Building Inter-Generational Wealth

Important Note

There are NO guarantees in the Stock Market. 

Celebrated investor and ‘teacher’ Warren Buffett probably said it best when he told us in his 1996 Letter “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these”
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable company whose earnings are virtually certain to be materially higher 5, 10, and 20 years from now”. Warren Buffet 1996 Letter. Keys to investment success 

Still a little knowledge can be a powerful asset and hence, as new investors, it makes sense that we understand the foundational concepts that govern the market. This will help us to feel at home, and participate in the discussion, even though we know we must do more listening and learning and less talking. Each concept will offer guidance on its own, and, usually more, in various combinations with others. They will transform you into a more successful investor and better financial planner for yourself and your dependents (already born and yet unborn) as you build the mindset, and strategies, that will carry your legacy of inter-generational wealth-building down the family line.  

As ‘teacher Warren’ has suggested, and to put things into perspective, what we want to do is buy the shares, either of an already successful company,  or a new one that is adjudged to have the potential to be. This will give us some ownership. Now, we can let the usually very well paid executives who manage it ‘work for us’ in doing two things inter alia, while we focus on our separate careers and leave us  to sleep well at nights.  These two things are to:

1) grow the company’s share price
2) pay a growing quarterly dividend

At this website, in our newsletters and throughout the book being written, we will speak to the ever-present importance of both in our Inter-Generational wealth building programme but, suffice it here to say that, if our backs are ‘against the wall’ and we have to sell some shares, the higher the price,  the more funds we will get since we may want the quarterly dividend to supplement our income.

Six important general concepts 

We already know that the two most powerful and important concepts in long term Wealth-building are Compounding and Time (as measured in decades)
But, as you would have suspected, there are others even if not as transformative and we will  look at some of  them before we go to the very specific ones.. 

In this regard, my suggestion is that you align yourself with at least one, but preferably two or three investment brokerages and subscribe to their stock market analysis feed. This feed will be ‘worth it’s weight in gold’ because, it will give you the computation of most of the investment concepts and or investment ‘measuring sticks’ that you will always  need in your investment journey We will look at six of these. If You grasp these, they will assist you in understanding the others. These six are:

1. Concept of comparables
2. Intrinsic or fair share value
3. Fundamental Analysis
4. Technical Analysis
5. Market price vs intrinsic value
6. Leverage

Concept of comparables

In stock market investing, ‘comparing oranges with oranges’ applies. This means that it makes more sense to compare certain metrics of companies in the same game, and on the same playing field, vs from different games playing on different fields. The comparison will be more meaningful.  So, compare companies in the same industry. Better still,  locate, if possible, the accepted  international  performance standards of that industry and use it as one basis (measuring stick) against which to evaluate that of the company or companies in ‘your viewfinder’. I said ‘one basis’ deliberately because, in assessing for what you want in a company (high dividend, fast growth in share price) you will use more than one metric in trying to get the best understanding of it.

Intrinsic Share Value

Professional and other knowledgeable investors are obsessed with this concept/metric. Note, to begin, that we are here talking about estimated share value. Not share price, which we will look at shortly. The obsession is to know the intrinsic or ‘correct value’ of a share for important practical reasons including say, if you are the owner and are now selling it but, even more so, if you are buying it because, if said share is valued at $1.0, you will not want to buy it for $2.0. But, as you also guessed, the pricing of anything in most markets is not an exact science as in mathematics or physics. This is where one Benjamin Graham 1894-1976 comes in. He experienced some of the devastation in the 1929 crash and from that, did a lot of evaluations out of which he developed a series of number crunching and formulae for estimating (crunching) what is considered to be the fair value of a series of metrics such as  value of shares, price-to-earnings ratio, debt-to-equity ratio and many others. Not surprisingly, he has come to be called the Father of Value Investing because, among other things, investors use his various ratios to enable them to negotiate the best value for themselves. It is important to recognize, however, (bearing in mind that we are not dealing with exact mathematical values) that two different analysts can come up with different fair value computations for the very same share of the very same company.

Fundamental Analysis

The experts in investment analysis use many analytical, and evaluative tools to do their analyses. With A.I. facilitation, they are now even using  what they call ‘big data. Remember though, the basic objective in all analyses is the search for what the trade calls intrinsic, or fair value. If you ask them,  too, they will likely explain that their evaluation practice is aligned to one of two basic modalities. One of these is called Fundamental Analysis. The other is called Technical Analysis. According to investment resource group Investopedia, Fundamental Analysis is a method of measuring a security’s intrinsic value by examining related economic and financial factors’. As you might say to yourself, ‘but this is really fundamental! In other words, after computing the intrinsic value of each share of a company, the Fundamental Analyst now looks around to find any and all issues that would tend to make it;

1. go up
2. go down, or
3. move sideways

Fundamental analysts have become associated with the practice of what is called Value Investing. Basically it means buying  shares below their intrinsic or fair value price, either for their own portfolio or for sale to other investorsfor a super bargain.(Keep this concept of Value Investing in mind. As a new investor, let your RIA know that you know of it and that you want to buy everything on this basis)

Technical Analysis

In essence, while Fundamental Analysis wants to know the fair value, primarilyfor value-investing purposes,  Technical Analysis is more concerned with what they call trend lines  and put less, or no focus at all, on what the fair value is. Thus, 

1. it uses the historical price points to predict the trend for price going forward-ie upwards, flat, or downward
2. not  particularly interested in finding intrinsic value, nor
3. pay much attention to environmental issues because, it assumes these are already embedded in the known market price
4. instead, its main focus is share price trend

Market price vs Intrinsic value

As a new investor, this is where ‘the tyre hits the road’ for you. In other words, it is critical to know that what is published in the newspapers or spoken about on radio or TV is the market price of the shares of companies and not necessarily their intrinsic or fair value. If you are buying, this would give you three options as follows,

1. buy never-the-less
2. find out the fair value, and
3. negotiate so that offer price gets closer to fair value or
4. wait it out until market price equals or, better yet, sinks below fair value.

It might be important for you to know that many serious investors will delay buying the shares of a good company until the price is right. For example, they might elect to wait until an ‘accident’ happens and other investors get fearful and sell for cheap because, they don’t see the ‘accident’ as a short term phenomenon. The world’s greatest investor, Warren Buffett, has  seen some of these ‘accidents’ and says he gets ‘greedy (and buys up cheap) when other investors are fearful (and sell out cheaply) and that he gets fearful (limits buying) when the crowd of investors sees value where he (Buffett) does not.

Leverage

The term Leverage is used many times in business. In essence, it means using one’s connection or influence to get a ‘yes’ (positive) where otherwise, the outcome would  be a ‘no’ (negative) This implies that having leverage is a very important positive asset. Think of the jack in your car and how, with a few small strokes, you can lift a car ‘weighing a ton.’ However, if the jack was not seated properly, the car could fall off (crash) and likely cause serious damage. Using the jack (with a few strokes) to lift the heavy car is leverage at work for you.

Companies exercise leverage too. This is where they use a little asset and a lot of debt to ‘buy’ something such as taking over another company. Most times this works out as anticipated and everybody makes money. Sometimes it does not and the over-extended ‘buyer’ crashes, not necessarily because it took on too much debt but, because an unforeseen and unrelated event happens and becomes the trigger that causes the ‘jack to slip’. In these circumstances, the Debt to Equity Ratio of the ‘buyer’ is an important metric to know. It measures a company’s financial leverage.

Another thirty (30) concepts to digest

You will find it helpful to know these six fundamental concepts.  They will give you a bearing as you embark on the road to learning how to build some wealth for yourself, and establish a platform, or procedure, for your dependents to follow your example and create their own down the Family Tree. There are many othersto know but, for now, we will just look at another thirty (30) based on the extent to which they, too,  can be described as foundational, if even with just a little less ‘global’ impact. Most of these will be found in Chapter 5 (A Basic Introduction To Stock Markets) Chapter 6 (Knowledge, They Say, Is Power) and Chapter7 (How To Do Basic Evaluation & Performance Comparison)

Understanding them, too, will put you up front in the class! However, remember that, not only are there many more generally accepted market metrics but, that, like with my own preferred Cost per Dollar of Dividend Paid vs the standard Dividend Yield used globally, many individual investors, and brokerage houses, have developed their own inhouse ‘measuring sticks’ for share price evaluation which they guard zealously. 

To summarise 

The idea of stock market investing is to get as many dividend cheques as possible ie having an ownership base to throw off periodic income so that we (you and I) and our children and their children, can live better quality lives wherever on the planet we live, and work. 

This means, inter alia, buying the right stock at the right price and the right time to get the most from ‘the work’ of your investment money….just as the billionaires do. Just remember, the stock market offers many upsides but no quarantees. There is always what the investing trade calls a risk vs reward trade off. Still, since it’s one of the favourite wealth-generating places of billionaires, there has to be something there worth our interest. In Chapter 6 of my Book ‘Knowledge, They say, is Power’ we will explore this Risk vs Reward concept.

The Thirty (30) other Concepts

1. Saving
2. Interest
3. Investing 
4. Dividends
5. Compounding
6. Time (As measured in decade)
7. NAV (Net Asset Value)
8. Stock market
9. Stock exchange
10. Risk vs Reward
11. Index
12. IPO
13. APO
14. Broker
15. Brokerage
16. RIA (Registered Investment Advisor)
17. Listed Company
18. Shareholder
19. Share 
20. Share Price
21. Book Value
22. Fair Value
23. Analyst
24. Dividend Re-Investing Plan (DRIP)
25. Building Inter-Generational Wealth

Some Investment ‘measurement‘ tools

26. Earnings per Share (EPS)
27. P/E Ratio
28. Yield
29. Dividend Yield
30. Cost per dollar of Dividend
31. Capital Gains/Loss
32. Total Return
33. Debt Ratio
34. Return on Equity (ROE)
35. Compound Annual Growth Rate
36. Living Family Commitment

1. Saving (Account)

People with money can save it at any deposit taking institution ‘for a rainy day’ or to buy anything of their choice. Saving money is almost the same as ‘parking’ it. Typically, saving one’s money is a sure way to earn the least from it. Wealthy people rarely keep Savings Accounts except to ‘park’ funds for emergencies or planned investments

2. Interest 

This is the pay back, or income, that one gets for leaving his/her money (savings) at banks and similar other institutions. Banks lend out their savings (money you park with them) at higher rates of interest than the one at which they pay you. That difference is what they call a ‘spread’ That is where they (banks) make their own income.

3. Investing

Investing one’s money is the opposite to saving it. Saving money means ‘parking it’ safely for imminent or future use. Investing it is like ‘waking up’ money and putting it to productive use. Invested money normally earns much more interest, or dividend, than saved money.

4. Dividends

This is the share of a company’s profit that you get, paid on a per share basis. This means that the more shares you have, the bigger your ownership stake and the more dividend you get. When an investment is made in what is called fixed income investments like business loans, (called debentures) that investment makes periodic interest payments. Interest is payment for the use of other people’s money. Usually, these interest payments are guaranteed. On the other hand, when that investment is made in what is called equity, the pay back from the profit it helps to generate, if any, is called a dividend. The term ‘equity’ has specific accounting meaning. A good illustration is the shares of companies traded on a stock exchange. The Equity in anything is usually a mix of asset and liability. Probably because of this, dividend payments from investment in equities are not normally guaranteed. 

Note: Not every company pays dividends. Many prefer to use operating surplus to grow the company instead and rely on share price growth to reward investors. These are usually called growth companies. When you contemplate buying the shares of a company, be sure to ascertain that it is a dividend payer

5. Compounding

Compounding conjures up the perception of something growing on itself without outside help. Think of compound interest from the bank. It is interest growing on principal, and interest earned prior. The same applies to dividends. If, instead of taking ,and consuming it, you reinvest dividends (buy more) in the shares of the company that pays it, you are compounding those dividends and growing your number of shares (share count) without taking money from your pocket! In stock market investing, compounding is one of, if not the most profound and  transformational  value enhancers.  Regrettably, the majority of investors either have never heard of it, or, having heard, have discarded it for inexplicable reasons. As a new investor, you should embrace this concept and let it work for you as one cornerstone of your wealth-building programme. The great Albert Einstein is reported as saying “compound interest is the most powerful force in the universe. He who understands it, earns it; he who doesn’t, pays it.” Make sure that you earn it. Always

6. Time (as measured in decades)

The literature on investing is overflowing with illustrations on the power of time to multiply the impact of compounding. The implication for everyone, but especially for those who live to their eighties and beyond, is transformational. If you buy a dividend paying investment at 25, continuously compound them and retire at 65, that is 40 years of compounding.  And retirement income!

7. NAV (Net Asset Value)

As is well known, every listed company is made up of both asset and liability and expressed on the basis of number of shares. As the name suggests, to get the net value of each share, the procedure is to subtract the liabilities from the assets and then divide the balance (net assets) by the number of shares.( The investment trade calls these ‘shares outstanding’)

8. Stock market

This is a marketplace where shares of companies are bought and or sold.  Sellers include companies which  want to offer their shares for sale. The market is not necessarily a physical meeting place anymore. Much of today’s buying and selling of shares is done online. This market is sometimes called a secondary market because, for shares to be traded in it, they must have been owned by somebody. The initial ownership occurs in what is called a primary market. This is where a seller of shares (say a company) initially sold them to ‘John Brown’ who, in turn might sell them to you (in the secondary market) The price of shares in the primary market (IPOs) are fixed by the seller. In the secondary market, price of shares are negotiable between sellers and buyers

9. Stock exchange

A stock exchange is an administrative body that develops the rules and regulations to govern the buying and selling of shares in a stock market. Every stock market is regulated by an exchange

10. Risk Return Trade off

Every investment involves a potential risk of loss and many people tend to be what is called risk averse. They prefer investments that have the word SAFE written in bold letters. There is no such safe investment in the equities market. This means you will have to compare the risk of any particular investment against the potential reward and make, or don’t make it, on the basis of the ‘pro’ vs the ‘con’. Billionaires and regular investors tend to see the ‘pro’. Most others are consumed with the ‘cons’. As Linkedin co-founder Reid Hoffman puts it “The vast majority of the human race are not good at seeing the upside. They think of risk first. As a new investor, you should rely on the advice of your RIA and or analyst for sound advise ad learn to see the upsides like billionaires

11. Index

A market index is a numerical indicator that measures the activity level, and value, of shares that are traded in that market. Each market develops its own index (indices). Popular indices are those on the New York Stock Exchange such the Dow Jones Industrial Average (DJIA) (measures activity/value of 50 leading US companies) or, the Standard & Poor 500 (S&P500) which does the same measurement of 500 other companies in the USA. Look up the index in the market in your own country and or region and remember to start reading up on everything on that market’s website

12. IPO

Acronym for Initial Public Offering. This is where an institution such as a company, makes its shares available to the public for the first time (initial) , on a stock exchange. Refer to stock market at #8. This offer is called a primary offer and the market for it is called  a primary market. Two distinctions of a primary market are

1. the purchase price for each share is fixed and non-negotiable by the seller and
2. The money a buyer pays for each share goes directly to the coffers of the institution/company that sells it. 

IPOs are used by institution/companies to raise money from the public to fund their corporate objectives. Here are the IPO dates and share price of four well-known companies across the globe.

1. Apple (AAPL-Nasdaq)              Dec 12 1980 @ $22/share
2. Microsoft (MSFT-Nasdaq       March 13, 1986 @ $21/share
3. Cisco (CSCO)-Nasdaq)           Feb 16, 1990 @ $18/Share 
4. Amazon (AMZN Nasdaq)        May 15, 1997 @ $18/sh

(All have divided up each share into many multiples since and made millionaires of most early investors. Compare the respective share prices when you read this Newsletter to underscore how the stock market creates wealth for investors) 

13. APO

Acronym for Additional Public offer. This is where an institution, such as a company, comes back to the market to raise more funds, pretty much on the same basis as in the IPO but, there could be many changes in the details such as the price of each share on offer. It could be the same, or different, from that at the IPO.. Purchase price of shares similarly go to the coffers of the company promoting the APO

14. Broker

A broker is a kind of ‘middle man’ who handles the paper work of selling the shares that an institution, such as a company, makes available for sales in the primary (IPO to buyer) or secondary markets (where a person who owns a share sells it or a person who wants a share buys it) 

15. Brokerage

The administrative operation of a broker. Usually, they publish a great deal of very helpful market data including analyses of companies done by their in-house analysts

16. Registered Investment Advisor (RIA)

Brokerages are usually peopled with persons who know something, or a lot,  about stock market investing so they can advise the public about what stocks to buy, or sell.. Most exchanges stipulates that the technical competence of these people be certified by a recognized 3^rd party. As a new stock market investor, your RIA should be more your friend and mentor. He, or she, must be your guiding hand until, and even beyond, when you are comfortable enough to make your own investing decisions 

17. Listed Company

‘Listed’ means post-IPO approved by relevant exchange and now written up on, or accepted to trade (sell) it’s shares in the open market. All its shares are now traded between those who want to buy and those who want to sell All of this buying and selling is done through a middle-man broker who handles the ‘negotiation’ on price (in the even this was not already settled)

18. Shareholder

This is a person, or institution, who owns some of the shares of a listed company. A shareholder is usually the same as a shareowner. In the ‘old days’ shareowners would get a paper certificate as evidence of ownership of the number of shares they have bought. If, or when, such a shareowner sells his/her shares, the certificate of ownership would move to the new owners of those shares. Today, share ownership has moved to an electronic platform which is maintained by the company’s registrar. This makes it easy to electronically maintain share ownership. NOTE: The essence of everything at our website, “School Without Walls” and the Book on which I am working is for you to become an owner of an income-producing asset. Becoming a shareholder of  a dividend paying company is a great place to start.

19. Share

It confers part ownership of a company, even if you own only own one share. Just like your motor car (many individual parts working together) a listed company is made up of many ‘individual parts held together’. The smallest, and indivisible part is called a share. This is what is bought, and or sold, in the stock market. Ofcourse, the person who owns 100 shares would have 100 times more ownership, and company benefits, as you.

20. Share Price

The price of a share is ‘in the eyes’ of the person who buys it (for the price he or she pays willingly, i.e.. without coercion).  In the stock market, different people will normally pay a different price for the same  share of the same company on the same day in the same stock market because, in their opinion, or calculation, they see a certain value outcome down the road. This is where, as a new investor, your RIA/Mentor can be the best friend you have ever had. His/her advice could prevent you from over-paying for the share of a particular company

21. Book value

Every company has a monetary value. This is not necessarily obvious. The closest you might come to the ‘true value’ of a share in a company might be arithmetic average you get if you divide the overall value of a company by its number of shares. The investing trade calls this the book value

22. Fair value 

Refer to Intrinsic Share Value under Six Important General Concepts above) and  recall the reference to  Benjamin Graham 1894-1976 and how the stock broking industry reveres him for giving it a series of formulae for computing this value which, you know by now, is mostly different from what usually exists in the market. There, the fair value of company XYZ’s share might be $50. Yet, some investors will pay $60/share (or more!) while others pay $40/share. Make sure you are the one who pays the $40/share!! If so, you would be practicing Ben’s and Warren Buffett’s investing modality, i.e. value investing. It seeks to buy shares below their fair value estimate. This helps to build what Warren calls a moat to give protection of the value. Remind your RIA that you want your share purchases to be at, or preferably blow, fair value.

23. Analyst

 Many RIA’s have specialized in researching the true, or fair value, of the companies they analyze. They have become known as analysts. They are an important part of the investing community

24. Dividend Re-Investing Plan (DRIP)

As the name suggests, DRIP is where you use your dividends to buy more of the shares of the company that paid it (or shares of any other company) Dividends can play a most profound and transformative role in an investor’s portfolio. You can either consume it (what most investors do) or reinvest (compound) it at source (which is what too few do) to build share count and investment value. As a new investor, this is how you should use yours to grow your ownership of income-producing assets i.e. the shares that pay a dividend periodically (usually every quarter)

25. Building Inter-Generational Wealth (The Strategis)

The concept of building inter-generational wealth is one where, for illustration, one generation A (Silent) builds wealth through the next generation B (Boomers) for that generation’s (B) benefit while generation B (Boomers) does the same building through C (Gen-X) and generation (C) in turn continues the building through generation D (Millennials)  which in turn builds wealth through generation E (Gen-Z) and the next one builds it for the succeeding ones on a continuing and revolving basis, as a deliberate strategy to build a family legacy of wealth. The concept relies on the four cornerstone foundations outlined in the Philosophy & Strategies of Inter-Generational Wealth Transfer,which are;

1. Relationship between us and our money. It is our money that should work for us and not us working all our lives for it
2. The ownership of income-producing assets e.g. shares in dividend paying companies
3. Using the stock market to put money to work, and
4. Family indoctrination into the mindset of always being wealthy on a revolving basis

Revolving means that every beneficiary generation instills the concept, and strategies, into the consciousness of each family member. The concept relies on the two most profound wealth-building strategies of compounding, and time (as measuredin decades). A key component of the concept is that it is not left to chance. It becomes a ‘living commitment’ in the awareness of each generation as a deliberate strategy to enrich the lives of all its members. A great way to initiate the concept is to 

1. give each child a stock market investment at birth (or as soon thereafter as possible) in a dividend-paying company 
2. allow the investment to ‘grow with the child’ by re-investing all dividends to increase share count and investment value. 
3. By age 25, each young adult would have compounded his/her initial investment over two and a half decades and have accumulated some personal wealth, depending on the size of the initial investment.
4. Each such beneficiary would repeat the investing modality with his/her children and enjoin them to do the same when they become parents

Some Investment ‘measurement‘ sticks (tools)

From the wealth-building concepts and strategies you will glean from my Book (and with the mentorship of your RIA) you will soon get to a stage where you want to assume more responsibility for your investment outcomes. This means being able to ‘take the pulse’ of the market. This will not make you an expert and, as well known and respected investor Warren Buffett has said, you and I need not be market experts to get the best out of the market but, this is one time (or another time!) where a little knowledge is not likely to be ‘a dangerous thing’ so, let’s look at a few of the ‘measuring tools’ that the experts use so that we get a working knowledge of what the information from them means, or implies, for our portfolio (companies whose shares we own.) Interestingly, many of the tools that we will look at were developed by the same Benjamin Graham who was referenced earlier when we discussed the concept of fair value. Many of these ‘measurement tools’ basically compare one investment metric against the other and use the result to develop a ratio. This way, by looking at the ratio (comparison value) one can draw certain performance indications, as follows;

26. Earnings per share

Companies go into business to earn a profit and, as with most things business, the net amount is usually expressed on a per share basis. Hence E.P.S. meaning Earnings Per Share. This is the arithmetic average from dividing the net profit by the number of shares outstanding.

27. P/E Ratio (or multiple)

One of the favourite comparison tools or ratios in stock market investing is price of share in relation to earnings per share or P/E. Investopedia calls it the “ratio for valuing a company by comparing its current share price relative to its (current) earnings per share, EPS”. The calculation is done by dividing share price by earnings per share. In effect, this indicates the number of dollars required to generate each dollar of earnings (Note- each dollar of earnings, not each dollar of dividend) By and large, the smaller the number of dollars (in price) required to generate a dollar of earnings, the more profitable a company is considered to be, though not necessarily so. According to Prof Gary Smith in his book, “Money Machine” page 84, the average P/E in the S&P500, 1871-2015, is 14.9 times (15) Understandably, the P/E ratio (or multiple) is a favourite ‘measuring stick’ among analysts and investors comparing performance outcome all over the world.

28 Yield

This is the return you get on an investment. This investment could be anything including shares bought in the stock market. It is usually expressed as a percentage so that if one gets $10 on an investment of $200 the yield would be 5%. This is computed by dividing $10 by $200 multiplied by 100. 

29.Dividend Yield

This is a comparison between the dividend an investor gets and the price of the share that paid it expressed as percentage. Thus, if the share price of Company ABC is, say $90 and it pays dividend of say $3, the yield would be 3/90*100 or 3.3%. Especially for value investors, retirees and those looking for as much income as possible from their investment, dividend yield is usually a leading determinant of where one puts his/her investment dollars. 

30. Cost per Dollar of dividend

As a stock market investor myself, I know the value of the dividend yield ratio. It tells us how much we get as dividend for each $100 of share price and this is very valuable information. Still, I like to use the related formula of knowing the cost of each dollar of dividends from the different companies in my portfolio i.e. companies in which I invest. As a retiree, this is very important to me. It enables me to better align the portfolio with my needs. To do this, I compare share price and dividend paid over a full four quarters (one year) 

31. Capital Gains/Loss

This is the profit (if any) you make on the disposal of an asset. Owning property, or  asset, preferably one that throws off income periodically, stands as one of the cornerstone recommendations of my wealth-building initiative. Occasionally, you might need to sell such a property or asset. If you had bought it for  say $100 and then sold it for $125, your capital gain would be $125-$100=$25 

32. Total Return

In respect of performance measurement, and as the name implies, this refers to everything that you get from ownership of an asset over time and includes any receipt such as interest, rental, dividends, capital gains, and more.

33. Debt Ratio

It is the ratio of total debt to total assets expressed as liabilities/assets. Companies are like us individuals. Many times, for a variety of reasons, we need to borrow money such as for buying a car or as mortgage on a new home. And every bank will be happy to lend us the money to buy that car if our debt ratio is within bounds meaning that, our salary can accommodate the payment without us missing any and ‘falling behind’. A roughly similar scenario occurs with companies. The implication is that when you know a company’s debt ratio, it helps to inform your decision on whether to buy the shares (take an ownership position) of this, or that company

34. Return on Equity (ROE)

This is a ratio that tells you how much net income a company is generation from each dollar of capital invested. The more the better! I am encouraging you to become a stock market investor (i. e. own a part of dividend paying companies) so that you can build some wealth for yourself and your dependents. This implies that the companies you buy must be in a position to make a profit and pay dividends. A company’s Return on Equity (ROE) is a very good proxy for their ability to do so. 

35. Compound Annual Growth Rate (CAGR) 

This is a very powerful measuring stick in the wealth creation business. If we, you and I, are going to become investors, not only will we need a strategy, or strategies, through which to do so successfully but, we will also need some ‘measuring sticks’ so we can better understand the language of investing and,  for telling us, whether we are progressing to our objective, standing still, or worse, losing the money we invested. We will also need to be able to compare our own performance against that of others to get a better perspective on how our portfolios compare., One ‘measuring stick’ that stands out is called compound annual growth rate or CAGR for short. The highly respected investor website Investopedia describes it as “the rate of return that is required for an investment to grow from its beginning balance to its ending balance, assuming the profits were re-invested at the end of each year of the investment’s lifespan”. But, since each year’s return is usually different, the CAGR is the rate that flattens out of the individual rates over the time of the investment into one rate whether the time was two, five, or 100 years. Computing the CAGR of an investment is not necessarily straightforward but, happily, the formula for doing it can be down loaded to your smartphone, and computer free from any app store. (See more @ Chapter 7)

36. ‘Living Family Commitment’

This “Living Family Commitment” is a cornerstone understanding to be instilled into the consciousness of members of a family committed to inter-generational wealth-building and transmitted from one generation to the next.  It is to be initiated by the patriarch, or matriarch, who is the foundation stone for family wealth transmission.

Brokerages: a store house of wealth-building information

As a new investor, your RIA and his brokerage should be your best friends. Apart from yourRIA, brokerages offer two important assets. These are;

1. Analysts who regukarly analyze companies and write the  full-blooded evaluations which they share freely with their subscribers, and in addition,
2. Brokerages normally generate, on a periodic basis, (daily/weekly) all, or most, of the important ratios in a market. 

This makes it easy for all, both seasoned investors, and newbies like us, to gain access to great comparative data. I greatly recommend this ‘treasury’ of investing information to you.