It’s all magic. Anyone can become a millionaire without special anything. All you need is money, and … abracadabra … magic works itself. That magic is compounding, like a snowball rolling down the hill.
Albert Einstein – Compound Interest quote (not proven he actually said it)
As Einstein once said, “the most powerful force in the universe is compound interest.” Well actually, nobody can confirm the quote’s true author. It’s just credit to Einstein himself to give the quote more weight. More weight as in the snowball rolling down the hill. More weight as in your investment account balance increasing.
Past S&P 500 Returns
Over the past 40 years (1978 to 2017), S&P 500 has had an inflation-adjusted annualized return rate of 8.11%, after having dividends reinvested.
After dividends and compound interest, $1,000 investment in 1978 would be $22,661*.
Over the past 30 years (1988 to 2017), $1,000 investment would be $9,595*.
Over the past 20 years (1998 to 2017), $1,000 investment would be $2,623*.
Over the past 10 years (2008 to 2017), $1,000 investment would be $2,054*.
* Note the investment values above are before any brokerage fees and taxes.
That just includes the initial investment. It doesn’t include periodic investments. Let’s include periodic investments as an example.
Time Is Power
Below you will see two people, Jacob and Kelly, making a periodic investment until they retire at age 65. The only difference is that Jacob starts investing at age 20. Kelly starts out late, at age 30.
Their investment will yield inflation-adjusted 5% annual return, and 2% dividend yield which automatically gets reinvested.
Jacob and Kelly, Investments
Jacob started out earlier and invested $20,000 more than Kelly. However, he came out way ahead of her by a whopping $499,659. Time is money. The power of time and compound is real. Very real!
Start investing as soon as you can. The earlier, the better.
Start investing as much as you can. The bigger, the better.
Before you close this article, one more thing. You notice how a male (Jacob) made way more money than a female (Kelly)? Highlighting income inequality.
Oh, wait! One more thing. You notice how a female started out so late than a male? Highlighting other gender gaps across four thematic dimensions: Economic Participation and Opportunity, Educational Attainment, Political Empowerment, and Health and Survival.
Anyway, thank you for listening today. I mean reading. Have a nice day.
Figure 1: Trump Military Headlines. Google Trends – “North Korea”
At 17-years-old, Donald Trump was named a captain for his senior year at a military boarding school. Spending five years at New York Military Academy, the school taught Trump to channel his aggression into achievement.
Under the Trump budget, almost every budget increase goes to military departments, 10% increase Y/Y in the budget for military spending. It’s not a rocket science to figure out Trump madly loves force.
Even Trump’s Secretary of Defense loves force. Mad Dog James Mattis once said, “It’s fun to shoot some people. I’ll be right up there with you. I like brawling.”
At his confirmation hearing in January, Mattis said, “My belief is that we have to stay focused on the military that is so lethal that on the battlefield, it is the enemy’s longest day and worst day when they run into that force.”
Then there came 59 Tomahawk missiles to military bases in Syria and “Mother of All Bombs” on Daesh tunnels in Afghanistan. All of those came during the heightened tensions with North Korea.
War is Good for the Cold-Hearted Stock Market
North Korea acting out is a good thing for America. War throughout the history has made us united. Not to mention that the stock market goes up.
Figure 2: S&P 500 Index (SPX) – Daily Chart. The first circle represents the time of news reports on U.S. airstrikes on Syrian bases. The second circle represents the time of news reports on most powerful non-nuclear bomb being dropped in Afghanistan
As you can see in figure 2, the stock market barely reacted to the recent U.S. military actions that Trump gave a green light to.
As a trader and investor, I wouldn’t be concerned about the potential war with North Korea. (Although I would be concerned about the loss of human lives and loss of limbs.)
In early 2013, there were increased tensions with North Korea, similar to today. At the time, the stock market did not give a damn about the threats from DPRK.
Figure 3: S&P 500 Index – Daily The first headline shows two arrows. The first arrow represents when the headline came out. The second arrow represents February 12 when NK conducted the nuclear test. The second headline represents North Korea threatening the west as usually.
Not only does the stock market not care about North Korea, but also for any other war in the past century. War is good for the cold-hearted stock market.
Over the past 4 decades, Dow Industrials on average was turned on by U.S.-led military operations, returning 4% in a month after the beginning of military operations and more afterward.
Figure 4: War is Good for the Cold-Hearted Stock Market
Recent Three Wars
When the U.S., with support from allies, started bombing against Taliban forces in Afghanistan on October 7, 2001, the stock market went up, not down. Even after 12 days later when the first wave of conventional ground forces arrived, the stock market kept going up. By the year-end when Taliban collapsed, S&P 500 was up about 14.5%.
Figure 5: S&P 500’s reaction to the U.S. military action in Afghanistan – Weekly Chart
When the U.S. began the major combat operations in Iraq on March 20, 2003, the stock market skyrocketed as shown in the candlestick bar on the highlighted portion of S&P 500 Weekly chart in figure 6 below. By the time the operations ended on May 1, the stock market was up about 11.5%.
Figure 6: S&P 500’s reaction to the U.S. military action in Iraq – Weekly Chart
Figure 5: S&P 500 reaction’s to the U.S. military action in Libya – Weekly Chart
The only difference this time is we got leaders who very much loves forces and are violent themselves. Another difference is that North Korea is little powerful today than they were in 2013. But they are very weak compared to China, Russia, Europe, and U.S. It’s better to act now before North Korea gets even stronger. Although lives and limbs will be lost, I think there’s a greater cost if we allow North Korea to get even stronger.
China and North Korea
With China possibly increasingly going against North Korea, Kim Jong-un might act even more violent. I don’t think China really wants to break off its relationship DPKR due to the geographic proximity and China’s willingness to make more friends in the region. Besides being a military and diplomatic ally, China is also an economic ally. In 2015, the second largest economy accounted for 83%, or $2.34 billion, of the North Korea’s exports.
In late February, China sanctioned coal shipments from North Korea, who is a significant supplier of coal. Instead, China has been ordering the coal from the U.S. In the past, Trump said he wants to help the country’s struggling coal sector.
As Reuters reported, Thomson Reuters Eikon data shows “no U.S. coking coal was exported to China between late 2014 and 2016, but shipments soared to over 400,000 tonnes by late February.”
Is China having a change of heart on its relationship with North Korea? I don’t think as China’s trade with North Korea still increased by almost 40% in the first quarter of this year. China also buys other stuff, such as minerals and seafood. Looks like China wants to be on the good side of North Korea and Trump. The Art of the Deal.
Is this time is also different when it comes to the stock market? I don’t believe so. I’m not worried about the negative impact on the stock market due to North Korea, even though they were to be invaded.
However, I’m watching very cautiously China and Russia getting into an armed conflict with the U.S because of the North Korea situation. Armed conflict between the superpowers is a game changer. Although that’s very unlikely as superpowers argue all the time.
Suggestion For Your Portfolio
The situations might affect the markets for a very short period of time, especially if there’s uncertainty. But investors shouldn’t worry about it. The market could care less about a war, specifically when it’s aboard.
During the times of war, don’t reduce your holdings because of misconception war is bad. If you do, you will miss the gains.
Figure 6: Capital Market Performance During Times of War Sources: The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term US government bonds for long-term bonds; five-year US Treasury notes for five-year notes; long-term US corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index. Returns for a war-time period are calculated as the returns of the index four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.” Risk is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results.
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.
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.
Figure 3: Bottles + Cans = Cash
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.
Believe it or not. I love the tweets from @realDonaldTrump. No matter what the content of the tweets are, I love the fact it moves the markets. Why would I love it? Because I love volatility.
In December, Trump tweeted out;
The United States must greatly strengthen and expand its nuclear capability until such time as the world comes to its senses regarding nukes
The tweet sent shares in small uranium miners soaring, including Uranium Resources (NASDAQ: URRE) and Uranium Energy Corp. (NYSE: UEC) by 31% and 13%, respectively.
Despite the real world complications, I just love the fact it agitates the markets.
More tweets;
The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th.
These tweets, as you can guess – sent the shares of Lockheed Martin (NYSE: LMT), which is the supplier of F-35 program, and Boeing (NYSE: BA) – down. From both tweets, Lockheed Martin lost billions in market cap. The rival Boeing was barely unchanged at the end, as it means more opportunities for them to gain more contracts.
However, Trump targeted Boeing in earlier December when he tweeted this;
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!
Trump’s tweets are just awesome. The volatility it brings allows me to make more money than the non-volatility. As I mentioned in my previous article, I recently opened RobinHood account, broker with $0 commissions. Using the broker in the future, I’m planning to buy some shares of the companies Trump negatively targets, especially if investors overreact.
Since it seems Trump has a strong hatred towards Mexico and the U.S. companies working there, here are the potential targets;
It seems there are seconds delay until the stocks react to Trump’s tweets. That’s rare considering the era of algorithm trading which can react in milliseconds and less.
10 seconds elapsed between Donald Trump’s tweet and the so-called drop in Boeing stock. Just FYI
Algos have yet to incorporate Trump’s tweets into their codes. It’s not that simple yet as it can be difficult to determine the sentiment from a tweet. Algos can easily get the direction of the stock wrong. We need more tweets to better analyze it.
But, will the future tweets move the markets or not? It all depends on how successful Trump is in implementing what he tweets. If Trump is unable to do so, he will just lose credibility.
Meanwhile, markets will react to the tweets and I plan to take advantage of them.
Trigger (originally a class project at Cornell Tech) just recently introduced “Trump Trigger” that will send you a notification every time Trump tweets about your investments. Not an algo, but notification that can be useful for amateur investors. Not my thing.
Whatever it is, I plan to take take advantage of them for financial gain.
Speaking of Twitter, follow me. I tweet about some of the articles I read, my trades and some sarcasm. Unfortunately, my tweets do not move the markets……for now.
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.
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
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)
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 (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 PeerCompany 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
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 is undervalued (target price will be revealed in part 2)
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
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.
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.
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.
