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🍦 Value investing in flavor

April 13, 2021 Sign up

Hey smart people, get out your reading glasses. The Tuesday ones specifically. Here’s what’s on the menu for today: 

  • The resurgence of value investing, and how to find undervalued plays
  • Prince’s estate drama, and the takeaways
  • What's your life worth? Way more than what the life insurance policy says
  • It's financial literacy month. Join Tiller Money & Finny for a Financial Literacy Q&A on April 22

INVESTING

The resurgence of value investing

Image source: WSJ

We all want to find the next $MARA, the next Zoom, or the next parabolic runner that’s moving solely on the basis of Reddit hype and diamond hands that dumps the next day. Looking at you, $NAKD. That’s all well and good, but even the best investors know this to be a gambler’s game most of the time.

A good alternative to the high risk, high reward venture of growth investing is value plays, and it seems to finally be getting some shine again after a long stay in the dark. Value investing has been vying for a comeback lately after growth stocks have essentially dominated it for the last decade.

Perhaps one of the most famous value investors of all time is Benjamin Graham. Graham even wrote two books covering his strategies, oh and he also taught Warren Buffet for a while too.

So then why has this promising method seemingly fallen to the wayside?

Value investing is the less attractive, but oftentimes more reliable alternative to the flashy prospects of growth stocks most new investors are drawn to. It often involves buying stocks that no one is thinking about anymore, or that just seem downright boring at the time of purchase. 

It's like a really good sale. You know how we fall prostrate to worship the retail gods every time Black Friday comes around just because H&M is having a 50% off sale? Well, the stock market does similar things, but way more than once a year.

Value investors seek to find undervalued plays that have mostly been beaten down due to the emotional nature of the stock markets. Market indexes have a way of dragging down entire sectors and exaggerating both gains and losses of stocks just because of public sentiment. The market is a social creature, but value investing seeks to prey on that. 

Value plays are typically more well-established companies that have already matured beyond their growth period. They’ve already been through puberty, and a mid-life crisis of sorts has gotten them a bit down lately.

Finding undervalued plays is the name of the game here, and there are many ways to go about doing that. Investors will use a myriad of different metrics and even more qualitative indicators to try and sniff out a diamond in the rough. The goal here is to find the (albeit subjective) intrinsic value of a stock, which is calculated based on a number of things, like:

  • P/E Ratio. Price to earnings ratio calculates the price of the stock relative to a company’s reported earnings. The average P/E ratio for the S&P 500 has historically been about 12-13, which means the price is trading at 12-13x earnings per share. A higher ratio is either indicative of an overvalued stock, or that investors are in anticipation of growth in the future. Value investors though, look for stocks with an undervalued P/E ratio. 
  • Free cash flow is king and another valuable data point to use. It's measured how much extra cash a company has after subtracting operating expenses, capital expenditures, and other relevant sources of capital drain. A business with a higher free cash flow is likely to have more money to invest in growth, pay off debt, and expand, making it a solid candidate for being undervalued.
  • Debt to equity ratios, or D/E, are used to determine what the company's debt looks like in proportion to its assets. A lower debt to equity ratio shows that the business is using less debt to finance its assets, and is generally a good indicator of an undervalued stock depending on the price. This also varies from industry to industry, with some sectors having more fixed costs than others. 
  • Other relevant indicators to check as part of your due diligence: P/B Ratios, PEG Ratio, CROIC and more.

Our Take. We could go on for days about the endless opinions and strategies that can create a successful value investment strategy, but each investor should curate their own personalized method by juxtaposing their goals with their tolerance, and of course their own research.

📚 Take this bite-sized quiz to review fundamental analysis of stocks and the key metrics that can help you with your due diligence:

ESTATE PLANNING

Prince’s estate drama and the takeaway

When a family loses a loved one, the last thing they want to endure is a convoluted estate dispersion and disagreements about the deceased’s assets. This has been the case for the family of former world-famous artist, Prince, who’s been dealing with an ongoing dispute over his estate for 5 years now. 

Prince did not have a will to establish who would receive his assets and how it would all be dispersed, and that’s helped to create one of the most complicated probate negotiations between private parties and the IRS. And it certainly hasn't helped that his estate is so massive. The family’s private estimation comes in at $82.3 million compared to the IRS’s at $163.2. 

Why does all this matter, and what can we learn from it? You might not have an estate with a fluctuating value in the hundreds of Ms, but an estate of any size can quickly become unnecessarily messy if there aren’t clear guidelines on how to execute it after death. Unfortunately, we've seen this play out over and over again (ahem... do the names Tony Hseih, Arethra Franklin, Sonny Bono, and Jimi Hendrix ring a bell?).

Here’s what we took away from all this.

  • Most wills are simple, and this can easily be avoided. It’s unlikely you’ll find yourself in a situation like Prince’s family, and creating a will is something that can even be done in a matter of minutes online for most people.
  • The will is just a means to an end. The overarching point here points to financial intentionality, and there are other financial steps that can be taken prior to your departure that contribute to the preparedness of your family, and may even decrease your tax burdens as you age. Case in point: you can gift over $11 million over the course of your life without ever having to pay gift tax on it via what's called the lifetime gift tax exemption.
  • The time to act on your future is now. We’re not pessimists, but you never know what life holds. Children and grandchildren or not, no one wants their partner to deal with the aftermath of a heartbreaking situation on top of becoming the default executioner of your estate. This is something no one likes discussing, but something that can bring peace of mind for the rest of your life. 

💡Tooltip. If you need affordable user-friendly options to create a will or think you may need an estate plan or more, check out Trust & Will, Fabric, and Rocket Lawyer.

MONEY THOUGHTS

What's your life worth? Way more than what the life insurance policy says

The philosophical question of  “what is life worth?” has been explored by nihilists and fundamentalist religions alike for thousands of years, and believe it or not, they still haven’t figured it out. But someone else did though, and it wasn’t Nietzsche, Camus, or even Jesus himself, it was actually...the government.

The history of determining life’s value

In 1972, a member of Nixon’s administration set out to determine the economic value of human life for the sake of figuring out how this has influenced regulatory decisions over the years, and the number they came up with? $885,000 in today's value. 

This was later adjusted to $1 million, and today this figure ranges from $8 to $10 million USD. The Consumer Product Safety Commission uses $8.7, the EPA goes by $7.4, and the DOT says $9.6 million dollars.

The reasons behind this are pretty impersonal, and kind of...scary

Calculating the value of human life is used by regulatory agencies and governments alike to calculate the cost-effectiveness of certain health and safety measures taken. These regulations, when they exceed a certain price point, are required to pass a cost-benefit test, which determines whether or not it gets implemented. For example, if the cost of installing seat belts that beep when you don’t buckle up exceeds the value of lives saved by wearing it, then it gets rejected. 

Think about it though, we do this all the time. Life insurance, anyone? We typically value ourselves far less than $10 million dollars when we buy that $500,000 life insurance policy, so this is nothing new for most of us. There just seems to be a disconnect when government and regulatory bodies put a price on our life. 

CELBRATING FINANCIAL LITERACY MONTH

Join Tiller Money & Finny for a financial literacy Q&A

Join Heather Phillips of Tiller Money & Chihee Kim of Finny on Thursday, April 22nd at 12:30pm EDT for a zoom conversation about:

  • Financial literacy and what it means in today's era of digital spending & tracking and current economic landscape
  • Review of resources and technology that are helping bridge the financial literacy gaps 
  • And an opportunity to ask your own financial literacy questions!

What is Financial Literacy Month? Financial Literacy Month is a nationally recognized month-long campaign to bring awareness to the need for more financial education in schools and for adults.

What is Tiller Money? Tiller's mission is to create customizable tools that empower people with greater understanding, confidence, and control of their financial lives. They help people track all their accounts in one place, so they always know where their money goes, and confidently plan their financial future.

Join us on April 22nd by registering right here:

✨ TRENDING ON FINNY AND BEYOND

  • World stock markets—where is the opportunity to invest? (Finnyvest)
  • Is it safe to eat at restaurants again? Here’s what to expect (WSJ)
  • Dwyane Wade made $196 million playing basketball, but still budgets (CNBC)
  • Looking for a financial coach who will guide you in sharpening your financial skills, all without making judgment or selling products? Meet Ilene Slatko of DSS Consulting and schedule a free consultation (DSS Consulting)
  • Finny lesson of the day. Since we're talking about value investing, let's also review growth investing:

Finny is a personal finance education start-up offering free, game-based personalized financial education, a supportive discussion forum, and simple stock and fund tools (aka Finnyvest).  Our mission is to make learning about all things money fun and easy! 

The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own boss!  It's sent twice a week (Tues/Thurs). The editorial team: Austin Payne and Chihee Kim.

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If you have any feedback for us or interested in sponsoring, please send us an email to feedback@askfinny.com.

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