Wednesday, August 24, 2016

How to set up your own perpetual income machine

Every dollar that you have in your possession can be traced back to you exchanging your labor for money. The labor you provided was essentially a time commitment on your part to an employer or clients. Therefore, every dollar you own, is essentially a unit of time you spent to acquire it. The problem with this type of exchange is that in order for you to earn more dollars, you need to either spend more time doing work. Therefore, your ability to earn income is limited by the amount of time you have. This is where you may decide you may need to create a perpetual income machine. This perpetual income machine would produce earnings, without much labor effort and without requiring you to show up to a specific location for a scheduled period of time every day. With the passive income generated from this income machine, you are essentially buying time.

This perpetual income machine would produce income to you, which would likely grow above the rate of inflation, and therefore would maintain your standard of living. This of course is much more than what the average American has been receiving in raises over the past six years. All of the corporations I have worked over the past six - eight years have been characterized by increase in responsibilities for employees, increase in hours they have to exchange for the same pay, meager or non-existent pay raises, and higher levels of stress. It is no wonder that so many are dissatisfied with their jobs, and want to retire early to pursue their passions. In this article, I would discuss how I am planning to earn income without having to exchange labor for money, by setting up my perpetual income machine.

Monday, August 22, 2016

How Dividend Growth Investors can prosper even if interest rates increase

Last week, I wrote a groundbreaking article, which outlined the basic premise that interest rate levels affect P/E ratios that investors are willing to pay for stocks. I also made the call that even at a P/E of 20, stocks are cheaper relative to bonds, and could withstand doubling or tripling of the interest rates, while still remaining more attractive, relative to bonds. So there is some margin of safety in common stocks today, relative to bonds.

The only way that bonds do better than stocks over the next ten or twenty years is if we get deflation, and we experience a situation that is similar to Japan between 1990 - 2016 or US between 1929 - 1933. Just to be on the safe side, when I discuss bonds or fixed income, I want you to know that I mean long-term US Treasuries.

The interesting part is that a lot of pundits have been expecting higher interest rates in the US for the past 8 years. Their train of thought has always been that these rising interest rates will potentially reduce the demand and prices for stocks, and dividend stocks in particular. A lot of investors have been deceived by this train of thought.

These pundits have been wrong for 8 – 9 years in a row. Interest rates have been declining, and stocks have been rising. Unfortunately, many companies are selling above 20 times earnings these days.

Friday, August 19, 2016

Holding Through the Good Times

This guest post was written by Joe Ferris, who is a long-time reader of the site. The author now manages money professionally and creates individualized dividend portfolios for individuals, families, and institutions. He charges less than most mutual funds and more than most indexes. He has over 60 happy clients and is based in California. Californian readers may contact him at if they are interested in inquiring about his portfolio management business

I am a long time reader of this blog. DGI has helped me solidify a solid investment strategy over the many years of my reading his blog, and I have enjoyed our personal correspondence over the last 6-7 years or so. Recently, in the course of our correspondence DGI asked me if I would want to write a guest blog, and I happily agreed. His posts on university endowments primarily using their interest and dividends, and not dipping into their principal, changed my way of thinking about investing and the capital markets

One day in 2010, I read this particular article, which analyzed V.F Corporation (VFC) . It made a lot of sense to me, and after further research, I decided it would be appropriate to initiate a position. I did so, buying VF Corporation at a split adjusted cost of $20.85 per share in January of 2011.

Well-known value investor Li Lu described during a presentation how he sometimes scrutinizes a company's management, even investigating the owner of an apparel company at his synagogue and asking around about his character. This was in reference to Timberland, then run by Jeffrey Swartz, a descendant of the founder. Lu was impressed with both management and the company. Apparently, VF Corporation was too, because in June of 2011 they acquired Timberland. After this acquisition, the market saw good potential in VF Corporation future earnings, and the share price went up.

Wednesday, August 17, 2016

Interest Rates Affect Stock Valuations

Interest Rates affect the multiples on stocks. We all know that companies can grow earnings and dividends over time, while bonds offer a fixed coupon. In general, bonds and equities are parts of the opportunity set for investors. In other words, the typical investor allocates their portfolio between bonds and stocks, and possibly overweights the assets that may appear attractively valued relative to the other. Of course, interest rates are just one of the inputs in valuing businesses.

In the early 1980s, the P/E multiples on stocks were in the mid to high single digits - as low as 7. This represents an earnings yield of roughly 14%. At this time however, long-term bonds yielded  as much as 15%/year. There were several well-known investors such as Warren Buffett and Peter Lynch, who have said that at a 15% bond coupon issued by US treasury, it makes more sense to invest in bonds rather than stocks.

This chart shows the yield on the 10 year US Treasury Bond since 1962

Monday, August 15, 2016

My own unique approach to investing for retirement

Last month, I discussed with you reasons to have your own unique investment strategy. I reached the following conclusion:

If you follow someone into a security, you are giving up control over the selection process. You may know when the other person purchased the security, but you do not know when they will sell it. You have no visibility as to why they bought the stock. This is dangerous, because you may be the last person to be notified when the stock is to be sold. You are also not learning anything, because chances are that the other person has not shared all of the relevant points with you. When you make investment decisions without any input on your own, you are like a blind person driving on a highway. The problem is that noone has your best interests at heart, than yourself. Actually, many people have an incentive to deceive you and sell you on to a product or service that will enrich them at your expense.

When you focus on others, you may be able to get lucky from time to time. But this is not a good foundation for your retirement investing.

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