THIS IS MY 168TH BLOG ON UNDERSTANDING MONEY
TOOLS
June, 2019
This blog will be called “things” again, as I will skip
around with various “things” I deem of material interest.
First, a lovely neighbor lady, and good parent mentioned to
me this week that she has such great teenagers because she drums into them the
value of “hard work”. I brought
into context that “working smart” is equally important and not to be
overlooked. I view working smart
probably more importantly than working hard, and the higher you go on the
education ladder the more important it is, in school or in the work place.
Next, in my last couple of blogs someone mentioned that I didn’t
discuss capitalization much in regard to stocks and companies. Let’s take a look. (I have covered the
topic several times in past blogs.)
Capitalization can be used in many contexts. One is “how to capitalize a company”. That means to raise money for your
endeavor. Best to check with a
lawyer or expert as you could be crossing over into Securities violations with
severe penalties. Rule of thumb,
stay with sophisticated millionaires, and stay far away from naïve, little old
ladies!
Another use of the term is the capitalization rate, or what
you will earn from your investment.
This is mostly used in real estate, however can be used elsewhere as
well. It is found by dividing the
net income of an investment by the market price. The higher the cap rate, the lower the risk: the lower the
cap rate, the higher the risk.
The stock markets are driving the rational mind into a state
of delusion. Every day the markets
are being driven further upward without reason, except too much money chasing
any product and companies buying their stock back with either borrowed money or
earnings. There are two very concerning issues. One, is the lack of profitability of corporations today, and
two is the ever increasing debt of most of these companies. I hope these companies don’t come to me
and other taxpayers to bail them out during the next recession as they did in
2008 and 2009! Wall Street is
taking companies public with initial public offerings. If you use standard
“capitalization rate” to figure your investment you can’t as these companies of
late don’t make money, but have huge losses. Let’s take my favorite to beat upon, Uber. They lost $3 billion dollars in 2018, made
the original people very wealthy and may never produce a profit. Excuse the pun, but Uber is nothing
more than a “vehicle” for trading a stock, not investing.
Let’s take a look at our prime company composite, the Dow
Industrial Average. I get current
updates on the exchanges via my phone and a subscription to a service that
brings it to me every 15 minutes.
A few weeks ago the Dow Industrials stood at about 23,000 which equated
to a price to earnings (P/E) of about 26 to 1. (Once again, the historical 135 year average for this
exchange has been about 15 to 1.
This ratio can calculate your rate of return. You merely divide the
price into 1. This will give you a
percentage return on investment to earnings either in a stock or index fund, the ROI.) In the example of a couple weeks ago,
the dividend yield from the composite was about 2.7%. Let’s take a look at today, June 20. The Dow Industrials closed at
26,753. The P/E is now up to 28.34
and the yield is down to 2.07%.
What this tells me, and you, is that the price has been irrationally
driven up while earnings and dividends have not increased at all, thus risk has
increased, and your return on investment has decreased. Very dangerous territory! Everything into the future, and now so
high that the market is priced decades in advance of rational investing
theories.
The last use of capitalization for today’s blog is for
depreciation in terms of accounting and taxes. Many assets in a business can be capitalized on a company’s
balance sheet over its life. Typically
you will either expense an item if it is a short-term item, or capitalize and
depreciate the item out over a period of years if it is an asset that has a
longer-term life. Your accountant
can tell you what the IRS will permit.
Some assets like real estate can be held to an accelerated depreciation;
perhaps good, perhaps not. You may
have to “recapture” depreciation in assets such a real estate.
Hope you learned something in this blog.
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