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Over time, my experience shows me that the price for the portfolio tends to track the portfolio's overall earnings per share growth. If any of you read my blog series on model portfolios over the past few years, you probably noticed exactly the same thing. To be sure, the price for the portfolio twists and turns violently each day or each year for any reason or for no reason at all.

But in fact, these violent twists and turns in stock prices are exactly why I mostly choose to buy individual stocks instead of diversified index funds. You see, silly price swings in the market have left me convinced that stock prices are at least partly driven by mania, or trading momentum, or blind indexing - factors that have NOTHING to do with earnings. Does the intrinsic value of a business change much on any given day? Happens all the time If Philip Morris PM misses revenue estimates one quarter and the stock crashes, I buy more shares because in my mind, a single quarterly report says absolutely NOTHING about the long-term intrinsic value of a business.

Do you really think that the vicissitudes of the Italian sovereign bond market will make people drink less Moet champagne?


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I doubt it and in fact, maybe those vicissitudes will make people want to drink MORE. Sometimes it takes years to find out whether I outguessed the market or not. This too is a niche I'm looking to exploit, for unlike a professional fund manager, I can afford to wait for years or even decades to find out if I was right, or if I acted like an utter moron which happens sometimes and which costs me money every time.

Patience is probably the only edge that individual investors like me have in the single-most competitive asset market known to man. The value of that edge cannot be overemphasized. Did I ever tell you about our cat who was ominously named "Muffin. She didn't move. In fact, she didn't actually do anything.

She just sat. Hours and hours and hours. Tick tock, tick tock, tick tock. Then the sun went down. Then the mouse finally came out. Then Muffin bit off its head. Pure investment genius. And oh No mouse heads for YOU. First let's discuss the "how" and then get to the "what. What's a reasonable price?

How To Invest $1,000,000 For Future FIRE

I take a weighted average of the last 5 or 10 years of earnings, and pay less than 23 times those average earnings, depending on the company's earnings growth. I make exceptions, though. What if the company has changed in a material way over the past 10 years?

In that case I might only look at the most recent 3 or 4 years of earnings. I make exceptions to my investment criteria based on random life observations. I was in Thailand recently and noticed a demographic explosion: wealthy young professionals there are seemingly obsessed with owning only the most recognizable luxury brand names. Humans can still see things that give us some advantages over computer trading algorithms, and while that remains the case, I'm very comfortable taking my reinvestment strategy off a purely numbers-based autopilot. What's a "high quality" business?

To my way of thinking, it's a business with a mix of some or all of the quantitative and qualitative factors listed below. Manageable debt and an unquestioned ability to repay it will lower the expenses of the business, and will limit bankruptcy risk. I use a free account at Moody's and I check credit ratings for my holdings on a periodic basis. The process of compounding THRIVES on a steady influx of cash, so I want to own businesses that can consistently make money with a wide margin for error in both good and bad economies and across business cycles.

Steady, thriving businesses that can continuously redeploy capital in a profitable way are the perfect harness for the power of compounding. Cutting costs is a great way to generate rising profits, but is only possible to a point. A company that can constantly access new markets and deliver more and more expensive products and services has limitless upside potential. Retained earnings can tempt managers into expensive follies, such as corporate takeovers that do not make much sense.

By contrast, companies with steady, rising dividends must have some discipline when it comes to the company's free cash flow. Nothing says "loyalty to shareholders" louder than a steady supply of checks in your mailbox. Oh, and as far as discipline goes, management understands that taking those accustomed checks away from shareholders will elicit a gentle and soothing response from the stock market Earnings statements can be misleading.

Over time, if a business is really doing as well as the earnings statement says it is, you ought to see an impact materialize on the balance sheet. Here are some examples. Owen Winkelmolen. Fee-for-service financial planner and founder of PlanEasy. Goals are important. Financial goals are especially important. So it may remain at the same level for a few years. Free Resources. Not easy. This is a reasonable assumption for long-term investment returns Relevant: Saving money for retirement is extremely relevant to us.

Financial planner, personal finance geek and founder of PlanEasy. New blog posts weekly! Related Posts…. The Simple Retirement Plan.

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There's just one more thing I can do to hurry along towards that goal. As long as I don't sell appreciated assets, the capital gains will enjoy tax-deferred status. If I keep the positions until I die, then under current law, the capital gains will permanently escape taxation and my heirs will take a stepped-up basis in the stock equal to the price for the shares on my death depending on tax elections the executor of my Will makes.

After practicing trusts and estates law for many years, I can tell you from much first-hand experience that Section of the Internal Revenue Code is the source of absolutely mind-boggling amounts of permanently tax-exempt capital gains. Dying is one of the smartest tax strategies around. How will I generate non-realized capital gains on my portfolio? Naturally, I have no control over market prices so I can't assume when or whether the gains will ever materialize. The best that I can do is to take my best shot, which will be a function of doing what I've already been doing for the past 20 years.

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My investment approach focuses squarely on compound earnings growth. I look at the earnings per share for each company I own, I multiply that by the number of shares I own, I add it all up and can then see the overall earnings per share for my entire portfolio. My portfolio is essentially a multinational conglomerate, and I'm like any CIO. My job is to grow the overall earnings per share for the overall portfolio. I do that in three ways: 1 I only invest in companies that do a good job growing their and therefore, the portfolio's earnings per share, 2 I reinvest savings and allocate capital into more businesses at the best prices I can find and 3 I occasionally reallocate capital away from stocks that trade at high multiples and reinvest the proceeds into similar quality companies trading at lower multiples.

My overwhelming bias is to avoid selling anything for any reason - particularly if doing so would result in capital gains taxes that could otherwise be avoided. I might sell expensive shares of a company as a result of the company being taken over or bought out, for example. I will most likely sell any company on the spot for engaging in illegal or fraudulent activity, and I will likely do so immediately and irrespective of the share price. Absent those sorts of circumstances, I'd much rather hold the stock. To the extent that I ever willingly sell stock, I'm far more comfortable selling highly appreciated, expensive stocks if I hold the shares in a ROTH IRA and won't attract any capital gains taxes.

Over time, my experience shows me that the price for the portfolio tends to track the portfolio's overall earnings per share growth. If any of you read my blog series on model portfolios over the past few years, you probably noticed exactly the same thing. To be sure, the price for the portfolio twists and turns violently each day or each year for any reason or for no reason at all.

But in fact, these violent twists and turns in stock prices are exactly why I mostly choose to buy individual stocks instead of diversified index funds. You see, silly price swings in the market have left me convinced that stock prices are at least partly driven by mania, or trading momentum, or blind indexing - factors that have NOTHING to do with earnings. Does the intrinsic value of a business change much on any given day? Happens all the time If Philip Morris PM misses revenue estimates one quarter and the stock crashes, I buy more shares because in my mind, a single quarterly report says absolutely NOTHING about the long-term intrinsic value of a business.

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Do you really think that the vicissitudes of the Italian sovereign bond market will make people drink less Moet champagne? I doubt it and in fact, maybe those vicissitudes will make people want to drink MORE. Sometimes it takes years to find out whether I outguessed the market or not. This too is a niche I'm looking to exploit, for unlike a professional fund manager, I can afford to wait for years or even decades to find out if I was right, or if I acted like an utter moron which happens sometimes and which costs me money every time.

Patience is probably the only edge that individual investors like me have in the single-most competitive asset market known to man. The value of that edge cannot be overemphasized.

JSE Power Hour: Tax-free investing 2019

Did I ever tell you about our cat who was ominously named "Muffin. She didn't move. In fact, she didn't actually do anything. She just sat. Hours and hours and hours. Tick tock, tick tock, tick tock. Then the sun went down. Then the mouse finally came out.