Book Review: Payback Time
Town’s investing philosophy is very much based on the success of Warren Buffett’s endeavors. The strategy taught in this book involves value investing over the long-term.
He shows no respect for the mutual fund industry and reluctantly mentions index funds for investors who simply want to take the easy way out. Therefore, stocks are his weapon choice for revenge. Against who or what? I’m not too sure.
These are the highlights of the book:
- The Three M’s. Meaning. Moat. Management. Town stresses that we are not dealing with stocks but we are meddling with businesses. So, we would like to invest in a business that 1) is simple and understandable to the investor, 2) has a competitive advantage versus those in the same industry, and 3) has stellar cast in management to keep the business running as it should.
- The Big Five Numbers plus Debt. After finding the right companies, we want to find the value of that company through return on invested capital, earnings growth, sales growth, equity growth, cash growth and debt. This was the formula taught in Town’s previous book, Rule #1, to find value of a company.
- Stockpile at the right prices. As Town puts it, the key to growing wealth through stocks is stockpiling – hoarding shares at an optimal discount price. It represents a refined and picky version of dollar-cost averaging. He throws a bunch of different nicknames for numbers (Sticker Price, Margin of Safety Price, Payback Time) but they all point to a set price-point criteria for buying stock that yields a low-risk, profitable investment.
Instructional Investing is Hard to Find
Payback Time is written in a great instructional format that teaches the reader what to look for and how to look for it. In my opinion, the most valuable content is the set of parameters that Town uses to identify a good investing opportunity. Along with guidelines to find the right company, he tells you when you should buy and when to sell.
Town gives a complete example of how to enforce the strategies that he teaches. To top it off, he touches upon the various investment vehicles that would maximize earnings and advises on making routine contributions – which is the best way to begin saving to invest.
Town’s value calculations include data research from many years ago. He likes to look at the trends of a company’s core financials dating back up to 10 years before. While historical numbers tell how a business became what it is today, I’ve always been skeptical as to how it translates into future performance – especially in the fast-paced, volatile age that we live in now.
He also wrote a section on trending and the use of technical indicators to pick out the right times to buy and sell. Again, technical analysis was invented to time the market, which is something I wouldn’t attempt. Instead, I prefer his price indicators over such hooey. If the stock’s price has reached its value without significant potential for growth, sell it. If the stock’s price reaches a significant discount to value, buy it.
Overview
This book definitely encompasses the investment mentality that any stock investor should have. Town stresses that we are investing in a business of which we are looking to become part-owners. Therefore, we must start from the perspective of a owner, not just an investor.
I am someone who is starting to jump into individual stocks rather than simply relying on index funds. Payback Time is just the book to learn more about sound long-term investing with stocks, which has greater potential for higher returns compared to diversified funds.
For anyone looking to become more active in building a stock portfolio, Payback Time
Give Me the Cash, I’ll Swipe My Credit Card
Cash is not a regular camper in my wallet. My cash back credit card, on the other hand, gets much more action.
Wow. That just made me sound like a compulsive spender. But, that is not the case. I am a little more aggressive with the way I use my credit card to maximize the cash back I get.
Cash Back Hoarding
Unless there were plans that would require cash, the maximum amount of cash I carry with me on a typical uneventful day is about $20. I like to take advantage of the cash back perks on my card whenever possible – even it means just a few cents.
So when friends call me on a whim to hang out, I’m usually caught off guard when we decide to eat somewhere a step up from the ubiquitous fast food chains. For the past few occasions, I’ve been the one who didn’t have the cash when it came time to pay the bill. Obviously, I’d be the one to take their cash and put the tab on my credit card.
Sure, I could have told the waitress to charge the difference but I would be missing out on free cash back.
Right after spending the night out, I’d head straight to the ATM on the way home and deposit the money into my checking account. After the transaction is posted in my credit card account, I pay the bill.
Also, my dad and his friends are obsessive aficionados of vintage audio. They lack the English skills and computer skills to buy the many music toys that audiophiles crave. Their favorite place to shop – eBay.
Every time they find something they want, it costs hundreds to thousands of dollars. They don’t have the means to make the purchases so I buy everything for them. In addition to the cash back that I get from my credit card, I’m racking up a bunch of cash back on eBay through Bing cashback and eBay Bucks.
A Bootleg “Cash Advance”
There have been instances where the cash actually becomes a cash advance without the ridiculous interest rate.
I wouldn’t have incurred the debt if I didn’t have to put any extraneous charges on my card. With a swipe of the card, I get cash. That is a recipe for a financial disaster. It is no different from borrowing cash on a credit card. Soon, it can build up and end up putting you in debt.
There were a few times where I had paid for something with my card and gotten cash for it – just to spend it and realize my credit card balance was over the roof.
Are there any other readers out there who are love offering their cash back credit card to pay for stuff while you get the cash?
(Photo credit: JOE MARINARO)
Weekend Links: Fear of Gym Club Memberships
Lately, I’ve been on the hunt for an affordable gym chain that does have really bad reviews when I type the company name and “scam” in a Google search. Most of the gyms around my area are notorious for smooth sailing up to the point where you want to terminate your membership.
For example, Bally’s gym scam revolves around a shady renewal/cancellation policy. Plenty of members have said that some gyms continue charging them despite no longer being a member or stating that their membership somehow was re-activated without their knowledge.
Many friends of mine are members of Bally’s and offered to refer me for a cheaper price. I’ve been skeptical and almost agreed at one time. But, I know that their content with the gym exists only because they haven’t tried to leave yet. That’s when the trouble starts.
Sigh. It is a fruitless endeavor.
The YMCA seems like a very nice place but it is definitely not one of the affordable options. I guess you get what you pay for in the fitness industry. But, the deceptive business practices of the popular chains are ridiculous.
Anyway, onto some more interesting stuff around the personal finance blogosphere:
- Earn more money. It matters more than everything else combined. at Pop Economics. We always ramble on about how to save, budget, and invest but the key component to our personal finances is income. Without it, we cannot save more or invest more. So why don’t we care about making more money?
- A Hypothetical Conversation Between a Stock Picker and an Indexer at AllFinancialMatters. This post offers a deeper look at the mechanics of the stock market that introduces an interesting reasoning for index funds. Great food for thought for every investor.
- Beware when trying to find deals at Clever Dude. Bargains are not bargains if you end up spending more than you intended. All too often do we search for great deals online and end up buying things we don’t need – and we did it just because we thought we’d be saving a bunch when we really weren’t.
Check out these carnivals that Realm of Prosperity participated in:
- Festival of Frugality at Wealth Junkies
- Carnival of Finance at Funny About Money
The Road to Retirement Includes More Than Just Yourself
As a guy in my early 20′s, the scope of my financial concerns does not extend far beyond myself and my immediate family. Being the independent person that I am, I seem to have adopted a selfish outlook when it comes to my future with money.
When I look at my parents, hard working immigrants who spent the last 23 years in the U.S., their family has often placed them in tough positions when it comes to money.
Through their experiences, I can see the many impending financial obstacles that would trouble me as well.
The Typical Thought Process
Not yet introduced to the many other burdens of life, I disregard them when I go off planning for retirement. Evidently, I’m not the only one who puts little thought into the financial situations that our futures will present. Most young adults coming out of college think of climbing the corporate ladder, becoming rich, and splurging on the many luxuries offered in life.
Many are not even thinking about retirement – those that do, often think about themselves and themselves only, just like me. Now that I’m conscientious about what the future may hold, I need to account for the twists and turns along the road towards retirement.
A Very Bumpy Road Ahead
For those who like to set goals, one of them may sound like this:
“I want to become a millionaire by the age of X.”
Well… throw these people into your calculations and figure the probability of that statement coming true.
- The spouse. Retirement will become a worry for two people. We must take account of contributions that each person will make towards the desired retirement lifestyle. Should the wife stay at home? Should I take a second job? The dynamics of financial planning changes every time another person enters the picture. A spouse can delay or accelerate the realization of retirement. From the time the relationship starts getting serious, one’s money no longer concerns only one person.
- The parents. Turning away those who raised you is a despicable act. So when mom and dad needs money, it’s nearly impossible to say “no”. The major financial responsibilities arise when elderly parents begin suffering the health problems that come with old age. Should the parents have difficulty paying the medical bill, it’s up to the children. And not to forget, this applies to the in-laws as well.
- The children. The word on the street is that the average cost to raise a child in the United States from birth to 18 years of age is roughly $250,000. That amount doesn’t include a college education. And, that’s only for one child – dare you have two? A small sigh of relief results from the possibility that your children may help support you when you reach your later years.
I expect to have all these people in my life so I better be prepared. I won’t be surprised to find out in the future that my efforts to grow my Roth IRA would help pay for my child(ren). While we must not elude the fact that these people will pose a financial threat, they are also the source of love, joy, and happiness.
So, remain optimistic!
(Photo credit: Hey Paul)
Dollar-Cost Averaging: Go Discount Shopping in the Stock Market
If you follow me on Twitter, you will find that I often cheer when the stock market falls a few hundred points. Some investors will think that I was drunk and cursing me in their minds as their investment portfolios bleed money.
But, I have investments in my portfolio too. Shouldn’t I be sulking like most other people?
No, Because that is the time when the stock market goes on sale and I buy in every time it does so – essentially, I dollar-cost average whenever a discount stock market presents itself. Obviously, I’m not the only one who lurks in the bushes. There are plenty of other prospective investors ready to pounce on a sale.
What is dollar-cost averaging?
Dollar-cost averaging is an investing technique where you invest in increments over time. You would buy more as prices drop and buy less as prices go up.
This attitude applies the same way for a trip at the supermarket. If you are confident and steadfast with a particular item, there is no doubt that you’d buy it. It just comes to how much of it you will buy – which is often determined by its cost. Once in a while, you may find a 12-pack of Coke or a box of Cheerios on sale. You know you found a deal and these goods can last quite a while, so you buy multiples of them at a discount price. But when it isn’t on sale, you’ll still buy them but much less in quantity.
If you trust your selection in a stock, ETF, or mutual fund for the long-term, you’d prefer to purchase shares with as little cost to you as possible. When the share price ringing in a profit but you feel that the company still has room to grow, you’d continue to invest in it – but less. And finally, if you feel the share price has reached its maximum potential, it may be the time to sell.
An example of dollar-cost averaging by buying shares of Company X with $10,000:
- 400 shares at $5/share
- 500 shares at $4/share
- 800 shares at $2.50/share
- 500 shares at $4/share
- 800 shares at $2.50/share
You acquired 3,000 shares of Company X at $3.333/share. A one-time purchase of Company X at $5/share would have resulted in only 2,000 shares (1,000 less).
Since you are confident in Company X’s long-term growth, the current price only dictates the rate at which you can accumulate shares. If you figure Company X’s value to be $6/share and the business has no major negative changes to its operations, then you’d probably expect the share price to reach that level sometime in the future. Any price you pay under $6/share is considered a discount.
The Arguments Against It
The biggest factor to employ this technique successfully is the ability to shun emotion from investing. Watching my stock portfolio drop and in the red is not a pleasant site. As a human being we all feel fear when we lose something, especially money.
I conquered my fear of investing by educating myself and learning that a stock market slump isn’t a bad thing. Nevertheless, it’s not surprising that an investor doesn’t want to continue buying a stock that went from $50 to $10.
Dollar-cost averaging will never beat the guy who can time a stock’s trend. An investor who does make that one-time purchase at or near the bottom will make much more money. This person could be someone who did his homework or is plain old lucky. This person also saves on trading fees while making the most out of dividend payouts (if any). But, are you or can you be this person?
Who Should Dollar-Cost Average?
This method of investing is ideal for anyone who is incapable of, or doesn’t want to try, timing the stock market.
Mutual fund and index fund investors can dollar-cost average with less work since their funds’ performance is often based on a large, diversified selection of stocks. If the general belief is that the stock market or specific industry is bound to go up, investors simply have to follow market or industry news. When financial advisors tell clients to rebalance their portfolio by selling the funds that made money and buy more of the funds that lost money, it is essentially dollar-cost averaging.
Investors in individual stocks would have to remain informed on a company’s activity to make sure that there isn’t loss in value. And if there is, the investor’s dollar-cost averaging may not yield profitable results as expected. The entire stock market breathes more confidence in investors versus a single stock. But, individuals stocks have more growth potential.
(Photo credit: mvhargan)
