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A Four-Step Retirement Plan

By John Del Vecchio

Ahhhh retirement! Most of us would love to be on a beach somewhere right now sipping a frothy Bahama Mama. But very few of us want to put in the right kind of effort to get us there. Retirement may seem way off in the distant future or even simply an unreachable destination. But, we can get there with just a few steps.
Step one is that you must know the magic formula. It’s really simple to understand, but not that easy to abide by.

Here it is:

Income – Expenses = Savings

See, it’s simple! No algebra required. The reason why it’s not easy to abide by is that we live in a culture obsessed with consumption. Consumption is 70% of the economy, after all. The average American has over 300,000 items in their homes. 300,000! All that stuff can’t even fit into our houses, and so the storage unit business is booming! We are a nation of hoarders, it seems. There are even TV shows about hoarders followed by TV shows of people buying storage lockers filled with stuff after those hoarders haven’t paid the bills.

Unfortunately, people don’t save. That’s just the cold hard truth. Statistics show that nearly 50% of Americans could not fund a $400 emergency. Scary!

So, step one is to ditch the consumption culture and save first rather than spend. One way to do this is to max out all of your retirement plans. Since I’m self-employed I have a particularly great plan that allows me to stash away both the maximum 401(k) contributions allowed and maximize profit sharing pre-tax. Then I also have my IRA.

Simply put, since this money goes from my corporate account into my retirement accounts I never see it. So, I pay myself first.

Then I save a portion of my after-tax money as well. That’s not to say I’m cheap and live like a pauper or anything like that. I’ve traveled the world and I enjoy life. But, I don’t have three stereo systems and five flat-panel TVs. Come to think of it, I don’t even own a car!

Step two is to own everything. In case you haven’t noticed from looking at my last name, I’m Italian. I think it’s in my DNA to pay cash for everything, so I use credit lightly. In the 23 years since I’ve had a credit card I have never paid one cent in interest. You don’t get rich paying someone else 15% a year to buy stuff you don’t need with money you don’t have.

Same goes for a house. Why is it good to have a tax deduction for your mortgage interest? Have you ever looked at an amortization schedule? All of the interest is billed up front. I paid off my first home in 11 years. What’s more, I lived in the same place for 15 years despite stretches where my income was more than 10 times higher than when I first bought it. I simply obeyed the magic formula. Just because I made more money didn’t mean I needed to blow it. My digs were plenty fine. Just be happy with what you have! There’s no need to keep up with the Jones’. They’re broke anyway.

Step three is to invest in yourself. Once you’ve saved more than you make and you own everything, a good way to ramp up your wealth is to invest in you! I don’t mean ripping through $100,000 on an online degree that won’t land you a job. I mean develop a skill. Do something other people don’t want to do but need.

My cousin Eldo once told me that if you want to learn how to do something, get an estimate. By that he means if someone tells you it costs $25,000 to paint your house, you’ll become quite handy with a brush in a short amount of time. That’s exactly what I did. I bought a home and renovated it for my Dad. The painters’ quotes were outrageous, and while painting a house is not as simple as filling up the roller with paint and slathering it on the walls, it’s not rocket science either.

By the time I was done, I became good enough to paint other houses. I did an analysis and determined I could make $100,000 annually working 3/4 of the time and undercut the local competition.

Of course, that’s just a fall back option. My largest gains have come from taking small bets on myself, such as developing a product or service and selling that to others. I have made gains far larger than in the public markets and I have never lost money betting on myself.
You can do it too! And it’s worth checking out what my colleague Charles has to say about collecting “automatic checks.”
One problem though is that I cannot compound this wealth. The cash flow needs to be invested elsewhere. That’s where the markets come in.

Step four is to invest in instruments that you can stick with consistently for the long-term. It may be all stocks. It may be a combination of stocks and bonds. Or, you might be an international explorer and find those markets more attractive.

Mine is a combination approach. Part of my process recognizes that I have no idea what’s going to happen in the future. Neither do you. Stocks are expensive but they could stay expensive. Interest rates are low but they can stay there. So, a portion of the portfolio should be in a few asset classes that over time should do okay if held long enough.

The second part of the approach is following trends. What goes up could continue to go up. What goes down could continue to go down. The trend is your friend until the end when it bends. So, by investing in some trends, you’re always in when the market is going up. But, you’re not always in the market. And while you may get whipped around, you most likely will be out when a huge smash occurs.

And the third part is sentiment and valuation based. When there’s blood in the streets, invest. When you attend your holiday parties and everyone is telling you how much money they made in the markets that year, call your broker the next day and reduce your positions or get out altogether.

Whatever you do, the portfolio must fit your personality. There’s four steps to investment success…

Step 1: Stick with your process.
Step 2: Stick with it through thick.
Step 3: Stick with it through thin.
Step 4: Stick with it through hell or high water.

If you can do all of that, you’ll be headed in the right direction to meeting your retirement goals. Bottoms up!

Financial Expert Forensic

 

 

 

 

This article was originally published on the Economy & Markets Blog

Wall Street’s Finest are Starting to Get Bearish. Should we be Paying Attention?

By: John Del Vecchio

Talk about mixed signals… which, of course, is itself a solid indication that things are getting harder in the market.

The pros and the eggheads are getting cautious. The average individual investor is not.

How will the tension resolve?

Well, investment banks are getting bearish. Should we accord these Masters of the Universe any special attention?

Under most circumstances, the answer is, “NO!!!”

Wall Street firms are notorious for picking their clients’ pockets. That’s how Masters of the Universe fund their fancy vacations, private jets, elite schools, and tony estates: by taking the opposite side of client trades.

But, sure, it’s interesting that Goldman Sachs recently warned investors of lower returns ahead.

And, while the “great vampire squid” isn’t calling for a nasty bear market, it is approaching stocks with caution.

Rather than just accept its conclusion, though, I’ve reviewed my own metrics to see where we are and what we should do about it.

Let’s start here: Valuations are rich.

I like to look at market valuation relative to revenue. And we’re in uncharted territory here, an all-time record.

The S&P 500 Index is priced at 2.63 times its median price-to-sales ratio. Back in the heady days of the dot-com bubble, we hit about 1.8 times. And it went as low as 0.8 times in early 2009. (It’s easy to see now, but that’s a screaming buy.)

Let’s take a look at how individual investors have allocated their portfolios. The portion dedicated to stocks isn’t at record levels. But it’s close.

At 70%, we’re (un)comfortably are in the danger zone. And cash levels are at 16%, down from 45% at the beginning of the bull market.

At the same time, consumer confidence is skyrocketing.

Professional investors, meanwhile, are 85% invested in stocks, which is the functional equivalent of “all in.” They’re way too optimistic, too.

And let’s not forget that investors of all stripes are leveraged to the gills.

OK, how about the macro picture? Well, the Federal Reserve Bank of New York recently raised its measure of the probability of a recession to 15%.

That’s still “low” – it was 40% prior to the Global Financial Crisis/Great Recession. But it’s as high as it’s been in 10 years.

“Direction” is the real key: The New York Fed’s recession meter has been trending up for a while…

When everyone’s feeling flush and willing to spend, I hide my dough in a coffee can and bury it out in the backyard. The time to get the best deals is when everyone’s fearful.

But we’re still very far from fearful.

This complacency is a function of the fact that interest rates have been so low for so long. Interest rates are rising, and we’re starting to see smaller, “growth” stocks underperform.

And we could be in for a particularly volatile earnings season, as investors look to justify their holdings in the face of updated operating and financial numbers. At the very least, companies carrying large debt loads will see some cash flow eaten up by higher interest costs.

This combination of rich equity valuations and overly optimistic sentiment has been suggesting lower stock returns ahead for years. And still we rise.

So, what to do?

I’m going to keep my eyes on one trusty indicator, the 200-day moving average.

Since 1929, returns are nearly six times greater when we’re trading above the 200-day moving average of stock prices. And stocks are barely positive when the market is below the 200-day moving average.

So, a strategy built around investing when the market is above the 200-day moving average trumps a buy-and-hold approach.

A break of the 200-day moving average could signal that it’s time to get defensive. That’s when I’ll start to cut risk.

Unless the stock market crashes, odds are extremely high we’ll cross the 200-day moving average before any nasty bear market occurs.

It’s important to recognize the risks in the market right now.

But it’s equally important to not overreact.

The 200-day moving average helps me take emotion out of the equation. It’s how I let “price” tell me when it’s time to move to the sidelines.

It’s how I sleep at night amid crazy valuations and rising volatility…

-Originally appeared in the Rich Investor.

Are Rich Investors About to Get Crushed?

By John Del Vecchio

Dear JOHN,

No, I’m not talking about you, Rich Investor readers. I’m talking about individuals with huge stock positions.

These folks are neck-deep in the market. And while that might read as “confidence” to some, to me it reads “the other shoe is going to drop.”

We’re quickly closing in on the longest bull market in history, and it’s been a great ride.

Unfortunately, with investors and speculators leaning so heavily to one side, it could get nasty when the worm turns.

Merrill Lynch recent published a report indicating that its wealthiest clients’ cash positions as a percentage of their assets under management are at a low for this cycle.

Private clients (aka rich folks) hold their lowest cash position since just before the financial crisis.

You know, the one that turned a lot of 401(k)s into 201(k)s. Then, when the market bottomed, investors were flush with cash.

At exactly the wrong time.

Given their track record, I would consider private-client cash positions to be a contrary indicator.

That means it’s time to get cautious.

Since cash positions are at lows for the cycle, that means investors are, well, fully invested.

There’s little fresh capital waiting in the wings to buy stocks and boost prices. Everyone’s loaded to the gills.

But here’s where it gets even more disconcerting…

The beta, or the “juice” of their portfolios, has revisited the peak for this cycle and is at a much higher level than just before the 2008 crash.

A beta over 1.0 means that a portfolio is likely to make disproportionately large moves relative to the market.

Back in 2008, the beta of private clients’ top 20 stock holdings stood at about 0.85. Now it’s over 1.0.

That means you can expect losses to be magnified.

Additionally, everyone owns the same stocks because of substantial inflows into market index funds.

That means there will be nowhere to hide when the reckoning comes.

Market valuations are stretched. Volatility is low. Investors are fully loaded into aggressive stock positions. Now’s not the time to have your head in the sand, even if you like the view.

Good luck out there,

As appeared in the rich investor

LaCrock of Shit

By John Del Vecchio, Editor, Hidden Profits

Last week, National Beverage (Nasdaq: FIZZ) shocked the market by announcing it received a Securities and Exchange Commission (SEC) inquiry into a couple of “unique” financial metrics the company uses to measure sales performance.

National Beverage produces LaCroix seltzer water, the favored drink of Millennials and “influencers” the world over. The stock has been on fire as fizzy water gains share on traditional soda companies.

When the government asks for information, I find it wise to give it to them.

National Beverage refused, and the stock price sprung a leak.

This isn’t some random government meddling. The company’s actions raise serious concern.

On the surface, it’s a blazing hot market – which means any sign that growth may be slowing or unable to meet future expectations could send the stock into a tailspin.

Trust me, I know of which I speak.

I’ve spent the last 20 years focused on financial statement analysis and catching aggressive management teams with their hands in the cookie jar. The No. 1 red flag is when management messes around with revenue recognition.

Why?

Well, a modern company’s entire financial model flows from revenue on down. Revenue impacts profit margins, cash flow, and the strength of the balance sheet. When business is doing well and customers are eager for more product, there’s no incentive on the part of management to plays games with the top line.

Why mess with success?

That mostly happens when there’s a bump in the road and management isn’t open and honest about it.

That’s when they make stuff up.

And, to be clear, LaCroix’s metrics are made up. The company uses a figure called “velocity per outlet” and another one called “velocity per capita” to measure sales performance.

No one outside of the company knows what to do with those metrics.

That’s a problem, and it’s nothing new.

It probably won’t surprise you that companies do it all the time. The sweet spot for sour numbers is in the reporting of non-GAAP financial performance. GAAP is the acronym for “Generally Accepted Accounting Principles – you know, the legitimate stuff.

When it comes to non-GAAP figures, there’s a lot of leeway for management to create new metrics and, in doing so, report earnings in a sparkling light.

Warren Buffett calls these metrics “earnings before the bad stuff.”

FIZZ’s numbers might not be fraudulent. But management touted them enough to pique the curiosity of the SEC. When asked about what these velocity metrics measure, the company refused to answer and called them “secretive.”

Um, OK. We’re free to call them “bullshit.”

While “velocity per outlet” may look great on paper, using it in the first place is a solid red flag.

The stock has now recovered most of its losses. But that doesn’t mean the concerns have gone flat. In the end maybe, it’s nothing.

There’s a primary rule you should follow when it comes to stocks you own. It’s especially true for high-growth companies, where expectations might be in nosebleed territory.

Here it is…

Every company is guilty until proven innocent.

That might sound cynical. But that’s two decades of looking at these kinds of numbers talking.

Management must show you – not just tell you – with its financial disclosures that everything is fine. It must demonstrate there’s no reason to be concerned, that it’s presented a true financial performance and it’s sustainable.

This requires looking beyond the press release and digging deep.

One of the best things you can do for yourself each quarter is to analyze your portfolio’s quality of revenue recognition and look for red flags.

It’s the sort of work I do each month with my Hidden Profits recommendations. We’ve closed seven positions so far, with six winners averaging 35.35%. Our top winner’s at 56.16%.

Good luck out there,

John

As originally appeared in The Rich Investor.

Not Your Grandfather’s Robot Overlord

Hey John,

Recently, I wrote about how automation is increasingly becoming a part of our lives. I’m ultimately bullish on automation in cars, not so much for my beer-drinking experience.

Computers and robots have pervaded our lives at an ever-increasing rate – not always for the good. Regardless, the concept of automating just about everything is gaining steam.

Many predict that in just a few short years, much of the work we humans do will be performed instead by “artificial intelligence.”

A 2017 report by McKinsey Global Institute forecast that half of today’s work activities could be automated by 2055.

Buzzwords always crop up around the new – “disruptive” technologies, for instance.

But a particular phrase attached to the automation trend really bothers me.

“Surplus humans”…

That’s both sad and scary. It feels like our robot overlords are just steps off scene.

As machines clock in on the factory floor, humans get pushed aside.

The problem is humans have mortgages, energy bills, health insurance, student loan debt, food to buy, and other humans to rear.

Robots don’t.

My grandfather worked for General Motors. He had three children and a stay-at-home wife. He owned a home and a car. There was food on the table. Life was not extravagant. But his family was comfortable.

He and my grandmother, both products of the Great Depression, saved their money, too. In their later years, it led to a comfortable existence. They were self-sufficient.

Those days are over for most people.

It’s possible there’s too much of good thing. You don’t have to be a card-carrying communist to think that as humans get displaced, the risk of civil unrest rises.

Automation might, in fact, make the world a much more dangerous place.

Enter Amazon.

The company recently announced an initiative to allow humans to run a service of up to 40 vehicles and deliver packages from 75 Amazon stations. A relatively small $10,000 investment is all that’s required.

I’m sure the devil is in the details.

However, if a company has “surplus vehicles,” it might make sense to work with Amazon to generate revenue when they otherwise would be sitting in the parking lot not making money.

Score one for the humans!

Back to autonomous driving…

I’m bullish on the sector, ultimately. While I wouldn’t have much confidence in the technology today, it is improving rapidly. Over the long haul, we may be much safer and more productive with self-driving vehicles.

In the upcoming issue of Hidden Profits, I highlight a hiding-in-plain-sight stock with a unique technology that’s gaining traction in the space.

In fact, I once shorted the stock and made a substantial return as it cratered. Despite that dive, it’s still very much unloved by Wall Street.

Now, I like its prospects – for very different reasons than the rationale for my bearish bet a few years ago.

It just goes to show there’s no room for emotion in investing. And, when the facts change, change your mind.

A company can be a disaster waiting to happen one day, only to emerge as a leader in a new industry the next.

(Let’s just hope “leader” doesn’t turn into “we welcome our robot overlords.”)

Good investing,

John

As Appeared In The Rich Investor

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