A Guide To Owning or Renting Your Home

A Guide To Owning or Renting Your Home

Owning versus renting your home is a longstanding and often passionate debate. The reasons for owning or renting differ according to financial calculations and your personal preferences.

Factors To Consider

If you seek to own a home, do you prefer stability, building equity, control over home and its responsibilities, and tax benefits? Will you enjoy a sense of pride in ownership? On the other hand, does flexibility and freedom appeal to you, not having to deal with the home’s repair and maintenance, freeing you to use savings to make investments, and not have to worry about declining home values?

I understand the allure of owning your home as I have had with our primary home. We continue to hold a second home which we may one day make our primary spot. I grew up in the Bronx in an apartment building for affordable housing. As a result, my family paid a relatively low stabilized rent. Owning our home as inspired by the American Dream was out of my family’s budget.

My husband, Craig, is a real estate attorney dealing with residential and commercial transactions. When I went to law school, I was fascinated by the real estate field and became an investor in commercial properties for a time.

Before we review the advantages and disadvantages of owning and renting your home, let’s address critical factors to consider in making this critical decision.

Housing Market Trends

When it is the right time for you to buy or rent, it may be worthwhile to be aware of the overall housing market, that is, home prices, interest rates, and mortgage rates in particular. US homeownership had grown from 45.6% in 1920 to 66.2% in 2000. Homeownership rates peaked in 2004 at 69.2% (in both April and October of that year), then retreating to 65.8% in 2020.

Generational Gap In Buying Homes

According to a 2019 Zillow report, the average age of the typical first-time homebuyer in the US is 34 years old. Since the Great Recession, millennials were initially slow to purchase their home as they grapple with high student debt and slower wage growth. However, millennials’ average mortgage debt in 3Q 2020 is $237,349, just below $247,567 held by Gen X according to Experian data.

A major consideration in timing a purchase is the level of mortgage rates. Generally, mortgage rates rise during periods of strong economic growth and decline during weak or recessionary periods. Mortgage rates have been historically low, with current rates for 30 years, the fixed rate at 3.564%, and 15 years the fixed rate at 2.615%.

By pursuing a home purchase, make sure your finances are in order. That means being debt-free and establishing or expanding your emergency fund. When we review the financial costs, you’ll better understand the need to have a solid financial condition.

Substantial Financial Differences Between Homebuying And Renting

Financial costs differ between purchasing a home and renting. Homebuyers’ substantial costs can be divided into one-time payments upfront and at the closing. Purchasers face required one-time upfront and closing costs in addition to the ongoing or recurring expenses.

The process of buying a home through closing may be overwhelming, but each step is well defined.

Upfront And Closing Costs

Homebuyers are usually surprised by the number of required payments to those professionals (home inspector, bank attorney, title closer, appraiser, broker, attorney) who are assisting in their purchase. There are also other costs associated with securing the mortgage and protecting the lenders, as they will effectively own 80% of your home. You will pay mortgage application fees, points, and origination.

Upfront Costs

 

Earnest Money

Earnest money can range from 1%-3% up to 10% of the home price, depending on the locale. This money is a consideration for the mutual acceptance of a deal with the seller. As a credit, this amount reduces the purchase price at the closing. If you default before the closing, the earnest money can be the measure of liquidated damages to the seller.

Home Inspection

A qualified inspector will need to inspect the home for damages.  An inspection can help you decide on a house to buy, but before you put money down. The fee amounts vary based on the type of home, square footage, and locale. It is an essential cost as you may find structural damage or disclose other issues can reduce the price you are willing to pay.

Appraisal fees

These fees are for an independent certified appraiser’s report. The report is essential to protect the bank’s  collateral exposure. They are paid directly to the bank after inspection but before the closing and in conjunction with the mortgage loan agreement.

Escrow Accounts

The escrow account is for the bank’s benefit and the attorney’s.

The attorney escrow account holds your down payment for the house. The bank’s escrow covers prepayments for property taxes on the homeowner’s behalf for up to six months. Additionally, the buyer will be paying a full year’s homeowners insurance premiums upfront and one-twelfth of the premium into escrow. Some borrowers,  if applicable, pay private mortgage insurance (PMI) premiums. PMI is required if the buyer is making a down payment of less than 20% of the home price preferred by the lender.

Closing Costs

The final part of your purchase involves several closing costs associated with formalizing the mortgage processing and concluding the transaction between buyer and seller. They include charges for the loan application, processing, and underwriting. The latter may amount to about 1% of the loan. So if you are borrowing $300,000, you will pay $3,000.

You will be paying for a title search and other title-related costs to ensure you are purchasing a home with “good title” free of fraud and any liens for unpaid taxes, etc. The title company collects a premium and receives recording fees.

You will also be paying an attorney for closing your deal and representing you as the buyer in most states. The attorney’s fee ranges from $750-$3,000 depending on the deal’s complexity and your locale.

Recurring or Ongoing Costs

Your ongoing monthly costs of buying a home are your mortgage payments, utilities, garbage, property taxes, and homeowner insurance. These are predictable or fixed costs.

If you are buying a house (rather than an apartment), maintenance, repair, painting, and appliances may vary depending on the house’s condition and age. The costs are often difficult to estimate and may depend on your DIY abilities. You will also have other expenses for lawn care and snow removal, which differ based on your geographic location.

Costs of Renting Your Home

Upfront costs are far less. Landlords usually require 1-2 months for a security deposit at the time of the lease signing. Some landlords will increase additional security or fees for any pets you have for potential damage to their property.

The landlord may require an application fee for administrative costs and a possible broker fee unless the landlord pays this. There may be a move-in fee depending on the type of home you are renting.

Recurring Rental Costs

Tenants are responsible for monthly rent, all utilities, and renters insurance. While the homeowner has homeowners insurance, that doesn’t cover your personal property, including your furniture, clothing, electronics, computers, jewelry, and anything of value to you or liability insurance. The landlord will require you to purchase renters insurance.

Landlords are required to provide you with at least 30-day notice in most states with an increase in the rent unless stated as part of a multi-year lease.

What Is Your Financial Situation?

Before going house-hunting, if you plan to make a purchase, it is a good idea to check your credit report for any errors or issues. You need to be aware of any errors that you should correct. You should know your credit score and what amount of mortgage you can afford. There are steps you can take to raise your credit score.

By the way, your credit report matters to your landlord also. A poor credit report could be a thumbs down on your ability to rent. If your credit score is fair, it may mean providing your landlord with more security. However, a poor credit score has far more of a negative impact on your ability to borrow.

MyFICO’s loan calculator is handy for estimating your APR, monthly loan payment, and total interest paid. For example, using a $300,000 loan your payments for 30 years and 15-year mortgages as of April 9, 2021, based upon your FICO score will be:

30 Year Mortgage

Credit Score                APR             Monthly Payment        Total Interest Paid

760-850                      2.764%                  $1,227                    $141,702

700-759                      2.986%                  $1,263                    $154,517

680-699                      3.163%                  $1,291                    $164,881

660-679                      3.377%                  $1,327                    $177,583

640-659                      3.807%                  $1,399                    $203,664

620-639                      4.353%                  $1,494                    $237,826

 

15 Year Mortgage

Credit Score                APR             Monthly Payment        Total Interest Paid

760-850                      2.107%                  $1,945                    $50,162

700-759                      2.329%                  $1,976                    $55,736

680-699                      2.506%                  $2,001                    $60,219

660-679                      2.72%                   $2,093                    $65,685

640-659                      3.15%                   $2,093                    $76,822

620-639                      3.696%                 $2,174                    $91,255

 

A Few Observations

Irrespective of your FICO Score, the lower the credit score, the higher your APR, monthly mortgage payment, and total interest paid.

Financial Implications For 30 Year versus 15 Year Mortgage

When comparing the different loan maturities on a $300,000 loan:

  • The APR will be higher for the 30-year mortgage than 15 years, all else being the same.
  • The monthly mortgage payments will be significantly higher for the 15-year mortgage, given the shorter period. If you can afford to pay the higher monthly amount, you are better off with the 15-year mortgage because you pay less in total interest.
  •  Assuming you have a 720 credit score, the total home price, including total interest paid and down payment will be lower with a 15-year mortgage loan.
  • The 30-year mortgage is much higher because you are paying interest on your loan longer, so the total home price or principal is $375,000 plus $154,517 equals $529,517.
  • If you opt for a 15 year mortgage, your total home price or principal  is $375,000 ($300,000 loan + $75,000 down payment of 20%) + $55,776 in total interest equals $430,776 for principal and interest.

Advantages Of Buying Your Home

 

1. Building Equity

Paying your mortgage over time will result in building some equity in your home. You should be aware that your initial payments are predominantly for interest on your loan, especially if you have a 30-year mortgage and equity builds relatively slowly.

On the other hand, you will undoubtedly be owning your home much more quickly with a 15-year mortgage. A mortgage amortization calculator helps compare the principal and interest portions for the 15 and 30-year mortgages. Assume your loan begins in April 2021.

The comparison reveals that more than half of your first monthly payment goes to the principal than interest with the 15-year mortgage. However, only about a third of your payment goes to the principal with 30 years. The amount between principal and interest reaches parity until the year 2032, and equity rises slowly after that until the year 2050, when you satisfy the 30-year loan.

2. Your Home As An Appreciable Asset

Depending on your time frame, US new home median prices reflect appreciable growth. Median new home prices have risen from $17,200 in 1963 to $212,300 in 2011 according to the US Census of Housing. That is a 5.38% compounded annual growth rate. However, adjusted for inflation, the growth rate is 1.8%. On the other hand, inflation-adjusted monthly rent grew from $568 in 1960 to $934 in 2010, according to Apartment List Rentonomics. This 68% hike in rent is well ahead of the 18% rise in household income during the same period.

Your investment in your primary home essentially keeps pace with inflation rather than generating strong investment returns. When calculating returns you need to factor in the interest costs to the total price. That said, you are living in your home and hopefully enjoying a high quality of living which can be priceless for many.

There have broader differences in select markets across the US that exhibit stronger appreciation due to higher population growth, demand, and other factors.

Housing Bubble

The US housing bubble was particularly troubling for homeowners in the mid-2000s. Housing prices peaked in early 2006, then leveled off until record drops of 18% as reported by the S& P Case-Shiller index in October 2008.

While this drop was exceptional, it still provides a warning sign for those interested in purchasing their homes as loss in home values is real. However, some markets have recovered from the Great Recession and recent housing price trends seem more favorable.

3. HELOC As A Source of Funding

Once you have built some amount of equity and have paid your mortgage on time, you may be able to set up a home equity line of credit or HELOC. You can often get a loan more quickly and at lower rates because you are using your home equity as collateral. Part of these funds could go to building a new kitchen or expanding the house.

The HELOC, if not maxed out, can positively help your credit score. This is because the HELOC has increased the available amount of credit, lowering your utilization rate and improving your financial situation. Credit utilization accounts for 30% of your credit score. HELOC increases debt, so make sure you pay this loan on time and in full. To avoid a hit to your credit score, don’t close the HELOC unless you are too tempted to use the money or about to close on the house, as it will then lower the available credit.

4. Possibility of Rental Income

When you live in your primary residence, you don’t often think about renting out your property. However, your family may relocate for your firm for a couple of years, or your kids are moving out, and you want to travel more. You may decide to rent out your home or list it with Airbnb.

5. Stability In Owning Your Home

It is wonderful to raise your kids in one home, become part of the neighborhood and community. There is a certain calm feeling of not searching for a place to live and pack and unpack boxes. (Having just moved to a new home, I can share that I will be thrilled when our family settles in our home and the last box is gone.)

6. Tax Benefits After The Tax Law Changes

The 2017 tax law did impact some of the tax deductions enjoyed by homeowners. If you itemize your deductions on a joint filing, you still claim mortgage interest payments up to a $750,000 face value loan. Qualified loans include your mortgage, home equity loans, and HELOCs. This tax change is a reduction from $1,000,000 before the recent tax law. You can no longer deduct interest associated with home equity debt unless buying or improving your home.

Deductions for state and local taxes (known as the SALT deduction) and property taxes are capped at $10,000. This amount may be appropriate in Ohio but not in high-tax states like New York or California. This is a reduction from unrestricted amounts previously deducted. You can still deduct the proportionate interest associated with your apartment building’s mortgage if it is a co-operative.

Homestead Exemption

Certain states, like Florida, offer exemptions if you meet specific requirements. This exemption may protect a surviving spouse when the homestead spouse dies. A homestead exemption is a law that protects the value of a home from property taxes and creditors. Depending on the state, a property tax can get an exemption in the range of $25,000-$75,000 of a home’s assessed value from property taxes.

7. You Have Freedom To Do What You Want

Are you creative? Your home can be a good option for you. There may be some conformity required, but your wallet limits design and remodeling. You can do gardening and grow vegetables. Owning your pets is more manageable in your home. Your children can listen to loud music with fewer rules of noise after hours. Peace of mind can be precious for you and your family.

8. Sense of Pride In Ownership

For those who have rented for a long time. owning your home feels like an accomplishment. The land is a natural resource, and there is a good feeling of knowing you own the land where you walk and live.

Ask any refugee that has had their home taken away from them what a house meant to them. My mom was a refugee when she came to the US, having lost her family. Her home was taken away illegally and violently. While owning a home eluded her, she always considered owning a home away to wealth.

Disadvantages of Owning A Home

 

1. High Costs To Own

We addressed the one-time and recurring costs a homeowner has to realize, but it bears repeating. In particular, there are unforeseen events that require homeowners to do planning ahead of the purchase. Having an ample emergency fund is essential for all, but homeowners need to expand that fund to avoid borrowing unnecessarily.

Consider the age of the home and its condition when factoring in maintenance and repairs. Are you handy? We are not, and so we rely on a plethora of plumbers, electricians, and those who can help us around the house with shower breaking and leaky pipes. I keep wanting to spend time watching YouTube to pick up some tips but I am always afraid of starting a fire.

Our teens are handier but not always available given their schoolwork, friends, sports, video games, and sleeping late.

It may be worthwhile to watch the 1986 movie The Money Pit with Tom Hanks and Shelley Long. It left an indelible memory of what not to do with your house.

2. Lack of Flexibility

If you are adventurous, you may feel stuck in the same house and environment, especially as your friends may pick up and leave to try life in another place or country. You may want to sell your home and retire to another locale, but the local economy is weak.

We had next-door neighbors who experienced that predicament. They lived in Connecticut and had bought a house in Florida. The market had been terrible for the better part of a decade. They had to stay put in the colder climate they planned to avoid in their later years. They finally sold last year.

3. Your Home Has An Opportunity Cost

A home is usually the most significant asset you own. The mortgage, maintenance, repairs, and property taxes require a lot of capital that may be better invest in a diverse investment portfolio. Many people believe that when they sell their house, they will use the money for retirement. That is true, but there is no guarantee that you will be able to sell your property quickly or not be facing declining values.

Too much concentration on one asset is hazardous. You need to have investments in other assets but saving to invest in other vehicles is difficult when so much capital is in real estate.

One way to avoid this difficulty is don’t buy a house too big for you. The amount of space homeowners have been buying has dramatically increased since 1973. Specifically, median size homes have recently expanded to 2,467 square feet, up to 1,000 square feet. During that time, the average living space per person in the household has nearly doubled to 971 from 505. Do we need all that space and then have to furnish it too?

Advantages of Renting

 

1. Rental Costs Are Less

The lease agreement with the landlord provides your financial responsibilities, which are essentially predictable: monthly rent payments, utilities, lawn care, garbage disposal, and snow removal if applicable. There is a minimum of upfront fees. Finding an apartment may be harder in specific markets and more expensive based on demand.

2. Benefits of Ownership Without The Property Taxes

You may be fortunate to get the best of what property taxes pay for without having to pay these costs when you rent. Families are always willing to pay more money for a house to be located in a nice place with a great school district. Higher home prices and property taxes may put buying a home out of your range.

Our Recent Move To A Rental House

By renting, you can access the town’s beauty, infrastructures like transportation, town pool, and schools. These attributes are a big reason why we moved to a small town (from a big city)  to a house rental (from an owned apartment) and switched our kids from a private school to one of the best public schools in the state, if not the country.

Our son joined the football team, and our daughter is considering other sports not readily available at her previous school. It was a difficult decision, especially for me, having grown up in the city. Although it is early, it feels promising.

Renting may also help you get familiar with the area before purchasing and allow you to get your financials in order.

3. Free Of Maintenance And Repairs

Your landlord has primary responsibility for the care of the property. It is up to you to inform your landlord of the need for maintenance and care. For those not handy or not wanting to spend the money to fix things, renting can be ideal.  Usually, the landlord wants to use their folks (e.g., painters, electricians) for respective issues in the home.

4. Flexibility To Leave

At the end of the lease, you can leave the premises. Many people decide to move around and explore different areas or look for other jobs. You aren’t tied down, and as long as you make payments through the end of the lease, you are good to go. It is challenging to leave your own home as quickly as a tenant can.

Disadvantages of Renting

 

1. Higher Rent Or Sells Property

Your landlord can raise your rent with proper notice or sell the property. Renting has increased faster than household income has since 1960. Apartment List Rentonomics points out that inflation-adjusted rent rose 64% from $568 per month in 1960 to $934 in 2010, while household income grew only 18%.

Many homeowners turn to rent if they are unable to sell their property due to a poor market. Once the market turns, they may ultimately sell the home you are renting.

Markets vary, but in specific markets, there are fewer homes to rent.

2. No Equity Buildup or Tax Benefits

It is common for people to say that renting is throwing money away. Of course, this is not true as you are paying for the living space for some time. You have the freedom to find the best affordable apartment you can to live in an area you prefer.

You are not getting equity or tax benefits from your rent, but you are getting several advantages. You can divert your savings into other assets.

3. A Bad Landlord

It would be a drag if you rent an apartment from a bad landlord, but the good news it is not permanent. Before you rent, check out Yelp to see if there any red flags to know about your landlord. People are always willing to share their bad stories.

I recall some horrifying stories that painted their landlord as a reincarnation of Jack Torrance, played by Jack Nicholson in The Shining. Torrance was the caretaker at an isolated hotel.

If you are having trouble with your landlord, who is not providing services promised in the lease, there are legal actions to take.

4. No Upside From A Strong Housing Market

As a renter, you do not get the benefit of improving house values. It may feel bad when your friends are experiencing some growth in their home value, while you may be getting a notice from your landlord that they are getting ready to sell or raise the rent.

 

Final Thoughts

Hopefully, this guide provided you with good information to decide between buying or renting your home. Frankly, you can look at the calculations related to mortgage costs, building equity, home prices, square footage, but in the end, the choice is a personal one for you and your family.

If there is one point I would like to make, consider how your preferences line up with your long-term financial goals. Make sure that if you find your dream house, it is doesn’t break the bank. You don’t want to be too overladen with debt.  Remain disciplined in your spending and make saving a priority.

 

Thank you for reading! If you rent or own your home, would you kindly share your experiences with us? We always like to hear how you decided which shed light on a home decision.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Webull Review: What You Need To Know

Webull Review: What You Need To Know

Everyone should have an opportunity to build wealth. Learning the basics of investing and understanding the risks is an excellent way to pave your way to a successful financial future. It wasn’t easy to invest or trade stocks until recently without paying commissions to eat away at your profits.

The plethora of zero-commission brokers has leveled the playing field for more affordable investing. Webull can be a good choice for many and an alternative to Robinhood.

I should confess upfront that I tend to prefer investing rather than trading as the way to go in building wealth. That doesn’t mean holding onto long positions through thick and thin. No, leaving positions on autopilot can be risky. You should also know I am scornful of the practice of margin trading. I’ve watched friends go up in smoke from paying exorbitant interest that put them out of business.

 

What Is Webull?

As a relative newcomer, Webull is joining the competitive field of online trading that appeals to young traders. I applaud the rise in young retail investors participating in the markets. Webull offers commission-free online trading as a mobile-oriented broker. Like other mobile apps, Webull’s trading platform appeals to traders who have some financial markets’ experience and seek advanced features, including in-depth and real-time market data.

They are a legitimate player in online trading by constant improvement in the tools they offer to their subscribers,

Webull Background

Founded in 2017, Webull has about 15 million registered users in early 2021, gaining greater customer acceptance despite its lower profile than Robinhood. Comparisons to Robinhood are inevitable. When Robinhood halted trading temporarily in the GameStop frenzy, their users jumped ship to Webull, which had resumed trading more quickly.

Webull is growing its customer base quickly, which may account for the rocky beginning that I share with you below.

How To Get Started Opening A Webull Account

Setting up a Webull account is straightforward. You can sign up with your email address or your mobile number, and you will receive a verification code. Make sure you select your preferred brokerage account. You can choose a cash account or a margin account. Next, add your personal information, your profile, and answer regulatory and security questions. You will need to upload your proof of identity using a passport or a state-issued ID card. Both sides of a driver’s license suffice for identification.

Webull promotes free stocks (from $5-$250), which require a $100 deposit. I received two free stocks. You will need to link to a bank to fund your WeBull account with an ACH bank transfer. Technically, there is no minimum amount required unless you set up a margin trading account that requires at least a $2,000 deposit.

Before they transfer money from your bank to your Webull account, they will deposit two tiny amounts (like $0.09 and $0.33) into your bank account. You confirm the deposit amounts to Webull. There is a 24-hour delay in the posting. The next day, I found the deposits and attempted many times to let Webull know.

My Experience – An Unnecessary Delay

At this point, I reached out to customer support with emails and calls. Each time I called, I was on hold for 45-60 minutes. Come on, guys! My customer support person was always the same, Doug, and I wondered if there was only one person. Doug was super friendly, apologetic, and similarly stumped as to why my deposit verification wasn’t working, which held up my trading account’s funding.

This setup didn’t take hours; it took days! Finally, tech support intervened, and they fixed my account. Signing up via an email account rather than a mobile version was the culprit, but that should not make a difference. I get that they are mobile-oriented, but some of us still prefer bigger screens.

The delay in customer support occurred as Webull was signing up many customers. During the GameStop frenzy, volumes soared, and some customers left Robinhood when trading halted in some stocks. I have since learned that Doug will have company as they are adding people to customer support now.

Payment For Order Flow And Retail Trading

The SEC requires that Webull disclose it engages in the practice of “payment for order flow.” Webull, Robinhood, and many small brokers receive compensation for directing orders to market makers for executing the equity and options trades. These brokers realize cost savings and enhance their ability to handle high order volumes to offer zero-commission trading.

Trading volumes for stocks and options have been exploding as more individuals open trading accounts. This activity overwhelmed many small brokers. The average daily volume in equities has grown from 7 billion in 2019 to 14.7 billion in early 2021. The higher proportion of routing to these market makers (i.e., specialists on both the buy and sell of a trade) indicates that retail trading accounts for tremendous volume growth.

2021 Pros of Using Webull

No Fees Or Minimum Deposit

Webull offers commission-free trading with no required minimum amount, except for $100 to receive your free stocks. Zero commissions extend to unlimited day trades and options trades (no charge per trade or contract) and other tradeable securities they offer. There are no annual fees or charges for inactivity.

They do charge $75 for either closing an account or if you want to transfer your Webull elsewhere.

Free Stocks

Webull runs continuous promotions offering free stocks valued from $5-$250 per share once you drop $100 in your account. It is improbable that you will receive a free high-priced stock. I received two stocks: an AMC share valued at $8 and a Southwestern Energy (SWN) share valued at $4.38.

Tradeable Securities

The company has expanded its offerings, but there are some limitations. You can choose among hundreds of ETFs for diversification purposes. Webull allows trading during extended hours during pre-market hours (4:00 am – 9:30 am) and after-hours (4:00 pm – 8:00 pm). That you can is not a reason that you should as markets have less liquidity and more volatility.

Webull’s Offerings

  • Stocks
  • Options
  • ETFs
  • Gold
  • Cryptocurrency
  • ADRs (i.e., American Depository Receipts)

You can open a traditional IRA, a Roth IRA, or Rollover IRAs on Webull, and “more IRAs are in the works,” according to their website. Currently, they do not offer mutual funds, money markets, or bonds, which are big holes for those who may want diversification.

Easy-To-Use Customizable Dashboard

Forty-five or more widgets populate the dashboard to satisfy simple to more complex needs. The company has continuously improved its dashboard to allow traders to analyze trends and market information for a better experience with faster load times. Clients can configure their trading panel to fit their investment strategy.

Stock Charts

There is a rich assortment of high-quality stock charts with technical indicators from the most simple to advanced trading. You can display prices using Moving Averages, line, bar, Candlesticks, Hollow Candle, Heiken Ashi, or Colored Bar. You can draw, manipulate, compare two charts. I focus on fundamentals more than charts, but I plan to work on this skill.

Stock Screens

Webull’s stock screens are the typical ones such as top gainers, most active, stock earnings actual and estimates, dividends, splits, and Advances/Declines. Clients can look at markets by location: US, Hong Kong, London, Toronto, and all major global markets. I found these screens easy to find and use and all on one page with some toggling.

You can screen by market, sector, and market capitalization. There is a nifty IPO center showing activity in the primary market. The dashboard doesn’t display a SPAC center, but I bet that may come soon if there is interest in such a display.

Fundamental Analysis Tools Could Better

Investors can use fundamental analysis tools that may seem rudimentary to many. I am dating myself, but my first view of the markets was on a Quotron. I recall a librarian snipping news off a teleprompter giving us earnings results, dividend hikes, management changes, and other information.

The current fundamental analysis tools available to Webull customers indicate financial statement highlights, cash from operations, earnings estimates per stock, analyst ratings, short interest, institutional holdings and by ETF, and order flows. I use this information when making purchase decisions, looking for market sentiment changes, and it is easy to find.

Fundamental investors need more tools, such as downloading SEC documents and research reports from Ned Davis and Thomson Reuters.

Technical Indicators

The site has several technical tools to satisfy more advanced traders. Webull offers capital flow analytics to show the inflow and outflow positions in the market. These indicators show money coming into a specific stock or sector. Among the technical indicators is Simple Moving Average, Exponential Moving Average, Bollinger Bands, MACD, Volume, and Relative Strength Index (RSI).

Level I And Level II Trading

Level I and Level II are two different trading screens used in stock trading. Traders use these screens for direct access to real-time market data, such as the last trading price, the current bid and ask price, daily high and low, and trading volumes. Webull provides Level 1 trading data that gives traders all buys and sellers with actual “bid and ask” orders currently in the market.

Level II trading is market data powered by NASDAQ’s TotalView and is essentially NASDAQ’s order book. It adds a substantial dimension by showing the number of buyers and sellers at different price levels. Webull offers Level II trading for free for three months and is $1.99 per month after the trial period when you sign up for a new account. Robinhood provides this service free only to its gold members who pay $5 per month for this and other extras.

Webull offers other paid plans for premium data from regional markets like Hong Kong Stock Exchange, Toronto Stock Exchange, and London Stock Exchange.

Trading Platform

Webull gets a lot of respect and credit for its trading platform, available on mobile and desktop formats. A browser-based and downloadable desktop platform is accessible with advanced or customizable charts, screeners, and many technical indicators.

The platform is attractive for traders who want advanced features. You can set up watch lists, price alerts, and voice commands.

Margin Trading Available

I am not a fan of margin trading, especially if young traders are inexperienced with the practice. For those who are more mature and capable of handling its risks, margin trading is available without requiring an additional subscription or membership fees. To qualify for margin trading, you need at least $2,000 in your account.

The stated margin rates on Webull’s site appear to be in line with other providers. Rates vary by the margin loan size. The highest level of 6.99% is for a small loan up to $25,000, declining to 3.99% for a $3+ million loan. Margin interest is calculated daily and paid monthly. Be aware that these are stated margin rates, and brokers often raise rates or change requirements when markets get volatile.

Short Selling

When investors or traders sell short, they take a short position instead of a long position when purchasing a stock. For a short position, you need to borrow the shares, paying margin interest for the loan. The cost associated with a short sale is the fee for borrowing that stock. Webull’s fee changes every day for every available stock and is charged daily.

I cannot stress the risks of short-selling and margin trading. When markets get volatile, brokers can raise their requirements regarding how much money traders have to put down using leverage or margin.

Security and Safety

Being secure and safe investing your money on an online trading site is a primary concern. Webull is regulated by the SEC and FINRA. As a member, SIPC covers up to $500,000 per account per brokerage firm, and up to $250,000 may be in cash. Two-factor verification and encryption of your personal information and passwords are worthy safety features. They also require you to set up two different passwords for different functions.

That said, users should do their part in protecting their accounts to the greatest extent possible.

Virtual Trading and Competitions

When you initially have your account, you can do virtual or paper trading for free without depositing any money, using some or all of their tools. For the beginner, this feature is desirable for those who want to practice and feel comfortable with their website.

As far as I know, Robinhood does not have simulated trading. I use simulated stock market games to allow students to invest and trade stocks in my classroom, so I liked seeing this feature.

And there’s more. Webull has Paper Trading Competitions, encouraging participants with prizes up to $300 going to everyone who has a positive return at the end of each week.

There is a private Twitter feed where users can comment on individual stocks, creating a community vibe for those new to trading, starting with the simulation.

2021 Cons Of Using Webull

Investment Limitations

There are some gaps in Webull’s offerings, notably mutual funds, OTC stocks, and bonds. They have been steadily building their products since 2019, offering options and cryptocurrency trading currently. As of yet, they do not offer fractional shares or pink sheet stocks, and on the latter, I hope they never do.

The ability to have an IRA account on Webull is terrific. However, they will need to have mutual funds for such accounts for diversification.

Cash Management

Webull doesn’t pay interest on uninvested cash or have a partner bank to handle this option. Robinhood pays interest on idle money, and Reddit’s comments indicated that some users stay with them for that reason. Although interest rates are super low now and perhaps not as urgent, it will be a product Webull will need to have soon as interest rates rise.

Prefer Better Educational Support

With the influx of young individual investors who joined firms like WeBull to trade for the first time since the March lockdown, it is essential to have educational support. I find WeBull’s educational material sorely lacking for their clientele, especially in advanced trading. When it comes to academic support, more is better in the financial world.

When you are trading and investing, you may run across many financial concepts and jargon you need to know.

Needs Better Customer Support

It may be just my personal experience that I had so much trouble reaching customer support, but I doubt it. When I called customer support, the minimum wait was 45 minutes to as long as 109 minutes. (Yes, I was counting!) That is unacceptable, especially when I tried to move the money into my account that had left my bank. I was persistent, but other potential users may give up.

On one of the long waits, I perused Webull’s name on the web and found they have an “F” rating on Better Business Bureau (BBB), with numerous complaints. So I looked at several brokers’ ratings on BBB and was not surprised that many have F’s, including Robinhood or low grades (C minus) for Fidelity and Ally Invest. TD Ameritrade appears to be an outlier with an A-minus.

I will say that when you do get a live person on WeBull’s customer service, they are patient and helpful. They need to add more live customer support.

What Can Webull Do Better

Webull seems to continue to broaden their products to their credit, and they should add mutual funds, bonds, and fractional shares.

They should partner with a bank to offer interest on idle cash.

Webull needs to strengthen customer support for kinks that are inexplicable, like my experience and educational materials.

Who Is Webull Best For

Webull’s paper trading option can benefit beginners who aren’t quite ready to pay for their trades. Their platform is best suitable for those in the intermediate level who want simplicity or desire more advanced trading. I use my Webull as an alternative broker to do some trading and investing separate from my financial advisor and other accounts.

Full-time day traders who require far more advanced systems would probably find WeBull’s platform lacking in some areas.

Final Thoughts

Webull is emerging as a legitimate competitor and alternative to Robinhood, growing its customer base to a potential number two spot among online brokers serving retail traders. This relative newcomer in the zero-commission online trading world continuously broadens its products to satisfy its customers and leverage its trading platform.

This article originally appeared on Your Money Geek and has been republished with permission.

10 Steps Women Should Take Negotiating Salary Compensation

10 Steps Women Should Take Negotiating Salary Compensation

” No wonder women don’t negotiate as often as men. It’s like trying to cross a minefield backward in high heels.”

 Sheryl Sandberg, “Lean In: Women, Work, and the Will To Lead”

The gender gap remains in the usual places for women–less pay, work fewer years in the workplace with time out for children and other dependents, lower savings for retirement–but women are gaining ground.

More women are graduating college and hold more graduate degrees than men. They are reaching higher corporate levels, and there are more women-owned or founded businesses. They are making progress, as women are primary breadwinners in 41% of US homes but still carry the additional caregiving and household duties.  

Women Need To Be Assertive But Find It Hard To Negotiate

When it comes to women achieving success in their careers, moving from entry levels to ever-higher corporate levels, they need to understand how to negotiate compensation packages better. Women tend to be less assertive and more accommodative than men. That may leave significant money on the table, starting with their first job’s salary.

When women get a lower salary than men for the same job and experience, we should not dismiss that difference even for just one year. It becomes cumulative. She starts with a lower base. Even if she and her male counterpart get identical raises and promotions over the same years worked, the impact of compounding interest leaves a sizable gap in her comparable net worth.

Women Pay A Greater Social Cost

Studies have pointed to the “social cost of negotiating” which negatively impacts those who are self-advocating for a salary raise. It shows that the hit was significantly worse for women than men.

“Aggressive and hard-charging women violate unwritten rules about acceptable social conduct. Men are continually applauded for ambitious and powerful and successful, but women who display these same traits often pay a social penalty paid by women who display these traits. Female accomplishments come at a cost.”    Sheryl Sandberg

Research shows women make better advocates when they represent others than for themselves. Women fear backlash when it is for themselves but are better when they negotiate for others.

10 Steps Women Should Take When Negotiating

 

1. When You Limit Yourself To The Offer 

Before you go gangbusters, know that specific jobs may not be negotiable. Entry-level positions may be less negotiable, especially when you have little to no experience in the field.

Typically, teaching, union, hourly positions, government, and civil jobs have stated pay scales. Increasingly, companies are being more transparent with structured compensation schemes easier to understand.

2. Do Your Research First

Be aware of the typical salary ranges for jobs in your field and your geographic area. It may be difficult for you to negotiate when it’s your first job. However, you can inquire what the high and low salaries reflect.

Glassdoor, Payscale, and Salary.com are good places to start to find average salaries. Their sites may provide you information for your first job offer and be a source as your role expands at the firm. A search can provide you with relevant documentation when you seek a raise.

Speak to people who you know are working in jobs of interest to you. Ask them about the drivers of success and challenges and companies that may have opportunities. Another place to learn from is Linkedin, an excellent professional networking website source to use. Job boards are helpful when you begin the interviewing process, and reach out to human resources representatives in your field.

You should learn what the industry norms are for your field and how it relates to your education and experience.

Always be prepared to reflect on successes thus far, especially when asking for raises and promotions.

3. Build your Negotiation Skills

It is not unusual to be uncomfortable to ask for higher pay, bonuses, benefits, or promotions. Take a class to develop your negotiating skills,  or find a good negotiation coach.

I strongly recommend articles and YouTubes by Stanford Graduate School of Business Professor Margaret Neale. Her videos focus on strengthening negotiation skills for women. She is a negotiation expert and author of “Getting (More of) What You Want.”

Negotiation Is A Lifelong Skill

Lifelong skills are core in many aspects of your career and life overall. Specifically, negotiation skills require the ability to communicate, take on a challenge, critical thinking, and problem-solving. Being able to negotiate for yourself is essential  These skills will help build your confidence the right way, prepare thoroughly on the key issues, and listening to the other side’s perspective. 

Don’t be afraid to practice by doing a video of yourself. Listen to your voice and tone. Watch your demeanor and body language. Ask someone to critique you. Stay positive, sit straight, and sound confident.

Practice for real by calling your cable company, asking for a reduced bill, negotiating your interest rate on your credit card, asking for a reduced price for a used or new car, for example. Be armed with information before you make the call. Imagine the power of reducing costs by practicing your negotiation!

4. Getting A Job

If you have completed the interview process for a job you desire, show your enthusiasm but not discuss salary. Wait for the offer, and the position is firmly in your pocket before you discuss compensation. Don’t be the first to provide a definitive dollar amount or a range you are seeking. You should find out the typical salary range by doing your research ahead of time (see below). 

If offered a job but not yet the salary terms, ask for the range. Don’t accept on the spot. Be thoughtful, understand the package, and be ready to negotiate. Your goal is to exceed the high end of the range because you are their best candidate.

A  2019 Glassdoor survey found 40% of employees–39% of men and 42% of women–accepted their salary offer and did not negotiate in their current or most recent job. These statistics reflect better gender parity, a significant change from the March 2016 survey when 59% of employees–52% of men and 68% of women– accepted their salary without negotiation. Women have further to go and should be able to say “No.”

5. Take Time To Mull Offer And Show You Are Serious

If you are unsure of the offer, ask for a little time to contemplate it. Even if you are silently jumping for joy, ask the hiring manager for extra time to decide. They will appreciate your seriousness. If you do want to accept the offer, give it orally and follow up immediately in writing. Ask for a letter confirming your acceptance and agreed-upon salary, your title, incentives, and benefits

If there is a gap between the figure you had in mind and their offer, you may want to open the door to negotiate. You can say you are excited about the offer and the organization. Ask if there is any leeway in the compensation. You want to be genuinely motivated, especially if you are confident in your skills and experience.

Consider Trade-Offs

If the salary gap is too large, it may be too hard to overcome unless other parts of the package, like bonuses or stock options, can bridge the salary difference.  Benefits that accompany your package may be up for negotiation between you and the employer. Make sure that this is possible ahead of time by speaking to HR.

Some companies have extra money set aside with expectations that prospective employees may ask for better compensation packages, but a lower percentage of women negotiate than men.

Salary History Bans Are Growing

By the way, if asked about salary history, change the topic to the position. Discussion of your salary history may be illegal in your state.  Massachusetts was among the first states to make it illegal to ask for that confidential information on an interview in 2016. As of 2021, 29 states now have salary history bans. 

Related Post: Challenges Women Entrepreneurs Face And Overcome

6. Keep Track of Your Accomplishments

As you move up the corporate ladder, keep a personal journal of what you have done, not hours worked. You need to build your list of selling points with real achievements like successful presentations. Examples of these are landing a lucrative contract, strong customer sales or satisfaction, or training new employees. It will strengthen your conversations when you pitch for more money and benefits.

Women often undervalue their worth and, as a result, have lower expectations for themselves. Confidence-building is just as important as your hard work, diligence, and skills. It took time for me to strengthen my self-assurance to take stands when necessary and to be able to convince others.

7. Solicit Manager Support

It is always a good idea to have management in your corner who can provide you support and feedback. Your manager can provide you with advice on how to advance in your career or get desirable assignments. Take the initiative to talk to your managers about how things are going. Look for mentors.

Ask your supervisor for suggestions on professional development or online course opportunities. Showing your engagement as a long-term player is a  positive reflection of your motivation.

Ask your boss for constructive criticism over coffee or lunch. Be professional, loyal, and supportive.

I was fortunate to have had good support from my research director, Charlie. He was often a good-sounding board, providing advice and valuable feedback in a complex environment, particularly for women. He treated people professionally and equally.

 

8. Getting A Raise

You always want to be paid what you are worth, whether you are changing jobs or moving up the ladder. If you remain in your organization, you have a record of accomplishments, your ability to work with or manage others, and a reputation. You can use internal and external sources to find out what people are making in the field.

When I was an equity analyst at a major global investment bank, I was happy with my package and not looking to leave. I ignored recruiter calls. That was a mistake. When I finally decided to talk to a recruiter, I found out that I had been underpaid (despite making big bucks!) relative to my male counterparts.

It is always good to listen to what you may be worth externally. Of course, there are “switching costs,” adjusting to different firms, management, and colleagues, having to maintain or rebuild your reputation for a new audience, other demands, and culture.

9. Know Your Worth

Often, talking to outsiders validate that you are in the right place. Nevertheless, use information like higher salaries or compensation packages to get what you want and need. Arrange to meet with your boss and speak honestly. Provide your accomplishments, share your continued enthusiasm to work with the firm, and specifically her/him and team.

Ask for the money you believe you deserve. If you cannot get to the exact dollar, consider your package and what upgrades you may want. As you move up in your firm to more senior positions, and there are specific times to discuss your annual package, it is not unusual to have an attorney with employment law expertise to assist you in negotiations.

Related Post: Ten Ways For Women To Achieve Their Financial Independence

10. Compensation, Incentives, And Benefits

Your salary is not the only part of the compensation package to consider.  Other incentives, benefits, and perks can be a big part of your compensation package. Some companies have been quite progressive and innovative. Investigate what these companies offer. In 2021, as hopefully the pandemic fades as bad memory for all of us, working from home may be in greater demand and more acceptable to more employers

Important features of a compensation package are:

Incentives such as bonuses and equity options are essential to your total compensation and may dwarf salaries. You want to know if there is a signing bonus, annual bonuses, and how you may earn equity options. Sometimes your title and position may dictate increased access to sweeteners to your compensation package. 

Learn about the company benefits such as Insurance and amounts (flexible spending or health spending plans, health, medical, disability, life, dental, and vision), 401K retirement plans and its employer-matching program, vacation, sick, and comprehensive family paid leave, college/graduate school tuition reimbursement, and other benefits.

Increasingly, companies offer other benefits and perks specific to your family situation, or you can negotiate for them to be in your package:

Flextime or work from home;

professional development opportunities;

commuter offerings like access to a car on weekdays;

Gym pass or discounts;

Severance packages in the event of a merger & acquisition of your company or elimination of your job;

An extra vacation to match the 4-5 weeks you had at your previous employer; and

Work-life balance offerings like working from home, flexible hours, child care cost reimbursements, extended parental leave.

The Corner Office

Sometimes there are perks for certain levels of attaining specific corporate levels. Years after I became the first managing director or MD (male or female) in my department after our Research Director, I was abruptly told to pack my stuff and moved to a huge corner office by a moving company. Frankly, I thought I was being let go, and no one came to talk to me.

Closing the door, I put my head down to do some work. A knock on my door, my boss walked in, asking, “Don’t you like your new digs?” He then told me he was embarrassed to tell me that managing directors get corner offices. However, I never asked for it and he was going to promote one of the men to MD’s, and already that person asked for the other corner office.

So I was entitled to a large office with space for a couch, I just didn’t know to ask. Don’t make my mistake!

Related Post: A Guide For College Grads On Your Company Benefits Plan

Final Thoughts

As women progress in their careers, compensation packages may become more complex.  Attorneys may do your bidding for you in negotiations. However, you need to understand what you deserve. Women are not getting what they are worth yet. Positive changes are happening for women in the workplace and elsewhere.

How has your experience been in getting a new job, a salary raise, and better benefits? Please share the post with others. If you found this article of value, please visit The Cents of Money and find others you may like. Give us your thoughts.  We are happy to hear from you!

 

 

 

 

 

 

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Money Lessons From Warren Buffett’s 2021 Letter To Shareholders

Money Lessons From Warren Buffett’s 2021 Letter To Shareholders

In his latest annual letter to shareholders, Warren Buffett, CEO of Berkshire Hathaway, wants you, the investor, to understand Berkshire Hathaway, the company he has steered since 1965. As in past years, I anxiously await Warren’s annual letter (he writes his letter as if he is addressing you personally, so hence my liberal use of “Warren”)  to learn or refresh my knowledge with his numerous golden nuggets.

Here is Warren Buffett’s letter that is a review of 2019

My Thoughts At First Glance

There aren’t any huge surprises though Buffett admitted to an error in overpaying for Precision Castparts in 2016. One of the best sections was his tribute to the founders of companies he purchased that show “success stories abound throughout America” as entrepreneurs without capital but with a strong work ethic. Look for “Mrs. B”  as a highlight that I embraced.

The letter is disappointing for what Buffett omitted. He mentions COVID-19 only once, alluding to it when he commented on the furniture company’s temporary closing. Yet, the pandemic destroyed small businesses and caused significant unemployment.

Another topic Buffett should be upfront about was the lack of making any acquisitions and his poor timing of selling stakes in banks and airlines during 2020. Buffett did talk about repurchasing more Berkshire Hathaway shares which may contribute to higher earnings with lower outstanding share count.

Labor Of Love

I read the letters and search for Warren Buffett money lessons, a task I enjoy since graduate school for business. It is my labor of love. My goal is to share his wisdom with others, notably with my college students and, of course, my readers. It is an exercise of enjoyable reading for American history buffs and those who are in finance.  

Buffett letters to Berkshire Hathaway shareholders go back to 1965 and chronicle the growth and challenges of the company’s businesses. I always uncover Warren Buffett’s money lessons as I did in the current letter on investing, diversification, overspending, debt reduction, entrepreneurism, ethics, and more.

Many of Buffett’s iconic quotes come from these letters filled with honesty, integrity, sardonic humor, and corniness when it comes to America. He and Vice Chairman Charlie Munger share their intellect, and at ages 90 and 97, respectively, it is no small feat. Longevity may just be one of the benefits of being a longtime Berkshire shareholder, as Buffett shares in this letter. 

The Letter At A Glance

There aren’t any huge surprises though Buffett admitted to an error in overpaying for Precision Castparts in 2016. One of the best sections was his tribute to the founders of companies he purchased that show “success stories abound throughout America” as entrepreneurs without capital but with a strong work ethic. Look for “Mrs. B”  as a highlight that I embraced. 

The letter is disappointing for what Buffett omitted. He mentions COVID-19 only once, alluding to it when he commented on the furniture company’s temporary closing. Yet, the pandemic destroyed small businesses and caused significant unemployment which remains high.

Another topic Buffett should be upfront about his lack of making any acquisitions, even after the market downturn. He also divested his bank or airline holdings in 2020, presumably due to COVID-19, but he didn’t explain his actions in the letter. 

Buffett Remained On The Sidelines

Most importantly, why was he uncharacteristically quiet in 2020?

If investors were hoping the 2020 letter would fill in some of the gaps in understanding Buffett’s uncharacteristic silence much of last year, they are going to be disappointed. What was going on that Warren Buffett did not take advantage of the dramatic stock market downturn in March 2020 to buy bargain stocks? 

He often is a voice of calm and reason when markets are extremely volatile. Typically, Buffett uses this scenario as an opportunity to pick up some bargains, either by purchasing equity stakes or making acquisitions. He remains healthy, and the letter does not cause us to worry about him, at least as far as being a 90-year-old man.

Uncovering Money Lessons From Warren Buffett’s Letter To Shareholders

 

Misses And Mistakes

Warren Buffett addressed the company’s two primary goals: increasing earnings and acquiring large and favorably situated businesses. Management met neither goal. However, they repurchased 5% of Berkshire Hathaway’s shares, which reduces the share count, raising EPS potential. 

Admits To An Error On Overspending

The Precision Castparts acquisition made in 2016 has not lived up to its profit potential. Berkshire took an $11 billion write-down. Buffett’s mistake of overpaying for this asset took him only four years to acknowledge compared to his 20-year famed struggle with the textile business he inherited at Berkshire. That is a big step in the right direction to acknowledge a mistake, Warren!

Berkshire Is A Conglomerate

Buffett describes Berkshire as a conglomerate,” but only in part.”  It differs from the prototype of “aspiring conglomerateurs” who will buy up for mediocre businesses.  Many conglomerates overpay for companies with overvalued stock. Tools to foster overvaluation involve “promotional techniques and ‘imaginative’ accounting maneuvers that were, at best, deceptive and sometimes crossed the line into fraud.”

“Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts, and investment bankers, but whose creations ended up as business junkyards.” I knew several candidates professionally he may have in mind.

Buffett is not a fan of Wall Street, particularly in this letter, as we discuss later.

Controlled and Non-Controlled Businesses 

Berkshire Hathaway is a holding company with controlled and non-controlled businesses. Their controlled businesses are typically those they own at least a 50% interest in and manage operations. Berkshire owns equity stakes or holdings of marketable stocks in non-controlled businesses they do not operate. 

 Buffett and Munger view Berkshire’s holdings of marketable stocks as a collection of businesses. These holdings had a year-end market value of over $281 billion in 16 company equity stakes, up from its $108.6 billion costs. For GAAP purposes, Berkshire can only book the dividend income from these companies, not their marketable (but unrealized) gains.

Four Family Jewels

#1 Property And Casualty Operations And Its Insurance “Float”

Berkshire’s insurance companies are its valuable businesses. They have unique characteristics that allow them to enjoy  $138 billion of insurance “float.” Like other insurers, premiums paid by customers can be invested in securities when customers pay premiums for policies and the time they make insurance claims that are liquidated.

The float is money that doesn’t belong to Berkshire and will go to intended parties in the future. It is free money in the meantime for investments.

Unlike its competitors, Berkshire follows an equity-heavy investment strategy not feasible for most of its insurer competitors with regulatory and credit-rating restrictions.

Instead, these competitors invest their premium proceeds in bonds that have to generate low-interest income from the likes of 10-year US Treasury bonds, yielding 0.93% at the end of 2020. Buffett worries that some insurers and bond investors may turn to increase their returns by buying more risky loans, which are “not the answer to inadequate interest rates.” It is hard to find income in a low-interest environment without adding risk as we discuss here.

However, the 10-year yields rose to 1.54% in late February 2021, above the year-end rate. 

Berkshire’s #2 And #3 Most Valuable Assets

Buffett’s points to the company’s second and third most valuable assets that appear to be a tie, and frankly, seems surprising.  The tie in Berkshire Hathaway’s most valuable assets is between Berkshire’s 100% ownership of BNSF, America’s largest railroad based on freight volume, and its 5.4% interest in Apple.

A 5.4% Interest In Apple, Helped By Share Buybacks

Roughly 42% of the marketable gain comes from its now 5.4% in Apple due to share buybacks.  Berkshire began investing in Apple in 2016 and mid-2018, representing an initial 5.2% stake, and realizing regular dividends of $775 million annually. They had an $11 billion gain from selling a small portion of their stake.

Through the math of Apple’s share buybacks and Berkshire’s repurchases, Buffett told investors that they “own a full 10% more of Apple’s assets and future earnings” than they did in July 2018. Q to Buffett Does he think that Wall Street analysts give proper credit to this non-controlled interest in their price targets in Berkshire.

 BSNF – Its Railroad Business

Tied with the Apple interest is its 100% ownership of BNSF, acquired in early 2010. It has been operating since 1850. It has required substantial investments since Berkshire’s purchase.  BNSF paid significant dividends of $41.8 billion in total to Berkshire after it fulfills its business commitments and maintains a $2 billion cash balance, reflecting a conservative policy.

Railroads are a fascinating industry for any Americana history buff. Their challenges are well documented from their early start and are in a more mature stage.

#4 Jewel – Berkshire Hathaway Energy

Berkshire’s fourth family jewel is Berkshire Hathaway Energy (BHE), owned for 21 years. Unlike BNSF and most electric utilities, it pays no dividends to Berkshire. BHE is amid a long-term $18 billion project to rework and expand a substantial portion of its outdated electricity grid throughout the West. The project began in 2006 with a  2030 competition date. This project is complex and essential to be able to deliver clean energy.

Berkshire Hathaway Ranked #1 As Largest Owner Fixed Assets

Berkshire is the largest owner of American-based property, plant, and equipment with fixed assets of $154 billion, followed by AT&T, at $127 billion. That Berkshire fact alone means it is an asset-heavy company that invests a lot of capital, not necessarily generating the best-earning results or even a good investment.

As most business college students learn in school, good returns can come from companies with minimal assets in high-margin businesses that have expanding topline growth. Simply being asset-heavy is not a reflection of a beauty contest.

Underperformance In Berkshire Shares

Indeed, Berkshire’s stock performance in 2020 was poor, up 2.4% compared to the 18.4% terrific climb for the S&P 500. Relative stock performance in 2019 was also weak, with 21% underperformance.

Investors would have done better with a passively managed Vanguard S&P 500 index fund paying an expense ratio of 0.14%. That means an investor would be paying about $14 fee annually for a $10,000 investment in the fund. Actively managed funds have higher expense ratios of 1% or higher, costing a $100 management fee for a $10,000 investment.

American Prosperity Fuels Business Creation And Entrepreneurship

Despite his age, Buffett is still playing for the long term with high confidence in Berkshire’s businesses, management, and employees. He is proud of his extensive property and casualty business and his smaller companies. They remain treasures within the Berkshire family, and he shared their beginnings as business creations by individuals that are American success stories.

One reason Warren Buffett may have less of need for Wall Street bankers is that he does his research, making purchases for Berkshire, even on a handshake after getting to know the founders and its business potential.

Berkshire’s Gems:

  • See’s Candy, a West Coast company acquired in 1972. Mary See began the business a century ago, reinventing age-old candy with new recipes such as Buffett’s favorite peanut brittle.
  • GEICO (Washington D.C.) began as an auto insurance company by the Goodwins in 1936. It became Buffett’s first love when he bought shares in 1951 as a Columbia Business student, purchasing GEICO for Berkshire in 1996.
  • National Indemnity (Omaha) began in 1940 by the Ringwalts to compete against well-funded giant insurers. It was purchased in 1967 and is Berkshire’s largest business.
  • Tennessee-based Clayton Homes and Pilot Travel Centers (38% interest but 80% in 2023) were each begun by young men, continued by their sons under Berkshire’s umbrella.

A Young Immigrant’s Story Seems Familiar

“One question I always ask myself in appraising a business is how I would like, assuming I had ample cash and skilled personnel, to compete with it. I’d rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don’t even dream about, and they then pass on to their customers much of the savings.”

Warren Buffett, from Wikipedia

Buffett continued to buy Omaha businesses. Among those was the Nebraska Furniture Mart (NFM), with an enchanting story told in Buffett’s letter. The founder of NFM was Rose Blumkin (Mrs. B), who arrived in Seattle in 1915 as a Russian emigrant, unable to speak or read English. She settled in Omaha and used her $ 2,500 savings to start a furniture store in 1936.

By 1946, her business stalled, and she was down to $50. Louie, her only son, rejoined the store after four years in the Army. He earned a Purple Heart, having fought at Normandy on Omaha Beach on D-Day and sustained injuries in the Battle of the Bulge. He joined his mom, renewing the business, and by 1983, their business worth $60 million.

Buffett purchased the furniture business, leaving the Blumkins to manage the place. Mrs. Blumkin worked every day until she was 103, and Buffett wrote, “…a ridiculously premature retirement age as judged by Charlie and me.” The business still run by the third and fourth generation of the Blumkin’s and now has the three largest home furnishings stores in the US today.

 Immigrant Stories Are America

Their story reminds me of my own mother’s immigrant story. She became a thriving retail owner after coming to America as a Holocaust survivor with $5 in her pocket. My husband’s account tells me of his two great grandmothers’ export-import and furrier businesses. Each story is unique but has parallels of strong immigrant women, who came to the US with little money, didn’t speak English, were primary breadwinners in their families, and loved America.

Buffett’s post-script to the Blumkin story could be my family’s or the many immigrants that landed in this country. When Mrs. Blumkin’s large family gathered for holiday meals, she always asked that they sing before eating. That song was Irving Berlin’s “God Bless America.” I promised you corniness!

Buffett And Munger’s  “Special Kinship” With Individual Investors

In business ethics, stakeholders of a company have interests in the outcome of the decisions made. Typical stakeholders are the board of directors, management, employees, customers, lenders, and stockholders.

The BH directors want the company to delight the customers, develop and reward the company’s 360,000 employees, called associates of the company. It is up to the board to determine dividends, strategic direction, CEO selection, acquisitions, or divestitures to act in the corporation’s best interests and its owners.

The owners are the stakeholders that most matter in the letter written by Warren Buffett and to whom he most directs his comments. 

Owner Constituents:

  1. Warren Buffett’s Berkshire shares ownership will eventually be annually distributed to various philanthropies as part of his estate plan
  2. Passive investing is a fund strategy that tracks a weighted index such as S&P 500 index funds.
  3. Actively investing refers to a portfolio management strategy where portfolio managers make investments. Both active and passive investing are institutional investors who may either have a long-term focus or use computers employing algorithms to trade with a short-term mentality.
  4. Individual investors are investors whose purchases are of smaller volume than institutional investors. They may buy Berkshire shares for long-term investment or use Berkshire shares as a source of funds. 
  5. Warren Buffett’s special kinship for the individual investor comes from his early roots as a money manager through partnerships. He and his family invested in the partnership with these individual investors of million-plus investors who line up with Berkshire’s philosophy favored by him and Charlie Munger. They are more likely to have long-term perspectives. 

Original partners were longstanding holders of Berkshire shares, many of whom are descendants of the original partners. They share a commonality with Buffett by being old-fashioned long-term investors who trust the management to do the right thing.

Stepping Down To Retire? Nope

“Could it be that Berkshire ownership fosters longevity?”

Warren Buffett

Would it surprise you that there were no announcements of Warren Buffett or Charlie Munger stepping down and moving over for Vice Chairmen Ajit Jain and Greg Abel? Me neither. In their 90’s, they remain energetic and love their jobs.

Instead, Buffett spoke of Pilot Travel Center founder “Big Jim” Haslam, who recently authored a book at age 90.

Buffett pointed to the earliest investors–a group of Omaha doctors who formed a partnership. One of those veterans just turned  100 years old, and he and all the doctors kept their original Berkshire shares they received from the partnership.

Wall Street And Speculators

Throughout the years of writing letters, Buffett and Munger together have shown there is no love lost for Wall Street, notably the investment bankers, analysts, and those of that ilk. As a former analyst, I take no offense, recognizing the culture of working on “The Street”  is often difficult to maneuver.

This letter was no exception. I thought there was more than the usual Buffett bite in this read. We use his quotes when he refers to Wall Street.

On conglomerates, Buffett refers to the overvaluation of an overvalued conglomerates’ stock to make acquisitions, he says, “Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.”

After his tribute to individual investors, Buffett refers to the tens of millions of other investors and speculators who have “a wide variety of equity choice to fit their tastes.” (His emphasis). According to Buffett, these investors will find CEOs, market gurus, price targets, managed earnings,  “stories,”  and “technicians” who will “instruct them as to what some wiggles on a chart portend for a stock’s move.”

The Monkey And Its Dartboard

Buffett believes many of these investors will do well, saying:

“Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing of all the S&P 500, will–over time–enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original selections.”

His italicizing of “over time” reminds investors of the need for having a long-term perspective, something that may be lost in the world of computer algorithms and day trading.

Buffett’s Book Recommendation

Warren Buffett is well known to be an avid reader and shares many recommendations. In his letter, he recommends “Common Stocks And Uncommon Profits” written by Philip A. Fisher in 1958.

In the book, Fisher analogizes running a public company to managing a restaurant. He said, “If you are seeking diners, you can attract clientele featuring either hamburger served with a Coke or a French cuisine accompanied with exotic wines. But you must not capriciously switch from one to another.” You and your business’s message to potential customers must be consistent with what they find when going to your premises

Inflation Wasn’t Addressed In This Letter

Not surprisingly, Buffett did not comment on inflation as our economy is not yet near full employment. However, Buffett did comment in his 1980 letter when the inflation rate was 13.5%, giving us a glimpse into his thoughts on high inflation in the late 1970s and early 1980s:

“High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners.

“This ‘hurdle rate’ the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners – has increased dramatically in recent years. The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil.”

Our recent post on Inflation And How To Protect Yourself From Its Effects

Final Thoughts

I learn from Warren Buffett’s letters to Berkshire Hathaway’s shareholders. The letters contain golden nuggets of money and life lessons. That doesn’t mean Buffett is beyond criticism, especially in his account of  2020 where omissions did not address many questions I would have for him. Becky Quick of CNBC in her standard interviews of Warren Buffett will ask the questions I raised in this article.

May 1st in the Berkshire shareholder meeting, and for the first time will be held in Los Angeles instead of Omaha. Buffett and Munger will be answering questions.

Thank you for reading! If you found any value in this post, please visit The Cents of Money for more articles like this. Why not become a subscriber so you can get our free weekly newsletter! Love to see you there!

 

 

 

 

 

 

 

 

 

 

Understanding Inflation And How To Protect Yourself From Its Effects

Understanding Inflation And How To Protect Yourself From Its Effects

We almost always have some inflation, meaning wages and prices increase which helps job creation and economic growth. The absence of inflation is deflation, which means declining prices and could cause or worsen a recession as businesses lay off workers.

For years, we have had low inflation with relatively stable pricing, largely due to the Federal Reserve’s efforts.  However, the low inflation levels could change as our economy rebounds from the pandemic. To find higher rates, you have to go back to 1990 when inflation was 6.1%. Double-digit inflation was more common in the 1970s, with its peak at 13.3% in 1979.

The Federal Reserve’s Monetary Policy’s Actions

The Federal Reserve has dual goals: maintaining relative pricing stability and sustainable economic growth with full employment. In the Great Recession and in March 2020, due to the pandemic-related economic downturn, the Fed steered towards accommodative monetary action to drop their fed funds rates to the lowest levels of zero-to 0.025% to stimulate the economy. 

Chair Powell and the Fed intend to keep interest rates low through 2022 and have said they would be more tolerant of inflation rates that exceeded their 2% target. There is a reasonable possibility that we will see higher inflation soon.

Will The Fed Stick With Their Accommodative Policy?

Despite their intentions to stay with an accommodate policy, the Fed’s policy mandate is to adjust their stance to changing information. The 10-year Treasury note’s yield has been rising and could signal higher inflation expectations. The Fed has tools to combat high inflation such as raising interest rates. 

It is not clear if the Fed will change gears but we can prepare ourselves. Should inflation increase to moderate levels above 2%, there are ways to protect ourselves from the potential erosion of our money. Moderate inflation may provide some benefits. You need some level of inflation to promote more spending.

Reasons Why We May See Higher Inflation

  • The Fed intends to remain accommodative for a while, with lower rates and liquidity.
  •  A potential $1.9 trillion fiscal support for those businesses and households in need is on the table.
  • The number of people getting vaccinated is rising, which may help boost the economy.
  • We are saving more with the latest US personal savings rate remaining high at 13.7%, about twice the rate seen in 2019.
  • Credit card balances at the end of 2020 reflect the largest yearly decline since 1999, reflects consumer spending is down.

These factors, if combined, may unleash consumer spending to kick up our economy and contribute to higher inflation. Offsetting these factors is high unemployment levels staying stubbornly high and may keep inflation low for now.

With low inflation, it has been difficult for anyone to earn any income in a low-yielding environment without taking on more investment risk. For investors with 60/40 retirement portfolios investing in stocks and bonds, respectively, some have shifted more significant proportion into stocks.

Investors will need to seek assets that are at least keeping pace with rising inflation. Holding cash in savings and checking accounts are suitable for liquidity purposes.  However, their safety feature will diminish as their values erode with rising inflation.  Later on, we have a list of investments that can protect you during a higher inflationary environment.

What Is Inflation And How Does It Affect Your Buying Power?

The definition of inflation is a steady rise in the general level of prices of goods and services. For example,  a gallon of milk cost $1.57 in 1975 rising to $2.20 in 1985 as a result of high inflation in the 1970s to early 1980s. It now costs $3.61 in 2021. The changes in prices are due to inflation, not scarcity. 

As a result of inflation, your purchasing power, the amount of goods and services that one’s income will buy, goes down. When prices rise, purchasing power declines, usually falling by the reciprocal amount of the price increase. Your paycheck may stay flat or go up more slowly, leaving you with less money. Union members may be an exception as they receive a cost of living wages as part of their contract.  

Calculating of Inflation

The US Bureau of Labor Statistics calculates inflation monthly using the consumer price index (CPI). The CPI is the best measurement of changes in prices of all goods and services purchased for consumption in urban households. This index tracks a market basket of food, transportation, housing, health care, and entertainment, broken down into over 400 subcategories bought by end-users.

The CPI is a cost of living index with a starting reference point from 1982-1984 as the base period of 100. The CPI for January 2021 was 261 reported on February 10, 2021, the cost of living would have risen 161% since the base period [(261-100)/100= 1.61 of 161%]. If car prices rose 15% over the past five years, you may be paying $34,500 for a car that had cost $30,000 ($30,000 x 1.15%).

Economists tend to look at sequential (quarter-quarter) or year-to-year changes in the CPI. The most recent sequential rise in January increased by 0.3%, and up 1.4% since a year ago. These price increases confirm the low inflation we have had since the Great Recession began in 2007.

The Purchase Pricing Index, or PPI, is similar to the CPI but measures wholesale prices from raw material through the production stages. When PPI rises, the higher costs often are passed on to consumers.

Low inflation has stymied returns from the low inflation environment from low-risk income-based investment portfolios as we discussed here..

What Contributes To Inflation?

There are various factors that may influence inflation.

Higher Demand

Demand-pull inflation occurs when total demand for goods and services in an economy outpaces supply. In the early 1970s, a strong economy caused oil prices to rise and pushed up inflation to 12% in 1974. Strong consumer demand for goods and services could result in higher spending leading to higher inflation.

Increase In Production Costs

A different way of rising prices than demand-pull can come from increases in production costs without higher demand is known as cost-push inflation. Higher production costs can come through increased wages, raw materials, depletion of natural resources, droughts, or higher taxes. Businesses are not always able to pass these higher costs onto consumers.

There have been conflicting views on whether raising the federal minimum wage to $15 per hour would cause inflation. One side of the argument points to wage hikes which have been slow to come for many employees, and therefore, increases are overdue. Wage growth often leads to a more robust economy.

However, the pandemic-related recession has caused high unemployment that has crippled many small businesses. Many believe that we should have an improved economy and higher employment before raising wages.

Natural Disaster Shortages 

Prices can rise when shortages in goods and services associated with natural disasters such as severe weather conditions, droughts, floods, fires, or avian flu. These disasters impact manufacturing plants, businesses, and residential areas. These unpredictable events may put temporary or long-term pressures on the production of goods, causing inflation due to scarcity.

In 2010, British Petroleum’s oil spill was the largest marine disaster in the Gulf of Mexico, causing higher gas and seafood prices. This area accounted for one-third of all seafood consumed in the US. About 40% of the Gulf waters needed to be closed to commercial and recreational fishing due to the spill.

Government Overspending

The US budget deficit has been rising from already high levels since the pandemic to counter the economic downturn. A government budget deficit occurs when expenses outpace revenues, not unlike the household budget.

Multiple fiscal stimulus packages related to hardships caused by the pandemic have been essential to provide funds to businesses and unemployed workers. This boost to government spending has required the US Treasury to raise capital and increase money creation by printing money. Both US Treasury and the Federal Reserve have increased money supply to increase liquidity and keep the financial markets calm, but a higher money supply typically leads to higher inflation.

Higher Prices From Higher Demand Post-Pandemic 

Many businesses lost revenues during the pandemic because of social distancing needs. As more people are vaccinated, our economy may rebound from strong demand in travel, entertainment, dining out, and going about life more normally. We may see some prices go up with increased demand and pressure to recoup lost revenues.

Different Kinds of Inflation

The various forms of inflation that are most worrisome are stagflation, deflation, and hyperinflation.

Deflation

Deflation is when there is an overall decrease in the cost of the economy’s goods and services. When price declines are minimal, consumers may spend more. When deflation is more pronounced, we may demand less, expecting more price declines. Businesses, anticipating lower spending, will cut production to prevent swelling inventories, and layoffs may result.

This deflationary scenario is considered the opposite of inflation and its evil twin. The Federal Reserve uses a 2% inflation target as part of its monetary policy, preferring low inflation to deflation. Deflation can send an economy into a recession or a worse downturn, causing layoffs.

Stagflation

Stagflation refers to a stagnant economy reflected in high unemployment and high inflation simultaneously. This problematic situation, spurred by an oil shock, lasted from the early 1970s into the early 1980s and was challenging to resolve. 

Hyperinflation

Hyperinflation has not been around for a while. The closest the US experienced hyperinflation was during the Civil War, and I think that is where everyone wants to see it, that is, in history. Between 1921 and 1923, the Weimar Republic, Germany’s government, experienced hyperinflation rising over 300%!

Relationship Between Inflation And Interest Rates

Inflation and interest rates are not the same thing, but they relate to each other. There is a tendency for interest rates and inflation to have an inverse relationship. When interest rates are low, it stimulates economic activity, and inflation rises. But, when interest rates are high, consumers slow spending, the economy slows, and inflation declines. It takes time for the economic changes to take place.  

Investing For Protection From Inflation

As an investor, you should have a better understanding of inflation so that you can protect yourself from its effects. Some investments keep better pace with rising inflation than others. Real or physical assets often appreciate at or faster than inflation, and can provide better returns for investors. It is helpful when investing to understand the economy as we discuss here.

Money Market Securities

Cash and cash-equivalent securities make poor investments in a low-yielding environment. However, when inflation rises, the annual percentage yield (APY) will increase. Seniors have been clamoring for 5% CD yields which do not currently exist. Should inflation rise to higher levels, having cash to investing in money market accounts that are FDIC-insured will be a desirable place.

Build CD Ladders

The six-month CD rate hit a high of over 17% in March 1980 when inflation was 14.8%. I don’t think anyone wants to see inflation reach those levels or expects inflation of that magnitude. However, you can build a CD ladder to take advantage of rising APYs offered by the banks and credit unions.

You can start with short-term periods such as three or six-month CDs as inflation rises, lengthening their maturities as high inflation stabilizes, locking in nice returns. CDs are a less risky way to earn higher returns, especially if inflation is over 5%.

TIPS And Other inflation-indexed Bonds

Currently, bonds at fixed rates do not yield meaningful returns. However, bonds with variable rates are worthwhile investments in rising inflationary environments.

Treasury Inflation-Protected Securities, or TIPS, are issued and backed by the full faith of the US Government. They are considered the safest security, most liquid,  and rated AAA for the highest quality. Holders receive interest income twice per year at a fixed rate. These securities are an excellent way to diversify your portfolio for the least risk among other inflation hedges.

As inflation-protected securities, TIPs provide investors with a guaranteed real rate of return. The principal of TIPS increases with inflation and decreases with deflation measured by the CPI. At maturity, you are either paid the adjusted or original principal, whichever is greater. Like all Treasury securities, TIPs are exempt from state and local taxes.

Municipal Inflation-Linked Bonds

 Like TIPS, investors can buy municipal (munis) inflation-linked securities that track CPI and adjust the bond’s principal. These securities can keep pace with inflation better than a municipal bond without this feature.

Compared to TIPS, munis do not have backing from the federal government, are less liquid, and its ratings vary by municipality.  Funding purposes are to build roads, schools, airports, or infrastructure projects. To offset its higher risks, holders of muni bonds are tax-exempt from federal income taxes.

Corporate Inflation-Linked Bonds

Corporate bonds may have inflation-linked features, similar to the other bonds, adjusting to the CPI changes to better pace with higher prices. These securities tend to have higher risks that vary by the quality of the corporation. These bonds are less liquid than Treasury securities (every investment is!) and don’t have any tax-exemption benefits for their holders like Treasuries or municipal securities.

Variable-rate bonds have floating interest rates for coupon payments. Municipal and corporate bonds may have this variable feature that is adjusted to the current money market rate for their interest rate.

Gold

Gold is an inflation hedge and offers diversification for any investment portfolio. As a physical asset, gold is in limited supply. Central banks own gold in their portfolios as part of their foreign exchange reserves.

Gold prices were up 25% in 2020, among the best-performing assets. You can buy gold in its physical form as bars or coins. Typically, gold doesn’t pay dividends. However, some gold mining stocks pay dividends (e.g., Newmont and Barrick) individually,  as gold miner ETFs or SPDR Gold Shares or GLD, the bullion is in a fund.

Silver is an inflation hedge with a lower price point, attractive for retail investors.

Commodities

Commodities are not just pork bellies. As an inflation hedge, it is a broad group with many different products you earn and store. There are three main categories:

  •  Agriculture commodities include food, meat, timber, and cotton.
  • Energy has crude oil and its refined products.
  • Metals categories are largely precious metals and industrial metals.

As the price of the commodity rises, the product that contains the commodity will likely rise. When aluminum or steel prices rise, manufacturers may pass on the higher costs to consumers.

Real Estate Investment Trust or REITs

Real estate property makes excellent investments when inflation rises, but it may require work to maintain. A REIT is a company that owns and operates income-producing real estate. There are many different REITs for equity, retail mortgage, health care or hospitals, and data storage, providing diversification for any portfolio.

They generate stable income from above-average dividend yields. That’s because REITs are required to distribute at least 90% of their taxable income to shareholders annually.

Common Stocks

Stocks, as an asset class, have historically provided returns that beat inflation. They are a sturdy investment for the 60/40 investment portfolio, with inflation-indexed bonds likely to do better when there is higher inflation.

Certain sectors may perform better than others. Energy stocks, much like the commodity itself, are often inflation hedges. Financial stocks earn better income margins on loans in times of inflation, and healthcare insurers have performed better when higher inflation appears.

We already mentioned REITs and gold stocks as a worthy area to invest in if inflation rises. Let’s add Dividend Aristocrat companies for inflation protection. They are represented by stocks that raise their dividends consistently for at least 25 consecutive years. There are different stocks in various sectors and are available as ETFs.

Another way to invest in stocks is to buy the S&P 500 index as a fund or ETF for inflation protection and diversification. If you choose to purchase stocks individually or as a sector, you may want to avoid utilities, consumer discretionary stocks, or companies with debt-laden balance sheets, like United Rentals.

Final Thoughts

Many are suggesting that higher inflation is on the horizon over the next few years. That may be as we haven’t had meaningful inflation since 1991. Higher inflation, so long as we don’t have stagflation or hyperinflation, is manageable. There are several investments that are attractive as inflation hedges for protection.

Thank you for reading! Share any comments or feedback, we would love to hear from you. Please share this post with others if you found something of value, and come join us at The Cents of Money!

 

 

7 Deadly Sins Of Investing And How To Avoid Them

7 Deadly Sins Of Investing And How To Avoid Them

In Seven, the neo-noir thriller, detectives David Mills and William Somerset (played by Brad Pitt and Morgan Freeman) track down a serial killer who uses the seven deadly sins as a motif in his murders. Investing may not be as lethal as a serial murderer. Here, we discuss the seven deadly sins of investing,  how they may impact our stock performance through destructive mistakes, and how we can avoid them.

What Is Investing?

Investing is a way to potentially grow the amount of money you have. The goal of making investments is to buy financial securities and hopefully sell them at a higher price in the future than what you initially paid. A saver can become an investor by giving your money a chance to work for you.

Investing is the best path to achieve wealth but it’s not a straight road. Unlike saving, investing involve some risks that could cause you to lose money.  You need to understand these hazards so you may be able to mitigate them. Investors purchase stocks and bonds with long term goals, unlike traders who have short term plans.

We can lose money when investing leads to emotional behavior or bad habits. Start investing as early as you can so you can earn money on top of the money you already earned, called compounding returns. Stay focused and purposeful so you can avoid behavioral biases which often play a detrimental role. Using financial discipline when investing can help you to achieve success

The seven deadly sins passed down from the Catholic Church of the Middle Ages may cause investors to perform poorly as modern examples for each deadly sin. The seven deadly sins are lust, gluttony, greed, sloth, wrath, envy, and pride.

1. Lust

When thinking of this deadly sin, I can’t help thinking about Jordan Belfort, better known as The Wolf of Wall Street. Belfort, or what we see of him, nearly defines every deadly sin. For that reason, he and the movie based on his memoir is pure entertainment and instructive for those who lust after sex and money.

As the first deadly sin, lust is a strong craving or intense longing such as sexual desire. It can also mean hunger for money. From an investor’s point of view, falling in love with your investments can be hazardous. Heavily favoring one stock may result in too much concentration risk in your portfolio.

Overexposure To One Stock Poses Concentration Risk

Take the example of Gur Huberman’s “Familiarity Breeds Investment” study in 2001, which involves ATT’s (“Ma Bell”)1984 breakup. When ATT split into the 7 Baby Bells, its shareholders received equal amounts in each new company.

Huberman found investors tended to retain a disproportionate amount of shares in their local Bell company. These individual investors held as much as $10K-$20K of a single stock, a higher concentration than the typical stock holding in a US household’s net worth.

Overexposure to one stock poses more significant risks to your portfolio that can sneak on you from slowing fundamentals. Investing in the company you work for is common for many people. However, if you have substantial ownership of shares where you work for and in your investment and retirement accounts, you have too many eggs in one basket. Instead, you need to diversify your portfolio with different stocks, industries, and asset classes.

2. Gluttony

Gluttony is the overconsumption of eating and drinking. We have all been there, gorging ourselves over an excellent meal, and feel our regrets afterward. Dante refers to this sin as “excessive love of pleasure.” We may be engaging in gluttony by overindulging our funds into less liquid investments without leaving a cash balance to buy stocks in a correction or pay off debt.

The recent excessive trading of GameStop shares by retail traders to shake up Wall Street seemed to be foolhardy, if not reckless. Sending that stock into the stratosphere caught everyone’s attention before coming back to earth but may have been costly.

Diversification, Asset Allocation, and Rebalancing

Alternatively, some people hoard their cash in a savings account, which generates little interest income, especially in this low rate environment. Investors need to be careful in allocating money into investments and having funds for emergencies, debt pay-offs, and retirement.

The antidote to gluttony is purposefully investing with strategies that embrace diversification, asset allocation, and periodic rebalancing.

3. Greed

“My name is Jordan Belfort. The year I turned 26, I made 49 million dollars, which really pissed me off because it was three million a week.”

The Wolf of Wall Street

“Greed is good…Greed, in all its forms, greed for life, for money, for love, knowledge, has marked the upward surge in mankind and greed.”

Gordon Gekko, Wall Street, the movie

Greed is not good, but it is very prevalent in the world of investing. The Wall Street (“the Street”) culture is all-consuming. It breeds greed and the need to make more than the person next to you. Not everyone working on the Street is greedy, or a criminal but temptations are there as they are everywhere.

The definition of greed as a sin is an intense and selfish desire for something of value, referring to wealth, material possessions, power, or food. Trendy investments are often collective greed that may become long term losers. Stock manias reflect “irrational exuberance,” a phrase used by then-Federal Reserve Chair Alan Greenspan when he commented on stock’s higher asset values than fundamentals warrant.

Bubble manias of the past–Dutch tulips, South Sea, Japan’s real estate and stocks, dot-coms, housing– should provide historical context to fear and greed in today’s markets. We hear about overbought markets but justify our purchases in SPACs, bitcoin, Tesla, Nio, so we aren’t left out of some of the apparent winners.

Lock-In Some Profits

How can we better deal with our greed, so we don’t become a casualty of fickle markets? No one gets hurt taking some profits off the table. I sell a small percentage of my gains regularly, usually, after a stock rises 20%-25%. This way, I may avoid my winners blowing up, an experience I have in my past.

Recognizing the need to be rational when investing is essential. It means doing your research, or if you feel you don’t have the time, are too emotional, or don’t have the inclination, you may be better off finding a financial professional to advise you in your best interests.

Take heed from another respected investor, Warren Buffett, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” There is a Fear and Greed Index (FGI) that measures investor sentiment for those opposing emotions daily, weekly, monthly, and annually. Too much fear can send stocks down, while greed indication may push stocks up.

4. Sloth

Why do they have to pick on this cute animal known for moving slowly and spending most of its time upside down in trees? As a deadly sin, sloth translates to an absence of interest or not exerting oneself physically or mentally. Said another way, it is the avoidance of hard work and perseverance, or simply laziness.

We can usually spot sloths who are lazy about physical exercise. However, investing requires cognition or understanding of what you are doing with your money. 

Laziness can hurt you when you are jumping into stocks without rhyme or reason. A slothful investor may under-invest or spend too little time reviewing one’s portfolio. Investing is not a “set it and forget it” activity. Investors may mistake the buy and hold strategy as akin to that. The buy and hold strategy means that you have a long-term perspective, but you need to adjust your portfolio for new or changing information.

Be Aware of Biases At Work

Making investments requires research. Even if you are planning to use a financial advisor, research is necessary. You still need to find a person or team that works to understand your financial goals to work with you on your financial plan.

Slothful people may be prone to procrastinate over making decisions. The status quo bias occurs when someone may be resistant to change. The endowment effect is similar, but it occurs when someone places a higher value on what they already have. Shortly after my parents passed away,  I inherited stocks, such as ATT and IBM, conservative names appropriate for their portfolio but not necessarily mine. Yet, I held on to their stock picks as an example of an emotional bond that was irrational.

How To Avoid A Slothful Nature?

If you intend to monitor your portfolio, recognize the need to be proactive in having diversification, taking some profits, and making adjustments as warranted based on changing company fundamentals. There are many different kinds of low-cost index funds that have other purposes of fitting your investment strategies. For example, you may look at target-date index funds that may appropriately adjust holdings based on your age.

Automation

You can automate your paycheck by allocating a certain amount or percentage to go into retirement savings, so you don’t have to remember to contribute to this account regularly. It is essential to use your paycheck to make it easy to make investments, save money, and pay bills.

Consider talking to a financial planner to help you with your financial goals and make investments for you.

5. Wrath

“Heeere’s Johnny!”

Jack Torrance, off-season caretaker in The Shining

There are many images of wrath, but Jack Nicholson’s character comes to mind. Wrath is defined as uncontrolled feelings of anger, rage, vengeful, and even hatred. Jim Cramer’s very rational rant in 2007 (and transcript) as the financial crisis was unfolding, but the Fed Chair was not yet cutting the fed funds rate or adding liquidity to the markets.

When the stock market becomes volatile as it did during 2007-2009 and in March 2020, we have wrathful states that pose dangers for any investor. We become angry at bad decisions for keeping stocks too long or selling them too fast as many jumped to do as the stocks sold off in March in the shortest bear market in memory.

GameStop As An Example of Irrational Buying

Retail traders who may lack experience may seek greater risk than they can handle and make irrational buying decisions.  We saw some recklessness as buyers were bidding GameStop shares up to crazy prices beyond their poor fundamentals.

It seemed as though traders were trying to punish short-sellers such as hedge funds by engaging in combat. Stories of young investors who took out costly loans to buy shares at exorbitant prices are heartbreaking. We wrote a letter to young investors you can read here.

Studies suggest that anger may increase our risk-taking. Don’t be reckless and engage in using leverage like margin trading.

Avoid anger and other emotions when making investments. The market doesn’t hold grudges, know how to be vindictive, or have a memory from day-to-day.  Investors need to make adjustments for changing circumstances.

Learn From Mistakes And Use Discipline

Learn from your mistakes to not sell as the market is plummeting unless you need liquidity. Stay rational by not impulsively trading or investing. Give yourself some discipline by selling a losing stock after it drops 7%-8% to avoid a more significant loss. Consider taking some profits off the table to lock in those gains.

6. Envy

Have you ever felt envious? Of course, you have. Envy is a feeling of resentful longing often brought on by someone else’s possessions, better standing, or luck. Envy often leads to conspicuous consumption to match those around them at work or in the neighborhood. The phrase “keeping up with the Jones” may mean buying a new car or a boat to fit in with other people around you.

Investing circles may envy those who are “killing in the market” when they share their wins in the most trendy stocks or funds. What they may not be telling you is about the mistakes they have made in the past. At one time, people envied Bernie Madoff’s clients for above-average returns, and we know how that movie ended.

Herd Mentality Bias

Merrill Lynch may still refer to its financial advisors as its “thundering herd,” but following or copying the herd is a negative sentiment. In behavioral finance, herd mentality bias refers to the investors’ tendency to follow what other investors are doing in the market.

Think of dot-coms, GameStop, or popular acronyms for groups of stocks such as “FAANG,” standing for Facebook, Amazon, Apple, Netflix, and Google, before it changed its name to Alphabet.

It is not always the wrong move for individual investors to buy rising stocks that reflect heavy trading volume. Sometimes that is a healthy indicator of institutional buying, and it is painful to go against the smart money crowd. However, it will financially hurt when large investors start shedding stocks in their portfolios.

Don’t Chase Hot IPOs

Individual investors, who typically do not have access to new issues, often seek the hot IPOs after pricing in the primary market. The average first-day pop in the post-IPO stock is 20%, but hot names have shot up 80%-100% or more. Six months later, many of these stocks have fallen below their IPO price as the aura on these stocks is gone, a casualty to weaker fundamentals than expected.

Instead of being envious, learn about investing, risks, and develop strategies that work for you. Remember that Madoff’s returns were fictitious. It is in our nature to compare ourselves with others. However, you cannot be sure that you are looking at anyone’s full picture. Don’t waste your energy on envy.

7. Pride

“Details of your incompetence do not interest me.”

Miranda Priestly, The Devil Wears Prada

Pride or extreme pride is hubris, a Greek cousin to pride. Hubris means self-confidence, arrogance, and corrupt selfishness. One who has hubris irrationally believes they are better, superior and has excessive admiration of their self-image. Having this kind of pride is a self-destructive vice, especially harmful when you are an investor.

It is hard to work for someone like Meryl Streep’s Miranda Priestly, who always desires to be right. As an investor, the need to be right can hurt your ability to make money.

You may hold on to a losing stock and an unrealized loss rather than admit you are wrong. The justification for holding on to the stock is that it is only a loss on paper until you sell it. However, a 10% unrealized loss can widen if fundamentals warrant it. Loss aversion bias is the tendency to prefer avoiding losses to acquiring gains.

Overconfidence Bias

Another bias is overconfidence, which means having an egotistical belief in your investing acumen. It is challenging to perform better than the market averages, but those who are overconfident tend to operate with the false comfort they can perform well.

Instead, having a fear of being wrong in many investing situations can help you stay on your toes. The best investors avoid overconfidence and consider worst-case scenarios as medicine to remain aware of downsides in the market. They recognize that there is much that you cannot control about the market.

Avoiding The 7 Deadly Sins With These Investing Rules

To recap some of the ways you can avoid the investing pitfalls associated with the seven deadly sins:

Avoid concentration risk by diversifying your portfolio and do asset rebalancing.

Be aware of the emotions and behavioral biases that impact our decisions.

Don’t dump stocks during times of market turbulence.

Buying hot IPOs post-pricing is not a good idea, as there will be a better time and price to do so. 

No one gets hurt taking profits off the table to lock in gains.

Don’t engage in reckless strategies such as short-selling or using leverage to buy stocks.

Use automation to move money more quickly from your paycheck to contribute to your savings, retirement, and investment.

 

Final Thoughts

When investing, you may have run into the seven deadly sins that can impact your performance. Counter each sin, often wrapped in emotion or biases, with purposeful investing to avoid common mistakes.

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