One of the reasons ETFs have exploded in popularity recently is because ETFs are more tax efficient compared to mutual funds. Why are do ETFs have better tax efficiency, and when does this difference even matter?

What is the Difference Between a Common Size Balance Sheet and a Regular Balance Sheet?

Common Size Analysis of Financial Statements involves looking at the numbers on the financial statement as a percentage of a total rather than their absolute value. Typically investors will look at a company’s common size balance sheet and common size income statement.

This is helpful when not only looking at a single company’s financial statements, but also comparing multiple business of different sizes at one time. Let’s take a look at an example of a normal balance sheet and a common size balance sheet for several companies:

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Below is a simple 5 question quiz presented to 25,000 Americans. Only 14% got all 5 answers correct.

We have also updated this to include the new “bonus question”available.

This is troubling because not understanding these topics can have a profound impact on your future investing success.

A lot of families handle their own finances, so it is imperative that the basic topics covered here are understood. At Begin To Invest, I want to empower people to have the confidence to handle their own finances and be able to do it well.

Here, we discuss the topics covered in the 5 question quiz in detail, to ensure you understand these concepts.

I first heard of the book “The Outsiders” in Berkshire Hathaway’s 2012 letter to shareholders. And who is going to ignore a book that Buffett calls “outstanding!”?

The book goes in detail on 8 different CEOs who excelled at creating exceptional long term returns for shareholders. In fact, the average returns of these companies’ shares outperformed the S&P 500 by a factor of 20 – every $10,000 invested in these companies was worth $1.5 million 25 years later.

What’s their secret? And how can we use those lessons to find today’s great CEOs?

Warren Buffett’s 2014 letter to shareholders tells the amazing story of Buffett buying Berkshire Hathaway.

At the time Warren’s investing style, taught by Ben Graham, was to look for “cigar butt” stocks – stocks that were dirt cheap, but provided a “free puff” to investors willing to make the investment. Berkshire certainly could have filled that criteria, here is how Buffett tells the tale:

“…have an adequate idea of stock market history, in terms, particularly, of the major fluctuations. With this background you may be in a position to form some worthwhile judgment of the attractiveness or dangers…of the market.”

– Ben Graham

As I write this, worldwide stock markets are reeling from scary headlines of the spread of the coronavirus. Over the last 2 days, the Dow is down more than 6%, the 89th worst 2 day stretch in history.

I thought it would be fun to look at the major stock market declines of last decade – to get an “adequate idea of stock market history”, as Ben Graham said, in order to form judgement on how we should be reacting to today’s headlines.

Before reading, take a minute to try and recall the worst news headlines from the past decade. What was worth panicking over? How did the stock market react? How did you react?

History tells us that what seems important today is often forgotten tomorrow. And it tells us that the last thing you should be doing in panicking and selling your investments.

Don’t believe me? Below we have a collection of the major headlines in the past decade that moved markets and caused thousands to panic.

How many of these do you even remember?

What seems significant today?

With a new year comes new IRS rules. Here’s what has changed for 2020 in regards to how much you can contribute to your IRA, 401k, and Roth IRA – Along with various income restrictions to be eligible.

Finding a company with a competitive advantage means finding an investment that will offer solid returns for decades to come. What identifies a company with a strong competitive advantage? Some results may surprise you.

“…managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.”

-Warren Buffett 1982 shareholder letter

There is so much more to finding a good investment than finding a specific ratio on a company’s balance sheet. As Buffett says, evaluating a company’s financial statement should be the beginning of your research, not the end.

Buffett has made his billions by identifying companies with strong competitive advantages, and buying and holding those companies for decades (Or as he says, preferably forever).

A strong competitive advantage means that a company will continue to make profits year in and year out, no matter the economic or political environment. It maximizes shareholder wealth by harnessing the power of compounding interest in its accumulated earnings.

But, a strong competitive advantage is not identified just by looking for a certain Price to Book (P/B) or Price to Earnings (P/E) ratio. Instead, it means understanding how the business operates and how the company’s financial statements identify advantages the company has its in field.

For example, consider Coca-Cola’s current ratio. Historically, it has been under 1. Any basic stock screen that excludes companies with current ratios of less than 1 (which is a quick test to see which companies can afford to pay their bills over the next 12 months, read more on current ratio here), would have excluded Coca-Cola from the results.

How can it be possible that one of America’s strongest companies looks like it won’t be able to afford to pay its bills by a simple ratio like the current ratio? It turns out, this may in fact be a sign of a significant competitive advantage for a select set of companies!

A low current ratio is #4 below, here are the rest:

Every once in a while, I like to take a closer look at an event that comes up in our “This Day in History” archive, which gets posted daily on Facebook, Twitter, and is now available as an Amazon Flash Briefing.

Today we look into the life of Peter Lynch, whose birthday is this week, and who is one of the most successful mutual fund managers in history.

What did Peter Lynch look for in an investment, and what stocks would Peter Lynch buy today?

Lynch looked for 5 key criteria when selecting an investment:

1. Buy What You Know

2. Growth At A Reasonable Price

3. Avoid The Hot Stocks

4. Stay Small

5. Strong Balance Sheet

We’ll look at these in more detail below, and a list of companies that meet all of these criteria –  but first a quick look at Lynch’s historic run as a mutual fund manager:

Peter Lynch – One of the Investing Greats

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This week, we will be revisiting some of our previous posts on John “Jack” Bogle, who passed away today. R.I.P Jack.

Jack did more for American investors as a whole than any individual I’ve known.

If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value. In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.

-Warren Buffett

Below is a post we originally published in 2013, looking at an interview Bogle did with Men’s Health Magazine:

What are the secrets to long term investing success? No one better to ask than Jack Bogle, founder of Vanguard, creator of the index fund and orator of my favorite investing quote, which can be viewed from an old CNBC interview, here:

Bogle Comments on the Markets from CNBC.

“Don’t just do something — Stand there!”

The following is in the May 2013 edition of Men’s Health magazine:

1. Forget “the market”

Bogle says: “When we speak of ‘the stock market,’ it’s meaningless. It’s merely the value investors put on all those securities, thousands of different stocks with a value of $15 trillion. It goes up and it goes down, but in the long run it goes up. The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.”

2. Understand your role

Bogle says: “Your job is to capture as much of the market return as possible for as long as possible. The only way to start investing for a lifetime is to buy a broad-market index fund. Don’t pick an actively manage mutual fund. Don’t pick stocks. Don’t pick hedge funds. In the long run, I believe in owning the stock market, not having a manager own little pieces of it for you.”

Our take: For those of you who have signed up for our newsletter and received our free eBook, you have seen the numbers. A majority of mutual funds lose to the general market. For most investors, owning the broad based index funds is not only the easiest option available, but the best!

3. Don’t kid yourself

Bogle says: “I ask people: what is the intellectual basis for indexing? Reduce costs and you maximize your fair share of the market return. What is the intellectual basis for active managing or stock picking? It’s basically ‘I can do better’. Is that an intellectual basis? No! It’s a hope, it’s a brag, and it has no chance of ever being realized in the long run.”

4. Seek Boredom

Bogle says: “I look at indexing is being simple and, sad to say boring. Be bored by the process but elated by the outcome. In Vegas, it’s the opposite. You elated by the process, by the moment, but you’re bored by the outcome because you know exactly what it’ll be. The more you bet, the more you lose. Investing shouldn’t give you a rush.”

Our take: The Vegas analogy is one we have used before here on Begin To Invest. If you want excitement, take your money to Vegas. Remember if an investment can make you rich in a day, it can also (and will probably) make your broke in a day.

5.Think ahead. Way ahead

Bogle says:
” It’s foolishness think you can beat the market. There are only two things working here: How did it much cost to get into the market, and how long are you in? If you’re investing for a lifetime – and you should be, saving for retirement and educating your kids along the way- if you’re 20 years old now, you should be thinking 60 or 65 years as your time horizon.”

Our take: The magic of compounding interest works best the longer you give it. Remember, you are saving now for money to spend decades down the road in retirement. Don’t worry about what the value of the account will be tomorrow.

6. Forget “the Number”

Bogle says:“There used to be a company reported to tell you ‘the number’ [how much you need to retire]. It’s more complex than that. It’s what those dollars are worth and 30, 40, 50 years. Everyone is looking for the answer, and there really isn’t an answer except save. Save more. Invest for the long term, get cost out of the equation, and get diversified to the nth degree.”

Our take:  I have  talked about “the number” several times here on Begin To Invest. I think its important to have an idea of money that you will need during retirement based on estimated expenses. Don’t don’t get infatuated with that number, especially early on.

7. Invest. Don’t trade

Bogle says:
“All the trading back and forth each day and called financial pornography. Paying attention minute to minute, hang on every word, this is not investing. This is trading on what you think other traders will do. How can you tell who’s right and who’s wrong? It’s a casino. Whether it’s Wall Street, the lottery, or Las Vegas, ‘hope’ is not a good investment strategy.”

Our take: Amen. Just in our last post we talked specifically about what some people call “investing” is really nothing more than “betting”. Don’t bet your life savings, invest it.

8.Do some math

Bogle says:
“Should the market return 7%, and you’re paying 2% to managers and brokers to get that seven, you get five. [The rest] goes to the croupiers on Wall Street, the managers, the traders, the speculators.”

Our take: (Insert graph of 7% return vs 5% return here) Fees add up over time. A one time $1,000 investment today that grows at 7% will become nearly $30,000 50 years from now. Compare that to a reduced 5% return over 50 years, which becomes only $10,000. That’s $20,000 you are giving to Wall Street instead of keeping for yourself.

9. Keep it simple

Bogle says:
“The rules are simple. If you don’t save, you will have nothing. Guaranteed. Not investing is not an alternative. I have an age-based rule of thumb: have a bond position that equals your age. If you’re 25, have 25% in bonds, the rest in an index fund. Today, bond yields are so low, this doesn’t work quite as neatly as it worked for a long time. But it simple.”

Our take: This sort of goes with rule number 4 – seek boredom.

10. Don’t Peek at Statements

Bogle says:
“This is one of the most important rules of investing. If you never peek from the age of 20 to the age of 70, you’ll rip that first 401K statement open at age of 70, and I recommend you have a doctor on hand because you’ll go into a dead faint. Your heart might even stop. You’re going to have an amount of money you can’t even imagine.”

Our take: This might be a little extreme for most. Although it is most certainly true, just investing a small amount leads to a large sum over long periods of time.

11. Know your limitations

Bogle says:
“Sometimes the market is valued way higher than the growth line, and sometimes it’s valued way lower. If you could forecast that, you’d sell at the high and buy the low. But here’s the thing I don’t know how to do it. I don’t know anybody who knows how to do that. And I don’t know anybody who knows anybody who knows how to do it. It’s a fool’s game.”

Our take:

12. Don’t panic, be cool

Bogle says:
“In this decade, the heavy lifting will have to be done by stocks. If stocks deliver 7%, you’ll have 100% return in 10 years. And there will be bumps! I don’t want to be deceiving anyone. I can guarantee there will be at least two or three 20 to 30% bear markets in that time frame. Just assume them. When I happen, just say, “I knew that.””

Our take: “Don’t just do something – Stand there!”

How do you know if a corporate bond fund is a better investment than a treasury bond, or a municipal bond?

The answer depends on your income, your federal and state tax rates, and your state’s tax laws. We have built this tax equivalent yield calculator to help you quickly determine which type of fixed income investment will provide you with the highest after-tax return. [continue reading…]

Happy New Year!

With a new year comes new IRS rules. Here’s what has changed for 2019 in regards to how much you can contribute to your IRA, 401k, and Roth IRA – Along with various income restrictions to be eligible.

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Uncovering any type of value has been tough in this market.

Stocks are trading at their highest multiples in years after nearly a decade of rising stock prices. Even with the 2008 financial crisis, the S&P 500 has had just 1 negative year in the last 15 – a feat that has happened only once before in history (1982-1999 is the only other 15+ year period with only 1 negative year). The CAPE ratio is at a level above 30, a level which has never produced positive 10-year returns. The S&P 500’s dividend yield is now below the 10-year treasury, something that last occurred a decade ago.

Historically, at times when stock markets have been so expensive, bonds have offered yields to help reward patient investors unwilling to invest in an expensive stock market. Before 2008, 10-year treasury bonds yielded 4.5%. Prior to 2000, that same bond yielded over 6.5%! But today, bonds are offering generational low interest rates that even in today’s low inflation environment yield real returns around 0%.

But getting out of your comfort zone may prove worthwhile. Below we will look at a publicly traded third party trust that holds high yielding bonds in a specific company. However the trust is valued 38% less than the market value of the bonds that are within the trust.

We will then explore the ways to hedge our investment to eliminate credit risk in its underlying holdings. For large investors this is easy to do, but small investors need another option. We will use the findings of a 2011 academic paper to construct a put option position to completely hedge our position, theoretically leaving us with a 6.8% net annual yield and hopefully a one time 38% gain – completely independent of the general stock market’s return.

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On the eve of a day that could be one for the record books, let’s take a look at how one of the world’s most famous companies can see its value go down by $120 billion in just hours.

Facebook, one of the largest companies in the world, is currently down 20% in trading tonight:

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Generally, increasing assets are a sign that the company is growing, but everyone can relate to the fact that there is much more behind the scenes than just looking at the assets. The goal is to determine how the asset growth of a company is financed.

To do so all we need is the last few years of a company’s balance sheet and the most basic financial statement equation:

Assets = Liabilities + Equity

The assets of a company are what the company owns. Typical examples of assets are; equipment to make a product, buildings owned, raw materials to create a product, inventory of the product to sell and cash in the bank.

Think of your household. Your car, your home, your furniture, TVs, Computers, bank accounts etc.

Generally, increasing assets are a sign that the company is growing, but everyone can relate to the fact that there is much more behind the scenes than just looking at the assets. Back to our household example:

Imagine watching a neighbor pull a sparkling brand new BMW into their driveway, getting out dressed in his fancy Italian suit, talking on the latest smartphone, and coming over to ask if you can watch his house for 2 weeks while he travels to sail in the Caribbean. You may think he is making it big, right? Maybe he got a big bonus from work, or a promotion…

That may very well be the case, or he may be racking up debt (liabilities) to finance these assets.

You may never find out which option applies to your neighbor, but thankfully the SEC requires publicly traded companies to be a little more transparent with their financials than your neighbors. [continue reading…]

As the search for new investment ideas continues, I’ve been thumbing through a lot of annual reports.

A couple companies that were at the top of my list to check out; Zillow (Ticker Z or ZG) and Santander Consumer USA (Ticker: SC). What makes these two names interesting? [continue reading…]

Mr. O’Glove is the author of one of my favorite fundamental analysis investing books: Quality of Earnings

This talk only begins to touch on the topics covered in his book. If you find any of his talking points interesting, read the book for much more details and insights.

He is known for is in depth analysis of company financial statements. He was the author of the ‘Quality of Earnings Report’, a newsletter focused on identifying financial discrepancies, primarily for institutional investors. He published the Quality of Earnings book in the mid 80s. It may be old, but it is still one of the most useful for education investors on reading a company’s financial statement.

I can’t say I agree with everything he says in this talk (specifically that Buffett should break up Berkshire Hathaway, inflation comments, deficit speak, etc.), but that doesn’t mean he doesn’t provide a ton of value in his talk. [continue reading…]

A New Year for the stock markets – That means it is time to run our Ben Graham Value Screens again and see what companies have made the cut this quarter! [continue reading…]

Update: This is an old post featuring the 2018 limits. Need to know the 2019 limits for IRA, Roth IRA, and 401k contributions? See the 2019 post, here.

Good news on the retirement front this year! For the first time in 6 years contribution limits for some retirement accounts are going up! What has changed for 2018 when it comes to your 401(k), IRA, ROTH IRA, and more? Here’s the quick rundown for most savers:

For more details: [continue reading…]