and then get a raise to 75k a year and still not be saving. The best part is, they always make excuses why their circumstances are different and cost of living went up. No bro, you got a raise and thought you could afford that beamer and now you are back where you started. Which brings me to my next tip…

5. Bad debt goes first

I mean I guess first off, don’t get into bad debt. When I say bad debt, I don’t mean your school loans. That’s a necessary evil that got you where you are now. When I say bad debt, I mean anything above 5% interest that you probably could have lived without. The worst of all is credit card debt.  The average credit card interest for 2019 was 21% hahaha. If you promised me I could make 21% a year on any investment I make for the rest of my life, I would be wildly rich when I’m 50.

But okay don’t be so hard on yourself. You got yourself into absolutely crippling credit card debt. You went to a financial adviser and they threw up all over their desk when they looked at your bank statements. This is now your main focus.

Start dumping all this money your saving into your bad debt first. There’s no point in trying to build a saving account if you have the magical powers of compound interest working against you in the wrong direction. Chip away at it and promise yourself that you’ll never get back into this position again.

Good luck. I just want you to know that I believe in you.

State of the Market

Before I start getting into the nitty gritty I just want to address where we are at in the stock market. Stocks took a fat dookie this morning because of the Modelovirus out in China.

This is what we like to call an event. Stocks have been a god damn money machine for the past 18 months so everyone is kinda on edge about the crash. If you own companies, the most important thing to ask yourself is, “has the long term outlook of my company actually changed?” It probably hasn’t… unless this becomes a full on plague, I doubt this is really going to affect the bottom line of most companies 3 years from now.

People on Wall Street have more mood swings than an angsty teenage girl. Either the god damn word is on fire or nothing can go wrong.

My recommendation is to stop checking the markets unless you are shopping for a new stock. Some companies may have gone on sale today but keep in mind that everything is still trading above fair value for the most part.

Crush up a Xanax in your coffee this morning, and just chill out.

RIP Kobe