I currently have a fairly small position in the automaker Ford (F); I own just north of 100 shares. Over the last month, Ford stock has pulled back in the neighborhood of 15%. That’s a pretty serious hit for most investors and understandably has a lot of people worried. In my opinion, F still represents a good long-term investment and I plan to stick with the stock.
The reason for the sudden decline in Ford stock price is that F made a presentation to investors wherein the company detailed that it’s European and South American operations will not be profitable; Europe, in particular, will represent a much larger loss than originally anticipated. To compound the problems, F’s warranty expenses are higher than anticipated. Additionally, Russia represents a problem area due to massive political and economic instability.
Mitigating those problems are several factors:
First, warranty expenses, while higher than planned, are at an all-time low and have been consistently decreasing over the last decade or so. The company is doing a good job of addressing these problems.
Second, Europe will be profitable in a couple of years. With some good execution, F will be at least break-even in Europe by 2016.
Third, Asia is going gangbusters for F. China is buying F like there’s no tomorrow and that trend looks to continue.
Fourth, North America still loves F. North America has been F’s bread and butter for a long, long time and that success looks to continue. I’ll be interested to see what happens to pickup sales when the new aluminum F-150 is released next year.
Finally, 2015 is still projected to be one of the top two or three most profitable years ever for Ford. I don’t see management cutting the dividend; I would not be surprised to see a small increase sometime in the next year.
My position in F is not a pure dividend play – there is a bit of a growth factor here too. I see this stock rising and paying out consistent dividends with inconsistent increases over the next 10 years and I plan to be along for the ride.
It’s everyone’s favorite time of year: tax refund time! And if you’re lucky enough to get a bonus at work, many employers pay out performance bonuses around this time of year.
Now, I’m not going to slap you on the wrist for getting a large tax refund (not today, anyway); I received a pretty nice refund myself. And while it’s not absolutely optimal to get a big tax refund, it does happen. Today I have two quick pieces of advice for you if you find yourself getting a sizable tax refund and/or bonus payment.
If you’re saying, “What should I do with my tax refund?”
The answer is:
1. Pay down any debt you may have.
2. Invest in income-producing assets.
That’s it. You didn’t think I was going to say anything different, did you?
There are a couple of caveats, of course.
I say to pay down any debt you may have. Honestly, I’m mostly concerned about consumer debt. Credit cards, auto loans, retail accounts, etc. After that, I would probably focus on things like student loans and then maybe the mortgage. But when we’re talking about student loans and mortgages, we’re generally talking about pretty cheap money and sometimes it makes more sense (mathematically speaking) to invest your dollars instead of paying down cheap debt. As long as the debt isn’t unnecessarily straining your cash flow, I’m fairly agnostic on whether you pay down inexpensive debt or invest. Both are good moves.
The advice to invest in income producing assets should come as no surprise to anyone. That’s one of my most strongly held beliefs about money – that it should work for you and produce a steady stream of income. That income can come in the form of dividend checks, reinvested dividends, royalties, rents, etc. Whatever form it takes doesn’t matter to me. As long as you are investing your money as soon as possible, I’ll be happy. Why? Let’s take a quick look at an example.
This is something I heard in primary school somewhere but it stuck with me. If someone offers you a lump sum of $10,000 or one penny today, two pennies tomorrow, four pennies the next day, etc. for one month, which would you take?
I cannot stress this enough: TAKE THE PENNIES. The power of compounding is such that after a mere three weeks (21 days) you will receive over $10,000. On the last day of the month, day 31? You’ll get over $10MM! Obviously this is a ridiculous example where your money doubles every single day, but the greater point holds. Invest your money and leave it invested for a long time. Let it grow and watch the power of compounding take over. You won’t be sorry.
Over the last few weeks we’ve been talking a bit about investing and some basic personal finance principles. Today I thought I’d revisit an important topic: what is an investment?
I think all too often, when people think about investing and investments, what they are really thinking about is speculation. People tend to view investing as being almost equivalent to a form of gambling or playing the lottery. There are probably a few different reasons for why this is. First of all, investing can be intimidating if you are new to it or are just a little unsure about how it works. Think about the sheer scale of the global markets – over the course of a year, trillions of dollars are invested and traded with frightening speed across the world. How can little old me really be a part of such a monstrous marketplace that is dominated by behemoth mega-corporations? When you think about it in those terms, it makes sense that investing would be intimidating to a lot of folks. I can certainly understand that.
Another reason that I think investing makes folks nervous is that it can seem to be complicated. If you do a quick Google search for investing advice or investing information, you’re going to get a huge amount of information thrown at you. And if you’re looking for financial information for a specific company, you are going to find tons of numbers that can be confusing and difficult to understand if you don’t know what to look for.
So with all of that said, how can we simplify things and make investing seem a little bit more practical and understandable for the everyday person that is not a financial professional? I think we should start with answering this simple question: what is an investment?
For our conversation today, let’s keep in mind that I’m specifically talking about investing in stocks. There are all kinds of investments and some of what we talk about today can be applied to other types of investments, but I’m really just talking about stocks today.
So, finally: what is an investment? According to Merriam-Webster, an investment is the outlay of money usually for income or profit. That’s actually a pretty good general definition but let’s see how our friends over at Investopedia define investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
That’s a mouthful. Let’s focus on the last part of that Investopedia definition: an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. So, want to break that down? Good, me too.
First, what’s an asset? Well, from an accounting perspective an asset is an item that is recorded on a firm’s balance sheet which indicates ownership of something. For our purpose today, we won’t really focus on the accounting treatment of assets, but rather on the economic definition: an asset is something you own (a resource, a stock, a house, etc) with the expectation that it will provide you with a future benefit. Simple enough?
The next part of our definition that we need to talk about is the part about providing income in the future. Now, I’ve talked before about dividend stocks and why I think they are great. If you need a quick primer on that, I recommend reading about building a dividend income ladder. The basic gist is this: lots of companies make money. Some of those companies take profits and reinvest everything in the company in the hopes of generating more and more future earnings which will cause the stock price to rise, thereby benefiting their investors. Other companies reinvest a portion of their profits back into the company to drive future growth and earnings, but they also take a portion of profits and distribute them to shareholders directly, in the form of dividend payments. This is a method of directly and regularly rewarding stockholders by returns a piece of the profit pie to investors in the form of cash, rather than only in an increased stock price. This fits in with our definition of an investment providing income in the future.
That last piece about companies making money and then reinvesting in the company in order to grow earnings and drive the stock price higher also covers the final portion of our investment definition: that an asset will appreciate and be sold at a higher price for a profit. This is the classic idea about stock investing that everyone knows. Almost everyone can tell you about how to make money in the stock market: buy low, sell high. The basic idea is easy, but the successful execution of that idea can be a bit more difficult.
So there you have it, a basic working idea of what an investment is. I didn’t get into it in too much detail, but an investment is a carefully calculated move – it is nothing like a gamble or a hope. Investments are made based on a careful analysis of available information. If you are putting money into something because you heard it will be the next big thing, you’re not investing. You’re gambling. And that might be ok, but just don’t confuse investing with speculating. There’s nothing wrong with chasing unicorns now and again, as long as it doesn’t make up a large portion of your investing activity.
Later this week I’ll talk about why I think dividend investing is superior to the type of investing where you buy a stock and just wait for some appreciation in the price and then sell it for a profit.
Are there any specific investing questions that you have or that you’d like to see me cover here? I’m open to suggestions!