Investor Quote of the Week

Quote Meaning

Imagine having $10,000 and putting it into a savings account with an interest rate of 1% per year. After one year, your savings account will grow to $10,100.

Now, consider inflation, which is the rate at which prices for goods and services increase. Let's say inflation is 3% per year. This means that the purchasing power of your money decreases by 3% each year.

After one year, due to 3% inflation, what you could buy for $10,000 now costs $10,300.

However, your savings account only grew to $10,100.

So even though you earned a little interest, your money's purchasing power actually went down. You would need $10,300 to buy the same things you could have bought for $10,000 a year ago, but you only have $10,100.

In contrast, if you had invested that $10,000 in the stock market, you might have earned a higher return, say 8% per year.

After one year, your investment would be worth $10,800. Even after accounting for 3% inflation, you would still come out ahead because your money grew more than the inflation rate.

This example shows why relying on a savings account is not a wise way to become wealthy, especially when you consider inflation.

Investing in higher-return options can help your money grow faster than inflation, increasing your wealth over time.

Nugget of Wisdom

Never pick bottoms.

Picking bottoms in the stock market means trying to predict the lowest point of a stock’s price before it starts to rise again.

This strategy is risky and often unsuccessful because it's nearly impossible to time the market accurately.

Here’s a real example to illustrate why it’s important to avoid this approach and how to invest wisely instead.

Real example: trying to pick the bottom of Amazon during the 2008 financial crisis.

If you tried to buy Amazon at $3 per share in October 2008 because the price dropped 26% from its high, you were now sitting on a -37% loss by November 2008, when Amazon stock dropped to $1.8 per share.

Instead of trying to time the market, consider using dollar-cost averaging (DCA).

This strategy involves investing a fixed amount of money at regular intervals, regardless of the stock's price. Here’s how it works:

1. Regular Investments

Invest a set amount, say $500, every month into a diversified portfolio of stocks, regardless of market conditions.

2. Reducing Risk

Spreading your investments over time reduces the risk of investing a large amount at an inopportune moment.

3. Average Cost

Over time, you’ll buy more shares when prices are low and fewer shares when prices are high, averaging out your purchase price.

Mistakes to Avoid

Listening to your friends.

Imagine your friend telling you about a hot stock.

They heard it’s the next big thing. You invest without doing your own research.

A few weeks later, the stock dropped because the company had poor earnings or management issues that you didn’t know about.

You lose money because you didn’t check the facts yourself.

You didn't do your homework, and you blindly trusted your friend's stock advice.

This happens more than you think and can cause a big strain on your friendships.

Unless your friend has been an investor for some time or works in the financial industry, do not blindly trust their stock picks.

Always do your own research (DYOR) and make your own decisions about whether to invest or not.

For example, those who listened to their friends who bought GameStop at its peak a few weeks ago were severely burned.

Your friends may learn about a stock through a news article, social media, or word of mouth.

These sources often provide superficial information. Without thorough research into the company's financial health, management team, competitive position, and future prospects, their tips could be based on incomplete or inaccurate information.

Stock of the Week

Moody's Corp. (Ticker: MCO)

Company Description

Moody's Corp. engages in the provision of credit ratings, research, tools and analysis to the global capital markets. It operates through the Moody's Investors Service (MIS) and Moody's Analytics (MA) segments. The MIS segment is a credit rating agency, which publishes credit ratings on debt obligations and the entities, including various corporate and governmental obligations, structured finance securities, and commercial paper programs. The MA segment develops products and services, which support financial analysis and risk management activities of institutional participants in global financial markets. The company was founded by John Moody in 1909 and is headquartered in New York, NY.

Profitability Metrics

5-year average EBIT margin: 42%

5-year average net-income margin: 30%

5-year average return on equity: 156%

Growth Metrics

Revenue growth 5-year average (year-on-year): 6%

EBIT growth 5-year average (year-on-year): 7%

Got Questions?

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I’d love to hear your questions or feedback.

Cheers,

Sam