investing Archives - Out of WACC

Investing: Easiest Side Hustle Ever

There are two ways to make money: humans and invested money. Humans work to make money. That money either gets spent or invested. We need both!

Lack of Financial Literacy

The problem is that almost half of Americans don’t own stocks. From 2009 to 2017, the average percentage of Americans who owned stocks was 54%, down from an average of 62% eight years before. The figure includes individual stocks, 401(k) plans, shares in an equity mutual fund or an IRA account. Understandably, income is highly correlated to U.S. stock ownership rates.

The problem lies in the lack of financial literacy. It’s in human nature to spend money to fulfill our present needs and wants. The emotional desire to spend more now throws out the need to think long-term. (For example, don’t shop while you’re hungry). Investing is savings since you didn’t spend the money on a $3 coffee or $1 bottled water.

Invest = Save

With that being said, side hustles are needed. The point of side hustles is to make extra income and diversify your cash flow. Most side hustles takes your time. Most side hustles hire you. The only side hustle that doesn’t require time and you are the boss is investing.

By investing, I don’t mean in penny stocks and individual stocks. By investing, I mean index funds or ETFs. By investing in index funds/ETFs, you cannot be fired, nor do you need to take time out of your schedule to work on it.

By investing in the market, there is no income tomorrow. By investing in the market, it increases your probability of financial stability (and happiness?) in 5-45 years. If investing now, you’re not spending. By not spending, you may not feel happier in the present. But most of the times, we buy things we don’t need. Investing increases the probability of better future consumption in which life circumstances might be worse than it is now.

Fun/Sad Fact: There’s a couple in NYC making $500,000 a year and only has $7,300 left to save. That’s still a lot, but only 1.46% of their gross income. They could have more savings if they were disciplined. (I don’t know them personally, so they still could be disciplined).

Stay Disciplined

Building wealth is so easy, except it is hard to do it consistently. There are two types of people in the world; disciplined investors and non-disciplined investors.

In order to be disciplined, it’s important to think long-term by having assets allocation in sync with your current life situation, and by doing that you’re likely to maintain the portfolio in market volatility. After all, the market always goes up in the long-run. After all, the Dow Jones index will hit a million (current: 26,500.00) in 99 years.

Historical logarithmic graph of the DJIA from 1896 to 2018.
Source: Wikipedia

Another way to stay disciplined? Let the technology invest for you. Most investment accounts allow automatic investments. Even little as $20 a week can add up in the long-term. Apps like a micro-investing Acorns app is helping an average-Joe invest more than he usually would, without the emotional attachment since he doesn’t really notice the money leaving his checking account.

Sure, investing has its risks. But, stick to long-term. Non-invested money loses its value due to inflation. Take the risk and that risk will reap your rewards.

When the stock market increases, the rich get richer, so do you. (maybe you’re already rich so you belong in the rich category. Well “rich” is a subjective term to everyone). Your wages may not grow, at least your investments are growing.

Just wait and you’ll get your reward. While you wait, do other things such as other side hustles that require your time. Or go hiking. Or learn to play guitar. Whatever interests you.

I didn’t even mention saving in an employer-sponsored retirement account. I mean, 3/4 of U.S. employers offer 401(k) match. That match is FREE MONEY! Freeeee, something Bernie Sanders would love.

Financial Literacy Is Crucial

The Power of Time and Compounding

Over the past 40 years (1977 to 2016), S&P 500 has had inflation-adjusted annualized return rate of 7.20%, that’s having dividends reinvested. That means $1 grew to $16.14.

Without dividend reinvestment, S&P 500 has had annualized return of 4.12%, which means $1 grew to $5.02.

Can you see the power of time and compounding? I hope you see it.

S&P 500: Inflation-Adjusted, With Dividend Reinvestment

Let’s assume you’re 20-years-old, saving $1,000 each year for the next 40 years. When you’re 59, you will have $40,000 in cash. That is considering zero inflation.

Now, let’s assume you invest in the market that will give you inflation-adjusted annualized return of 5%, without dividends. When you’re 59, you will have $97,622.30.

Figure 1: Investment Growth Annual
Annual Contribution – $1,000
Dividend Yield – 1.5%
Expense Ratio – 1.0%

Lastly, let’s assume you invest in the market that will give you inflation-adjusted annualized return of 5%, with 1.5% annual dividend. When you’re 59, you will have $141,731.09.

Oh My God! The Power of Time and Compounding!

If you want to invest, invest now. Don’t let all-time highs scare you.

S&P 500 is currently yielding 1.93% dividend. Since the late 1800s, the lowest dividend yield was 1.11% in August 2000. The average dividend yield is 4.38%.

The returns you see above and below are before taxes. Tax laws might be different in 2056.

In this post, I will outline some of my plans to be a very long-term investor. I’m mostly trader and investor with less than the 5-year horizon.

Money Should Not Be Emotional

Over a year ago, I tried to open a ROTH IRA (retirement) account. After filling out the answers to countless questions, the application asked me to provide a proof of income. At the time, I did not have a job. So I just gave up on the application and did not think about it until last January.

I spent so much money in December and January alone, the expense amount freaked me out. I asked myself two key questions:

What can I do to save more?
What are the non-mandatory expenses?

One of the ways I can save more is, believe it or not, recycling bottles/cans (I don’t consider it income). In a family house of 6, we drink a lot, especially water. I drink about 12 bottles of water a day….using the same bottle. I fill the bottle with boiled water. Others just waste the bottles. I rather profit from people’s mistakes.

All those bottles collected in about two weeks made me $5.65, worth almost 6 pizzas, 2 each day. Or 6 yogurts, 3 each day.

If I make $10 every month for two hours of work, I can make $120 a year. That money can add up over the long term once invested in dividend-yielding ETFs.

I will not continue collecting bottles/cans (side hustle) once I get a full-time job/live on my own. I’m doing this now because I don’t even do my own laundry….yet.

I also figured out the non-mandatory expenses to cut back on, specifically on “ex”-food items I used to buy on a pulse. Small purchases (gum, candy, etc), for example, can add up over time. Those purchases are paid in cash. Well, I don’t carry a lot of cash. I carry reasonable amount. How you define ‘reasonable’ is up to you.

Why I don’t carry a lot of cash:

No track of cash flow. Credit card allows that
Risk of theft
Worried about losing the wallet
To avoid small purchases

Savings and Investing on Auto-Pilot

In January and February, I decided to open multiple accounts to keep my cash, rainy day savings, investments and deposited more money into my Robinhood brokage account.

Why multiple accounts? Because I don’t trust FDIC, which “protects” or “insurances” depositors to at least $250,000 per bank. I’m paranoid someday FDIC won’t be able to protect every depositor, after a major hack or something. Who knows, it might even take a long time to get depositors’ money back.

What if I lose my debit card? I wouldn’t want all/most of my cash in that account. At most, I keep 30% of my cash in the checking account. Now, my cash and short-term securities (stocks, etc) are diversified among multiple accounts.

Besides the savings account (almost 1% interest), I opened two more investments accounts. These accounts are different than Ameritrade/Robinhood.

Financial Literacy Is Very Important

The first account is Acorns, an investment app that rounds up user purchases and invests the change in a robo-advisor managed portfolio. For me, there’s no fee since I’m a student and under 24. I don’t trust robo-advisers, but this case is different. There are only 6 ETFs which I have looked into and decided they were good for the long-term in a diversified portfolio. 75% of its users are millennials.

79% of millennials are not invested in the stock market. I find that as a real concern.

The second account is Stash, an investment app that allows users to pick stocks in themed based investments around wants (Clean & Green, Defending America, Uncle Sam, etc). This app is also targeted toward millennials. Unlike Acorns, Stash charges you even if you are a student. But, the first three months are free. Like Acorns, Stash has a subscription fee of $1 per month for accounts under $5,000 and 0.25% a year for balances over $5,000.

Studies show 48% of Americans cite a lack of sufficient funds as their main barrier to investing. Luckily, technology is transforming the way people invest. Start small. Before you know it, it is big.

Both of the micro-investing apps are like savings/IRA accounts for me since I can grow my portfolio through dividends. I have checked out the ETFs Acorns invests in, they are good. I have checked out the ETFs Stash offers. Most of them are good. I have invested in the stable ones with low expense ratio relatively to its dividends.

Unlike ROTH IRA, I will need to pay taxes on realized capital gains, dividends and income interest.

Whopping 69% of Americans have less than $1,000 in a savings account and 50% of them have $0 in that account. All these people playing Candy Crush should be thinking about their future. Be a Robo-Saver and Be a Robo-Investor.

Note: All of my $$$ comes from off-book jobs, scholarships, prizes, and living under mommy and daddy’s roof (Can’t wait to move out). This post doesn’t mean I will stop trading. I will continue to trade forex, stocks, and commodities.

Equity/Commodity Portfolio Performance: Inception & 2016

In the previous article, I laid out my performance for Forex portfolio since inception and for the year 2016. This one will briefly lay out the equity/commodity portfolio performance. Briefly, because I don’t have much statistics on it than for FX……for now.

Before going further, I should note: “Average price” includes Dividend Reinvestment Plan (DRIP) – the dividends I received were used to buy additional shares in the company.

Since inception (summer of 2014), I’m down 31%. I’m currently holding 9 companies, including the ones I wrote article(s) about; GoPro (NASDAQ:GPRO), General Electric (NYSE:GE), and Cisco (NASDAQ:CSCO). I don’t have Eli Lilly (NYSE:LLY) since my broker doesn’t allow me to short.

All shares of 9 different companies belong to 1 class: domestic equity. 59.4% is in large cap. 18.89% in mid cap. 3.66% in small cap. And 18.05% in “other domestic equity.” Will change the allocation this year; international equity, fixed income, etc.

On February 16, 2015, I wrote about Microsoft (NASDAQ:MSFT) when the share-price was $43.95. Today, it’s trading at $62.14. I missed the opportunity to go long on it.

On April 12, 2015, I wrote about GE and believed GE was a strong by (it still is). Since then, GE is up 12.30%, from $28.06 to $31.51 (dividends not calculated). Dividends are automatically invested in new shares. Average price I paid for the shares is $25.99. I’m currently up 21.24%.

In the summer of 2015, I wrote about CSCO (part 1, part 2 AND 4Q FY’15 earnings report). Since the first article, CSCO is up 7.97%, from $27.99 to $30.22 (dividends not calculated). Average price I paid for the shares is $24.85. I’m currently up 21.61%.

On November 21, 2015, I wrote my first article on LLY and believed it was overvalued (it still is). Since then, LLY is down 13.98%, from $85.50 to $73.55. Second article on LLY was posted very recently.

On December 26, 2015, I wrote about GPRO and believed it was a buy. Since then, GPRO (and I) are down whopping 52.62%, from $18.34 to $8.69.

For the last year, my equity portfolio is down 12.61%. Because of $9.99 trade fee and low capital, I have refused to buy some stocks I wanted at times.

I recently opened Robinhood, broker with $0 commission. I’m planning to use it to actively trade equities and commodities.

As to commodities, I’m up 8.25% since inception (fall of 2016). I’m currently holding 50 shares of Direxion Daily Gold Miners Bull 3X Shares (NUGT), which is up 24.03%.

I might change my broker to Interactive Brokers (IB) from TD Ameritrade, as IB offers more tools for portfolio analysis.

If you didn’t like this performance/article, read the “Forex Portfolio Performance: Inception & 2016.” Maybe you’ll like that performance/article enough to like me again.

If you do, follow me on Twitter (@Khojinur30). I tweet out my trades live. If you don’t, peace.

Cisco Systems Inc. (NASDAQ: CSCO) Undervalued – Part 2

Part 1 can be accessed by clicking here or http://www.outofwacc.com/cisco-systems-inc-nasdaq-csco-undervalued-part-1/

Before I go any further, let me tell you what led to Cisco in the first place. I strongly believe in technology and Internet of Things (loT). I believe the market will increase significantly as there are unlimited demand for it and will continue to have unlimited demand.

(Part 1)

Continued:

Cisco’s gross margin, operating income, operating cash flow, and total cash are strong and of course impressive.

As of April 25, 2015, Cisco had almost $54.5 billion cash on hand. If you look at the “Total cash” chart below (Cash as of April 2015 not shown), you will see that Cisco had slightly over $52 billion cash as of July 2014. In a year, they managed to increase their cash about 5%. Over the last five years (2010-07 to 2015-04), they managed to increase their total cash amount by 36.25%. For company that’s so large and has a market capitalization of $136.9 billion, total cash appreciation is pretty impressive.

Cisco's Total Cash – Annually — Cisco’s Total Cash – Annually

As of April 25, they had current assets of $69.4 and total assets of $106.2 billion. They have total liabilities of $47.4 billion. With strong amount of cash and assets, liabilities are not an issue and should not be in the future as the company continues to trim down liabilities.

Gross Margin is very strong, although it has declined 3.7% in the last five years (see chart below)

Gross Margin % - Annual (2005 to Present) — Gross Margin % – Annual (2005 to Present)

Over the 10 years, operating income has increased significantly while both operating cash flow and working capital has doubled. It shows that Cisco cares about longer-term success instead of focusing on short-term maximization. Long-term investors will benefit from the minds of the management.

Operating $$$ and Working Capital - Annual (2015 - Present) — Operating $$$ and Working Capital – Annual (2005 – Present)

Comparable Company Analysis:

Below, you see a Comparable Company Analysis chart. I chose one major peer, Qualcomm. The reason I only chose Qualcomm is because all other peers such as Juniper Networks and Palo Alto Networks are too small.

Company Comparable Analysis – One Major Peer

Dividends and Stock Repurchase Program:

During the 3rd quarter of fiscal 2015, Cisco paid a dividend of $0.21 per share, or $1.1 billion. As of today, the divided is still the same. However, it’s expected to increase in the future. They pay a dividend of $0.84 annually, or 3% yield.

CSCO Dividend - 2011 to 2015 — CSCO Dividend – 2011 to 2015

In the same quarter, Cisco repurchased approximately 35 million shares of common stock under the stock repurchase program for an aggregate purchase price of $1.0 billion. The remaining authorized amount for stock repurchases under the program is approximately $5.3 billion with no termination date. I believe they will issue new share buyback program after the current program ends, probably in about five quarters if they keep spending approximately $1.0 billion each quarter.

I love that Cisco is aggressively buying back stock. Not only that, but they pay divided to their shareholders which I expect to increase in the future.

Conclusion: From my analysis on Cisco, I have my stock price targets.

By 3rd quarter of fiscal 2016: Net income from 3Q fiscal 2014 to 3Q fiscal 2015 grew 11.74%. Let’s assume, it grows 5% from 3Q fiscal 2015 to 3Q fiscal 2016, net income would be $2,558.85 (in $billions), or GAAP EPS of $0.50 ($0.4971 to be exact). It would be $0.03 EPS increase year-over-year. When Cisco buys back shares, EPS will be higher depending on the amounts of shares purchased back.

Now, let’s assume GAAP EPS for the next 3 quarters stayed the same as 3Q fiscal 2015 which is at $0.47. After the 3Q fiscal 2016, Cisco would have EPS (TTM) of $1.91. At the current share price, the P/E ratio would then be 14.82x. But at this rate of growth, $CSCO would be worth $32, 13% higher than current price ($28.32), at P/E ratio of 16.75x, just 2.82% higher than the current P/E ratio of 16.29x.

My target price might change when Cisco reports 4Q fiscal 2015 earnings on August 12, 2015. I expect better than expected results. US Dollar (greenback) strength might hurt foreign sales. About 40% of their sales are aboard.

Disclosure: I’m currently long on the stock, CSCO. I went long last year at price just below $25. I will continue to be long.

Note: All information I used here such as revenue, gross margin, etc are found from Cisco’s official investor relations site, Bloomberg terminal and morningstar. The pictures you see here are my own.

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Cisco Systems Inc. (NASDAQ: CSCO) Undervalued – Part 1

Cisco is undervalued (target price will be revealed in part 2)

Cisco Systems Inc. (NASDAQ: CSCO) - 5 Year Daily — Cisco Systems Inc. (NASDAQ: CSCO) – 5 Year Daily

Cisco (NASDAQ: CSCO) – networking giant – designs, manufactures, and sells networking equipments. Founded in 1984, Cisco has grown exponentially over the years. In May, Cisco announced that Chuck Robbins will be the new Chief Executive Officer (CEO) effective July 26, 2015, replacing John Chambers who will assume the role of Executive Chairman and will continue to serve as the Chairman of Cisco’s board. John Chambers is confident Chuck Robbins will continue the positive momentum. I, too, am confident because Chuck Robbins has a great history.

In the past, Robbins has been Senior Vice President (SVP) of Worldwide Field Operations, SVP of the Americas, SVP of Worldwide Sales, SVP of US Enterprise, SVP of Commercial Business, Head of North American Channels, Group Vice President (GVP) of US and Canada channels, and has been a Director of Cisco since May 1, 2015.

Chambers stated “Chuck’s vision, strategy and execution track record is exactly what Cisco needs as we enter our next chapter, which I am confident will be even more impactful and exciting than our last.” Well, I’m also confident that Chuck will do a great job at Cisco, benefiting shareholders.

For someone who has been committed to Cisco for a long time, and held high level roles, I believe he’s the right person for the job. He will be ethical and care about the longer-term at Cisco, instead of short-term maximization.

On May 13, 2015, Cisco reported third quarter earnings and it was relatively strong. Revenue was $12.1 billion, increase of 5% year over year. Net income was $2.4 billion or $0.47 per share on Generally Accepted Account Principles (GAAP), up from previous fiscal year third quarter earnings of $2.2 billion or $0.42 per share.

Cisco Earnings - Quarterly — Cisco Earnings – Quarterly

Revenue for the first nine months of fiscal 2015 year was $36.3 billion and net income, on a GAAP basis, was $6.7 billion or $1.29 per share, compared with $34.8 billion revenue and $5.6 billion or $1.06 per share for the first nine months of fiscal 2014 year.

In 5-year average, Cisco’s revenue and net income has been growing at more than 5%. For company that is so large, 5-year average growth rate is pretty impressive. Not only revenue and net income are impressive, but also gross margin, operating income, operating cash flow, cash on hand, and dividends.

Part 2 will come soon…UPDATE: Click here for Part 2 or http://www.outofwacc.com/cisco-systems-inc-nasdaq-csco-undervalued-part-2/

Note: All information I used here such as revenue, gross margin, etc are found from Cisco’s official investor relations site, and Bloomberg terminal. The pictures you see here are my own.