How Do You Make a Living From Stocks?

How Do You Make a Living From Stocks?

by | Sep 5, 2021 | Investing in stocks, Value investing

How do you actually make a living from stocks?

What are the specific steps? Do you sell the shares?

This is a question many people ask me.

The underlying question here is also: what comprises a return on a stock? Is it just the rise in the stock price?

In this blog post, I will explain the three things that can make up your return.

I’ll also explain how I generate an income so I can pay the bills.

What Makes up a Financial Return from the Stock Market? 

Let’s begin with a definition.

According to Investopedia, a financial return is “the money made or lost on an investment over some period of time.”

Let’s break that down. How can you make money on a stock?

Here are the three factors:

1. Increase in The Stock Price

A financial return on a stock can be an increase in the stock’s market price.

This is probably what most people associate with the word “return” when it comes to stocks.

To make a living this way, you will have to sell, and this will of course reduce your remaining number of shares.

Hopefully, the remaining shares are worth so much more than when you first invested that your total wealth grows even if you sell a small portion of that portfolio.

2. Dividends

When a company makes a profit, they can choose to pay part of the profit to the owners.

As a shareholder, you are one of the owners.

When companies pay out a portion of the profits, that is called a dividend.

The dividend goes into your investment account without you having to sell the paper.

Sounds cool, doesn’t it? You don’t have to sell. You can just lean back and enjoy the ride. 

Then why not just focus on companies that pay a lot in dividends?

There are, in fact, major disadvantages to actively pursuing the so-called dividend kings.

Companies that are growing and have a large market potential ahead of them are too busy reinvesting the profits in new markets, new employees, innovation, and acquisitions. They don’t pay dividends, because that would mean missing out on great growth opportunities in the market.

The major dividend stocks typically consist of very mature companies like the Coca-Colas and Johnson & Johnsons of the world.

If you only invest in the dividend kings, you’ll miss out on great growth opportunities, and your overall return will falter.

The other disadvantage of dividends is that you have to pay tax on them. This handicaps the effect of compounding.

You can read more about the advantages and disadvantages to dividend stocks in this blog post.

3. Share Buybacks

Share buybacks are an alternative to paying dividends.

Instead of giving the money directly to the shareholders, the company may choose to use some of the profit on buying back some of their own shares.

This will cause the price of the stock to rise in the long run, because the cake (the company) will be divided into fewer slices (shares). When the cake is cut into fewer slices, each slice is worth more.

Your piece of the cake, your shares, will therefore be worth more over time if the company makes regular share buybacks.

Warren Buffett loves stock buybacks, and his company Berkshire Hathaway regularly buys back shares.

So what are the benefits of buying shares back in terms of dividends? Why is Warren Buffett so happy about it?

It’s simple.

When you receive dividends, you must pay tax on that amount. You don’t have to pay taxes when the company repurchases stocks (provided, of course, that you don’t sell the share).

This means that share buybacks don’t cripple the effect of compounding. The money can continue to grow exponentially.

But to take advantage of this, you will of course have to sell the stock at some point, and then we’re back to square 1.

You can read more about share buybacks in my blog post here.

How Do I Make a Living From Stocks?

A lot of people ask me how I do it.

Do I sell shares in order to pay the rent? Or do I pick dividend stocks?

The answer is that I do something completely different.

I do a particular kind of options trade that creates an income flow.

I follow the principles of value investing when doing these trades. I look for undervalued companies and analyze them.

The great advantage of my method is that I can live off my shares without having to sell them.

It doesn’t hurt my portfolio and doesn’t set up barriers for compound interest rates.

This is the secret method that I don’t usually talk about in my blog posts because people can get it horribly wrong if they do it uninformed.

Where did I get the inspiration for this method? From Warren Buffett himself.

It’s a public secret that Warren Buffett is one of the biggest stock options traders in the world.

Why is it a secret?

Because he doesn’t talk about options.

One thing is what Warren Buffett does and another is what he recommends his followers do.

He tells his followers to invest in an index fund. But that is pretty far from his own value investing and stock picking style.

Why does Warren Buffett never talk about his options trades?

I believe it’s for the same reason I avoid it.

I’m afraid people will google “options” and do it wrong and lose a lot of money on it. You have to know what you’re doing if you move into options – or you might put a lot of money at risk.

There is only one place where I talk about options, and that is in my courses.

I’ve been teaching this stuff for years in Danish, and more than 150 people have attended my 8-12 week long courses.

This fall I will launch my first course in English.

Make sure you’re on my email list if you want to be invited to my next webinar where I tell you about my upcoming online value investing courses. If you download my e-book, you can say yes to receiving emails.

Dividend Stocks? Here Is Your Crash Guide

Dividend Stocks? Here Is Your Crash Guide

by | Aug 16, 2021 | Investing in stocks

When listening to novices and cautious shareholders, one would think that the paved road to financial freedom (and sense of financial security) lies in a very specific place:

Namely, in dividend shares.

In this blog post, I will explain exactly what dividends are and why dividend-paying stocks are not a secure investment.

I’ll also explain which companies typically fall into this category, and you will understand why they are not always the best investment.

ABC… What Is a Dividend stocks?

Let’s start at the beginning.

What exactly are dividend stocks?

On this blog, there’s room for both the investor with decades of experience and the ambitious newbie who is trying to figure it all out.

Let’s get the definition in place so everyone can join the conversation.

A dividend stock is really just a share in a company that pays dividends.

Maybe you’re asking, what’s a dividend?

When you are a shareholder, you become one of the owners of the company.

Dividends just mean that the owners get paid a part of the profits. It goes directly into your investment account as cash.

Why are Dividend Stocks Many Beginners’ Favorites?

When you start investing, you may well have a feeling that there’s a bit of an abracadabra with stocks.

Maybe shares feel a bit like play money, something that is not real (don’t worry, it’s real). 

It may seem safe and perhaps a little fascinating that real money magically appears in your investment account. It’s real cash in your pocket that can be used out there to buy ice cream and t-shirts.

It gives you the feeling that it works when you are still unsure whether those stocks are real.

And as the saying goes: A bird in hand is worth two in the bush.

But when you think about it, why is that?

What is that bird doing in that hand at all? Is it sick? Can it not fly?

That brings us to the next point…

Why You Need to Be Careful With Dividend Stocks

There are two reasons why you shouldn’t fill your portfolio up with dividend stocks.

The first reason is that dividend stocks are an extremely conservative choice, which means that your portfolio will probably stagnate.

Companies that still have a world to conquer typically don’t pay dividends because they invest to exploit their future potential. They can spend money on product development, research, expansion, hiring new talent, acquisitions of other companies, and much more.

Companies that pay a lot in dividends are often mature companies that have reached a point where they’re present in all the markets and in all the product groups that make sense to their business. You can’t expect the share price to skyrocket.

Let’s make it real with some companies that everyone knows.

Coca-Cola is known as a dividend stock. The conglomerate is in all geographic markets and sells many kinds of sodas and snacks.

It’s not realistic that they will double their revenue, but it’s realistic that they will continue to have stable growth slightly above inflation.

Amazon and Google, on the other hand, even though they are already huge, are still conquering the world. They don’t pay dividends. They are aggressively investing in new business opportunities.

Apple is a company in between. They are still growing, but they also have a gigantic cash flow and huge profits. They reinvest and make acquisitions, but they also pay a small quarterly dividend.

Compounding Is Clipped

The second reason you should be careful about going all-in on dividend stocks is taxes.

When you receive dividends, you pay taxes, and that destroys the effect of compounding.

There are other ways a company can distribute a profit and reward shareholders.

They can choose to buy shares back (also called share buybacks).

The stock price will go up because the value of the company must be distributed over fewer ownership shares – and the shareholders won’t have to pay tax on the rising stock price as long as they don’t sell it.

Warren Buffett’s company, Berkshire Hathaway, never pays dividends but regularly buys back shares for this exact reason.

When you pay taxes, it chips away at the benefit of compound interest (that’s when the money grows exponentially because your return is reinvested).

Dividend stocks aren’t optimal if you’re at the beginning of your investment journey, where the money should grow over a decade or more.

Dividend stocks make more sense if you’re going to take advantage of your financial freedom and are ready to eat off your investments.

Hopefully, the investments you make at the beginning of your journey as an investor will later pay dividends as the company matures – and then you can just sit back and enjoy it.

Where Can You Find Dividend Stocks?

Are you still keen on the idea and want to find a dividend-paying stock?

There are lots of lists of dividend-paying companies on the big internet.

You can google “dividend kings” or “dividend aristocrats”, and you’ll see the giant, international dividend-paying stocks.

Since mature companies are often international, you’ll find many great deals.

You can find one of these lists here.

Whatever you choose – dividends or not – you must make sure you choose healthy, good companies at reasonable prices.

It’s not worth it to get a return of 2 % a year in dividends if the stock price drops 50%.

You have to follow a checklist and make sure you are investing in a good company at a reasonable price – dividends or not.

You can learn more about that in my investment book Free Yourself here.

Ten Reasons You Stop Yourself From Investing in Stocks

Ten Reasons You Stop Yourself From Investing in Stocks

by | Mar 21, 2021 | Investing in stocks, Newbie

You’ll find them all over, but you don’t notice them.

Who?

The people who want to invest in stocks but never do.

They’ll read business news, hang out in Facebook groups about stock market investing, and some of them might even read this blog post. They’ll do anything to make their money grow.

Expect one thing.

Actually invest.

Wanting to invest but not doing it is a pretty common ailment.

They’re like the person with tons of cookbooks on the shelves but with takeout food on the dinner table.

They’re like the person who loves watching do-it-yourself programs about people who built entire houses with their bare hands, but who never get around to fixing that handle on the bathroom door.

What’s actually stopping them?

There are ten reasons why people stop themselves from investing.

If you haven’t invested yet and want to, do you recognize yourself in any of these ten points?

1. They Don’t Understand the Value of Time

Richard Branson says that any successful entrepreneur knows that time is more valuable than money.

When you invest, time makes a big difference.

The sooner you get your money invested, the sooner it will grow exponentially.

Here’s an example.

Let’s say you invest $5,000 for a child’s retirement. You get an average return of 15 percent for 60 years. How much does it turn into?

Hold on to your chair. It turns into $19 million.

Let’s say you wait until you have $500,000 and invest with an average return of 15 percent for 10 years.

How much does it turn into?

It turns into 2 million.

In other words, get at it.

2. They Make It Too Complicated

They think it’s super complicated to invest, and they believe they have to read half a library before even signing up for an investment course.

Maybe they even have the idea that it will ALWAYS be too difficult. They might make excuses to themselves like not being good at math, not being good with money, not having the right mindset.

3. They Procrastinate

They know they have a tendency to put things off, and somehow they are almost proud of it.

They tell themselves that it’s just who they are.

It becomes their excuse for not getting it done.

The real reason they hide behind a shield of procrastination is that they think investing is dangerous and overwhelming, and that’s the real reason they push it off.

4. They’re Afraid of Making a Mistake

What if they fail? What would people think of them? How would that feel?

The human mind is actually more motivated by avoiding pain than by gaining something new.

These people spend time thinking of all the negative consequences.

But if you don’t begin, you really fail. Remember that.

5. They Don’t Live According to Their Values

Either they aren’t aware of their values, or they just don’t live according to them.

They might want financial freedom and a feeling of peace and security, but they don’t take action to get it.

They’re like the person who worries about the environment but who keeps eating huge steaks and driving to work in a big diesel car.

If you want financial freedom, but you don’t invest to make your money grow, you’re not living out your values.

6. They Try to Time the Market

They think the stock market is too expensive and wait for it to dive.

The problem with that is that none of us knows when that will happen. Not even Warren Buffett can time the market.

When the correction comes, they still hesitate, because they fear that it will dive even more, and they still don’t invest.

They miss the opportunity. Every day. 

7. They Fear Getting Rich or Too Successful

Sounds unlikely?

Well, take into consideration that this isn’t a very conscious point. It’s a subconscious fear of what your family, friends, and neighbors might think if you “have too much”.

A lot of us have been told that we were “greedy”, “selfish” or simply just “too much” when we were children.

I grew up around left-wing politicians, and as an adult who took up an interest in investing, I was always afraid of being called “a capitalist”.

When it finally happened, it felt like a relief. It wasn’t that bad.

Yes, there will be people who will think badly of what you do and who you are, but it’s better to get them out of the way early on, so they don’t hold you back any more.

Shrug and move on.

Be honest about what you do and who you are.

8. They Want to Be Rescued

This is also a subconscious mechanism.

None of us would be proud of having an almost childish need of being seen and being “saved”.

It might be the woman who wants a man to take care of her.

Or it might be a man who wants mom and dad to show their love by helping him financially.

It can also be the person who plays the lottery and daydreams of a big win.

9. They Lack a Strategy

They think that buying shares is just buying, and they don’t have a strategy or a plan.

This reminds me of myself as a teenager when I tried to make my first meal.

I went to the store to look around and buy something on the fly and “just” cook it. 

I bought chicken hearts and cream.

The plan? There was no plan, I just remembered that eating the heart of the chicken was my favorite part of the chicken as a child (yes, the chicken came with all the parts). My second favorite thing was a cream-based sauce.

I went home, fried the chicken in a pan and put cream on top.

Let me tell you, chicken hearts in cream is a nasty dish. I still get nauseous just thinking about that meal.

For years after that, I told myself that I simply wasn’t good at cooking. As if my destiny was determined by that one experience.

How would my first cooking experience have turned out if I had found a recipe, made a shopping list from that, and simply followed the recipe?

You can do the same with investing. You can follow a simple recipe so you know what to put in your cart.

10. They Think They Have To Figure it Out Alone Without Help

They think they have to do it all alone at the kitchen table without getting any help. 

They don’t even know that they can get help.

Think of something you have learned and mastered in life. How did you learn?

I learned to read and write in school. I learned to knit with the help of an older relative. I learned to drive by taking driving classes. I learned to swim by taking swimming lessons, and I have even taken some as an adult to get better.

How come many of us expect to figure the money stuff out at the dining room table at night?

What To Do If This Is You

If you recognize yourself in any of these points, congratulate yourself.

You have just become aware, and now you can do something to change it. If you hadn’t become aware, you would have continued on the same path.

The first step is to get some knowledge.

I have condensed my 20 years of experience as an investor and financial journalist into my e-book, which you can download here.

Once you are on the email list, you’ll get a weekly tip or blog post to keep you on track.

You can join the investing community I’ve created on Facebook right here. You are no longer alone. 

Don’t forget to read my free e-book that explains my whole investing process. You can get it here.

The 10 Most Important Characteristics of the YOLO Investor

The 10 Most Important Characteristics of the YOLO Investor

by | Mar 14, 2021 | Investing in stocks

Phillip, a first-year student, was just 21 years old and still living with Mom when he bought his first shares.

His mother, who had taken several investing courses, had been trying to get him interested in investing for the last five years.

Initially, she was happy to see him invest in stocks. When Philip asked if he could borrow $5,000 to invest, she immediately said yes – no questions asked.

She later regretted it when she discovered he’d placed all the money in one stock: GameStop.

“I know I can lose all the money, but I’ll probably get it out before then. Besides, if I lose the money, I lose the money,” he told Mom when asked.

His interest in investing picked up during the first lockdown when both classes and his birthday party were cancelled. He spent most of his time reading the news and chatting on social media while doodling at the kitchen table in his mother’s apartment. Stocks hit the news with a plunge and a quick rebound.

He saw the V-drop shape and thought something like, ‘Hey, maybe stocks aren’t as boring as I thought. Mom’s onto something.’

That’s when he began investing.

First, it was a way to make a few quick bucks. Then he discovered there was a big community online of people just like him. He also realized that he got a kick out of it when he made some quick gains.

How did things turn out for Philip’s GameStop investment? We’ll never know, because Philip is a composite character of several people I’ve talked to.

Maybe he sold before the stock imploded. Maybe he lost most of it.

Philip is a YOLO investor (You Only Live Once), and people like him are getting a lot of attention in the stock market news these days.

It’s even a verb. You can YOLO in the stock market. These YOLOing YOLOers can influence how the market will develop in the future.

The fact is, there have rarely been as many private investors in the stock market as there are right now.

Private individuals now account for almost as much of the volume of the US stock market as institutional investors such as pension companies and mutual funds, according to numbers from Bloomberg published in this Financial Times article (sorry paywall).

Not only are private individuals flocking to the stock market, but this new investor, the YOLO, has emerged, and they’re not behaving like the rest.

YOLO investors arrived with the pandemic.

Like Philip, they were tied to a screen at home during lockdown, and many of them have gained access to a bag of money they did not have before, like the US stimulus check or other corona-related subsidies.

What else do we know about these YOLO investors?

1. They Gamble

The YOLOs invest short-term and aim to make their money multiply in a few days or weeks.

They approach the stock market as if it were a one-armed bandit, betting on hitting the jackpot. They go for profitable long shots, not incremental gains.

Saving for retirement is more distant to them than a space station.

They invest as if there’s no tomorrow – that’s the whole idea of you only live once.

2.  They Invest Borrowed Money

They use margin on the account, they borrow money from various sources (like “mom”), and they use leveraged products.

They’re simply not at all afraid of losing borrowed money. 

3. They’re Poorer

They have less money than previous generations of private investors.

How much do they have?

Typically between $1,000 – $5,000 in savings, according to the article from FT – and many have no savings at all. If they don’t have savings, they’ll borrow the money.

By comparison, the typical private investor during the dotcom bubble had about $50,000 to invest.

4. They Are Younger

They’re in their early 30s – and often much younger.

Compare that to the generation of private investors who invested in the dotcom bubble. They were about 50 at the time (so around 70 now).

The YOLO investors are so young that they were still playing with their LEGOs when the financial crisis raged. A serious stock market crash belongs to the dusty history books.

Which might be one of the reasons they don’t seem to fear a crash.

A 12-year-old bull market is an eternity if you’re in your 30s or younger.

5. They Use Social Media to Make Investment Decisions

They’re more likely to trust a stranger on social media than a financial expert on TV.

They grew up with social media, and social media is where they socialize and develop their worldview.

They’ll discuss stocks and private details about their financial position with strangers online, no problem.

They aren’t afraid of writing something like:

“I have $10,000… What should I invest in if I want the money doubled in a year?”

What’s astonishing about them is that they’re likely to do whatever a stranger with an alias tells them to do.

6. They Invest with an Activist Mindset

They invest in Tesla because they want less air pollution.

They invest in Beyond Meat because they cheer for Greta Thunberg.

They invest in GameStop to drive hedge funds out of their short positions.

They invest in cannabis stocks because they want cannabis products.

They invest in bitcoin to defy the government monetary policy (the eternal printing).

They invest because they want their money to make something happen in the world.

7. They Love All Tech

Their favorites are fintech, biotech, blockchain, all crypto, gaming, and Tesla.

They admire Catherine Wood from Ark Invest and the SPAC king Chamath Palihapitiya – they might even have one of them on a poster or a coffee mug.

8. They Use Commission-free Stock Trading Apps

They trade through commission-free apps on the fly.

They don’t need to sit themselves down in an office chair at a big desk with a steaming cup of coffee and a pair of reading glasses to enter a stock.

They grew up playing with a smartphone while eating cereal, and they’ll happily trade stocks on an app while taking the subway or chatting with a friend (or a stranger online). 

9. They Love Fractional Shares

On a platform like Robinhood, it’s possible to buy so-called fractional shares, which is a small part of a stock.

They love this stuff, because they don’t always have enough money to buy the whole thing.

For example, most of them don’t have $3,000 for a share in Amazon or $2,000 to buy a stake in Google.

10. They Don’t Care About Compounding

They invest now to get money now. They’re in it for the instant gratification.

Investing to get solid in retirement doesn’t rhyme with you only live once.

How will YOLO Investors Affect Your Stocks Going Forward?

When a large group of shareholders enters the stock market and when they behave atypically, it can affect the entire market.

Since “YOLOing” is a new phenomenon, none of us know exactly how they’ll behave going forward – they’re really a bit of a joker in this stock market game.

But here’s my best bet on what they’ll mean for you and your stocks:

A. Greater volatility.

When YOLO investors jump on a stock like a swarm of grasshoppers, the stock price could potentially rise to astronomical levels and implode afterwards, as we saw with GameStop.

B. More uncertainty.

We don’t know how they’ll react to certain events. They aren’t investing in their retirement funds, and they don’t think long term, so certain events might trigger them. These could be:

  • Taxes: What happens when they realize they have to pay taxes on their gains for 2020? Are they even aware? As they don’t have a lot of excess cash, tax liabilities in the spring might cause shares to plunge if they have to sell shares to afford paying them.
  • A correction: How will they react to a correction? Will they panic? Or stay cool? The fact that they have no experience with the financial crisis might mean they’re in for a surprise. On the other hand, many YOLOers began investing after that V-shaped plunge during the first lockdown – this might suggest that they aren’t afraid of stock volatility. However, they weren’t there for the steep plunge. They came in with the reversal and only enjoyed the ride up.
  • Reopening: What happens when all the covid restrictions disappear? They entered the market pushed partly by boredom. Will they sell all their shares and fly to Bali when the world reopens?

What should you do?

Now, more than ever, it’s really important to check the facts and the numbers on a company before you invest.

When volatility and herd mentality come into play, it’s vital to make sure there’s a connection between price (stock price) and value (value inside the company).

You have to go through a checklist (you can download mine here) and do some basic calculations.

My favorite way to check what a company is worth is using Warren Buffett’s owner earnings calculation, which you can learn about in my e-book right here.

Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.

Share Buyback: Three Things to Watch Out For

Share Buyback: Three Things to Watch Out For

by | Mar 7, 2021 | Value investing, Investing in stocks

What does it mean when a company announces share buybacks?

Is it a good thing or bad thing? Should you rejoice or worry about it?

The short answer is that share buybacks are good when they benefit the shareholder and bad when they don’t.

The next question is, when are they and aren’t they beneficial?

But first, let’s define share buybacks. What are they exactly?

It’s the company buying back its own shares from the stock market so they are no longer in circulation.

Why do companies do it?

It’s a way of rewarding shareholders. The consequence of share buybacks is that the share price usually goes up.

How’s that?

Imagine you have a cake that needs to be divided into ten pieces.

Let’s say you redivide it and split the same cake into eight pieces instead of ten.

To be exact: We go back to the original size of the cake, dividing the same amount into eight pieces instead of 10.

Now each piece is larger. Therefore, each piece should cost more.

Then surely, it must by definition be a good thing when a company buys its own shares back, right?

No. Not necessarily.

You need to look at it in a larger context and ask a series of questions.

You have to ask:

Is the Company Profitable?

If the company isn’t profitable, it’s a bad idea for them to start buying back their shares.

Running on a deficit is like having a hole in the bucket, and they need to focus on closing that hole before doling out money to shareholders.

Share buybacks are a way to distribute the year’s gains to shareholders. It’s an alternative to dividends. They shouldn’t distribute winnings if they don’t have any winnings. It’s that simple.

If you discover that a company buys back its own shares during a period when they are running at a loss, you should sell that company’s stocks (or avoid investing in them).

It’s a sign of poor management.

Do They Owe a Lot of Money?

If the company is over its head in debt, management shouldn’t buy back shares.

When they buy shares back, if they do so on borrowed money, they increase the debt burden.

They should instead spend that money on paying down debt.

What’s the problem with having a high debt burden?

Companies with a lot of debt are at greater risk of going bankrupt in a downturn or crisis than companies with lower debt.

It’s not much different from a person with a lot of personal debt. If the person gets fired, they’re at a greater risk of not being able to pay the bills and going into foreclosure than a person with low or no debt.

How much debt is too much? That’s a great question too.

My rule of thumb is that I only invest in companies that can pay off their long term debt in three years with free cash flow.

Is the Stock Expensive or Cheap?

If the shares are expensive relative to the value of the firm, it doesn’t make sense to buy back shares.

Why not?

Because they’ll pay too much for the stock. They’d be throwing money out the window.

A share buyback is just like an investment.

Let’s say that a company is actually worth 100 USD per share. If they buy shares back at 200 USD per share, they throw 100 USD out the window every time they buy one share back.

Remember that it’s also your money that the management mismanages. As an investor, you are a co-owner of the company. The management is just a deputy.

Why do stock investors ignore badly managed buybacks?

Many stock investors believe that the stock market is efficient, and if you believe that, it follows that any share price is therefore a reasonable level to buy the shares at.

In my e-book Free Yourself, I explain why the stock market isn’t efficient. You can download it here.

The Pros and Cons of Share Buybacks

Warren Buffett loves buybacks – provided they’re done right. His company Berkshire Hathaway does it regularly.

If it’s an alternative to dividends, what are the benefits of buying shares back relative to dividends? Why is Warren Buffett so fond of it?

The answer is simple: tax benefits.

When you receive dividends, you have to pay taxes. When the company buys back its own shares and the stock price goes up, you don’t pay capital gains tax (provided, of course, that you don’t sell the share yet).

The effects of compounding are hurt with dividends. In other words, your money can better enjoy the power of compounding with stock buybacks.

So what are the disadvantages of buybacks?

They only occur if the repurchase is done on a “false” basis, like in the three points above (done by unprofitable businesses with high debt burden and that are overvalued on the stock market).

Why does it even happen that management buys back shares even though the foundation isn’t in place?

It happens because the management has an interest in getting the stock price pumped up.

Many companies reward top management according to the performance of the stock price, e.g. with stock options and various bonuses depending on the stock performance.

They’ll only get paid if the stock reaches a certain level.

This means that many executives tend to make stock repurchases out of self-interest to get their bonus pay, and sometimes their selfish interests are so great that they ignore common sense.

In conclusion, there’s really no way around it. When a company reports share buybacks, you have to check if the company is profitable, has a reasonable level of debt, and whether it’s over or undervalued on the stock market.

You can learn much more in my free e-book Free Yourself right here. 

The Craziest Things Private Investors Say About the Stock Market

The Craziest Things Private Investors Say About the Stock Market

by | Feb 28, 2021 | Investing in stocks

 

Try to notice the things people say to each other every day. In particular, pay attention to the phrases that you hear over and over again as automated responses.

People say things like: “Nothing is as bad as it seems.”

Or,

“What doesn’t kill you makes you stronger.”

They say these kinds of things, pat each other on the back and move on as if the problem has already been solved – instead of giving the issue the attention it deserves, figuring out the damage, and working out how to improve it going forward.

The truth is these kinds of catchphrases make us lazy and complacent.

The stock market has its own silly and irrational sayings that are as contagious as a virus.

In this blog post, I’ve collected the ten most damaging investor clichés.

1. “This Time It’s Different”

No, it’s not.

People say this to defend a frothy stock market bubble. It’s a way to avoid facing the fact that sooner or later, the music will stop.

This is said by people who really want to believe in fairy tales and ever-rising stock markets.

But stock prices don’t always go up. There’ll come a correction and at some point even a market crash. Just like rain after the sun. The seasons change.

2. “I’ll Buy Some Stocks on Sale Today.”

People say this (or write it on social media) on days where stocks drop 2-3 percent.

It’s obvious that the person doesn’t have the slightest idea of ​​how overvalued the stock market is.

Most stocks should be cut in half to be reasonably priced.

A banana isn’t on sale when it’s sold for 8 USD instead of 10 USD.

3. “The Stock Has Hit Bottom and Can’t Fall Any Further.”

Oh, yes it can (unless it went bankrupt and went to 0).

People who say this throw a quick glance at the chart and guess how the stock will move going forward. You can really get burned doing this.

Instead of reading the future in a chart, you need to look at the company itself, the product, the leadership, and the numbers, and determine from that whether it’s a wonderful company with future growth in revenue and profits.

There’s a term called falling knives. It describes stocks in decline. They’ll fall – and then they fall some more. If you try to catch them, you’ll cut yourself.

They might stop and rest before falling more. They may even stop, rise slightly – a so-called dead cat bounce – and then fall over the edge.

Unfortunately, this is the point where many novices say, “the stock has bottomed out and can no longer fall.”

4. “The Stock Has Had a Nice Return and Will Perform Well.”

Some people look at the stock chart and think it’s a reflection of some kind of truth about the company and how it’s doing in real life. They think the stock chart is testimony to what’s going on inside the company and a sign of how it’ll do in the future.

Just because a stock has risen, you can’t presume that it’ll continue to rise in the future.

You have to look at how the company itself is doing. Like I said before, you must open the reports and look at the numbers.

Rather than judging from the chart, try to be able to say something like, “The company has stable growth in revenue and profits, good competitive advantages, high cashflow, no debt. I think it’ll get over the crisis.”

5. “Everything Is Priced Into the Stock.”

The stock market is a huge auction with a lot of bidders. It’s a place where emotions can run wild.

Imagine an art auction where the auctioneer asks if there are any higher bidders.

You can almost envision a scene play out where two participants begin to bid each other up in excitement. We’ve seen it plenty of time in movies.

That’s exactly what’s happening in the stock market – with millions of people getting excited and bidding each other up.

Therefore, there isn’t always a correlation between reality inside the firm and the share price.

6. “It Looks Expensive.”

Here’s a person trying to assess whether it’s a good trade just by looking at the evolution of the stock price.

But you can’t tell if a stock is expensive or cheap just by looking at the stock price. Share prices can at times be completely detached from the reality of the company.

Like I say, you’ll need to compare the stock price to the reality of the company and the numbers in the annual and quarterly reports. You can learn more about that in my e-book here.

7. Shares in the Company Only Cost 5 Dollars, So I Can’t Lose That Much.”

If you invest 10,000 USD into a company that costs 5 USD per share or 2,000 USD per share, you risk the same amount of money, and theoretically they can both go to zero dollars per share.

You risk 10,000 USD no matter what the stock itself costs.

8. “I’ll Buy Next Time It Dips.”

What if the next dip is at a higher level than the price of the stock today?

It doesn’t always make sense to wait – not if you only base your decision on the stock price. It makes sense if you relate the stock price to the value inside the company to be able to estimate if the company has reached a fair valuation.

9. “I’ll Wait Until the Market Crashes.”

It’s called timing the market, and it’s impossible.

Some people believe that value investing is all about sitting on a lot of cash and waiting until the whole market crashes.

That’s not what it’s about at all.

It’s about keeping an eye on the companies’ valuations, figuring out what they’re worth, and buying when they’re on sale.

Even when we’re in a stock market bubble, there’ll always be companies that go on sale.

Sometimes the market sends individual companies into a whirlwind and they end up on sale, and sometimes it’s a whole industry that gets stirred up and shaken.

10. “Just Keep it, It’ll Make a Comeback.”

When people need comfort after a position has fallen, this is the cliché they tell each other. But there’s no law of nature that a stock will return to the same level it’s been trading at before, and there’s no law that it will increase at the same rate.

Instead of trying to put a band-aid on the loss with empty phrases, why not learn how to invest properly to make sure you’ll make sound investment decisions in the future?

You can follow a checklist to figure out what the company should cost. You get a good introduction to the method in my e-book right here.