Money, time and mental energy are ‘your most valuable resources’ and- this blog may help you use them wisely

Why am I doing this?

I am doing this to help you.

I have developed a love for finance, the financial markets & how we can not only invest our money but also our time and mental energy to be truly free and have a more desirable life.

A less desirable life is often caused by- not knowing how to save and invest money, time and mental energy. This realization made me talk to the people in my life about what consists a good life and how to get there. Sometimes I see a light bulb lighting above their head, or feel that I’ve helped to alleviate at least one confusion/pain/problem in their life. Serotonin floods inside my body and makes me feel so good! I love this feeling, obviously. I also love how this means that, I can be of, at least a little help, in the process of cleaning up the mess that humanity is facing right now. This made me want to help more people which, gave birth to this blog.

 

Who is my target Audience?

If you’re under 30, you will benefit most from this blog, but of course people of every age may find this blog useful. It’s never too late to get your act together.

What do I expect you to do(or have) after reading this blog?

More financial freedom

Who wouldn’t want to be able to retire early? To not have to go to work, or, to do the things s/he loves and still have the bills paid?

You will need some really simple daily habits to be able to do this. Like- spending a little less everyday and saving that money in a jar.

You will also need to invest those savings. To know why you must invest, Read this post.

Efficiency in using time, money & mental energy

These 3 resources are our most valuable resources. If used in the right way, they will take you to a better life.

Acquiring new skills fast but also in a proper way

If you’re familiar with Cal Newport’s work, you’ll know how skills can make you ‘so good that they can’t ignore you’. This famous line by him (also the name of his book) points to the fact that, your career satisfaction depends on how skilled you are. He coined the term ‘career capital’ which is the bargaining power you have in your field of work to get more autonomy, competence and relatedness. These three are the traits that makes a career more satisfying. And ‘rare and valuable skills’ are what increases your career capital.

It’s fun and useful to learn new skills even if not for career advancement.

To put knowledge into action

The following quote from Cal Newport illustrates this point perfectly. So I’ll just let you read the quote.

Think Like The Rich: Understand The Most Important Money Concept.

We, every student of finance, know this concept. It’s basically the core of all that we study. What is it?

The Time Value Of Money.

You may say it’s obvious. Money has time value. $100 today is better than $100 after 10 years. We all know inflation is real and it eats the value of money away. What else?

Well, investing. That is the holy grail. Don’t even try to work hard to gain financial freedom. By all means work hard if you want to, but not for financial freedom. It doesn’t work that way. What you have to learn is investing. To do nothing while your money does the work for you.

 

 

Food for thought:

Say, you are 20 years old. You have $1000 in your bank. You want a new fridge. But, you are also thinking about whether you should invest now and live with your old fridge for few more days? What should you do?

Let’s assume you invested $1000. This investment gives you 7% interest compounded annually. Let’s go a little crazy and say that you keep up this trend of sacrificing short term needs for the bigger picture. So, you start investing $500 in the same account from next year, every year.

Now let’s fast forward a little bit. You are getting married. It’s also your 32nd birthday. And you have almost $12,000 in your account. How much was your investment though? Only $7,000.

You earned almost $5,000 doing nothing. Your money worked hard though, every day and every night, for you.

Think for a second. What would have happened if you bought the fridge, and didn’t sacrifice little short term pleasures every year? You would end up with a beat up fridge, some garbage you don’t use anymore and miss out on free $5,000 .

…………………………………………………………………………………………….

What if you had invested in an investment that gave you 12% interest compounded each year? You would end up with $17,000 after 12 years. You would’ve earned $10,000 doing nothing!

……………………………………………………………………………………………….

Let’s consider these 2 friends. Ally and Jane.

Both are 20 years old. Ally saves 5 thousand dollars every year and invests it in an asset that gives her 10% interest compounded each year,

Jane doesn’t have the discipline to do that.

At their 40th birthday,

Ally has almost $300,000 in that account. Guess how much her investment was? Only 100,000 ! She basically earned 200,000 dollars for free! Ally is thinking about retiring from her current job and follow her passion of travelling the world and write about her own experience. And why shouldn’t she? She has enough financial backup for sure!

What about Jane? Well, she’s thinking about quitting her job and to start a business. She also wishes she was as wise as her friend Ally when they were younger.

Food for thought:

What if Ally just saved $5000 every year but not invest it in an asset?

Answer: Simple. She would have missed out on free 200k dollars!

Cost of Equity & Dividend Growth Model

Cost of equity refers to a simple concept- the required rate that common shareholder’s expect. Sadly, calculating it is one of the tougher things to do (you can view this as exciting because it’s tough if you’re a twisted individual like me 😉 ).

There are 2 ways to calculate this.

i) The Dividend Growth Model &

ii) The Security Market Line Model (SML)

Let’s discuss them briefly:-

i)The Dividend Growth Model: 

Here, Re is the cost of capital. D1 is next years projected dividend, Po is beginning stock price and g is growth rate.

Growth rate is the rate at which dividend is expected to grow next year.

D1 can be calculated by this formula:- D0*(1+g)

Good sides & Bad sides of using this method:

Good- It’s simple and easy to apply.

Bad-

Firstly, It depends on the company actually paying dividends (for at least 2 consecutive years) , but, not every company does that.

It also assumes that dividends grow at a constant rate, which is a lie too (usually).

Secondly, It does not explicitly consider riskiness of the security.

We can tackle these problem with the next model- SML which is discussed in the next post.

 

WACC & The Cost of Capital

WACC

Companies finance their project with money they get from preferred stockholders, common shareholders, lenders etc. This is why, when they undertake any operation, they keep in mind to generate at least ‘the least amount of return’ that would satisfy all these investors. The minimum rate, that is calculated for each project, to satisfy the investors is called  the required return. Corporations calculate a weighted average of these required return. This is the Weighted Average Cost of Capital or simply called WACC.

Cost Of Capital

Required return, cost of capital and appropriate discount rate are interchangeable terms.  They mean the same thing.

Cost of capital is determined by the usage of funds rather than source of fund. This is a little counter-intuitive. But don’t worry! Here’s some further explanation 🙂 –

Investors put there money in assets with different levels of risk. They want higher return when the risk is high and lower return when the risk is low. That is why the required return is not the same for even a single investor when we consider his different assets. I guess this argument applies more to common equity holders that bond issuers or preferred stock holders as the latter ones require more or less fixed rates of return.

So, the riskiness of an investment affects its required rate of return(i.e. cost of capital). That is why cost of capital is determined by the usage of funds and not the sources of funds.

 

 

‘Must haves’ for stock market success- Warren Buffet shares his wisdom

Are you ready to learn from the best?

Do you want to become a trader, who rises above the crowd?

Have you got what it takes to admit own ignorance and listen to “the” superstar?

Let me share with you a little secret that Mr. Buffet revealed.

To profit from the stock market, for most of us, is a long shot. We may get singular home runs here and there, but in the long run, losses catch up.

Warren Buffet suggests that- a stratospheric IQ, Unusual business insights and insider information isn’t necessary to be a successful investor. Rather, he endorses a good framework and the emotional strength to abide by it.

How many of we know that Buffet had a mentor? His name was Benjamin Graham and as Buffet said in Ben’s book- The Intelligent Investor (preface to the fourth edition), Warren’s life was influenced by Ben more than any other man except Warren’s father.

I think, therefore, there’s a lot to learn from Ben’s book. You must definitely study that book.

Warren E. Buffet wrote in that same preface that, a man needs to follow the behavioral and business principles that Graham advocates and to pay special attention to chapters 8 & 20. Thus an investor may avoid getting poor results, according to Warren.

He goes on to say that, getting outstanding outcome depends on the amount of effort and intellect put into investments.

But that’s not all, market’s stupidity helps a business-like investor a lot too.

Hope this post ignites the necessary motivation in you to read the book (if you haven’t already)  🙂

The Journey Begins

Thanks for joining me!

Good company in a journey makes the way seem shorter. — Izaak Walton