Are You Making This Common but Costly Retirement Mistake?

Editor's note: This week, we're sharing some important wealth-building advice from our friend Mark Ford… including how to live a rich life for less money, how to start improving your financial situation right away, and how to get a little bit richer every day. Today, he warns about the biggest mistake people make in retirement…
 
I consider myself to be an expert of sorts on retirement. Not because I've studied the subject, but because I've retired three times.
 
Yes, I'm a three-time failure at retiring. But I've learned from my mistakes. Today, I'd like to tell you about the worst mistake retirees make.
 
It's a common mistake… Yet I've never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books…
 
The biggest mistake retired people make is giving up all their active income.
 
When I say active income, I mean the money you make through your labor or through a business you own. Passive income refers to the income you get from Social Security, a pension, or a retirement account. You can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investments.
 
When you give up your active income, two bad things happen…
 
First, your connection to your active income is cut off. With every month that passes, it becomes more difficult to get it back.
 
Second, your ability to make smart investment decisions drops because of your dependence on passive income.
 
Retirement is a wonderful idea: Put a portion of your income into an investment account for 40 years and then withdraw from it for the rest of your life. Once you retire, you won't have to work anymore. Instead, you will fill your days with fun activities like traveling, golfing, going to the movies, and visiting the grandkids.
 
But consider this: A retirement lifestyle for two, like the one I described above, would cost about $100,000 per year.
 
How big of a retirement account do you need to fund that?
 
Let's assume that you and your spouse could count on $25,000 a year from Social Security and another $25,000 from a pension plan (two big "ifs").
 
To earn the $50,000 balance in the safest way possible (from a savings account), you would need about $5 million, because savings accounts only pay 1% at most right now.
 
But middle-class American couples my age are trying to retire with an account in the $250,000 to $300,000 range. And that's where the trouble begins. To achieve an annual return of $50,000 on $300,000, you would need to make 17% per year.
 
Getting 17% consistently over, say, 20 years may not be impossible, but it's too risky for my taste.
 
I retired for the first time when I was 39. I put my money into AAA-rated municipal bonds (very safe at that time), yielding between 5% and 6%. It didn't take long to figure out the math: At those ROIs, I could not maintain the lifestyle I wanted. To get higher returns, I would have to put my money into riskier assets. I had an instinct – correct, I think, in retrospect – that would end badly.
 
So what did I do? I went back to work.
 
I went back to earning an active income because I didn't want to spend my days trying to "beat" the market and my evenings worrying about how I was doing. And do you know what happened? The moment I started earning money again, I started to feel better.
 
Retirement isn't supposed to be a time of worrying about money. But when your income is entirely dependent on the return you're getting on your investments, that is exactly what will happen.
 
As I write this, millions of Americans my age are quitting their jobs and selling their businesses. They are reading financial magazines and subscribing to investment newsletters. They are hoping to find a stock-selection system that will give them the 20% to 30% returns they need. But they will find out that such systems don't exist. They will have good months and bad years, and they will compensate for those bad years by taking on more risk. The situation will go from bad to worse.
 
It doesn't have to be this way. Let's go back to the example of the couple with the $300,000 retirement fund and the $100,000-per-year retirement dream. If they each earned only $15,000 in active income and added that to their Social Security and pension, they would need a return of only about 7% on their retirement account, which is more realistic.
 
I am not saying that you should give up on the idea of retirement. On the contrary, I'm saying that retirement might be more possible than you think.
 
But you must replace the old, defective idea that retirement means living off passive income only. Paint a new mental picture of what retirement can be: a life free from financial worry that includes lots of travel, fun, and leisure. Funded in part by active income from doing some sort of meaningful work.
 
The first benefit of including an active income in your retirement planning is that you will be able to generate more money when you need to.
 
But the other benefit – which is less obvious – is that it will allow you to make wiser investment decisions because you won't be a slave to your investments.
 
There are dozens – no, hundreds – of ways for a retired person to earn a part-time active income. You can, for example:
 
•   Earn $50 to $500 per hour working part- or full-time, from home or at the local coffee shop, as a freelance copywriter.
    
•   Follow a simple money-making formula to begin your own, fully scalable international trading business, acting as a highly commissioned broker by hooking up U.S. buyers with Chinese manufacturers.
    
•   Make $30 to $100 per hour as a tutor. Or you could put your friends and family to work as tutors and make $500 to $1,000 per hour.
    
•   Make $50 to $500 per hour running a home-based business that performs routine homeowner services such as lawn care, pool maintenance, tree trimming, or carpet cleaning.
    
•   Earn $50 to $100 per hour walking dogs and offering your clients other related services such as pet sitting, dog grooming, and obedience training.
 
Take this advice to heart and you'll avoid the biggest mistake many retirees make.
 
Regards,
 
Mark Ford
 
Editor's note: As Mark explained in today's essay, it's critical to keep your income streams active. The Palm Beach Letter research team has found more than 30 unique ways to generate safe income streams. Learn about them – and how to get all of their research for just pennies a day – right here.

Source: DailyWealth

How to Get Richer Every Day

Editor's note: In the past few days, Mark Ford has shown DailyWealth readers that you don't need to scrimp in order to save money and that it's never too late to start making better financial decisions. In today's essay, he shares his No. 1 rule for building wealth…
 
Of the hundreds of wealth-building strategies I've tried over the years, the best one was also the simplest: Make sure you get a little bit richer every day.
 
This thought occurred to me more than 30 years ago. I had recently decided to become rich, and that decision had me reading and thinking about wealth-building day and night.
 
I had fantasies of getting rich in all sorts of fancy ways. But deep down I knew that complicated strategies were not for me.
 
When it came to making money, I was extremely risk-averse. In the race to a multimillion-dollar retirement, I was the tortoise, not the hare…
 
At the time, I had a net worth of zero and an annual salary of $35,000. With three small children and my wife in college, our expenses were gobbling up every nickel of my after-tax income.
 
So my first wealth-building goal was small: I would get richer by just $10 a day.
 
I knew I would eventually raise the ante, but I wondered, "How much money would I acquire in, say, 40 years by just putting an extra $10 aside every day in a bank account earning 5% per year?"
 
I did the numbers and was happy with the answer: almost $500,000.
 
My total capital invested would be $149,650. The simple interest would total $156,950, and the compounded interest would amount to $182,061, for a total of $488,661.
 
Then I wondered, "What would happen if I put away $15 per day?" That came to $719,604.
 
And then I asked, "What would my retirement fund grow to at 8%?" That came to more than $1.6 million!
 
You can imagine my excitement. And so I made this my No. 1 wealth-building commandment: Get a little bit richer every day.
 
But I soon realized that I couldn't follow this rule consistently if I invested my money in stocks. The market fluctuated too much. I'd be worth $110,000 one day and $108,000 the next.
 
My friends and colleagues who knew more about investing than I did told me not to worry about these short-term fluctuations. They said if I kept my focus on the long term, I would get the 9% or 10% the market delivers over a long period of time.
 
But even though I understood the principle, I didn't want to settle for that.
 
I resolved the problem. I put the bulk of my retirement savings into municipal bonds, high-yielding bank CDs, and unleveraged rental real estate properties. This drastically reduced my portfolio's volatility.
 
But it also – in theory, at least – reduced my expected ultimate return on investment (ROI).
 
I compensated for that lower ROI by taking on more work and devoting a portion of that extra income to my retirement savings. This ensured I was always ahead of my schedule – even if the ROI I was getting on bonds, CDs, or real estate dropped.
 
My simple, tortoise-paced program worked. Since I made this resolution in the early 1980s, I have never experienced a single day of being poorer than I was the day before.
 
Think about that.
 
And there's more: Submitting yourself to this commandment will change the way you think and feel about building wealth.
 
It will help you appreciate the miracle of compound interest. It will make you less accepting of risk. It will make it easier to understand the benefits and drawbacks of every type of investing.
 
And it will turn you into an income addict, which – in my book – is an essential component of thinking rich.
 
If you want to use this strategy for retiring rich, begin as I did with a goal of $10 per day. Once that becomes easier, you'll find that you want to raise the ante. You could hike it to $15 per day, as I did my first year. But soon thereafter, your addiction to income will make it possible for you to raise your target much higher than that.
 
These days, my target is $10,000 per day – and I do it without worry.
 
I've explained this strategy to many people over the years. And I don't think a single one ever took it seriously.
 
Perhaps it didn't seem clever enough for them. Or perhaps they felt they were already doing well by following the investment schemes they were using at the time.
 
But none of them ever acquired the wealth I did.
 
They sometimes had great individual hits they'd tell me about – or even streaks of winners when the markets were favorable. But as time passed, Mr. Market always took a toll on them.
 
In the race for wealth, I've always been a tortoise. But by following this simple rule of getting richer every day, I was able to do better than I ever expected… without a single day of feeling poorer than I was the day before.
 
Regards,
 
Mark Ford
 
Editor's note: If you want to get richer and increase your income every day, Mark's Palm Beach Letter advisory is a must-read. He and his research team have uncovered dozens of nontraditional ways to generate extra income… like a way to get guaranteed payments for the rest of your life. Get more details on this loophole and many others right here.

Source: DailyWealth

How to Become Financially Independent in Seven Years or Less

Editor's note: Yesterday, our friend Mark Ford shared a few tips for mastering the balance between spending and saving. Today, in the second part of his weeklong wealth-building series, he explains that wherever you are financially, you still have time to build wealth…
 
You are middle-aged. Your net worth is meager. Your income is barely sufficient to meet expenses… And those expenses are going up. The War on Cash is looming. Economists are predicting things will get worse. What can you do?
 
Should you give up your dream of retiring comfortably one day? Should you accept a future of increasingly meager existence? Should you grow bitter and curse the powers that be for putting you in this situation?
 
Or should you take responsibility for your situation and make changes?
 
That last question was rhetorical, of course. But sometimes, I wonder if people really do understand their options. There are things that happen in life that we can't control. But we can control the way we respond to them…
 
I understand that when you are halfway through your life and barely making ends meet, it seems like the only chance to become financially successful is to win the lottery (either an actual lottery or the stock market equivalent of one). So it may be frustrating to hear some rich guy from Palm Beach tell you that you can't quickly turn $25,000 into $1 million by investing in stocks.
 
But I believe – no, I am certain – that anyone who has modest intelligence and a positive attitude can become financially independent in seven years or less if he or she is willing to work incredibly hard.
 
You do not have to give up on your dream of being wealthy. You always have the ability to change your financial life. It will just take a bit of time and patience. And it will require that you change some of the thoughts and feelings you have about wealth and your relationship with wealth.
 
The first thing you must do is accept the fact that you are solely and completely responsible for your current financial situation. Before you react defensively, read that sentence again… I didn't say you are the cause of your situation. I said you are responsible for it.
 
By taking responsibility for your current condition, you also assume responsibility for your future. Nobody can change your fortune but you. And nobody else will. The sooner you accept that reality, the sooner you will shed the anger and blame and begin to feel financially empowered.
 
I'm not giving you a pep talk. I'm telling you the truth. I've done it myself, and I've coached dozens of people to do it, too. It is a simple adjustment of your thinking, but it is extremely powerful. It works instantaneously. Without it, you cannot move forward by even a single inch.
 
The second thing you must do is set realistic expectations. I've had people tell me that they don't want to make 10% or 15% per year on their money. They think returns like that are ho-hum. They want some incredible stock tip or a secret get-rich-quick technique. But when I hear someone say that, I think, "This person will never become wealthy."
 
Realize that 10%-15% is a high rate of return. Warren Buffett – the most successful investor of all time and one of the richest people on the planet – has averaged 19% on his investments over his entire career.
 
And realize that the journey to millions of dollars is earned $100 at a time. You must be willing to accept this fact to move your financial life forward. Your financial life is like a car that has stalled. And right now, you want to be driving it at 100 miles per hour. But it can't go from zero to 100 miles per hour in no time flat. Inertia is against you. Be happy with 10 miles per hour now… and then 20… and then 30. This is how wealth accumulates… gradually at first but eventually at lightning speed.
 
The third thing you must do is thoroughly understand the difference between spending and saving. With every paycheck you get, cover your necessary expenses first (bills, mortgage, etc.). Then, put some money toward saving. This includes what you use to invest, as there's no distinction from good savings and good investing. What you save can be used as leverage to create additional income. Only after you have "paid yourself" by saving should you add to your "spending" account.
 
The fourth thing you must do is recognize that your net investible income (the amount of cash you have after spending and saving) is the single most important factor in determining how quickly you will become wealthy.
 
Commit to adding to your income with a second income. Make an honest count of the number of hours each month you devote to television and other nonproductive activities. Devote your time to building wealth instead. Cast aside the comfortable shoes of victimization. Put on the working boots of a financial hero.
 
It's not fun to realize, in the midst of your life, that you haven't acquired the wealth you want. But the good news is your past doesn't have to be a prologue… unless you allow it to be one. You can change your fortunes today by doing the four things I've just told you to do.
 
You are only 47, not 87. You have plenty of time to increase your income and grow your net worth. Why do you assume all is lost when – as any 87-year-old will tell you – you have a whole wonderful life ahead of you… a life that can be rich in 100 ways?
 
Regards,
 
Mark Ford
 
Editor's note: Mark and his research team at the Palm Beach Letter have found more than 30 little-known ways to help you generate safe and steady streams of income… like a loophole that could allow you to collect up to $2,200 a month for the rest of your life as long as you live in the house you own. Learn more about this and many other ways to generate income right here.

Source: DailyWealth

You CAN Live a Rich Life While Building Wealth

Editor's note: This week, we're sharing some of the best wealth-building tips from our friend Mark Ford. Mark is a serial entrepreneur – a self-made millionaire who has launched dozens of businesses. In today's essay, he explains how to optimize your money so that you can build wealth and enjoy it…
 
I grew up relatively poor, the second of eight children. My father earned $12,000 a year as a college professor. As a teenager, I was ashamed of our small house, my hand-me-down clothes, and my peanut butter and jelly sandwiches.
 
I dreamed, literally dreamed, of living like a rich man.
 
And so, when I got my first job at age 9 as a paperboy – and then at 12 as a lackey at the local carwash – I would spend my money on luxuries, like a pair of brand-new Thom McAn shoes.
 
I worked every chance I got while in high school, and then worked two or three jobs during college and graduate school. I spent 80% of my money on necessities: food, clothes, and tuition. But I always spent a bit on little extravagances. Even back then, I had the notion that I didn't need to deprive myself now for some better life later.
 
I tell you this to emphasize a key part of the simple money-management system I've used to generate millions in wealth…
 
I don't believe in scrimping severely to optimize savings. I believe you can live a rich life while you grow rich, so long as you are willing to work hard and stay smart about your spending.
 
Think of the typical earning/spending/saving patterns of most wealth-seekers…
 
During their 20s, they spend every nickel of their modest income to make ends meet. At that age, it is nearly impossible to put aside money for the future.
 
During their 30s, their income increases. But this is also when they start a family. Expenses soar. There are more mouths to feed, a "family" car to buy, and the dreaded down payment on a first house. They manage to save a little during these years, but not nearly as much as they thought they would.
 
If they work hard and make good career decisions, their income climbs much higher in their 40s and early 50s. They have more money to put aside for the future, but they are also tempted into buying newer cars, nicer clothes, more exotic vacations, and – the biggest wealth-stealer of them all – that dream house.
 
In their later 50s and 60s, their income plateaus or even dips… And they may have to start shelling out for college tuition. Aware that their retirement funds are being depleted rather than enhanced, they invest aggressively to try to make up the difference.
 
Finally, sometime in their mid- to late 60s, they realize that they don't have enough money to retire. They have spent almost 40 years working hard and chasing wealth, but they never managed to attain it.
 
It's sad, but it's the reality for most people. And it is just as true for high-income earners (doctors, lawyers, etc.) as it is for working-class folks.
 
There are two lessons to be drawn from this:
 
First, it is very difficult to acquire wealth if you increase your spending every time your income goes up.
 
Second, setting unrealistic investing goals means taking greater risks. And taking more risks, contrary to what many pundits say, will almost always make you poorer… not richer.
 
The truth is, there is only a marginal relationship between how much you spend on housing, transportation, vacations, and toys and the enjoyment you can derive from them.
 
My spending strategy is simple: Discover your own, less expensive way to live a rich life. By a "rich life," I mean a life free from financial stress, but also filled with things that give you pleasure.
 
The fact is that you can own and enjoy the world's finest things – the things that make life luxurious – for a tiny fraction of what a billionaire might pay. For example…
 
•   You don't have to "pay up" for a $175,000 Savoir Beds mattress. You'll sleep just as well on a $3,000 Stearns & Foster Silver Dream mattress – or on one you can make yourself for $1,000.
    
•   A bottle of 1989 Château Haut-Brion will set you back $1,700. But a Crozes-Hermitage White Petite Ruche 2012, which scored a 92 on Wine Spectator, will taste nearly as good and only cost you $30.
   
•   You could cough up $140,500 on a Maserati Quattroporte. Or you could spend $40,000 on a used BMW 760Li that, I think, is more beautiful, comfortable, functional, and durable.
    
•   Everyone dreams of spending a few $1,500 nights in the Hôtel Barrière Le Fouquet's. But I guarantee you'll have a better, cozier, "richer" experience at a $300-per-night bed and breakfast.
    
•   Your family can be just as happy in a house that costs $100,000 or $200,000 as opposed to one that costs $10 million or $20 million.
    
•   Brand names are parasites that gobble up wealth. You could buy off-brand items that work just as well or better and save tens of thousands of dollars while losing none of the prestige.
   
•   You could have all the glamor of eating a $200-per-person meal at NAOE in Miami. But you can get better food and a much better experience by hiring a private chef to cook whatever you feel like for $35 per hour.
Make smart spending decisions. Stop thinking that because you're earning more money, you should be spending more. Your future wealth depends on how much you save and invest, not on how much you spend. And if you want more ways to live a rich life for less money, you'll find them in my book, Living Rich.
 
Regards,
 
Mark Ford
 
Editor's note: Mark and his research team at the Palm Beach Letter have found more than 30 little-known ways to help you generate safe and steady streams of income. Best of all, his "Income for Life" strategy lets you generate tax-free income that's invisible to the IRS. Learn how you can access all of Mark's research for just pennies a day right here.

Source: DailyWealth

Don't Let the 'Glidepath' Illusion Ruin Your Retirement

Editor's note: Today, we're concluding our weeklong series of investment lessons with value investor Dan Ferris. (If you missed the previous essays, read them here, here, here, and here.) In the final installment, which we originally published last August, he explains how to avoid a hidden danger that could ruin your retirement…
 
The traditional notion of retirement says you should take bigger risks in the stock market when you're young.
 
You have more time to make up for losses than when you're older. As you age, you should take fewer and fewer risks, so you won't lose your retirement money… so the conventional wisdom goes.
 
This well-worn strategy is called "Glidepath investing." And it could ruin your retirement.
 
Let me explain…
 
The emotional appeal of Glidepath investing is obvious. Young people feel like they're going to live forever, so it feels better to them to take more risks. Buying riskier stocks feels right.
 
Older people feel they have more to lose and might not be able to support themselves one day, so they tend to be more risk-averse. For them, buying fewer stocks and more bonds feels safer.
 
There's an army of financial planners and other "helpers" out there selling products designed to get you to retirement with a big, safe nest egg, based on this feel-good notion.
 
However, research suggests that what feels good isn't necessarily what you should do…
 
Investor and researcher Rob Arnott of Research Affiliates published a report in 2012 called "The Glidepath Illusion." Arnott's research suggests Glidepath investing will make you less money by leading you to put less money in higher-return investments (stocks).
 
Arnott studied 141 years of stock and bond returns from 1871 to 2011. From these data, he hypothesized a range of possible outcomes. In general, Arnott found evidence that the range of outcomes from doing the opposite of Glidepath investing was superior to the range of Glidepath-based outcomes.
 
It's well-documented that stocks outperform bonds over the long term. Glidepath investors wind up putting a bigger percentage of their assets in stocks when they're younger and have less to invest. They put a higher percentage into bonds when they're older and have more to invest.
 
That's the basic error. Investors put fewer dollars into higher-return investments, then interrupt the compounding process to put more dollars into lower-return investments. So they make lower returns than if they had done the opposite of Glidepath investing.
 
Glidepath investing is a good recipe for feeling good, but a poor one for making as much money as possible in stocks and bonds. Arnott's conclusion is worth quoting and keeping close at hand as a reminder…
 
Investors who are prepared to save aggressively, spend cautiously, and work a few years longer (because we're living longer) will be fine. Those who do not follow this course are likely to suffer grievous disappointment… No strategy can make up for inadequate savings or premature retirement.
Save aggressively. Spend cautiously. Let your investments compound as long as possible before drawing them down. That's sound advice.
 
Sadly, it makes perfect sense that the financial-services industry is once again doing exactly the wrong thing for clients. Don't trust financial planners and brokers. They're commissioned salespeople. They're incentivized to sell investments, NOT to make you money in stocks and bonds.
 
For as long as my health holds out, I'll stay productive and hopefully get well-compensated for my efforts, saving aggressively and spending cautiously. I recommend you at least give the traditional notion of retirement a second thought and consider an alternative that'll leave you better off emotionally and financially.
 
Good investing,
 
Dan Ferris
 
Editor's note: Saving up cash to spend on high-quality, dirt-cheap companies is a surefire way to investment success. Dan has found an incredible opportunity to put your cash to work in the market… But it may not last long. Learn more about it right here.

Source: DailyWealth

Why 'Boring' Businesses Are More Profitable Than 'Exciting' Ones

Editor's note: All week, we've shared some of our favorite investment lessons from our friend and colleague Dan Ferris… including why it's important to ignore the news, how to spot the world's greatest businesses, and why the price you pay is the most important key to your success. Today, in an essay that we originally published in April 2012, he explains the magic of "boring" businesses…
 
A reader wrote to me with a complaint…
 
He was irritated with my coverage of World Dominating Dividend Growers (WDDGs).
 
These stocks are too "boring," he said. Why pay to hear how these companies continue to do the same darn thing day in and day out?
 
If you're a regular DailyWealth reader, you know what I mean by WDDGs. These businesses are usually the No. 1 companies in their industries. For example, UPS (UPS) is the No. 1 package-delivery company in the world. Wal-Mart (WMT) is the No. 1 retailer. Intel (INTC) is the No. 1 maker of semiconductors.
 
These companies have thick profit margins, have fortress balance sheets, and pay out large and growing dividends. Because they are so good at what they do, and because of their dominant position in their industries, they are extremely resistant to outside competition. This allows their shareholders to safely compound their wealth over many years.
 
They are the ultimate safe havens. But according to the reader's complaint, there wasn't enough "new" stuff happening with these stocks to justify the time I spend telling readers about them.
 
It's extremely unlikely this person will ever make substantial money in the stock market.
 
You see, the urge for "action" is one of the hallmarks of the average stock market loser. Put bluntly, it's how poor people view the market. They see it as a place for "action." But investing isn't about action and excitement. That's what Las Vegas casinos are about.
 
Only after someone grows to favor "boring" over "action" does he start thinking like a rich investor, rather than a poor one. You need to understand that investing is about making money and keeping it safe, and that's what WDDGs do for you…
 
In fact, back in 2008, when the stock market fell 38% for the year, and more than 53% from its late-2007 highs, Wal-Mart returned 18%, and McDonald's (MCD) returned 6%. Not all World Dominators performed that well in 2008, but they all did better than the overall market.
 
Yes, they're boring… But think about why they're boring.
 
They don't change much over the years. Coca-Cola (KO) looks a lot like it did 20 years ago, except it's bigger now. Same with Wal-Mart, McDonald's… and most other WDDGs.
 
Coke will continue to exploit the world's largest beverage-distribution system. Wal-Mart will keep selling everyday goods at the cheapest possible price. McDonald's will keep selling fast food, based on what its customers demand. Boring. Very boring. But very profitable.
 
Compare that to exciting businesses, like biotech. Most biotech companies don't have any sales because they're just research companies. They usually wind up going out of business. Small exploration-mining stocks are also exciting. And they, too, generally have no revenues… And many of them wind up worthless.
 
But the WDDGs just keep doing the same old boring thing year in and year out… And their sales and profits grow almost every year, year after year, decade after decade. Their dividends keep growing every single year, year after year, for 10, 20, 30, more than 50 years in a row in some cases.
 
For investors, putting money into WDDG stocks is so boring, it's almost like putting your money in a plain old bank account… except this account can make you double-digit average annual returns over a long period of time… instead of the 0.1% you get in bank accounts these days (per Bankrate.com's national average). Over the past year, software giant Microsoft (MSFT), Internet "plumber" Cisco (CSCO), and medical-equipment manufacturer Becton Dickinson (BDX) have grown their dividends at an average rate of more than 16%.
 
If you want excitement, go to Las Vegas. If you want to make money, invest in boring businesses that dominate their industries and pay higher dividends every single year.
 
Good investing,
 
Dan Ferris
 
Editor's note: Many of the companies in Dan's Extreme Value portfolio are "boring." But they gush cash… trade at steep discounts to their intrinsic value… and dominate their industries. And investors who buy today could be sitting on huge profits several months from now. We think that's anything but boring. Learn more about one of Dan's favorite opportunities right here.

Source: DailyWealth

A Timeless Rule Followed by Every Wealthy, Sophisticated Investor

Editor's note: So far this week, Dan Ferris has shown DailyWealth readers why they should ignore the noise in the financial media, and how to identify World Dominators. Today, he explains the most important thing to your investment success…
 
On June 15, 1998, Coca-Cola (KO) – owner of the world's most powerful brand – traded for $88.94 per share.
 
For many years, I've been telling my readers to keep the bulk of their equity holdings in companies like Coca-Cola, which has fat profit margins, high returns on capital invested, a great brand name, and a sustainable competitive advantage. I call companies like Coke "World Dominators."
 
Owning dividend-paying World Dominators and compounding their gains over many years is the surest, easiest, greatest way to get rich in stocks. But anyone who bought Coke in late 1998 ignored a timeless rule that wealthy, sophisticated investors hold sacred. And they suffered big losses.
 
What is this rule of the wealthy? How did violating this rule allow some investors to actually lose money on one of the world's greatest companies? And how can you begin using it to make a fortune in stocks?
 
The rule is that the price you pay is the most important thing when it comes to succeeding as an investor. If you pay a cheap-enough price, you can make money in even the worst businesses. If you pay a dear-enough price, you can lose money for long periods of time in even the best businesses.
 
Back in 1998, Coke's annual earnings amounted to $1.43 per share. So at the all-time high of $88.94, the market was valuing the business at 62 times annual earnings.
 
That's crazy expensive. Investors were accepting an "earnings yield" of about 1.6%. (That's the amount in earnings the company generates as a percentage of your purchase price. So take $1.43 in earnings, divided by an $88.94 share price, and you get 0.016… or 1.6%.)
 
Think about it this way: It's like buying a $100,000 house that you can rent out for about $1,600 a year, or $133 a month. It would take you 62 years to get your money back out of that investment. And only another fool would pay you $100,000 to take the house off your hands.
 
When you accept terms like that, you're almost guaranteed to lose money in stocks. And that's exactly what happened to investors who bought Coke at the wrong time.
 
Less than three months after Coke nearly hit $90 a share, it was down more than 30%. Five years later, it was down 50%. Even 13 years later… counting dividends… those investors hadn't made a dime in Coke… which is one of the world's greatest companies. Nothing much changed about Coke's business during that time. It was still one of the world's most recognizable brands. It still sold soda all over the world. It still had high profit margins.
 
The losses incurred by folks who bought in 1998 were directly the result of paying a ludicrously high price to become a shareholder.
 
The same thing happened to investors who bought software giant Microsoft (MSFT) in 1999. Shares peaked at $119. Today, the shares trade around $53.
 
Investors who bought back then lost because they paid the wrong price. The stock was offering roughly a 2.4% earnings yield. At that rate, it would take you 42 years to get your money back.
 
I don't know about you, but I don't have that kind of time. I'd much rather see a "payback period" of 12 years or less. That means getting an earnings yield of 8%-10% (or more).
 
Smart, successful investors know that the price you pay is everything when it comes to making money in stocks, commodities, or any private business. You can lose money even in the world's greatest businesses if you pay too much. If you take that lesson to heart, and only pay the right price – the cheap price – you're virtually guaranteed to make money over the long term.
 
Good investing,
 
Dan Ferris
 
Editor's note: As Dan explained in today's essay, the price you pay is critical. Right now, one of his favorite investment opportunities is trading at a huge 40%-plus discount to the value of its assets. By buying today, you're virtually guaranteeing the price you pay is favorable. Learn more about this opportunity right here. (You won't have to sit through a long promotional video.)

Source: DailyWealth

A Common-Sense Guide to 'World Dominating' Dividend Stocks

Editor's note: We're continuing this week's series of investment lessons from our colleague Dan Ferris. Yesterday, he showed readers the key to success for some of the world's greatest investors. Today, he explains how to identify World Dominating stocks…
 
If I could teach investors just one thing, it would be how to identify and value a World Dominating Dividend Grower (WDDG) business.
 
It's the single best way to get rich in stocks…
 
Remember, these are the world's strongest, safest companies. These companies dominate their industries. They have the best brand names, the biggest competitive advantages, and the biggest profit margins, plus they pay the safest dividends.
 
In other words, these stocks are different from typical stocks. They are different from "the market." WDDGs are vastly better.
 
And today, I'll show you exactly how to identify one…
 
Let's use Becton Dickinson (BDX) as a "case study."
 
Becton Dickinson is the World Dominator of needles and syringes for the medical industry. Odds are you've come into contact with the company's products dozens of times in your life and never realized it.
 
Like many WDDGs, BDX was the driving force in creating the industry it dominates today. In 1906, it built the first plant in the United States for making needles and syringes. And in 1925, BDX began offering the BD Yale Luer-Lok Syringe, which created a secure way to attach and remove a needle from a syringe. These connectors remain an industry standard today. BDX is also the top maker of safety devices to prevent needle-stick injuries.
 
BDX has an extraordinary brand, and it is No. 1 in its industry. Those are "on the surface" clues to finding these stocks. But we also need to look inside the company… to find the financial clues of a WDDG business.
 
To say Becton Dickinson has all the financial clues of a World Dominating Dividend Grower is the understatement of the year…
 
One of the hallmarks of a WDDG is consistent profit margins. This is the amount of money a company earns from each dollar of sales. A great business should have consistent profit margins so it can pay you a consistent stream of dividends… But that company should also have a sustainable, long-term competitive advantage so it can consistently earn those profit margins.
 
Becton Dickinson's gross margins (the margin earned before deducting the basic costs of doing business) are consistently above 40%. Its net margins (the margin earned after deducting all expenses and income taxes) have consistently been between 10% and 17% for the last 10 years.
 
That's huge. Most businesses are ecstatic to earn net margins of 5% or 10%.
 
Another hallmark of a WDDG is huge free cash flow. Free cash flow is the final "cash in hand" number that a business owner has after deducting expenses. It's a vital number for investors.
 
BDX gushes free cash flow. On sales of $12.2 billion, BDX generated more than $1.6 billion in free cash flow the last four quarters.
 
A third sign of a WDDG stock is a strong balance sheet. As shareholders of a business, we want to see lots of valuable assets and low debt. We want a strong balance sheet so we don't have to worry about tough times causing a bankruptcy.
 
Becton Dickinson has an excellent balance sheet. It has $1.7 billion in cash and short-term investments and less than $11.9 billion in debt. BDX's debt is tiny compared with its earnings. Its earnings cover its interest expense nearly five times over. Just imagine earning five times your mortgage payment every month!
 
Finally, for a company to qualify as a WDDG, we need to see a history of dividend growth. Becton Dickinson is one of the best dividend-growth stocks in the world. BDX has relentlessly raised its dividend every year for the last 44 years. Its last increase was by 10%…
 
Becton Dickinson pays out nearly one-third of its earnings per share in dividends. So there's plenty of room for big dividend growth in the coming years. Right now, BDX yields 1.5%. If it maintains its 12.5% annual dividend growth, you'll be making about 14% annually over your original cost in 20 years.
 
To sum up, there are obvious things to look for when you're after the world's safest, best dividend-paying stocks… the kind you can hold for decades and get rich. This includes a dominant brand and the top position in an industry.
 
But today's essay shows you some vital "financial clues" for finding these stocks… and why Becton Dickinson is a great example.
 
Good investing,
 
Dan Ferris
 
Editor's note: Right now, many of the world's blue-chip stocks are expensive. But Dan has found a handful of World Dominators that are cheap enough to buy today. Learn about one of those opportunities – and how to get started with a risk-free trial to Extreme Value right here.

Source: DailyWealth

One Popular Investor Obsession You Should Give up Right Now

Editor's note: This week, we're featuring some of our favorite timeless investing lessons from our colleague Dan Ferris. In today's essay, he shares an idea that helped Warren Buffett and Peter Lynch become some of the world's greatest investors…
 
Today, I'm going to teach you one of the hardest lessons for investors to learn…
 
It's worth it to try, though. The fact that most investors will never learn this concept gives those of us who do a huge advantage now and forever.
 
It may come as a shock… You may find it very hard to believe… But it's the key to success for some of the world's most successful investors…
 
Gross domestic product (GDP) growth and stock market returns have just about nothing to do with one another. In fact, you can achieve great investment results without ever thinking about another "macro" issue again.
 
Most people base their investing decisions on economic data, forecasts, and what they hear in the media. They obsess over unemployment numbers… the Producer Price Index… housing numbers… interest rates… factory orders… industrial capacity utilization… the Baltic Dry Index…
 
But the wisest, richest investors in the world say to forget it.
 
Business partners and billionaire investors Warren Buffett and Charlie Munger, for example, have been investing their own and other people's money for more than 50 years. And in all that time, they claim they've never had a single conversation about the economy. They simply don't waste time on it.
 
The vice chairman of investment firm Fidelity, Peter Lynch, is one of America's top money managers. He says if you spend 13 minutes thinking about economic and market forecasts, you've wasted 10 minutes. It's just not worth thinking about.
 
Ben Inker of the money-management firm Grantham, Mayo, and Van Otterloo wrote an excellent paper demonstrating that there's no meaningful correlation between GDP growth and investment returns.
 
In other words, stock market investors who think it's important to worry about where the economy is headed are dead wrong. Every minute you spend worrying about macro data has zero value to you as an investor.
 
It's hard to remember this, though.
 
Everywhere you look, the financial news media are constantly trying to connect the two. They're obsessed with pretending to know what you should buy and sell based on all the economic data pouring out of governments, Wall Street banks, and the talking heads every day. But it's all useless noise. Most of that economic news has little value at all for investors.
 
Instead of worrying about all that, stick to studying great businesses.
 
Companies like Wal-Mart (WMT) and McDonald's (MCD) thrive in recessions as consumers pinch pennies. Consumer-products giant Procter & Gamble (PG) steals market share from its competitors during tough times because it has enough cash to maintain its advertising. In 2009, Berkshire Hathaway (BRK) used its massive cash hoard to make incredible deals with cash-strapped firms that couldn't access credit anymore.
 
For every great business like these, there's somebody who thinks a macro wind will crush it. He has failed to learn one of the greatest lessons for anyone who seeks riches in the stock market: Great businesses are great because they can ride out and even exploit macro problems.
 
Great businesses aren't cyclical. They don't get better or worse with the economy. They stay profitable and continue to gush free cash flow and pay higher dividends every year.
 
If you focus on buying great businesses, you can turn down the volume on the news fretting about the Fed's latest pronouncement.
 
You probably don't believe it… I get reader feedback indicating many folks refuse to stop obsessing about economic and political problems. They just don't get it.
 
What's a fella to do? It's my job to show you the way, to help you become a better investor. But lots of folks don't seem to want to hear it. Instead, they let the market guide their investing decisions time and time again… And they miss out on some great investing opportunities.
 
I'm not saying you should never read another newspaper. By all means, know what's happening in the world. Understand the backdrop in which you're investing. But don't waste a minute trying to figure out what stock to buy based on economic reports and forecasts.
 
Don't let macro fears prevent you from buying great businesses and compounding your wealth with great stocks.
 
Good investing,
 
Dan Ferris
 
Editor's note: Right now, Dan's Extreme Value portfolio contains several World Dominators… companies that are No. 1 or No. 2 in their industry… that gush cash and trade at huge discounts to the value of their assets. Learn more about one of those opportunities – and how to gain access to the rest of the World Dominators – right here.

Source: DailyWealth

The Biggest Lie: 'It Takes Money to Make Money'

Editor's note: We're ending Steve's weeklong series on how to live a more productive life with one of our all-time favorite essays. (If you've missed the previous essays, catch up here, here, here, and here.) In it, he debunks one of the biggest myths about money…
 
"Congrats, Steve, you just made $100,000 today," the lawyer said.
 
I had just bought a property… cheap. The lawyer figured I could sell it for a six-figure profit right away.
 
A friend of mine heard about this deal and said, "Well… it takes money to make money."
 
I was surprised he said that, actually… To me, this little phrase is one of the biggest and most dangerous lies out there… It is a convenient excuse to simply not try to succeed.
 
It's like the old joke:
 
"Lord, I've worked hard all my life, why couldn't you have just let me win the lottery?"
 
The Lord replied, "Why didn't you just buy a ticket?"
 
You have to try. And it doesn't "take money to make money"…
 
In my last real estate deal, one of my business partners put up no money at all… Instead, he's putting in "sweat equity."
 
He's doing most of the work on this project, adding value to our investment. I'm sure he will come out with a six-figure profit when we sell. He could even make a couple hundred thousand dollars! Remember, he put zero money in.
 
So in his case, it didn't "take money to make money."
 
His situation is not unique in real estate… A common deal goes like this: A young guy comes up with an idea to make money. He finds a property he can buy for $100,000, put $20,000 into, and sell for $150,000. The problem is, he has no money. So he finds an old guy with money, and they agree to split the profits 50/50. If the deal goes according to plan, they both walk away with a $15,000 profit.
 
He had the only two things you need: an idea and the willingness to roll up his sleeves and make it happen… He did everything from finding the old guy and convincing him to invest, all the way through to selling the property.
 
In both examples, the young guy didn't even have any risk in the deal.
 
Real estate deals are an easy example. But it doesn't "take money to make money" in other areas, either…
 
A young friend of mine came up with a simple idea. He launched a website that focuses on – get this – forklifts! It's like Hotels.com, only for heavy-duty equipment. If you need to buy or rent heavy equipment, you can locate… through his website… the pieces you need that are closest to you and at the best prices.
 
It's not the sexiest-sounding business… But it's a great idea. It cost him next to nothing to set his website up and call equipment owners to get them onboard.
 
Now he earns a commission from every sale or rental. Life is good. He doesn't work for "the man" anymore, and hasn't for years. And he's making more money than ever.
 
It doesn't take money to make money. You just need two things:
 
1.   A great idea.
2.   To roll up your sleeves and make it happen.
You can't underestimate either of those things. The amount of effort and commitment required will be extraordinary. But that's the way it goes. You're trying to break out of the ordinary. So an ordinary effort won't cut it. You will need to sustain an extraordinary effort.
 
This is hard. But it's how you make money.
 
It is much easier to give up. It is much easier to say, "It takes money to make money," and never try. It is much easier to complain that you'll never win the lottery, without buying a ticket. (You know what I mean.)
 
Don't ever catch yourself saying, "It takes money to make money."
 
It doesn't… It takes a great idea and the willingness to make it happen.
 
Now get to it! You can do it…
 
Good investing,
 
Steve
 

Source: DailyWealth