Wealth Tips

You might have heard the term “Value Investing” used synonymously with the Billionaire investor, Warren Buffet. There has been so much weight put on the value investing method as Buffet has been able to outdo S&P in terms of returns. As a simple illustration, Buffets investment in Berkshire Hathaway grew at a rate substantially higher than the S&P. The graph illustrates the point.

Warren Buffet hails from Benjamin Graham’s school of value investing. Value investing is a term coined for the act of looking for a company which is traded below its real value, or the intrinsic value. The catch is, how to determine this intrinsic value? This is what makes Buffets stands out in the crowd. It has been widely accepted that Buffet concept of value investing is rather perfect as he has the ability to “sniff” these stocks and hence his portfolio has shown exceptional growth over the years. But for the rest, value investing method is not out of reach altogether. By doing some homework, you can use this brilliant way of picking stocks too.

Now, EMH (Efficient Market Hypothesis) says that financial markets are “informationally efficient” which means that one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made. In simple terms, you can’t always find an arbitrage opportunity due to the error in the market, as when more and more investors make use of this opportunity, the market will correct itself and there will be no more arbitrage opportunity. But Buffet isn’t particularly concerned over this short-term return method, or how the market behaves generally.

Rather, by practising the value investing method, Buffet looks for companies which has potential growth and currently underpriced and buys the shares so that he can gain ownership. Following are the value investing guidelines that Buffet uses to pick stocks:

The thought of retirement freaks the majority of people, regardless whether they are in the “9-5 job” group or “business owner” group, although the former may find it more grappling. And some choose to be ignorant and live in  utter denial till the eve of their retirement day. But being ignorant is far from the solution!

The wise will always be aware of their present financial standing (or Net Worth) and absolutely clear about where they are moving towards. You need to know where you are at now financially, so that you can set a clear plan where you want to be in the next 5 to 10 years. A simple planning would save you a hell lot of trouble later.

Here, I am going to share with you on how to determine your Net Worth and how you can leverage on this to tune your financial position in the right direction.

How to Calculate your Net Worth?

It is absolutely possible for your wealthy neighbor next door to have a negative net worth. So it is not all good if they seem to be adding to their fleet of cars and perpetual home renovation, unless their net worth is in the black. Net worth of an individual is calculated by this simple formula:

Net Worth = Personal Assets – Personal Liabilities

Assets

Your assets can be classified as current and non-current assets. Current assets are those that can be converted to cash quickly. These are like your savings accounts, certificates of deposit, bonds, stocks, mutual funds etc. Non-current assets are like your primary residence and other properties, pension fund etc.

Liabilities

Your liabilities include credit card outstanding balance, car loan, home loan, and other financial commitments that is payable. People often get into debt or take a loan by looking at whether they will be able to stomach the installments, so the value of the total liabilities put together can often be overwhelming.

Doing the simple maths, you would know by now whether your are in net asset position/positive net worth or net liability position/negative net worth.

If you are in the positive net worth group, Well Done! The next step is to increase you existing net worth.

But if you are in the negative net worth group, the alarm rings!

You need to create a plan to reduce your liabilities, which can be done in two ways, increase your income and/or reduce your expense. More often than not, spending can be held as one of the culprits. You need to cut spending to the minimum and move towards paying off the debt. If your net worth is low, you need to build through savings and investments. A rule of thumb, you must have net savings every month.

Although the task may sound daunting, you may be surprised how the little savings that you do can go a long way..

So all the best in increasing your Net Worth!

Paul N.