Broken Pie Chart

Watching financial media, you hear terms like PE and Forward PE multiples, revenue, margins expanding or contracting, and share buybacks. So, what does it mean for a stocks price when multiples increase or decrease? What is the attribution for earnings increasing or decreasing? How do you calculate net profit margin? Earnings releases can be more complicated than they need to be. In this episode, Derek Moore explains scenarios in detail so you can gain a better understanding of all these terms and what it means for stock valuations and earnings growth.

How to calculate the market cap of a stock

How to calculate the earnings per share (EPS)

How to calculate the PE Price to Earnings Ratio

Using net income and revenue to figure out the net profit margin

Difference between multiple expansion and earnings growth for stock prices

What are key determinants of a stock's earnings (Revenue, Margins, Share Buybacks or Issuance)

How share buybacks effect earnings per share

Difference between market cap and net income versus per share earnings

How earnings per share can growth with changes in share count, revenue, and net profit margins

What is a PE ratio?

What is net profit margin?

What is a stock's market cap?

Mentioned in this Episode:

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

J.P. Morgan's Guide to the markets https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets

Recently a JP Morgan analyst highlighted how wrong stock market predictions would have caused investors to lag the markets by up to 60%. What were some of the since disproven predictions? Why do people read and follow some of this stuff? Although analysts also have predictions that prove true, if you have a hedged portfolio strategy why should you even care what people are saying? Discussed in the episode are some calls by Elaine Garzarelli , Nouriel Roubini, Jeff Gundlach, Peter Schiff, Carl Icahn, Paul Krugman, Marc Faber and more.

Summarizing recent JP Morgan analyst report on Armageddonist Comments costing investor money

Why does the financial news media continuously offer up various expert predictions on market direction?

Prediction that Blockbuster would take market share from Netflix

Credit Default Swaps are low risk for AIG

1987 crash predicted by Elaine Garzarelli

In fairness, predictions were a point in time by their authors

Doomsday stock market predictions probably get mouse clicks

Historical lookback at actual annual return for S&P 500 despite 1987 crash

Reviewing various historical long-term cycles in the Dow Jones index

1982 to 1999 magical run for stocks

Instead of following every prediction just be long the market but be hedged

Hedgers opportunity to buy at market bottoms

Mentioned in this Episode:

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Elaine Garzarelli calls 1987 crash https://www.garzarelli.com/downloads/WSJ-Crash.pdf

Marketwatch article showing doomsday predictions that were wrong and would have cost investors https://www.marketwatch.com/story/heres-the-price-to-be-paid-for-listening-to-armageddonist-predictions-2019-11-13

JP Morgan Guide to the Markets https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets

Hilariously wrong predictions from Netflix to Credit Default Sways https://www.dividend.com/how-to-invest/10-hilariously-wrong-bullbear-calls/

Jay Pestrichelli and Derek Moore are back to walk through several examples of how we hedge concentrated stock risk. Various techniques like direct hedging, covered calls, volatility selling overlay, and more are talked through. See how it would play out with stocks like Conagra, Apple, and Proctor and Gamble where they explain targets and outcomes when hedging was needed and when it wasn't. What are the tradeoffs between upside capture and hedging? Plus, get a sense how it may be more complicated than simply owning a stock and buying protection. Get insights into the process of managing positions and benefits for the end clients.

Presenting three distinct case studies hedging concentrated single stock risk

Hedging programs versus buy and hold Apple as single stock

How much upside do you give up when implementing a hedging strategy?

Toolbox for generating premium and offsetting losses

How much downside protection do we put on?

Each stock is different in hedging approach

Process and initial discussion with clients around hedging their positions

What does a low-cost basis mean relative to taxes?

Designing structured exits over time for single stock holdings

Why people hold large single stock positions

Review of differences in volatility between the market and a single stock

How volatile has Apple's stock been historically?

Mentioned in this Episode:

Contact Derek www.razorwealth.com

Why covered calls are not a good hedge https://podcasts.apple.com/us/podcast/why-covered-calls-are-not-a-true-hedge/id1432836154?i=1000455815806

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Article showing how investors made poor decisions at market bottoms https://zegafinancial.com/blog/can-buffered-and-hedged-equity-strategy-save-investors-from-making-behavior-mistakes

Jay Pestrichelli previous podcast appearances https://zegafinancial.com/in-the-news/podcast

Schwab's guide to investing and taxes https://www.schwab.com/public/schwab/investing/retirement_and_planning/taxes/current-rates-rules

ZEGA Financials' Jay Pestrichelli joins to discuss how risky single stocks are and how we have developed a system to hedge that risk. Some people want to hold concentrated stock positions due to tax consequences and are reticent to sell. See how using a hedging strategy can help manage risk, schedule diversification, and use hedging profits to buy more shares otherwise known as the hedger's opportunity. See the show notes below for links discussed in episode and other Jay and Derek episodes.

What is concentrated single stock risk?

How much more risk is holding just one stock compared to a diversified portfolio?

How do people wind up with large concentrated stock positions?

How can direct hedges mitigate downside risk?

Why covered calls are not a hedge

What is the hedgers opportunity?

Irrational decisions at market bottoms and tops

Markets are near all-time highs more often than you think

Despite impressive historical returns Apple stock has experienced huge drawdowns

How hedging single stock risk can solve problems for advisors and investors

Mentioned in this Episode:

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Article showing how investors made poor decisions at market bottoms https://zegafinancial.com/blog/can-buffered-and-hedged-equity-strategy-save-investors-from-making-behavior-mistakes

Jay Pestrichelli previous podcast appearances https://zegafinancial.com/in-the-news/podcast

ZEGA Financials’ Jay Pestrichelli joins to discuss how risky single stocks are and how we have developed a system to hedge that risk. Some people want to hold concentrated stock positions due to tax consequences and are reticent to sell. See how using a hedging strategy can help manage risk, schedule diversification, and use hedging profits to buy more shares otherwise known as the hedger’s opportunity. See the show notes below for links discussed in episode and other Jay and Derek episodes

You might have read that covered calls are a good way to hedge. They do have utility for investors, but they are not an optimal hedge. Understand how they only minimally reduce the downside while reducing the upside. Plus, see how low interest rates have undermined call premiums.

What are covered calls?

How much do covered calls hedge the downside?

How do covered calls cap upside moves?

Examples of covered calls and the premium received vs. downside hedge

What are options collar strategies?

What is the option Greek RHO?

How option premiums are affected by interest rates

Why record low interest rates make covered calls less appealing

Mentioned in this Episode:

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Recently I found several different research pieces showing how at the very lows of the Great Recession in 2009 the percentage of funds in money market funds was at its highest. In 2009 the fund flows to bonds were greater than the previous 5 years combined. So why with equities so cheap did people stay in cash or bonds? Wouldn't they want stocks when they were cheaper? This highlights how investors who panic an make rash decisions can do so at the very worst times.

Why do investors panic?

How does fear guide investor decisions?

Percentage of funds in money markets spiked at time of March of 2009 lows

Why investors didn't rebalance out of bonds and into stocks during the great recession

2009 fund flows were a record year for bonds

How using Buffered or Hedged Equity Strategies can help reduce fear and irrational choices

Benefits of staying invested while hedged

Why now is a good time to be hedged

Mentioned in this Episode:

Contact Derek www.razorwealth.com

Morningstar Bond Fund Flows 2009 Chart https://morningstardirect.morningstar.com/clientcomm/2009.pdf

Dalbar Quantitative Analysis on Investor Behavior Report https://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf

Podcast talking about markets within 3% of all-time highs 36% of time https://podcasts.apple.com/us/podcast/fear-investing-surprising-data-points-to-markets-near/id1432836154?i=1000443860686

Why diversification fails https://podcasts.apple.com/us/podcast/ep012-does-diversification-alone-reduce-systematic/id1432836154?i=1000423615813

Buffered Equity Strategies https://podcasts.apple.com/us/podcast/adding-downside-buffers-to-investment-portfolios-using/id1432836154?i=1000419699076

Why investors need a hedged equity strategy https://podcasts.apple.com/us/podcast/why-investors-need-a-protective-hedged-equity-strategy/id1432836154?i=1000418366567

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

You here quite a bit of talk about the top 1% of wealth in the media. But what if it was easier than you think to land yourself into the top 10% of wealth in the United States and across the world? Derek Moore takes you through the numbers explaining what asset levels it takes to get into various percentiles of net worth and runs the numbers on what type of assumed growth rates and contributions it might take over various time periods.

How much net worth does it take to get into the top percentiles in the United States?

How would your net worth rate compared to adults around the globe in USD?

The power of committing to contributing money monthly over many years

Median vs. Mean net worth numbers

Using PMT Function in excel to estimate return and contributions needed to get to a level of wealth

Discussing Credit Suisse' Global Wealth Report pyramid

How many millionaires are in the U.S. and various countries around the world?

Mentioned in this Episode:

Download Credit Suisse Global Wealth Report 2018 https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

Post corporate tax cuts of 2018, share buybacks have been talked about both in positive and negative lights. Some think companies should use their free cash flow differently. But how do share buybacks benefit shareholders by boosting earnings per share?

Key Takeaways:

• What are share buybacks?
• How share buybacks increase earnings per share or EPS
• Similarities between dividends and share buybacks
• How to calculate a share buyback yield versus dividend yield
• Uses of free cash flow to equity shareholders
• Share buybacks don't get taxed at the shareholder level like dividends
• Share buybacks provide more flexibility compared to dividends for corporations

Mentioned in this Episode:

Broken Pie Chart Book by Derek Moore https://amzn.to/2MibTSk

Contact Derek Moore www.razorwealth.com

No one likes paying capital gains tax (although better than losses). Yet what if you were paying on gains only due to inflation where your purchasing power didn't grow? Recently some U.S. Senators wrote a letter to the Treasury Secretary Steve Mnuchin urging him to consider indexing capital gains for inflation. What would that mean for individual investors?

What would it mean to index capital gains for inflation?

Examples showing differences in capital gains tax due when cost basis is indexed for inflation

Would it result in opening opportunities to diversify if the tax bill was reduced?

How gains due to inflation don't equate to increased buying power

Senator Ted Cruz Coke Stock example showing capital gains due even though loss after inflation adjustment

How this could help long time homeowners

Can the Treasury just instituted indexing for inflation or does Congress have to pass a law?

Mentioned in this Episode:

Current capital gains rate tables https://www.schwab.com/public/schwab/investing/retirement_and_planning/taxes/current-rates-rules/dividends-capital-gains-tax-brackets

Barron's article around indexing for capital gainshttps://www.barrons.com/articles/indexing-capital-gains-to-inflation-makes-no-economic-sense-51564833600

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com