If someone is contemplating a Futuristic Retirement Income and how they might attain this goal, they may wonder what the Rich People know that they don’t. Seniors are continually seeking supplemental income for their retirement.
So this is a problem?
Recent circumstances, political campaign and political rhetoric have brought out conditions that often cause some people, who are not “rich” to envy and even resent those who do have money. This is unfortunate because, in fact, with sound investment practices, the poor can find themselves in the rich department.
It would be wrong to call anyone a loser, and most people are not really “losers”. Many have hit bad times and run across circumstances that have caused them to receive some sort of setback. Many of these setbacks cause monetary losses.
Lord knows that we had a huge setback in May of 2012, when a car flipped and landed right on top of us. We both received broken necks and we are still recovering and in therapy. That is a setback. When it comes to the stock market, most people are likely to lose money than gain in wealth. Usually though, this is due to a lack of knowledge or a short “blip” in the market that causes a loss. So very often, people tend to bail out of the market at take their losses just when they should be buying. It is often a risk and reward thing.
Dalbar is a firm that tracks the “real world” returns of mutual-fund investors. Not the overall returns of the mutual funds themselves, but the actual returns that individual investors make in them. These folks are a good representation of the average investor.
Dalbar’s research shows that while stock mutual funds gained about 9% on average from 1991 through 2011, the actual return earned by the average investor was only 3.2%… which didn’t even beat the rate of inflation during the period. This could be a problem now, couldn’t it?
Why does the average guy lose?
No doubt you’ve heard some vague reasons why the “average guy” struggles in the market. He gets greedy near market tops. He gets too fearful near market bottoms. He struggles with his emotions. He was just a little late.
Those are valid reasons. But many people struggle in the stock market because they fail to learn five basic ideas.
This post is about one of those ideas. It is about a simple wisdom that has been shared for a few centuries.
These ideas are not ours. We have learned them from our own research and, actually, some personal experience.
Invest Only in Great Businesses…Avoid Bad Businesses
Most recently, this played out greatly in the latter part of 2011.
The first part of the lesson came when Warren Buffett, CEO of Berkshire Hathaway, paid more than $10 billion to buy around 5% of IBM. He simply said, “I felt that IBM had a very good business.”
The second part when American Airlines filed for Chapter 11 bankruptcy. The company had lost $10 billion since 2001. As with almost all bankruptcies, it was likely common shareholders will get nothing.
The lesson: Buy only good businesses …. Not bad businesses.
It sounds simple. And it should be.
It seems the only way to stay in the airline business is to declare bankruptcy. That’s because airlines are bad businesses.
There are a lot of reasons why airlines are bad businesses. These reasons include capital investment before you can sell one ticket, unions, fluctuating fuel prices, weather, etc.
Focus on Best for a Futuristic Retirement Income
But Buffett prefers to focus on buying the world’s best businesses. That includes Coke, Wal-Mart, and Johnson & Johnson… And now it includes IBM, as well…
To run its business, all IBM needs to do is simply hire skilled people and give them the tools they need to keep in good working order the rat’s nests of computers and wires that power the world’s biggest firms. It doesn’t need to worry about what the price of copper or oil is doing.
In short, IBM doesn’t have to deal with any of the worst problems airlines do. And you’ll see what that means in IBM’s financial results…
IBM earns $15 billion of free cash flow every year and does around $100 billion in sales. That’s $0.15 in free cash flow for every $1 of sales. During one of the worst periods in stock market history – 2001-2011 – IBM rose about 6% a year. The S&P 500 returned less than 1% a year. American Airlines, of course, was down 97% during that period, due to the bankruptcy filing.
Over the long haul, great businesses beat the market while exposing you to less risk than you get with most stocks… and they sure beat the heck out of losing money in bad businesses.
In short, avoid lousy businesses. Buy very good businesses. It’s a simple formula. Most folks don’t have the know-how or the discipline to follow it, but that’s the surest strategy to making money in stocks over the long term.
Keep this in mind. Are you investing in a Good Business? Keep passion out of your decision. This is profit or loss and not happy face stuff. Live for Your Futuristic Retirement.
Buy only good businesses …. Not bad businesses.
Good investing for your Retirement,
Bea & Terry Reeves
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