Stocks for Dummies (Aviators)

[MilitaryToFinance]

On 8/31/2018 at 8:33 AM, katdude said:

- Price is psychological, not based on the actual book value. Invest in stocks that are trading close to what their book value is. Selling all Amazon assets and properties and distributing them to shareholders will not get you $2000/share. You will not get your money back.

This is a fundamental misunderstanding of value investing. Very few businesses are tied to book value. Financial firms tangible book value matters a lot, manufacturing heavy businesses book value can matter. Lots of important things are not captured in book value and not even Buffett is buying based on Price to Book these days. You should be looking at free cash flow generation, ROIC, earnings yields, and most importantly return on incremental capital employed. These are the things that take a fundamental knowledge of the business to understand and figure out.

If you can type it into a yahoo finance search and have answers in a few seconds I can guarantee you that any excess returns that "strategy" might have had in the past has gone away to the algorithms. 

[katdude]

@MilitaryToFinance I have studied all those metrics you mentioned before. I was doing great, in $6k profits over just 4 months by trading high yield dividend stocks that are close to book value and currently on an uptrend.

Now I messed with growth stock, FB in August. I bought it the day before it crashed thinking "Well, FB had great earnings results each quarter for the past 3 years, I can sell it off after the results". Now I'm sitting at over $18k loss. 

That's what happens when you pay for projected growth, earnings, etc blah blah all those metrics. I think you should pay for what its worth now, not what it may be worth in the future. Because expectations can change and that's what happened to FB.

On the other hand, if I stuck on to my prior strategy of trading stocks close to blook value that have strong fundamentals, pay good dividends and are on uptrend, I would have still been in profits. 

Amazon's earnings per share are $12 and Facebook earnings per share are $6. How come Amazon is $2000/share and Facebook is $160?  Amazon should only be double the price of FB as it only earns double??

Thats why I say price is psychological and just BS. Pay for what its worth and you won't lose in the end.

Edited September 7, 2018 by katdude

[uhhello]

6 hours ago, katdude said:

@MilitaryToFinance I have studied all those metrics you mentioned before. I was doing great, in $6k profits over just 4 months by trading high yield dividend stocks that are close to book value and currently on an uptrend.

Now I messed with growth stock, FB in August. I bought it the day before it crashed thinking "Well, FB had great earnings results each quarter for the past 3 years, I can sell it off after the results". Now I'm sitting at over $18k loss. 

That's what happens when you pay for projected growth, earnings, etc blah blah all those metrics. I think you should pay for what its worth now, not what it may be worth in the future. Because expectations can change and that's what happened to FB.

On the other hand, if I stuck on to my prior strategy of trading stocks close to blook value that have strong fundamentals, pay good dividends and are on uptrend, I would have still been in profits. 

Amazon's earnings per share are $12 and Facebook earnings per share are $6. How come Amazon is $2000/share and Facebook is $160?  Amazon should only be double the price of FB as it only earns double??

Thats why I say price is psychological and just BS. Pay for what its worth and you won't loose in the end.

For fucks sake it's 'lose'.

[MilitaryToFinance]

@katdude

If you’re day-trading stocks trying to guess the reaction to earnings then you aren’t value investing and any discussion of the balance sheet is moot. But I’ll leave that aside for now. I agree that you should pay for what a business is worth today and paying inflated prices for speculative growth stories usually ends in tears. But book value is not really what the business is worth today.

In a competitive market if you are earning returns in excess of your cost of capital, unless you have a specific competitive advantage, you will see competitors enter the business until the returns decline to your cost of capital. The reason book value mattered in manufacturing business or railroads for instance is those physical assets drive the value of the business and book value is a rough estimate of the cost it would take for a new competitor to replicate your business and enter the market.

If I want to create the next Nvidia to get a piece of their amazing 45% ROIC, the less than $1B of PP&E they own has very little to do with their $12B in sales and $160B enterprise value. Those thousands of engineers they employ to develop new chips and who they pay collectively $2B a year drive much of that value. But GAAP says R&D is an expense and you can’t capitalize it on the balance sheet, ergo no book value. Is NVDA really worth $275/share? I don’t think so. But is it only worth $13.37/share in tangible book value? I highly doubt it.

[katdude]

@MilitaryToFinance Interesting thoughts. So book value is more relevant in manufacturing/ tangible businesses. Agree it is hard to estimate the true current value of a business such as Nvidia or FB.  I just want to exclude the speculative future growth story that is factored into the price and estimate true current value. So when we buy something, we know that we aren’t overpaying.

[Craftsman]

What’s the opinion  on target date mutual funds? I.e. vanguard target date retirement fund? Vs spreading that out over other mutual funds investments? Specifically, only Roth IRA contributions, Not other 401k,  IRA spread out over growth, international, ETF’s etc. you can insert any other company for vanguard, although from my public school education vanguard has been one of the best. 

[billy pilgrim]

57 minutes ago, Craftsman said:

What’s the opinion  on target date mutual funds? I.e. vanguard target date retirement fund? Vs spreading that out over other mutual funds investments? Specifically, only Roth IRA contributions, Not other 401k,  IRA spread out over growth, international, ETF’s etc. you can insert any other company for vanguard, although from my public school education vanguard has been one of the best. 

I am no expert investor, but everything I've read* on the subject has basically said to avoid mutual funds and just invest in an index fund.  (You can also do bonds and real estate funds to balance your portfolio).  I think Buffet has the same opinion.

 

*Random walk down wall street, a couple of Nassim Taleb's books.

[jazzdude]

What’s the opinion  on target date mutual funds? I.e. vanguard target date retirement fund? Vs spreading that out over other mutual funds investments? Specifically, only Roth IRA contributions, Not other 401k,  IRA spread out over growth, international, ETF’s etc. you can insert any other company for vanguard, although from my public school education vanguard has been one of the best. 

Also not an expert...But here it goes

Vanguard's founder is a big believer in investing only in index funds, and vanguard waa one of the first companies to really do index funds. Freakonomics radio did a pretty good interview with Vanguard's founder https://freakonomics.com/podcast/stupidest-money/

If you look at (specifically) Vanguard's target retirement funds, what they are doing is adjusting the stocks vs bond ratio, and over time increasing the amount of bonds to reduce risk. But the underlying things it invests in are index funds. So it lets you put balancing risk on autopilot, with a target date to retire and be in a lower risk portfolio at retirement.

My current split is about 50/50: about half in target/lifecycle funds, and half in index funds. That's across TSP, IRA, and brokerage accounts.

My next step is to find a financial planner and adjust the mix between roth and traditional. My pilot math has me conservatively retiring in about the same tax bracket, so there's not a clear advantage to either.

Sent from my SM-N920V using Tapatalk

[nsplayr]

I'm not a user of Wealthfront, but they wrote a great post about a different way to think about the Roth vs Traditional decision.

https://blog.wealthfront.com/roth-401k-vs-traditional-401k/

Key points:

"A Roth 401(k) enables you to pay a small tax bill upfront in exchange for what is almost undoubtedly a larger tax bill later. Thus, most discussion of Roth accounts tends to devolve into a debate on how much higher (or lower) tax rates will be in the future.

However, for most people, the issue is more basic. If you are a disciplined saver, you can get the same effect and the current tax deduction. You can save in a regular 401(k) now, take the deduction, and then save an additional sum in a taxable account to pay your tax bill on retirement.

So the question boils down to: Do you have the self-control and spending discipline to save money now to pay off taxes later? Or do you need the crutch of the Roth account?"

"Effectively, any kind of a Roth account can act like a “forced savings” of money you’ll need to pay taxes on your retirement savings. Most people need that kind of forced savings, which behavioral experts call a “precommitment strategy” – a way to overcome your own lack of self-control. From a behavioral finance point of view, people who invest in Roth accounts are likely to end up with more after-tax income when they retire."

[SurelySerious]

Alternatively, it’s just easier to use the Roth vs lack of self control. 

[MilitaryToFinance]

15 hours ago, nsplayr said:

I'm not a user of Wealthfront, but they wrote a great post about a different way to think about the Roth vs Traditional decision.

https://blog.wealthfront.com/roth-401k-vs-traditional-401k/

Key points:

"A Roth 401(k) enables you to pay a small tax bill upfront in exchange for what is almost undoubtedly a larger tax bill later. Thus, most discussion of Roth accounts tends to devolve into a debate on how much higher (or lower) tax rates will be in the future.

However, for most people, the issue is more basic. If you are a disciplined saver, you can get the same effect and the current tax deduction. You can save in a regular 401(k) now, take the deduction, and then save an additional sum in a taxable account to pay your tax bill on retirement.

So the question boils down to: Do you have the self-control and spending discipline to save money now to pay off taxes later? Or do you need the crutch of the Roth account?"

"Effectively, any kind of a Roth account can act like a “forced savings” of money you’ll need to pay taxes on your retirement savings. Most people need that kind of forced savings, which behavioral experts call a “precommitment strategy” – a way to overcome your own lack of self-control. From a behavioral finance point of view, people who invest in Roth accounts are likely to end up with more after-tax income when they retire."

This is not as applicable to people in the military, and especially not military pilots who fly through combat zones frequently. Between your BAH, TDY pay, and any months with combat zone exemptions you are paying practically nothing in your effective tax rate as a military member. I never deployed but did a lot of TDY's and my effective tax rate on active duty was single digits. If you have a civilian job and the question is 24% tax rate today vs. unknown future rate there is a big debate about what your tax rate will be in retirement relative to that. But if you're comparing your future tax rate in retirement to the sub-10% you're paying today you can guarantee that your retirement taxes will be higher than that. Even capital gains will be taxed more than that. A Roth account is a huge benefit to Active Duty military.

[nsplayr]

@MilitaryToFinance you’re not wrong, in your fisnncial conclusions but:

A) the article basically concludes that Roth is better for almost everyone, so same end result 

B) I’m in the military, have deployed many times to combat zones, but now am Guard and have a civilian job, so the discussion is relevant to me personally and many here who are ARC/retired and working lucrative civ jobs

You are correct that the ideal beneficiary of a traditional 401k or IRA is a high wage earner living in a state with high state taxes who is self-disciplined enough to reinvest the tax savings from current-year deductions.

If you are a young pup on AD and deploying, Roth is your friend 100%, but the point of the article is that Roth is better for most people anyways regardless of speculation on future tax rates.

Personally, I max 2x Roth IRAs for myself and my wife, and do Roth TSP when I am on orders. In my civ job, I do traditional 401K because unfortunately Roth isn’t an option in our plan. When I hit the 401K contribution limit for the year, I switch to contributing to an after-tax 401K (which differs from Roth) because that money can be laundered into a Roth IRA the following calendar year above and beyond normal Roth IRA limits.

Edited September 17, 2018 by nsplayr

[katdude]

@nsplayr Can you please elaborate on how to use this after tax 401k and launder it into Roth for the next year.? I max out on my Roth too and wish I can contribute more to it. Thanks!

[nsplayr]

IRS Rules: https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

Good explanation: https://www.madfientist.com/after-tax-contributions/

Another article: https://www.kiplinger.com/article/retirement/T037-C000-S004-new-path-to-a-tax-free-roth-conversion.html

Pressed-to-test last year. The first week of Jan 2018 I called up Fidelity (manages my civ employer's 401k) and rolled out my after-tax contributions in two checks, my contributions and the growth. Growth gets deposited into a traditional IRA, my contributions deposited into my Roth IRA, which I had also maxed the previous year. Now all future growth of those after-tax contributions happens tax-free inside the Roth, effectively allowing me to contribute more than the normal $5,500 Roth IRA limit.

Note that your employer's plan must include the ability to make after-tax 401k contributions, and not all do. My employer only added that feature recently when we switched to Fidelity. Also note that you should absolutely take advantage of the full tax advantages allowed to you, i.e. take $18.5k in normal pre-tax 401k contributions, then do additional via after-tax as you can afford it.

This year for instance, I hit my $18.5k limit for pre-tax 401k contributions in July, so from Aug-Dec I'll make after-tax contributions, and next Jan I will roll all those Aug-Dec after-tax contributions into my Roth IRA and any growth into a traditional IRA just like I did last year. All my IRAs are with Vanguard and I highly recommend them for low-cost indexing and ease of use.

These tricks do no apply, IMHO, if you have any debt besides a mortgage, nor if you're not already maxing your Roth IRA (and your spouse's if you have one) AND are hitting the normal $18.5k pre-tax or Roth 401k limit already. The argument can be made to do this if you have low interest rate debt like some student loans or auto loans and your investments return higher than the interest rates on that debt, but to me, behavioral psychology points to taking the easy, guaranteed win of paying off debt and giving yourself more safety cushion in terms of cash flow, which you can then decide to invest when your debts are paid. YMMV.

If the above paragraph is all taken care of, proceed past "Go" and collect financial independence. Good luck! Start early too...I'm not that old and I still wish someone had taught me this stuff on day one of my career because time is your best friend when it comes to compounding.

[katdude]

@nsplayr Outstanding! I am 30 and I was under the impression I am a financial genius. And here you are, a financial mastermind! This is a great piece of knowledge that will help me make more $$. I was frustrated with the $5500 Roth limit. I am a fan of Roth though I used it only for last 2 years. Didn’t know about it before.

I do have some debt that I got from flying my 200 hours, but going forward I will try to max out $18.5 pretax 401k then roll over my after tax contributions next year to Roth!

I honestly believe if you are financially smart, you don’t need to work at all, as your money makes more money for you. **Claps hands**

[mcbush]

“The ancient Oracle said that I was the wisest of all the Greeks. It is because I alone, of all the Greeks, know that I know nothing.”   - Socrates