eBook-MillionDollarNestEgg

“Million Dollar Nest Egg” Strategy Redistribution Rights You may distribute this e-book freely, sell it, or include it as part of a package as long as it is left completely intact and unchanged, and delivered via this PDF file. --ValueStockMoves.com, LLC, Author & Publisher Million Dollar Nest Egg Strategy “Million Dollar Nest Egg” Strategy Build retirement we alth for yourself, not Wall S treet INSIDE THIS REPORT 1 2 3 4 Introduction Prologue Success Formula The Power of Compounding Interest Exploiting your advantages as an Individual Investor Diversification revisited Getting 20% annual returns Getting started 1. Introduction Imagine that, “me” with a Million Dollar Nest Egg! The top 10 percent of all wealth-holders in the U.S. own about 80 percent of the financial assets of the nation, mostly in stocks and bonds. Source: http://finance.yahoo.com/expert/article/yourlife/ So, how do the wealthy ones get there? Plain and simple: • wealthy people don’t settle for market returns • wealthy people exploit the power of compound interest to its fullest The book explains how to find and leverage higher rates of compound interest to build a larger nest egg with moderate monthly contributions. 5 6 7 8 2. Prologue Why share this valuable information? In late 1999, this author’s wife decided to leave her teaching career so she could stay at home with our two small children. The cost of child care was high and our work days were hectic to say the least. The benefit of the second income was marginal, so we decided to tighten our belt and see how we could do on my one salary. The school system notified my wife that she should decide what to do with the retirement money she had accumulated. Being a regular reader of the financial “advice” in the newspapers and business periodicals, we did what the experts suggested—we put the $ 10,933.37 into a rollover-IRA at one of the large financial services company. It was invested in an aggressive mid-cap growth mutual fund. The fund seemed well diversified, averaging 84 equities, spread over several market sectors (Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services, and Utilities). After completing the rollover forms we smiled with relief knowing that professional investment managers were going to help us grow that money for our golden years. We could go play with the kids, and not worry about it, right? As you might guess, we got into the fund just before the high point, shortly before “the bubble” burst. (See the tall peak in the graph below) Page 2 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy Figure 1. The NASDAQ Composite Index peaked in March 2000 Even as the market was dropping like a lead balloon, we listened to the “experts” and tried not to panic. In hindsight selling the mutual fund shares and keeping that money in the fund’s cash account would have been the right thing to do. But, sadly, per the experts, we never did move that money. And even now that we know we can do better with that money, we leave it there as painful reminder that no one will care for our future as much as we will. Approximately 8 years after the initial investment we logged onto the web site of that well-known financial services company to see that this part of our retirement nest egg was worth $6,612.74. Quite unemotionally it reported: -37.41% -$4,090.58. While we couldn’t blame the fund managers for the bubble, it left us with a sick feeling of not being in control of our own future. More recently having crossed that mid-life milestone we realized that even with the 401k contributions, we were not on track to meet our financial goals. History told us that maybe we shouldn’t rely just on the advice from the financial service industry and the so-called “experts” on television. Then just to seal the deal, the worst financial crisis since the Great Depression hit the U.S. and the world. Sadly and painfully, at the tail end of 2008, that investment was worth even less! The financial services industry was steering our golden years into the poor house. If you were not affected by the tech bubble, most certainly you were impacted significantly by the financial crisis of 2008. The Dow Jones Industrial Average (DJIA) is an index of supposedly the largest and most stable growth companies in the United States • On June 11, 1997 the DJIA closed at 7,575 points. Over 11 years later on November 20, 2008 the DJIA closed lower than that mark at 7,552 points. • As of November 20, 2008, the DJIA has fallen 5,712.23 points or -43% since Jan 1, 2008. The facts were right there in front of us, and for anyone else who cared to pay attention. Our own investment strategy wasn’t working, and it is no wonder when you look at the numbers. Page 3 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy We decided to educate ourselves and take control. We needed to make sure we were funding our own retirement, not the retirement of the financial services fat cats who were peddling the advice and services that was putting us on a road to a miserable retirement. Needless to say we were pleased with what we learned, and want to spread the word. The good news is that with a little effort, it is not difficult for any person to take ownership for his or her financial future. Page 4 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy 3. Success Formula Learn from the right experts One of the best contemporary books for the individual investor is “Rule #1” by Phil Town. It is one of the “must reads” for anyone wanting to take control of his or her own financial future. Not only is Mr. Town’s personal story inspiring, he has done a wonderful job of distilling the tenets that Graham, Buffet, and others successful investors have applied over and over again to gain consistent returns with almost no risk. Mr. Town explains in detail how to identify great businesses, how to value the business (and it’s not the P/E!). He goes on to explain that there are all kinds of reasons why stock prices for these businesses may be beaten down, and he shows you how to use the “tools” to see when money is moving into these stocks so you can get in at that right time. Take heed that the internet has changed the playing field dramatically for individual investors. The tools that Mr. Town presents were once available only to professional traders and are now available free on the internet. In the last section we explore other ways to find these great businesses. Use fundamental analysis to determine the true intrinsic value of a company before considering an investment. This philosophy ensures that only the highest quality companies with sustainable business models are deemed worthy. Dedicate some time each week Most people spend more time on their grocery shopping each week than they ever spend planning their own financial future. In a way, the formula and time commitment for financial success is not that different from your weekly ritual to replenish your food supply. Before you grocery shop you take inventory of what you have and what you need, you create your list, browse the products looking for quality items on sale, make the purchase, and probably revisit most of those products (in your pantry or refrigerator) each day. If you could spend just a fraction of the time you spend each week on grocery shopping managing your own financial future, you can grow a small nest egg into a million dollar or (multi-million dollar) nest egg with low risk high returns. Invest a little time along with your money and get on track for a plentiful retirement. Be a Good Consumer The actual activities involved in purchasing shares of great businesses are more aligned with shopping for a car than grocery shopping. If you are a savvy consumer, you probably do a little research before you visit the dealer or used car salesman. Most people will identify the class of vehicle to purchase, ensure it is of good quality, find out how much it is worth, and aim to purchase the vehicle for a price lower than its fair value. To investigate quality, you may research the vehicle model you want through Consumer Reports. If you are buying a used car you probably want to research its history with a report from CarFax. With only the VIN number of the car, this service can tell you the prior ownership of the vehicle, including whether or not the car was involved in any accidents. Page 5 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy How do you tell if a business is of high quality though? Your best bet for consistency is to find business with a consistent history of increasing growth with little or no debt. Next you want to educate yourself on the real value of your purchase. Returning to our car purchase example, you also are likely to look up the book value of the car you want to purchase. This information is available from several web sites such as www.kelleybluebook.com. Knowing the fair value of the car allows you to negotiate with the seller with the confidence that you will get a fair deal for yourself. But how do you tell if the stock price of a business is fairly priced, inflated, or attractively low? You need to know the intrinsic value of the company. Mr. Town’s book shows you step by step how to calculate the intrinsic value of the business. The last section of the report gives guidance on how to find the consistently growing businesses whose stock price has temporarily dipped well below its intrinsic value. Page 6 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy 4. The Power of Compound Interest One of the great things about retirement accounts is that your earnings grow tax-deferred so you can realize the full power of compound interest. But what about the rate of return on the money invested? Certainly a higher rate of return is better, but will a few percentage points have a significant impact on the growth of an investment account over time? Does it really make a difference whether your retirement account earns 6%, 8%, 10%, 15% or higher a year? Yes, it matters! In fact this is THE most important factor you need to consider. “The famous economist Milton Friedman once said that the greatest invention of man was compound interest.” Let's take a simple example: Suppose you are 40 years old and have $10,000 in an IRA account. For the purpose of this example, let's assume you will never add another dollar to that account from your own pocket. How much will that $10,000 be worth at age 65? The answer depends drastically on your rate of return. If you were getting a 6% annual return on your investment, then in 25 years that $10,000 would turn into $42,918. How would that same amount grow with a higher rate of return? At 8%, in 25 years that $10,000 would turn into $68,484. At 10%, in 25 years that $10,000 would turn into $108,347. At 15%, in 25 years that $10,000 would turn into $329,189. At 20%, in 25 years that $10,000 would turn into $953,962! Think about that. Without adding a dime to that account you could turn that $10,000 into almost 1 million dollars. Let’s be a little more conservative with our example and see what would happen if we add a small amount of money to that account each month. How would the nest egg change then? 6% interest Over 25 years $42,918 $ 77,647 $112,377 $181,835 8% interest Over 25 years $68,484 $115,564 $162,645 $256,805 10% interest Over 25 years $108,347 $172,764 $237,181 $366,016 15% interest Over 25 years $329,189 $474,420 $619,652 $910,114 20% interest Over 25 years $953,962 $1,289,068 $1,624,175 $2,294,388 Compounding growth is not linear, it’s geometric. Because you get interest on your interest, growth accelerates over time. Monthly addition $0 (no monthly contribution) $50 $100 $200 Quiz question 1: If someone offered to give you one of two checks, one Page 7 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy check made out to you for $112,377 and the other check made out to you for $1,624,175, which one would you take? Quiz question 2: (this is really question #1 using different words): Would you prefer to own: • a $10,000 investment growing at 6% interest to which you add $100/month ($112,377) OR • a $10,000 investment growing at 20% interest to which you add $100/month ($1,624,175)? Quiz question 3: If it were possible to generate that $1,624,175 for yourself, would you want to learn? Page 8 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy 5. Exploiting your advantages as an Individual Investor One of the biggest reasons individuals hand their money over to “professional” investors is because they have come to believe the aphorism "You can't beat the market". Indeed history does show that many fund managers may not be able to beat the market consistently year after year. However, an agile individual investor can do better than the market. Let’s explore the advantages of the individual investor. Fund managers control 14 trillion of the 17 trillion dollars in the market. That sounds impressive, but the downside is that fund managers cannot move money in and out of stocks quickly. It may take days or weeks for them to move into or out of a particular stock. Using the free, publicly available tools on the internet, it is possible to “see” money moving in and out of these companies. Mr. Town explains how to do this in his book Rule #1. • Advantage #1: The individual investor doesn’t have the same volume of money to move and can be more nimble. A “must read” book is Rule #1 by Phil Town. Not only is Mr. Town’s own story inspiring, he explains in very simple terms the strategies that Warren Buffet used to accumulate over $40 billion. However the goal is not just to beat the market, you want to earn a consistent level of return each year. If the market drops 3% in one year, who wants to "beat the market" by losing only 2% that year? We want to earn 15-20% on our retirement investment. It can be done. Warren Buffet has earned a 22% annual return from 1964–2005. One of the keys to his success is his famous rule number one – “Don’t lose money”. Or as Hippocrates put it, “First, do no harm”. The point seems obvious, but unless you are actively involved in managing your money it can happen. (Refer to the prologue in this report as a case in point) Most institutional investors are compelled to be “in” the market all the time. As an individual investor, you don’t have to be. It is perfectly fine to sit in a cash account waiting patiently (like a cat) to get into the right businesses at the right time. Remember rule #1 – “first do no harm”. You can’t lose money if you are sitting in cash. • Advantage#2: The individual investor doesn’t have to be “in” the market all the time. For years the high commissions charged on trades could eat into the individual investor’s profit. If you purchased $1,000 worth of stock, watched it rise 10%, and decided to sell, your gross profit appears to be $100 (10%). However if your account was charged a $20 commission to purchase, and another $20 commission to sell, your net profit is really only $60 or 6%. Of course, as the small investor invests more money, the impact of the commission fees will not be as great. But none the less, who wants to hand over part of their earnings if you don’t have too. Professional traders often have negotiated lower commission rates and are trading larger sums of money, so the impact is not as larger. (Incidentally, although you avoid commission fees by leaving your money in a mutual fund, you are still paying fees to the fund managers.) There is good news however. Page 9 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy • Advantage #3: Beginning in 2007 it is now possible for the individual investor to trade with 0$ commissions. Having no commission fees now allows even the individual investor to profit from the gentle fluctuations in the market. See section 7. Finally, some of the larger funds may avoid small cap businesses (market capitalization between $300M and $2B) because they can’t gain a sizeable position in these businesses. Getting around these restrictions often requires additional filings with the SEC, which is often a signal that results in inflating the price before the fund can make its purchase. • Advantage #4: Since the individual won’t be purchasing huge positions, the individual investor has a wider variety of businesses from which to choose. “But still, isn’t it risky for me to manage my own money?” The greater risk is not taking some responsibility for your own future. Remember, the fund managers and financial services industry will continue to make millions of dollars each year regardless of the performance of your money. The real risk can be listening to the “experts”. Reread the prologue for a real life example. Page 10 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy 6. Diversification Revisited "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing." -- Warren Buffet In column his column “To Diversify or Not to Diversify” multi millionaire investor and author Robert Kiyosaki explains that diversification is not bad for the passive investor that is satisfied with average returns. He further explains that diversification benefits the financial services industry because as it insulates them from the markets up and downs too. Losses are diluted, but so are gains. How does Warren Buffet’s, the second wealthiest person in the world approach diversification? Mr. Buffet’s holding company, Berkshire Hathaway owns many businesses outright. He has partial ownership of other businesses through stock positions. But just 10 stocks make up 85% of his share holdings. His philosophy is “focus”, not “diversification”. Contrast this against the dozens or even hundreds of stocks often held in mutual funds, or against an index fund that tracks a major crosssection of the market. (This is not to say that you shouldn’t invest in an index fund. If you are satisfied with average returns and you are comfortable knowing your future is subject to the ups and downs of the market as a whole, the index fund is a fantastic low-fee vehicle. See the Motley Fool for more advice there). But we know we can do better than that with just a little knowledge, guidance, and patience. Why not look at diversification in a new light? If you are nervous about taking control of your own money, then let your financial services institution manage the majority of your retirement funds. But take a small percentage of your money and put it in a selfdirected IRA account. We show you the how to open one with 0$ trades in the next section. Page 11 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy 7. Getting 20% Annual Returns One way to get a 20% gain in a year is to pick the right stock at the right time. You buy it and hold it through it’s up and down fluctuations, but so long as the overall trend is positive your, gain reaches 20%. If you can pick the right stock at the right time, it is possible to see even greater returns in the course of a year. But do you really have to sit through the weekly or monthly up and down trends? Is there a way to capitalize on these fluctuations rather than be held hostage to them through a strict “buy and hold” mentality. Remember rule number 1 is “first do no harm”. If your golden stock is trending in the wrong direction (we’re not talking about daily fluctuations – you need to emotionally detach yourself from daily movements), why loose that money? The answer to this question used to be, that it is not worth it to keep paying commission charges to get in and out of a stock. Large institutional investors on the other hand historically have much lower commission rates (and much larger trades), so this was much less of a factor in their decision. Now for the first time in history, the small individual investor can pay $0 commission on trades. “By the inch it’s a synch” We know this is simple math, but let’s take a look anyway. Let’s say you open a savings account that returns 5% a year with a starting balance of $100, compounded annually. In 1 year (12 months) you would have $105. Even if that 5% is compounded monthly, your rate is still 5% and you would have $105.12 at the end of the year. Try it at http://www.bankrate.com/brm/cgi-bin/savings.asp So we would need to see $120 in our account at the end of a year to realize a 20% return. We’re going to ignore the commissions charged for trades (because now we can!) Over the course of the month or even a week, is it unreasonable to have a stock gain 1.7%? Not at all. It is not uncommon for a stock to move that much in even a single week or even a single day. Let’s play this out in our example. Let’s say in January you buy a stock with your $100 it gains at least 1.7% within 4 weeks time (or less). You sell the stock and add a $1.70 to your account. You now have $101.70. Despite our earlier focus on compounding interest, let’s leave that out of this example to keep it simple. If you repeat the same set of steps with the same stock or a different stock in February, you add at least another $1.70 to your Page 12 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy account. 12 months times $1.70 is $20.40. At the end of the year the account now has $120.40. Hmm, that is a 20% annual return! Reread section 1 to recall what this could mean for your retirement lifestyle. How do you minimize risk though? What if the stock goes the other way? If you have a company that is trading below its intrinsic value and you can “see” that others (usually institutional investors) are getting into a stock, that’s when you move. If you “see” other are getting out of the stock, again that’s when you move. The tools that are now publicly available on MSN money and Yahoo finance. Phil Town’s book, Rule #1 explains how to use these tools. Page 13 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy 8. Getting Started Commission free Trading The first step to getting started is to open an IRA brokerage account. The brokerage account will allow you to purchase not only mutual funds, but also individual stocks. Trading within an IRA account will allow you to compound your gains tax-deferred. (You may also want to consider a Roth-IRA brokerage account depending on your expected tax bracket at retirement). There are plenty of on-line brokers that offer IRA accounts from which to choose. The commissions typically range from $7.95 to $19.95. The problem with the commission is that it eats into your profits, especially when you are just getting started. But there is good news. Zecco.com is an on-line brokerage site that in 2007 introduced $0.00 commissions to buy and sell stocks. How do they stay in business? Zecco makes money through 2 major revenue streams, online advertisements and interest from margin accounts. Zecco is safe and secure; trade confirmations are mailed to your home address from their clearinghouse. The advantage to you as in individual investor is that you can get into and out of a stock for no cost! You can open an account at http://www.zecco.com If you give a man a fish you feed him for a day. If you teach him how to fish, you feed him for a lifetime. “Okay, teach me to fish, and then please point me to the fish too!” Identifying businesses for your portfolio So what if you’ve read all of the books to learn about Value Investing. You are familiar with the terms such as ROIC, Equity Growth Rate, and EPS Growth Rate. So how do you find the businesses in which to invest? The best way to get started is to invest in what you know. Peter Lynch, former manager of Fidelity’s Magellan Fund is one of the most wellknown advocates of this strategy. The book is One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch and John Rothchild. Proverb: If you give a man a fish you feed him for a day. If you teach him how to fish, you feed him for a lifetime Most people would agree that it is better to learn how to fish. But once you’ve learned, wouldn’t it be nice if someone could point you to the best fishing hole? Page 14 of 15 ValueStockMoves.com, LLC Million Dollar Nest Egg Strategy Finding wonderful, undervalued businesses What happens when the businesses you know are not growing at the desired rate, or are not selling below their intrinsic value? The other option is to find a business of which you have some cursory knowledge, and take the time to learn more about the business and the industry. Ultimately you want to find companies that you understand that are both high quality and have stock prices that are well below their intrinsic value. “It takes a wise man to learn from his mistakes, but an even wiser man to learn from others." The site www.ValueStockMoves.com offers a subscription service that monitors thousands of publicly traded companies daily to find businesses that offer a strong return on capital, with consistently high EPS growth and equity growth rates and have prices that have fallen below their current and future intrinsic value. Invariably these are the companies to watch for future significant future gains! Amazingly the monthly subscription cost is less than a tank of gas and you get access to a list of businesses that meet rigorous criteria. This is by far the most valuable investment research information available for the money. This service also display common technical indicators to help you know the best time to get into these stocks so you can begin securing your future right away. www.ValueStockMoves.com Page 15 of 15 ValueStockMoves.com, LLC