Feb 28, 2021
Investing Class on Economic Indicators, Diversification & Leverage w/ Denver Nowicz
- BRT S02 EP9 (56) 02-28-2021
Things We Learned This Week
- Economic Indicators - how they effect the Economy
- The Fed, Money Supply, Market Cycles, Volatility
- Diversification, is it really as good as the business media claims?
- Why the Top Investors do not Diversify & choose to Concentrate their Holdings
- Leverage defined in the financial sense, and how to use it properly
Guest: Denver Nowicz, President - Wealth For Life
https://www.linkedin.com/in/denvernowicz/
https://twitter.com/denvernowicz
Denver is an advisor with nearly 20 years experience working with clients in investments and insurance, designing retirement plans with a combo of both. He takes us through different strategies for clients to get the best allocations for their money over the long term. It is the Combo Strategy of both Offense and Defense, the synergy of the mix, not ‘All or Nothing’.
We discuss the popular Economic Indicators you read and hear about in business news, what are they, how they affect the economy, and what you should pay attention to.The list includes – The Fed, Money Supply, Inflation, Housing, Inventory, Market Cycles, Volatility and more.
The Fed – Inflation & the Money Supply
Fed prints money $, creates liquidity, which leads to more borrowing (also because of low interest rates). People have more money to buy assets like stocks vs bonds, because of low interest rates. Low interest rates punish savers, and rewards people who put money in the market.
Market Cycles – Bullish – Expansion, Bearish – Contraction, Recessions
Mean Reversion – markets cannot go up forever, eventually this leads to a bubble (over inflated economy), there is a Recession, and the market goes down.
Have to study areas of the market with Capacity to Grow, as in what Market Sectors are growing to pick good investments.
Consumer Sentiment – VIX / Volatility Index, Consumer Debt
Inflation affects average consumer, if inflation rises then costs of common goods goes up. VIX is a measure of volatility over the short term, and if people think prices will rise. If VIX is high usually means there is inflation, fear, and less spending which hurts business. Economy is made up of 70% consumer spending.
Consumer debt is declining, but if they still have debt (in particular high credit card debt) then one has less money to spend elsewhere. High credit card debt needs to be paid off to create wealth. Consumers may need to earn more to pay debt, and save more.
Inventory – Business Debt, Container Shipments, Purchase Orders, Trade
What is going on with trade, and shipping inventory – people are buying goods and companies can meet the demand. The economy needs liquidity (borrowed $) to buy goods on credit. When liquidity dries up, then economy slows as business have less access to capital.
Employment – Jobs Report, Unemployment
Government – GDP, Tax Policy, Tariffs, Regulations
Housing – Home Sales, Mortgages
When interest rates are lower, then people borrow money to buy houses. People will also re-finance their mortgage, and sometimes take money out to spend on home improvements, etc. (tapping equity thru more home debt). This leads to more home sales, and over time home prices increasing – which could slow demand over time.
Speculation vs Investing - Investing in good companies with sales, low debt, and cash on the balance sheet can withstand downturns in the market. Speculation happens when people invest in companies that are volatile, inconsistent sales, and may have high debt (ie buying sales).
Diversification, is it really as good as the business media claims?
Why the top investors do not diversify and choose to concentrate their holdings including the Oracle of Omaha (Buffett), and his partner Charlie Munger at Berkshire Hathaway are two of the most outspoken critics.
You should be specialized in investing (buy a few good companies), know what you are buying, and monitor your investments closely. The goal is a small concentrated portfolio of well researched investments (5 – 20 stocks).
Indexing – buying the entire index (ie – S&P Index), a fund with low fees, that mirrors the Index, conservative passive approach for average returns
Problem is that this process can underperform the market a little – this is a good plan if an Investor does not want to do the work needed to find the good few companies. There are about 10 – 20% stocks in the S&P 500 Index worth investing in. The Index is made of 50% of mediocre to poor companies.
Zombie Co’s – there are 20% of the Index labeled this way - A “zombie company” is a term used to describe an uncompetitive company that needs a bailout to operate successfully or an indebted company that is only able to repay interest. Simply put, the effective on its debt (interest-coverage ratio of 1 or less).
The top companies (Big tech) are usually carrying the Index and responsible for most of the Index’ returns. Would you rather buy all the houses in a neighborhood, or the few best? Same philosophy in picking the better co’s / stocks to invest in, simply buy what is good and you understand.
Robert’s (of LifePro Asset Mgmt) core philosophy on picking stocks - good companies that are growing, leadership position in their industry, positive cash flow, good balance sheets, and low debt.
Real Diversification is a Combo of Assets –
Baseline / Defense: Insurance, Real Estate, Business Income (Cash Flow), Commodities, Cash – Streams of Income for a safe foundation to cover expenses and retirement
Offense / Growth: Stocks, Crypto, Alt Investments (Private Equity)
Leverage from good (OPM) to bad (debt), and what is the difference. Leverage defined in the financial sense, and how to use it properly. Leverage is just a strategy, if an investment is bad, then leverage magnifies losses.
The idea is to borrow at a low rate (and good multiple like 4:1), earn at a higher rate of return to make $ off the spread (like a bank) – borrow at 3% to invest and earn 8%. Wealthy use Leverage in conservative way, get a lower ROI on more $ money – multiplies rate of return.
Ie – borrow $1 mil to buy rental real estate + invest $250k of your $ (= $1.25 mil invested total), then make $100K at 8% ROI
vs invest $250k of your $ only (= $250k invested total), then make $20k at 8% ROI
This can be done with retirement accounts also – go to https://wealthforlife.net/
Article: Jim Harbaugh, Michigan Football Coach
https://www.linkedin.com/pulse/how-copy-michigan-coach-jim-harbaughs-14-million-per-year-nowicz/
Link to Taxes Show on 10/31/2021 w/ Denver: Here
Link to Offense / Defense Show on 6/6/2021 w/ Denver: Here
Link to Shows, Denver was a Guest: Here
Robert of LPAM on Stocks: Here
Investing Topic: https://brt-show.libsyn.com/category/Investing-Stocks-Bonds-Retirement
More - BRT Best of: https://brt-show.libsyn.com/category/Best+of+BRT
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