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5 Ways to Lose Money in Stocks

5 Ways to Lose Money in Stocks

Honestly, most people lose money in stocks. If you don’t want to fall into that statistic, you have to know what to watch out for.

Five of the most common culprits of stock market failure and how to overcome each… coming up!

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Investors make mistakes in the market all the time. That’s one of the reasons there are opportunities for us to generate out-sized returns.

In this post, we cover five of the worst and most common mistakes. (And I bet, even if you’ve see other lists like this, you haven’t heard #5 before…)

If you aren’t prepared for these, you should not have money in the market.

And if you haven’t already seen the deep dive video into the #1 mistake all investors make, you should check it out, because if you don’t avoid that huge mistake, you’ll be helpless against these five.

1. Panicking!

Massive mistake #1 is that most investors panic!

When you really think about it, on the whole, most of the time the market moves predictably. It’s relatively sideways, often with an upward slant. Because that’s only what’s happening most of the time (at least for the last several decades), that’s what we come to expect.

After a decade, we forget that markets go down too. Not in theory—I mean, we admit that it happens, obviously markets come down—but in practice, we don’t actually know or remember how that feels. We’re not prepared. And because it happens relatively rarely, we don’t know how to prepare. But when it does happen—when the market does fall—it can fall fast and hard. And even though that may only happen once every decade or so—each crash unpredictable and different than the last—that’s normal and should be expected.

Maybe you're right to panic...

Now here’s something other financial experts won’t say: I’m not going to tell you blindly that you’re wrong to panic. If you don’t know why you’re invested the way you are—if you don’t understand the reason underlying each of your investments—if you didn’t initially invest preparing specifically for the possibility of a crash… then maybe you should panic. Maybe you should pull your money out of the market.

Invest your time 

In fact, you probably should right now and invest some time in understanding why you’re invested the way that you are. Create an investment plan that is prepared for come what may.

That’s one of my goals with this blog and my YouTube channel: to give you everything you need to get there. So if that’s your goal too, I hope you'll stick around!

Also, if you want to supplement this post, you can check out the free course on this subject at Spicer Capital University. Its four hours of video content will help you overcome this huge mistake.

Calming profiting during inevitable chaos

Ideally, you want to be in a position of investment confidence as everyone else (...who isn't reading this blog or subscribed to my channel...) is panicking. You can observe the chaos with a cool head, because it is during that inevitable chaos we’re going to find some of our best opportunities to outperform long-term! (But that’s an exciting subject for another time…)

​2. Giving In to Euphoria!​

Massive mistake #2 is that most investors succumb to euphoria!

Also known as herd mentality, this one is similar to the first in that it is driven by our emotions. As we see others profiting from a market climb, it's hard to stay on the side-lines—even when we don’t understand or entirely disagree with the investment premise—a lot of people still jump in!

In fact, it’s the most disciplined investors who actually suffer more. Carl Richards, in The Behavior Gap, explains,

The terrible irony in all this is that the people who are trying the hardest to stick to their plans—the ones who hold out the longest before they finally capitulate—are the ones who end up getting hurt the worst because they buy nearest the peak. Once those hard-core holdouts give in, you know the top can’t be far away, because there is no one left to buy.

And in my mini-book, Stop Investing Like They Tell You, I posit,

The opposite is also true. As markets free-fall, it’s the “disciplined” investors who hold out the longest—and suffer the most—prior to their ultimate capitulation.

This euphoria/panic combination has knocked out countless investors.

3. Trading too Frequently

The third most common mistake is trading too frequently.

If you’re a day trader, the mistake becomes trading on emotion instead of your rules, but the negative effect on your long-term returns is the same.

I have a longer time horizon than a day trader, as most investors do. But when you become consumed by short-term fluctuations, you’re going to under-perform.

Not only will you under-perform, but you’ll lose more and more money to commissions.

Emotions strike again

Once again, your emotions work against you here. The solution is to have a plan before you enter each and every position. Based on what you know, play out every possible scenario in your head.

In his interview with Colm O’Shea, in Hedge Fund Market Wizards, Jack Schwager summarizes:

O’Shea views his trading ideas as hypotheses. [He] defines the price point that would invalidate his hypothesis before he makes a trade. And [he] then has no reluctance on liquidating that position.

Almost nobody does this.  We could do an entire series on this practice, how you can do it, and why it’s a good idea. If you’re interested, let me know in the comments.

The bottom line is that investors who trade on emotion (which happens when you don’t prepare for it ahead of time) and worry too much about short-term moves end up making a lot of bad (and expensive) decisions.

4. Getting Emotionally Attached to a Stock

The fourth big mistake is getting emotionally attached to a stock.

I’ve actually heard some industry authorities recommend you invest in companies based on your emotional attachments to them. That is the complete. opposite. of what you should do.

That is… dangerous! Emotions have no place in investing. That’s what makes it difficult, because we are emotional and instinctual creatures by nature. But as you read my posts and watch my videos or do any deeper research into the subject yourself, it becomes obvious that human emotion, in some way, is the primary force impeding most people’s investment success.

Before you make the decision to transfer your money from cash to the stock of a company, or wherever, you need to have analyzed that investment and have a plan. You need to have rules in place. And then you just need the discipline required to stick to those rules.

But if you don’t—if you decide to skip this part—if you just take a position because you like it or for some other emotion-driven reason, you probably shouldn’t be trading on your own.

And that’s okay… don’t feel like you have to.

Now, that process I just outlined of emotionally evaluating each trade before it is made is deep and more advanced. But it’s pretty imperative to lasting investment success, so you can bet we’ll dissect every aspect of that further to make it really easy for you to follow and thrive. So stay tuned!

5. Speculating Instead of Investing​

Investment mistake #5 is that most people are actually speculating when they think they’re investing.

  • If you don’t fully understand why you’re invested in a certain way, you might be a speculator.
  • If you don’t know when you plan to get out—if you’re just “playing it by ear,” you might be a speculator.
  • If you heard a good idea, didn’t have time to research it, but took a position just so you don’t miss anything… you might be a speculator.
  • If you just liked the prospects of a company’s product, so you bought some shares, you might be a speculator.

If you haven’t completed your own analysis of the company’s financials or you have no basis for any assessment of a fair value​, you are speculating!

Far too many individual stockholders in the market have never gone through any sort of formal analytical process to come to an educated decision about the investment they’re considering. If that’s the case, at best, you’re speculating; at worst, you’re gambling. Both can be disastrous long-term.

I put together a short video series explaining the differences between investing, trading, speculating, and gambling. Especially if you hold individual stocks, or would like to, you should check that out.

And if you’d like to learn more about that analytical process, I’m building a playlist for you on fundamental analysis. Stay tuned, cause we’ll definitely be covering that more over time.

So Many Potential Mistakes

Now, I want to hear from you. We just covered five of countless mistakes new investors make. What are some others you’ve seen or experienced yourself?

I hope this has been helpful for you as you start your journey to building your rapidly-growing, highly-diversified net worth. If so, be sure and stick around, because there is so much more to learn!

What Is PE Ratio?

What Is PE Ratio?

One of the fundamental ways to value and compare stocks is with the PE, or Price-to-Earnings, Ratio. If you plan to do anything in the investing world—even if that’s just spectating or watching CNBC—you’re gonna feel lost if you don’t understand this ratio.

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Because a company’s share price does not in any way reflect its value, it’s not helpful at all in our effort to value and compare companies. Apple, despite its $150 share price, is still worth $150B more than Amazon, with its $1,500 share price.

Price-to-Earnings Ratio

The Price-to-Earnings Ratio provides us a simple way to assess the value we’re actually getting when we purchase a share. It measures how much you’re paying for every dollar of a earnings.

You can use the PE ratio to gauge how similar companies in similar industry sectors compare to each other.

The Variables

The PE ratio is made up of two variables: a company stock’s Price Per Share, or PPS, and a company’s Earnings Per Share, or EPS.

Price Per Share is easy to see. It’s simply the share price at which a company’s stock is currently trading.

Earnings Per Share

EPS, on the other hand, requires a little calculation. It’s the company’s profit divided by the number of shares outstanding: the amount of profit that could be attributed to each of those individual shares you’re considering purchasing.

It's the kind of calculation you would do with any investment: I’m going to buy this house for $100,000, which is renting for $5,000 per year—that would be your Earnings Per House.

There's obviously a lot more that goes into your decision, but when you’re considering an investment, you want to know how much its producing. Earnings Per Share gives us a quick and easy (albeit incomplete) glimpse at this.

Thus, when you’re comparing the price of a share to the earnings per share—in other words, when you evaluate the PE Ratio—you learn how much investors are willing to pay for every dollar of earnings, or how much you would have to pay for each dollar of earnings.

Examples

At the time of this recording, Google (or Alphabet’s) shares are trading around $1,000 per share. Its Net Income over the last 12 months was just under $17B and there are about 700MM total shares outstanding. That means they earned around $24 per share ($17B/700MM shares). With that information, investors have been willing to pay the current $1,000 price per share; they’re willing to pay around $42 (Price/EPS or $1,000/$24) for every dollar of earnings. You could say Google has a PE Ratio of 42.

You can compare that to the fact that investors are only willing to pay around $16 for every dollar of earnings from Apple: Apple’s PE Ratio is 16.

Netflix’s is a little over 200. Amazon is over 250.

You might also want to use this number to compare a company to its industry or sector. The technology sector, for example, right now has an average PE Ratio of just under 43.

Or you could look at the market as a whole. For example, you could use the Standard & Poor’s 500 as a proxy for large United States companies. It’s PE Ratio right now is around 25.

How to use PE ratios in research

From these numbers, it would appear investors are expecting much more future bottomline growth from Amazon than Apple. If you have reason to disagree—if you  believe Apple will grow just as much or more than its competitors—perhaps you have the start of an investment thesis that Apple is undervalued, and thus would make a good investment for your dollars.

Or, on the other side, maybe you think investors are overestimating Amazon’s future,  and you have a case for its stock being overvalued.

Neither one of those reflects my personal opinion. They just serve as an example of how PE can offer a down-and-dirty, side-by-side industry comparison—and how it could help steer the direction of your research.

Where PE falls short

So, depending on how you compare it, a company could appear over-, under-, or appropriately valued based exclusively on its Price-to-Earnings Ratio. But obviously, there is much more to a company than its earnings over the last 12 months.

For example, as I just mentioned, this calculation in no way accounts for expected future growth, which is likely the reason Amazon consistently maintains a high ratio. On top of that, it also doesn’t accurately account for a company’s current financial position (considering important factors like debt and cash reserves). Many investors prefer to use a metric known as Enterprise Value to account for that as well. Additionally, consider the fact that net income does not accurately account for a company’s current operating performance, like the metrics EBIT or EBITDA might.

If you missed either of the videos I did explaining those subjects, be sure to check them out.

Take-away

Despite its shortcomings, you’ll still hear PE Ratios referenced all the time in the investing world. Its quick-and-easy calculation offers a convenient metric for initial comparison and cause for further research and analysis. But you should stop there. Definitely do not use a company’s PE Ratio as the primary driver for your investment idea. Try to figure out what else is going on with the company. Is there a reason for any discrepancies you may have discovered?

I hope you find this information helpful on your path to building your rapidly-growing, highly-diversified net worth. I really do hope so, because that’s my goal. If so, stay tuned, because I have a whole lot more in the works for you!

Two Specific Events that Create 100%+ Investment Upside Opportunities

Joel Greenblatt’s hedge fund was open to the public for 10 years. Its average annual return was over 50%. In his brilliant book, You Can Be A Stock Market Genius, he reveals where he found and how he selected the stocks that allowed him to be so consistently successful.

Two of his strategies are particularly interesting and super easy to understand and implement. I can’t wait for you to get started…

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 In his book, Greenblatt explores mergers, rights offerings, restructurings, and several other very specific occurrences in the world of business and stocks that create amazing opportunities for the disciplined, research-focused investor. And if that sounds like something you are interested in—and since you are here, reading this post, I can only assume it is—then you should probably get yourself a copy.

Cause these opportunities aren’t going away any time soon; you’ll see what I mean as we dive in.

My two favorites from the book are spin-offs and bankruptcies.

Spin-offs

Sometimes a business grows large and diversified enough that it makes sense to split up. This could be because the business made some bad investments and wants a way to offload them, or it could be because part of the company is so different from the principle line of business that both parts would be better off on their own.

Examples include when Phillip Morris spun off of Altria in 2008; Chipotle from McDonalds in 2013, and PayPal from Ebay in 2015. What started as a small part of a much larger company had grown to the point that it couldn’t fully thrive unless it was allowed to go off on its own.

What creates the opportunity?

When something like this happens, there is some inevitable (and understandable) confusion in the investment world. If the spun-off entity is small enough, there is often indiscriminate selling from large holders of the stock.

Indiscriminate selling is when investors sell their shares of a company for reasons other than those based on some sort of research or analysis.

This can cause the price per share to plummet, which causes other investors who were on the fence about the newly formed entity to also jump ship, perpetuating the problem.

Why would investors sell indiscriminately?

There are several reasons this happens, and those reasons aren’t going away. Think about this from the perspective of the manager of a large mutual or pension fund.

  • You and your team invested in the original company after much research and due diligence. You have specific, calculated reasons for investing in the larger company. But the new spin-off was just a small part of that original company. It may not have even come up in your research. As a disciplined fund manager, this doesn’t fit into your calculated approach. So you just sell.
  • Or what if your fund specializes in a specific industry, and the newly formed entity is actually in a very different industry—like if a car company spins off its credit arm into a new independent financial firm. It doesn’t make sense at all for you to hold on. So you just sell.
  • Or what if your fund has rules—as many large funds do—about the size of the companies in which you can invest. By your own rules, you may not be allowed to continue to hold the smaller spun-off company. So you just sell.

Regardless of the fundamentals, you don’t care. It doesn’t matter. You. Just. Sell.

If many big funds with their large share count exit, this drives prices down, creating opportunities for you and me.

How well have spin-offs performed in the past?

Greenblatt sites a relatively old statistic which is still interesting to consider. He says, “One study completed at Penn State, covering a 25 year period ending in 1988, found that stocks of spin-off companies outperformed their industry peers and the Standard & Poor’s 500 by about 10% per year in their first three years of independence.”

Now, of course, this is just what happened in history, and doesn’t predict what will happen in the future. But it gives you some useful perspective on the potential found within this relatively small pool of stocks.

The take-away

To be clear, I definitely don’t recommend you just buy up every single spin-off company without further consideration. As always, due diligence and analytical research are still recommended, and probably required, for long-term success.

But understanding spin-offs and how they work in the market provides a compelling starting point for your undervalued-stock discovery process.

Bankruptcies

Now let’s talk about bankruptcies.

Imagine you’re researching a company that appears cheap. You’re trying to figure out why, and then you find it: it went through bankruptcy. How does that make you feel?

For most, that’s the end of their research. They have no interest in dealing with a company with a checkered past.

Our opportunity

But this is a perfect example of the type of opportunity Warren Buffett was referring to when he said, "Be fearful when others are greedy and greedy when others are fearful."

Again, I’m not suggesting you buy up every company with a past bankruptcy. But if your detailed analysis suggests that the company is undervalued (based on its merits and prospects today), it may be other people’s fear suppressing the price.

Others’ fear can be our opportunity.

What creates the opportunity?

Greenblatt mentions four reasons a restructured yet solid company might see depressed valuations.

  • Again, indiscriminate selling, this time from banks, bondholders, and previous creditors. He says, "…there is ample reason to believe that the new holders of the common stock are not interested in being long-term shareholders. Due to an unfortunate set of circumstances, these former creditors got stuck with an unwanted investment. Consequently, it makes sense that they would be anxious and willing sellers."
  • Next, you have what are called vulture investors. They will occasionally invest in a bankrupt company. They’re looking for a surge in share price after the restructuring is complete, which often happens. Then they leave, pushing the price down.
  • Then, think about Wall Street. Analysts there don’t get paid to sell post-bankruptcy stocks like they do with IPOs. Greenblatt says, "Between the ephemeral shareholder base and the lack of Wall Street attention, it may take quite a while for the price of a stock issued through the bankruptcy process to accurately reflect a company's prospects."
  • Finally, a low-market-value stock may take time to attract the attention of big market players, as they likely could not take a big enough position to justify the research time and expense. In this video, we discuss the opportunity this fact alone creates for you and me across all low-market-value stocks. Greenblatt reiterates, "These situations are truly orphaned and may trade cheaply for some time before they are discovered."

My personal experience

I chronicled my first experience with a the stock of a previously-bankrupt company in an article I wrote for Seeking Alpha, published August 10th, 2016. With shares trading around $4.30, I presented this very case. I was able to identify the indiscriminate selling that was taking place by the six banks who were left holding roughly 7% of the shares outstanding. They hadn’t been allowed to sell their shares until earlier that year (several years after the company emerged from bankruptcy). Obviously, they didn’t really want to be there. Think about the downward pressure with that massive sell-off looming.

The company’s fundamentals were still sound, despite its low share price. So my thesis was that one of the main reasons for this suppressed price was the banks. I suspected that through abnormally large trading volume, you’d be able to see when they were exiting their positions, thus removing that pressure.

And that’s exactly what happened. Today, as of this recording, a year and a half later, it trades around $15.

How You Can Use This

When you understand what’s going on behind the scenes—specifically the psychology driving other market players—you’ll begin to see these opportunities. I’m not saying they’re common, and I’m not saying you (or I) will be right every time. I’m saying they exist and will continue to exist.

The first step in being able to identify them is an intimate understanding of those occurrences, so you know what to watch for.

A great way for you to do that—and where I first began developing my understanding of special situations like these—is through Greenblatt’s book directly. If these strategies interest you, I’d highly recommend it.

The other way to learn more about these strategies is for me to continue making videos and writing posts about them. What do you think? Would you like to dive deeper into either of these strategies? Would you like to be introduced to more? I want this blog to be as helpful for you as possible, so be sure to let me know in the comments.

If you get to where you’re successfully implementing these strategies, that’s one of the ways you can build your rapidly-growing, highly-diversified net worth. So if you’d like to continue on that path, stay tuned!

What Is EBIT & EBITDA?

What is EBIT & EBITDA?

What is EBIT? What is EBITDA? Which is better to use and when? Why can’t I just use Net Income? All the answers... coming up!

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Net Income Is Not Enough

When you’re trying to figure out how profitable a company is, you might be tempted to just look at the bottom of its income statement, its Net Income. Logical—but that number is not super helpful when attempting to value a company. The reason for that is because there are several “expenses” that come out before the bottom line that aren’t truly representative of the company’s current performance.

EBIT

A better place, where many successful investors look, is a little higher up on the statement. It’s called EBIT, or Earnings Before Interest and Taxes. This is Net Income exclusive of the company’s interest expense and taxes.

The reason that’s valuable is because neither of these exclusions represent the company’s current performance. The interest they pay has to do with past financing terms. And the taxes a company pays vary based on geography (...and the mad-tax skills of their accountants). So removing both of those offers a clearer picture of current income.

EBITDA

Wall Street likes to stretch this idea even further with EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization.

An argument can be made for not including a company’s depreciation expenses because they represent the historical investment decisions a company has made, not current performance. Especially for capital-intensive industries—like telecom or oil and gas—this metric could prove more useful.

Buffett's take on EBITDA

Even though EBITDA is an industry norm and commonly used, a counterpoint from Warren Buffett should be considered. He plainly observes, "In respect to EBITDA: depreciation is an expense; it's the worst kind of expense." [emphasis added]

So, if you choose to use EBITDA for your analysis (as many successful investors do), to respect Buffett’s point, be sure to at least specifically evaluate and compare the depreciation expenses of the company you’re researching, because it does still have a major impact.

EBIT > Net Income

So now you know: Net Income, we love you, but you’re not giving us the full picture. It’s not until you add back the taxes and interest (and maybe the depreciation) that you can really use these numbers (and ratios derived from these numbers) to compare different companies.

We’ll definitely be exploring some of those ratios and additional metrics you can use as you build your rapidly-growing, highly-diversified net worth, so stay tuned!

What Is Enterprise Value?

What is Enterprise Value?

What is enterprise value? Why is it used by so many successful investors? And what are all the parts of the equation that make up this important metric? All the answers… coming up!

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Market Capitalization

The most straightforward way to value a company is by multiplying its share price by the total number of shares outstanding. This gives you (what is called) a company’s Market Capitalization, or Market Cap for short. Essentially, this tells you how much it would cost to buy every share of a company—to own 100% of that company.

This simple metric is what’s used when stocks are divided up by their size. For example, the Standard & Poor’s 500 (S&P 500) is supposed to represent 500 of the largest United States companies as measured by Market Cap.

Why EV > Market Cap

But for a successful investor—trying to fully understand the value of a company, not just what all the shares are worth, but the actual complete picture of a company’s value as an investment—this metric is not enough. (And I hope that statement makes more sense to you in just a second.) Because of this, more often than not those successful investors use Enterprise Value, or EV.

Enterprise Value more accurately represents the net impact—the bottom-line effect as an investment—on the portfolio of a potential acquirer who might take full ownership of a company. 

So… if you’re buying shares in a company (you know, actually becoming part owner in that company), knowing what you would be out-of-pocket if you could just take over and purchase the whole entire thing (not a bad perspective—putting yourself in the shoes of a potential acquirer), that’s valuable information, right? It’s at least a more realistic representation than Market Cap of the value the market currently assigns to the company in question.

The Variables

Five variables go into this calculation, and when you think about each one, it’s obvious why EV is more comprehensive and useful than the traditional Market Cap.

Market cap

You start where we’ve already started, with the company’s Market Cap—what you would have to pay to buy 100% of the shares outstanding, becoming 100% owner the company.

You just bought the entire company, so that will increase your assets (right?)… but that’s not the end of it. That’s not the only effect this acquisition will have on your financial situation.

Plus total debt

If you’re now 100% owner of the company, you also now own 100% of its debts—both long- and short-term. So you need to factor that in. You can do that by adding it all to the Market Cap. Pretend as though, upon purchase, you’re also going to pay off every single creditor. (You don’t have to do that, but you will owe them all money at some point… so it needs to be factored in.)

Minus total cash

On the other hand, what if the company comes with some cash or cash equivalents? Well, that helps. That’ll work in your favor, so you can subtract that amount from the total amount you’re essentially paying for this company. Sometimes, this can be significant. Apple, for example, as of this recording, has well over $250B in cash reserves! Obviously, when you’re thinking about your Apple takeover bid (or just your own valuation of the company), this should factor in.

That’s most of your Enterprise Value calculation: Market Cap + Total Debt - Cash.

Plus other ownership interests

Now, I said there were five factors. There are. The other two are usually pretty small, if they even exist at all for your company in question.

At times, there are Minority Interests and/or Preferred Shareholders out there. These are other people or entities with claims to the company. Of course, then, they should be added in as well. They, too, are not considered in your basic Market Cap calculation, but obviously represent some value.

A Clearer Picture of the Actual Value

So there you have it: a simple way to gain a clearer picture of the actual value of a company. Market Cap + Minority Interest + Preferred Shares + Total Debt - Cash = Enterprise Value. And Enterprise Value comes up a lot in the ratios used to compare and assess the fair value of different companies.

We’ll be exploring some of those ratios, as well as other important metrics as we continue to build out your rapidly-growing, highly-diversified net worth, so stay tuned!

Emergency Funds: 3 Things Most “Experts” Get Wrong

When you critically consider the advice most people offer about emergency funds, three glaring flaws stand out.

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If you’ve been around me for any amount of time, you know that I’m not a fan of taking things at face value. Just because every “expert” regurgitates the same advice, that doesn’t make it right. And even with a concept as simple as an emergency fund… they’re failing you.

E-funds 101

In case you’re not familiar with the concept, your emergency fund is that money you have (or should have) saved in case of emergency—job loss, debilitating illness, tree falls on your home—you know, money that is there when you need it, so you don’t have to tap into your brokerage or retirement accounts, or worse, go into debt (...or even worse, go into more debt).

This should be one of the first steps in your financial planning process. And there are plenty of fine resources out there to help you find strategies to build your own emergency fund (for example, check out this video from The Financial Diet: https://youtu.be/L3EwcjzHiqY).

I’m going to assume that you’re familiar with the basics of what most experts recommend when it comes to your emergency fund, because for this video, I want to focus on what’s wrong with that traditional advice.

What's wrong with traditional advice

So far, I’ve identified three majors flaws: flaws that, when realized, will make you less confident and leave you feeling (I’m sorry, but) less secure. So if you don’t want to have to deal with that reality and the stress and pressure of finding a better way, you should probably stop watching right here.

#1. 3-6 Months Is Probably Not Enough

Tidy little rules like that—you know, like if your household has a single income you need exactly six months' worth of living expenses, and if you’re dual income,  you only need three—that can be nice. Our brains like rules of thumb like that; they don’t have to work as hard. But it's just that—a rule of thumb—yet it’s often preached as dogma.

Think about where that rule originated: it comes from the average amount of time people are out of work after losing their job. But there are a whole bunch of people who are out of a job longer than that. And, that’s just one of the potential emergencies with which this “rainy day” fund is supposed to help you.

Fixing this isn’t too hard, but it will require a little work—a little brain power—on your part.

How to overcome

You need to understand your monthly expenses. Itemize them. Actually write them down. When they fluctuate each month—like groceries or gas—assume the high end of that fluctuation range. Then, think about what you must have and what you could give up.

The YouTuber Beat the Bush does a great job at critically approaching this one point specifically, walking you through an itemized budget. You might want to check out his video here: https://www.youtube.com/watch?v=_MO28oMcgFo.

Now, think about how many months you would need funded so  you can sleep well at night. This number will not be the same for everyone. And it’s not just a matter of your comfort level or risk tolerance; consider how difficult it would be to replace your income. 

  • Is it difficult to find jobs in your industry right now? 
  • Or are you in high demand?
  • What options would you have?
  • What else are you qualified to do?
  • Is some of your income passive and reliable?
  • What kind of insurance do you have? Are you covered if you couldn’t work for an extended period of time due to illness?
  • Do you have something that would pay out in that situation?
  • If so, how much would it pay out compared to what you need?
  • How long is the waiting period before it starts paying out?

That’s a lot to consider, and unfortunately, that’s not an exhaustive list. But hopefully you see where I’m coming from and can replicate the mental exercise for yourself.

Honestly, after all that, I think most people would feel more comfortable with 12-24 months of emergency fund savings. I don’t mean to suggest a new rule of thumb for you to follow. I just want to illustrate how devastatingly off a three-month e-fund could be!

Throw out your rules. For this to work, you have to actually think about it! The number you come up with has to mean something to you.

If you think other people could benefit from this process,  please take a moment right now to share this post (or the video: https://youtu.be/HadiICSPJZI) with them. Help those you care about better protect themselves and their families.

#2. Don’t Keep It All In Banks

Just think about this. Practically, wouldn’t you feel more comfortable knowing your emergency fund is actually in a physical location—a secure place where you put it?

Maybe under your mattress is a little cliche, but how about a safe?

At least some of it? Wouldn’t you feel more comfortable with that? Knowing you could just be ready for any emergency without having to first stop by the bank…?

And isn’t that the point? Peace of mind.

Maybe you don’t see where I’m coming from yet. Maybe you can’t imagine a time when this would actually be a problem. I mean, during personal emergencies, sure, banks would be fine… (I’d still like to have it right there, but a bank would suffice.)

But is your emergency fund only for personal emergencies? Sometimes I feel like that’s how most people treat it. And if that’s all you need for peace of mind, fine.

What about a more widespread emergency? One where people panic—where en masse they make a run on the banks? They want their money; they’d feel more comfortable, right now for whatever reason, actually having it in their pocket.

Now, I’m not a doomsayer; I’m not making predictions here. But this can happen ...this has happened.

When this happened in the US during the Great Depression, banks made it difficult for you to actually access your funds. (https://www.npr.org/sections/money/2012/06/12/154719542/three-ways-to-stop-a-bank-run)

When it's in the bank, it's not within your control

Today, of course, with the internet, that would be different. But my point is, when it’s in the bank, it’s not entirely within your control. And when you understand how our banking system actually works with fractional reserves (where they only have to keep 10% of the money you deposit and can loan out the rest), you realize that your money actually isn’t physically  accessible to the bank either! (But that’s a rant for another day…)

To patch up our problem in 1933, the US government started insuring bank deposits with the FDIC. Since then, as that insurance amount has gone up dramatically over the decades, the US hasn’t  experienced any major problems like that.

If you think that system is sustainable (in case you want an update on how the US is doing, you can always check in on the US Debt Clock—again, this is a much deeper topic for another time), then maybe you don’t need to worry about this point. For me (and you can call me crazy), I just feel a little more secure when I have direct access to at least some of it.

It's worse in other countries

If you’re from another country, however, this point may become even more important. Most recently, Greece and Spain have been experiencing these types of bank runs. When people stop trusting in their government's ability to fulfill its obligations, those guarantees have less value.

Economist Charles Wyplosz said, "The problem we have today is that the Spanish guarantee is looked upon by Spaniards as maybe yes, maybe no. That's not the kind of risk you like to take with your money."

Whether it’s a household emergency or widespread chaos, I sleep better at night knowing that I at least have access to some cash, come what may.

#3. One Currency Is Not Enough

(I’m getting crazier here, I know it, but to be totally honest with you—and that's always my goal here—for me to have a complete sense of security during an emergency, one currency is just not enough!)

With the United States government’s unprecedented and constantly growing debt, spending, and deficit levels, I can’t say with 100% surety what our future holds. I do, personally, believe the trajectory to be unsustainable (again, topic for another time), but that doesn’t mean it couldn’t be corrected or improved. I’m not saying some sort of danger is imminent or even necessarily likely, that’s not the point here; I’m just saying that I don’t know what the future holds.

(And if you think I’m crazy... let me know in the comments. I probably am a little bit!)

So again, like the last point but maybe even more so here, if you’re totally sure that nothing will happen, that there’s no chance your country has any major financial problems, then maybe you can disregard this one.

But if even a tiny part of you is uneasy about the current state of affairs, then this might just resonate with you. Remember, a big part of an emergency fund is the feeling of financial security it can bring.

So if you’re going for PRO E-Fund Status… you’ll need to tackle this concern as well.

2 reasons (and how) to diversify your emergency fund

There are a couple reasons I feel more comfortable diversifying my emergency fund, especially that physical portion I keep on hand.

  1. At the most basic level: sometimes a currency loses significant purchasing power compared to the rest of the world. So, because I’m human and can’t predict the fate of any one currency, I would feel much more comfortable if my emergency fund were protected from that sort of devaluation.
  2. And, if by some cruel twist of fate, one of those doomsday scenarios actually plays out some day, I would feel more comfortable having a flexible emergency fund—one that also contains some foreign currencies, maybe some precious metals, maybe even a little cryptocurrency...

You Never Know What Might Happen

That’s the entire point of an emergency fund: that despite the reality that the unexpected can (does) happen—whether it is personal or mass chaos—you have peace of mind (at least with regards to your financial situation).

So, if you haven’t already, seriously think about it. Do you truly feel prepared, come what may, with only three (or even six) months' worth of living expenses denominated in your country’s currency and held in your country’s banks?

I want to know what you’re going to do about it. What change will you make to your emergency fund so it actually serves its purpose and gives you true peace of mind? Even a small step in the right direction can have a significant impact on your financial future. Let me know in the comments.

Top Stock Pick – May 2018

Click the image below and find out what stock Spicer Capital has chosen for our Top Stock Pick for the month of May ! 

Rather read? Check out the video transcript below! 

Our top stock pick this month has incredible growth potential is in a recovering and rapidly expanding industry. Based on our calculations is currently extremely undervalued with an

over 100 percent upside potential. Has limited downside risk in part due to its healthy balance sheet and as of this recording pays a 7 percent dividend. All the details coming up. 

I am thrilled to share our research with you today.

At Spicer capital we are dedicated to helping you build your rapidly growing highly diversified net worth one video at a time and one of the ways we do that for ourselves and our clients is through individual stock selection. I'll be

sharing our top ideas right here each month so if you haven't already consider subscribing.

I first have to disclose and want to disclose that as of this recording we are long this stock that is to say we own shares in this company. I own it in my own portfolio and we hold it in most of our clients portfolios as

well. The information I share with you in this video should not be taken as a recommendation that you buy shares yourself. I do not know your personal situation and if this stock would make sense for you specifically and as you

know from this video I don't want you to invest based solely on any idea. I am simply presenting you with our research that's a good place for you to kick off your own. As long as we're on the same page there let's jump into the stock. 

Hi-Crush Partners HC LP.

It supports the oil and gas industry which suffered through a bear market in 2015 and 2016 and with that fresh in their minds. A lot of investors are hesitant to jump back in. Most importantly Hi-Crush provides sand used in the oil fracking process. It's not my favorite sub-sector within the oil industry (Homer Simpson Quote) "you don't know anything about hydraulic fracturing you've just been brainwashed by liberal TV shows who use fracking as an easy bad guy but it could save this country." but the opportunity is undeniable. Now, fracking sand may not mean anything to you but the demand for sand has been increasing considerably. Sonny Randhawa a director and Senior Research Analyst at seaport Global Securities expects frac sand demand to increase to 100 million tons in 2018 and 115 million tons in 2019 and that's up from 82 million tons in 2017 and Hi-Crush is strategically situated to service the major extraction sites in the continental United States. On top of that last year they completed construction on their Kermit facility the first supplier of in Basin sand in the coveted Permian Basin this means that they can put the sand and directly onto trucks from within the basin itself they don't have to rely on trains to get it there and that's recently been a problem in the frac sand industry. Well this plan at least won't be affected by any rail delays and about 80 percent of the demand inside the Permian is within a 50-mile radius of Hi-Crushes facilities. 

Now I could go on with the other basins the other extraction sites and the rest of the infrastructure the assets that they have to take advantage of this demand increase but suffice it to say they are well positioned for this increase in demand including that huge first mover advantage with their Kermit facility. Hi-Crush has a market cap of around 1 billion dollars and if you haven't seen our video explaining why some amazing investment opportunities exist in the world of small caps you should check that out video that'll help provide you context for many of the ideas you'll see here on this channel. 

So what about Hi-Crushes competitors. The closest two companies in the industry are US Silica Holdings that's SLCA which has a market cap of around 2 billion and Fairmont Santrol  Holdings FMSA around 1 billion dollar market cap. Hi-Crush has a price to earnings ratio or p/e ratio of around 12 so for every dollar of earnings investors pay roughly $12. Silica's PE is around 15 Fairmont around 21 and the industry is around 18 so by that measure Hi-Crush  is undervalued. It's price-to-book or PB ratio is 1.3 so investors are paying around 1.3 times the value of Hi-Crushes assets Silica's PB is 1.6 Fairmounts is 3.6 but the industry as a whole is right there around 1.3. Hi-Crush currently has a dividend of 80 cents per share which at the time of this recording represents a dividend yield of 7% and that's a big deal compared to its competitors. Because Silica's yield is only around 1% and Fairmont doesn't even have a dividend at this point. Hi-Crush appears to operate more efficiently than its competitors. For example: its CEOs compensation is around 1.6 millioncompared to 4.7 million for Silica’s. Also Hi-Crush only has around 100 employees compared to the 2200 of Silica and the 1,000 of Fairmount.

Hi-Crush insiders and this part is important they own about 14% of the company. You can compare that to Fairmont with about 9% which is fine Silica where they own less than 1%. Remember the insiders are the ones who really know what's going on and so it's a good sign if they own some of the company. 

Now here's one of my favorite parts. Some fuel for our potential growth fire. Institutions only own about 35% of Hi-Crush shares and it's not that they're averse to the industry with Silica for example institutions owned over 100 percent of the shares I'd say they like the industry even Fairmont which is pretty much the same size has almost 90 percent institutional ownership. Fairmounts quite a bit older. Hi-Crush was formed in 2012 but whatever the reason Hi-Crush only has about 35% institutional ownership and if you remember from that video I referenced before about why we look at small and micro cap companies as institutions are able to start piling into a promising

growing company like Hi-Crush their indiscriminate demand can cause prices to surge.

Now when we first entered our positions and mentioned Hi-Crush partners to the insiders through our exclusive Patreon content we were able to get in at $11.04 that makes our dividend yield about seven point two five percent. I'm not a short-term investor so the fact that as of this reporting the stock is up three percent since we got in it doesn't mean much to me if it were down by that same amount I would still be releasing this video my time horizon is a little bit longer I don't make any assumptions about when the market will come to their senses on a particular

issue like this I'm expecting the market to realize the company's fair value maybe in a year or so again I believe to be over 100 percent higher than where it is today but the longer it takes for the market to do that barring any industry disruptions I believe the case for Hi-Crush will become even stronger and I will likely be if that happens I will likely be increasing my positions which of course would be updated in real time for all of you Patreon insiders.

I mentioned industry disruptions I believe that is the major risk here as with all investments there are several unknowables and a big one for this industry is the supply of oil. Decisions by individual governments or by OPEC could once again negatively affect oil prices for everyone and consequently the oil industry everywhere including here and including the companies that support the oil industry that's a big reason that I personally only invest in a company in this industry if it has a healthy balance sheet and Hi-Crush does. It has a debt-to-equity level below 25% compared to silica with 36.7% which is still fine and Fairmont with 235 percent. It’s earnings are about eight point five times its interest payments and its annual operating cash flow is almost 50 percent of its total debt all of those contribute to a healthy and favorable balance sheet should anything happen they should be okay relative to their competitors. 

So by now you know that the industry is growing rapidly that Hi-Crush is uniquely situated to capitalize on that growth that Hi-Crush compares favorably to its competitors in that space that there is a potential catalyst with the current lack of institutional ownership. That you get paid to wait with the six or seven percent dividend depending on when you're getting in and now you know why I believe Hi-crush will fare better should something unexpected significant and negative happen. 

Even if it wasn't undervalued today for all of those reasons this would be my pick within the industry. But based on our calculations which should just serve as a guide not a price target we believe the current fair value is over $24 per share today it trades around eleven to twelve dollars per share now we took the company's expected future cash flows as well as our reasonable conservative projections and assigned them a discounted cash flow value what would be a reasonable price today for those income streams going forward and when we took that total resulting value and divided it by the number of shares that's where we came up with a number of slightly over $24 per share.

Again this is not a price target. I'm not a fan of targets I'm not trying to predict the future but as the industry and this company stand today we would call $24 dollars a share fair. Somewhere around that realm would be fair.

Obviously between now and the time the market realizes and accepts this that fair value number will change as the underlying variables in the calculation inevitably change. 

If you're looking for ongoing analysis and updates from us and our research then you should check out our Patreon pageAs an insider that's where we answer every single question about the stock and our research and provide any updates to a portfolio or general expectations that have. Or if you want to follow everything to a lesser degree then you can follow us on twitter @SpicerCapital

Now I hope this has been helpful for you I hope it's given you an idea or some ideas again this is not meant to be specific investment advice. I encourage you to do your own research and I'd love to hear about it in the comments below let me know what what you think let me know what your research says or what you think of this research that we've done that's how we can really make the best decisions for our portfolios and I think together that's the best way to do that so definitely leave your comments and read other people's comments and let's start that conversation so that we can find the best investment opportunities. 

We'll put out at least one of these micro small have ideas every month for free here on YouTube to help you on your path to building your rapidly growing highly diverse by network. So if you're new here are subscribing and hitting that notification bell so that you get all our research in a timely manner for those of you looking for more ideas or even our specific trades you're the ones who should check out the Patreon page

I wish you all the best, take care.


The #1 Mistake Investors Make

The #1 Mistake Investors Make

Every investor makes this devastating mistake at some point (usually early) in their investing lives. Not only can it be difficult to recover from, for most, it results in a scarring conclusion to their adventure into the otherwise potentially-lucrative world of investing.

How I Learned My Lesson

On January 1st, 2016, I went off on my own. I was officially investing full time. Before that point, when there was no pressure, when stock research was just something I would do in my spare time, I’d been successful at identifying high-quality, undervalued stocks in which to invest.

But once that was my full-time gig, I felt like I needed to do more, like I needed to identify more opportunities than the 4 or 5 stocks I was finding each month. So, I sought help from others. I paid for several monthly stock selection subscriptions. I constantly had CNBC playing in the background. I started listening to others to find and implement ideas.

Sometimes these ideas played out as expected. Sometimes, of course, they didn’t. And then there was that one time—and this is what set me straight—one time the trade went horribly wrong. My position was crashing. I was bleeding money. I didn’t know what to do...

It was stressful and scary; I felt like a failure. The experience taught me an important lesson, but it was extremely difficult to live through.

Well, you don’t have to.

So What Happened?

[Don't forget to check out the video version of this post on YouTube. It's much more entertaining... see for yourself!]

What was the difference between my pre- (and post-) 2016 success and that brief stint where I experienced several overwhelmingly stressful trades?

I stopped relying on myself and my own research and conclusions. I stopped playing out every possible scenario in my head before entering a trade. I started:

Relying. On. Others.

And that was my crucial mistake. I have since repented and recovered. But this is a lesson that almost every investor learns the hard way at some point:

It is dangerous to rely exclusively on others investment ideas!

Why Does This Happen?

How do investors find themselves in positions they don’t fully understand and an emotional wreck when those bets don’t play out exactly as expected?

It starts with the fact that we’re surrounded by so. many. “Experts.” Professionals (or not) who are more than happy to share with you the next hot thing.

You have the screaming heads on TV, the well-spoken “experienced” or professional trader, and the wise, successful friend or associate. They're all trying to pitch you on and convince you of something...

The Main Lesson:

It’s okay to have someone you trust give you ideas, but it is dangerous to invest in those ideas without any further consideration or access to information.

Consideration

It is a viable strategy to hear them out and then—and this is the essential part—do your own research to supplement their investment thesis and come to your own educated conclusion.

I get it: there are countless investment opportunities in the world, and if it’s not what you do professionally and it’s not your passion, that can be an impossible mountain to sift through. But the ideas you hear from others, need to be the start of your investment process, not the end.

Access to Information

Alternatively, if you have full access to when and why that person-you-trust makes each and every trade—so you know when they’re entering, exiting, increasing, or decreasing their own positions—that too, could be a viable strategy for you.

The Young Pro...

I’m reminded of a young professional investor who, while stranded in an airport, had a brief chance encounter with his life-long investment role model. They began discussing their current theses on different markets. One in particular stood out to the novice investor. It was a trade made by the veteran that was the exact opposite of his own. Before he could ask for more information, the seasoned trader was boarding his flight.

This weighed heavily on the young pro. He didn’t like betting against his investment hero. He decided that he, the young one, must have missed something, so he reluctantly flipped his position. He trusted the veteran’s opinion.

The next day he suffered a significant loss in that position before pulling out. Turns out the young professional had been right. It’s too bad he had doubted his own research. It appeared the old pro had lost his touch.

Later that week he received a call from the veteran, asking how he was doing. The young trader explained that he was a little upset after the loss and expressed concern for the veteran, because he knew that the veteran’s bet had been much more significant.

The old professional was confused. He told him that he had made money on that position every step of the way. In the few hours after they had spoken in the airport, the market moved exactly as he had anticipated. Then, his research suggested that it was about to go the other way. So, unbeknownst to the young investor, he profitably switched his thesis, and consequently, his position.

The young professional was trading with an entirely different time horizon than the veteran. He didn’t have access to all the information, and his portfolio suffered for it.

My Friend...

One of my best friends is this way: constantly wanting to know the specific stocks I have identified as having 100% or more potential return. I’ve always been hesitant to share. Not because I don’t want him to profit from them, but rather because he doesn’t know exactly when my research might indicate that I make a change to that position (it could be a couple years from now, it could be hours from now).

That’s why I cringe when I see people investing their own hard-earned cash without any more than a hot (at least for now) tip to guide them. What should they do next? Knowing that is an important part of a successful investment strategy.

My Personal Solution for You

That’s actually one of the reasons I started my Patreon account, so that I could provide that friend and anyone interested with real-time updates, so you know exactly when and why I make every single move.

Conclusion

So whenever you hear that next good idea—and inevitably you will—whether it comes from me, Jim Cramer, or your best friend—I don’t care how amazing and urgent it sounds—do not invest while relying exclusively on someone else’s tip!

Do your-future-self a favor and either

  1. dedicate the time necessary to research and come to your own educated conclusion, or 
  2. make sure you have open ongoing access to all the information.

What's Your Story?


  • Do you have a story like this?
  • Where you or someone you know followed blindly someone else’s advice?
  • If so, I hope you didn’t lose too much. I’d love to hear about it, let me know in the comments.

My goal with Spicer Capital is to help you build your rapidly-growing, highly-diversified net worth. I hope you'll stick around and explore the many resources we've created for you, get your free copy of my book, download the free audiobook version (while my publisher still lets me give it away for free...), subscribe to our YouTube channel... whatever avenues would be most helpful for you!

I sincerely look forward to spending more time with you in the future (...maybe in the comments? I hope to see you there).

Take care.

Odysseus on Investing

Odysseus on Investing

In Homer's epic poem, The Odyssey, Odysseus must sail past the land of the Sirens. Warned that their song would lure him and his crew to their watery grave, he ordered his sailors to plug their ears with beeswax. But Odysseus, ever the curious traveler, longed to hear the song of the Sirens. He ordered his crew to tie him tightly to the mast and not let him free, no matter how much he begged.

Tempted by the sirens' beautiful song, he commanded his men to untie him. Fortunately, they heeded their previous orders and bound him tighter. Despite his precognition, even the strong-willed Odysseus would have fallen victim to the sirens' seductive calls.

In the treacherous world of investing, the sirens' cry assumes many forms. Unlike Odysseus and his crew, however, we do not have foreknowledge of exactly how or when they will try to lure us to our demise. All we know is that it will happen.

Continue Reading

Otelco: Undervalued with Great Upside Potential

Otelco: Undervalued with Great Upside Potential

A year ago I submitted my first contribution to Seeking Alpha. I covered a micro-cap company called Otelco. Their business model wasn't exciting, but the asymmetric opportunity was too great to pass up. I found the stock to be incredibly undervalued, a catalyst that could lead to quick and substantial gains, and very little downside risk.

Since that time, Otelco's share price has risen over 100%, and I don't believe the ride is over. The asymmetric upside potential of this small telecom company still exists--another 100% or so.

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