Finance

• Purchasing a stock = Buying part of a real business
• Buy stocks during recession
• During bull markets, risky and least profitable time to buy stocks

• Purchasing a bond = providing a loan
• During recession - least profitable and most risky to buy bonds
• During bull market - least risky and most profitable to buy bonds
• Longer the bond (e.g. 30 year bond), higher the expected interest rate
• If the graph for 30 year bond is decreasing, assume stocks are in bull (inverted yield curve)
• As interest rates increase, if bond doesn’t pay as much, it’s value decreases
• As interest rates decrease, and bond pays more, value of bond increases

• Considered gold standard of zero risk investment which other investments are measured against.
• Your risk profile is your rule of thumb:
• E.g. I do not consider any investment that doesn’t return x% vs 0 risk investment

• Market price of a stock is never equal to intrinsic value of a stock.

1863 french economist Jules Regnault’s “Efficient Market Hypothesis” which says the price of any financial instrument will be priced efficiently by the market over time is not accurate.

At any given moment, if only a small number of people (volume) in relation to the total number of stockhodlers are determining how much a stock is worth - is that a an accurate represenatation?

• Must be managed by vigilant leaders
• Must have long term prospects
• Must be stable and understandable
• Must be undervalued

Equity = what the company is worth right now.

If you sold everything and paid bills, what’s left over.

To calculate the intrinsic value of a stock - you need estimate future cash flow earnings and divident payments.

• Use the DCF method to determine the present value of future cash flows.

• Future Cash flow (10 yr period) = Book Value Growth + Dividend payments
• [estimated future BV (in 10 years)] + [sum of divident payments over 10 years]
• Then discount the cash flow by the current 10 year federate note
• Book value = Equity per share
• Total Equity / Total Shares Outstanding

• Get it’s book value for last 10 years
• Is it increasing? Slow or fast?
• What rate? Is it stable and predictable?
• Exercise: plot book value over time

• Average annual book value growth (%) = Present BV - Previous Years BV / Previous year’s BV

  Repeat for all previous 10 years to get book value growth rate

• Sum of book value growth / total number of figures = average book value growth

• Book value of a stock: FV = PV (1+i)ⁿ

  FV = future book value

  PV = Present Book value (or Current Book value)

  i = Book Value Growth Rate

  n = number of years into future

• EPS = Earnings per share

  Net Income / Total number of shares outstanding

  To get precise number, calculate diluted earnings per share

• Diluted EPS = Net Income / Diluted Weighted Average Shares

Assumption that your money will return, on average, 8% a year. If that’s too optimistic, keep a higher “times” number.

E.g. $50,000 a year (in total income before taxes) Farrell argues that you need to have $600,000 saved for retirement. Then, each year, you would withdraw $40,000 (80% of your salary) of that $600,000 and leave the rest invested. In order to maintain the same balance of $600,000, your investment would have to earn 7.15% – and, ideally, it would earn a little bit more than that to help you keep pace with inflation.

Save 12% of your income (if you’re 45 or under) 15% (if you’re over 45).

As you sock away money to meet that “twelve times” goal from the first chapter, your priority should first be to your 401(k), then to your IRA, then to other investing options. You need this savings to be automatic.

Borrowing for a mortgage is pretty much the only significant debt an adult should acquire.

Farrell recommends 50/50 stock/bond split if under 60 Shift to bonds as you get older.

Your stock investments should be spread across lots of different companies, including international ones, big ones, and small ones.

Your bond investments keep in government bonds, but diversified Rebalance annually - move money between the stocks and bonds to restore the overall 50-50 balance described earlier.

Don’t spend your time worrying about what Wall Street is saying. They’re often worried about the short term – the next few years. You’re worried about the long term, something rarely discussed on TV

Recommends getting coverage equal to 60% of your income, which will roughly amount to your current income after taxes.

Your life insurance should be a term policy that pays out 12 times your salary minus your capital-to-income ratio (discussed earlier). So, for example, if you make $70,000 a year, your total of your capital and your life insurance benefit should be $840,000 per year. As you save more - you should need less life insurance.

Looking into long-term care insurance in your mid-fifties. Before that, the risk is so low - not worth the cost. After that, your risk goes up - cost might be prohibitive.