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What Personal Rules Guide Your Investing Strategy?
BY STEVE DINNEN
There are rules to live by. And there are rules to invest by as well, if you want to do so profitably. One of the rules I learned, rather late, came from a friend who listened as I groused about losing 55% of the money I had invested in U.S. Steel. I was just sure it was going to bounce back and even added to my position trying to average down my cost per share.
"Ten percent and out," he counseled. Once a stock loses 10%, it's time to sell it. Yes, it may bounce back. But it could just as easily lose that 55%.
Probably two-thirds of my trades are losers. I count on the one-third win side to make my money, and since adopting this rule, I still see two-thirds of my trades as losers, but by limiting the downside on those losers my portfolio value has increased at a better rate.
While my friend's 10% rule is completely arbitrary, J. Kelly Flynn (pictured) has a more scientific approach to investing, as well he should because he does it for a living for himself and clients at Prospective Value Partners, where he is chief investment officer. Flynn looks at metrics such as ROIC -- return on invested capital -- "a proxy for quality," he said. Into this mix he blends weighted average cost of capital, or WACC. And the ROIC needs to exceed WACC. If not, he said, the company is destroying value when it deploys capital.
Flynn also likes a high free cash-flow yield. As an example (he's not necessarily making a recommendation), Flynn points to Johnson & Johnson (JNJ). It has a market capitalization of around $450 billion, and about $20 billion of annual free cash flow, which gives it a cash flow yield of 4.5%.
"Everything is free cash-flow positive," he said of the portfolio he manages. "To me, it's all about growing cash flow over time, whether you're a value or growth investor." His portfolio currently has an aggregate FCF yield in excess of 7%.
All this number crunching brings discipline to Flynn's investments. It's not all numbers, though, as Flynn frequently talks to management teams and looks at qualitative measurements, such as changes in insider ownership.
Also on the qualitative end of the spectrum come some personal rules John Schmidt, a retired attorney from Principal Financial Group, follows when he's making investment decisions. These should be easy to follow, right?
1. Be fearful when others are greedy and be greedy when others are fearful. This is attributed to Warren Buffet.
2. Don't buy things you do not understand, e.g., cryptocurrencies, hedge funds, options.
3. Distinguish between investments (intended to be held more than one year) and securities held for trading purposes, and limit your losses on securities held for trading.
4. Be patient. Few people get rich quickly.
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IRS Seeks to Close Tax Gap by Going After Cheats
BY STEVE DINNEN
While I'm dead certain no one reading this column has ever considered not paying their full due in taxes to Uncle Sam, perhaps you can share this information with that brother-in-law who seems to work little and spend much: The IRS is after him. Or soon will be, as soon as the Biden administration beefs up its ability to run down tax cheats.
This is serious stuff. The IRS believes there is a tax gap of more than $1 trillion -- the amount of money due to the Treasury versus what is actually paid.
High-income self-employed people are the target audience of IRS compliance officials. A W-2 employee at the local John Deere factory really doesn't have much of a chance to stray beyond what is already being reported to the government by way of wages and withholding. But a self-employed person -- say, a dentist, a lawyer a tavern owner -- with some sideline income from rental property, well, there are ways.
Individual taxpayers have seen their audit rates plummet by half from 2018 to 2020. But taxpayers with incomes of more than $1 million have seen their audit rate plunge to a mere 3.2% from 8.4%.
One thing the IRS will look at: The Biden administration wants sole proprietors and self-employed people to report total deposits and withdrawals to their banking accounts. Critics see this as overreach. Also, any business that accepts or works with cryptocurrency may have to report transactions that exceed $10,000.
So beware, brother-in-law.
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Companies must pivot their brand image and message to find differentiation against their competitors.
... Read more »
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Managing Your Investments as Stock Market Hits Highs
BY MALLIKA MITRA FOR MONEY.COM
For the stock market, new record highs are becoming the usual.
The S&P 500 closed at a record high on Tuesday while the Nasdaq topped 15,000 for the first time ever. But nowadays, new all-time highs don't feel all that special or new. This was the 50th record close of the year for the S&P 500, a benchmark commonly used to measure the broader stock market.
Stocks have made a significant recovery since their pandemic lows in March of 2020, with the S&P 500 up around 100% since that time. The market has been bolstered by the economy's speedy recovery, thanks in part to stimulus checks and near-zero interest rates, as well tech giants like Apple and Facebook benefiting from stay-at-home orders and a surge in new investors while everyone was stuck at home.
When the market is on fire, it can be tempting to take action — but making a change to your investment portfolio right now might not be the best move for you. Here are three insights from financial advisers to keep in mind. READ MORE.
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Making Your Marriage More Financially Equal
BY RON LIEBER FOR THE NEW YORK TIMES
A year and a half of pandemic living has revealed — or reminded us of — some persistent patterns around money, gender, marriage and families. And they aren’t always pretty.
There is anecdotal evidence of men confiscating their wives’ federal relief checks, and data showing a link between financial stress and domestic violence. And millions of women felt they had no choice but to leave paid employment to provide care for children or other family members.
Matrimony and parenting involve compromise, without question (and sometimes, seemingly, without end). But it need not be disproportionate.
There are plenty of reasons to equalize the financial decision-making in your marriage — and this goes for every couple, heterosexual or not. If you’re among the many getting married now as part of the great pandemic wedding boom, consider adding another promise: that yours will be a financially egalitarian marriage. READ MORE.
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