🎰 Build Your Perpetual Wealth Machine

What’s on the Menu 🍴

Today we’re talking about 9 steps you can use to start building your perpetual wealth building machine…

And we’re investigating WHY stocks and bitcoin keep trucking higher…

And weighing stocks vs. real estate…

And comparing winning stocks vs. the rest.

Let’s jump into it:

• Build Your Perpetual Wealth Machine 🎰

• The Haves & Have-Nots in the Stock Market ☯️

• Real Estate Vs. Equity Returns: Who Wins? 🏡 

• Video of the Day: Why Bitcoin & Stocks Are Squeezing Shorts 📺

Today’s newsletter is a 5 minute read.

Build Your Perpetual Wealth Machine 🎰

Over 20 years ago, I started investing to build life-changing wealth…

And today, that vision has developed into a self-perpetuating wealth building machine.

Next Tuesday, February 13th, I’m hosting a LIVE class to show you how to build your own perpetual wealth machine like the one below.

In the meantime, here are 9 steps to start building your wealth machine today:

1. Lay the Foundation with Positive Cash Flow Start with the basics: ensure you have more money coming in than going out. Your job, side hustles, or business ventures should fuel your wealth engine. Fine-tune your budget and cut unnecessary expenses to maximize your cash flow.

2. Maintain a Liquid Reservoir Your financial reservoir should include easily accessible funds for emergencies and opportunities. Consider high-yield savings accounts, money market accounts, or T-bills that offer stability and quick access.

3. Accelerate with Active Investing Actively engage in the market to grow your capital. This could mean trading stocks or cryptocurrencies, where you can leverage knowledge and market trends for higher returns. Remember, active investing requires time, skill, and emotional control.

4. Diversify into Real Assets Active real estate ventures like house flipping or developing properties can offer substantial rewards. If you prefer a hands-off approach, passive real estate investments or REITs provide exposure to the property market without the need for direct management.

5. Embrace the Power of Tax-Advantaged Compounding Invest in retirement accounts like 401(k)s and IRAs to benefit from tax advantages and compound interest. Over time, these can grow into significant sums, providing a sturdy pillar for your wealth machine.

6. Protect Your Gains Asset protection and estate planning aren't just for the wealthy. Use trusts and insurance to safeguard your assets from unforeseen events and ensure privacy.

7. Play the Long Game Long-term investments in stocks and bonds may be less exciting, but they're a steady path to wealth. The key is patience and resisting the urge to cash out at the first market jitter.

8. Store Value Securely Invest a portion of your wealth in assets that stand the test of time, like bitcoin or precious metals. Think of it as a wealth safety box, preserving value for future generations.

9. Keep Learning and Adapting Your wealth machine should evolve with you. Stay educated, adapt to new financial landscapes, and be willing to adjust your strategies.

By considering these components, you can construct a robust wealth machine tailored to your financial goals and lifestyle preferences. Remember, the most effective wealth machine is one that aligns with your risk tolerance, time horizon, and personal financial targets.

The Haves & Have-Nots in the Stock Market ☯️

There’s been WILD action in some of the stocks reporting earnings over the past week…

Just check out the chart of ARM Holdings, a semiconductor company that beat earnings expectations and forecast robust growth in the year ahead:

ARM gapped up nearly 50% in one day, as it joined NVDA and SMCI in the group of stocks clearly benefitting from AI-driven tailwinds.

There was also Palantir (ticker: PLTR), which mooned over 40% after delivering strong earnings growth:

ARM now trades for 30X forward revenues, while PLTR trades for 19X forward revenues.

While their profit margins are high, that still translates into 75-100X earnings multiples!

Valuations for many popular growth stocks have expanded into expensive territory again.

Yet, it hasn’t been a party for investors broadly.

Small caps, value stocks, Chinese stocks, and lower growth companies continue to trend downward even in cases where the fundamentals aren’t deteriorating.

Take PayPal (ticker: PYPL) for example…

PayPal beat earnings expectations in Q4, delivering 19% growth in earnings per share.

Yet the stock went DOWN 11% after the report, and trades at just 11X this year’s expected earnings.

Match Group (ticker: MTCH), the owner of popular dating apps Tinder & Hinge, met a similar fate.

It’s stock is down 8% since it reported earnings, despite delivering revenue growth of 10% and operating profit growth of 27% in the fourth quarter!

MTCH stock now trades at 11X the estimated 2024 earnings per share.

Perhaps MTCH & PYPL need to say the phrase “AI” more on its earnings conference calls! 😂

In all seriousness, these stocks show how narratives & sentiment can drive vast differences in stock performance.

Investors will pay almost any price for AI beneficiaries, but will abandon any stock that doesn’t have price momentum regardless of valuation.

Herein lies the opportunity for patient investors in our opinion…

Decades of data & experience show us that stock prices eventually follow the fundamentals.

If out-of-favor companies can continue to grow revenues and cash flows, eventually the stocks will respond.

This is especially true if management uses share repurchases & dividends wisely, enhancing value for patient holders.

Accumulating good companies at cheap valuations has worked pretty well for Warren Buffett throughout the decades.

The key is to ensure that the fundamentals are still moving in the right direction. That means making sure one is not bagholding value traps where the business is in decline.

The hardest part about this strategy is the patience it requires, especially when everyone else seems to be getting rich on the hot stocks of the moment.

Some of our best multibagger investments EVER were bought when sentiment was awful (ex: META) and have taken years to play out in some cases (ex: ANF).

Perhaps the late great Charlie Munger said it best: “The big money is not in the buying or selling, but in the waiting”

Real Estate Vs. Equity Returns: Who Wins? 🏡 

Real estate has to be the most beloved asset class out there.

It’s the easiest of them all to understand, which could be why it’s typically the first asset most people buy.

Plus, we all grew up in the United States being told that owning a home was the “American dream”.

The love for real estate really shows in the bottom 50% of wealth holders. They hold just over half of their assets in real estate.

So, as people start constructing their “wealth building machine”, real estate is the go-to for net worth growth…

But should it be?

Let’s look at housing vs. equity returns over time.

Taken from the popular research paper “The Rate of Return On Everything” (which covers asset returns from 1870-2015), we can see how housing and equity returns have fared.

Over the entire time period covered, (left side of image) it’s clear that housing had an advantage.

But, in the study, property taxes were not included as an expense when doing the return calculations, which is a huge part of the equation (especially for those of us in high value, high property tax areas)!

They mentioned in the paper to remove about 1% of the return to estimate REAL returns of housing in the U.S. after this very key expense.

You’ll notice that post 1950 (right side of the above image), equities beat out housing returns (even more so after considering property taxes on housing, of course).

So… is the world shifting from housing being the best asset class, towards equities?

Especially when considering how equities have performed since 2016?

To be fair, housing prices as measured by the Case-Shiller housing index, have had a good run as well… but, actual returns people are experiencing will vary.

To answer this question, it’s paramount to mention that real estate is a less volatile asset class over equities, so this can be considered a plus for people who don’t like volatility and risk.

Also, owning a home can be multi-purpose for folks, which is why they choose it as their first main asset to own.

They can live in it, lock in their mortgage payment vs. ever-increasing rent, and they can build equity over time.

Not only that, there are handsome tax rewards in the United States for those who sell a primary residence (look up ‘Section 121’ of the tax code for more).

However, the TRUE returns of a home you’re living in may or may not be as good as demonstrated in the study.

There are simply too many factors that go into real estate and the expenses you may incur that could eat into your returns over time.

• Some people may have it easy and not many costly repairs.

• They may have properly timed buying their home and locked in a low interest rate.

• They may have bought into an area before it had a big population boom.

While others may buy at the height of a hot market, with high interest rates.

(Although, we need to keep in mind the benefits of “leverage” that a mortgage gives us).

It’s quite a different picture in terms of what returns will look like for each scenario.

So, you have to really dig into your individual situation to be able to say if it’s the right investment or not.

What we do know, is real estate is a great way to hedge yourself against inflation, and it’s also worth working towards having a paid off home in retirement to control fixed expenses.

But, don’t get too zoomed in on only real estate like many tend to do. Equities in recent history have proven themselves as one of the best performing asset classes.

It’s totally okay for your first asset class that you own to be equities, and for you to buy a home when it makes the most sense financially (and return potential wise).

Both assets have a place in a portfolio and have obviously great return profiles (with equities inching ahead).

But as with any investment, it takes careful considerations about your risk tolerance, needs and overall lifestyle goals!

📺 Video of the Day:
Why Bitcoin & Stocks Are Squeezing Shorts

Bitcoin and stocks keep trucking higher…

And we’ve got a TON to talk about this week between the macro picture, earnings, China, and more!

Click here to watch - We Talk Money Episode 135

You’ll learn:

• Why are stocks continuing to hit all-time highs?

• Is China a value buy or a trap?

• What are earnings signaling?

• Is Apple going to pop?

• And more!

Food For Thought 🧠

"Fun is one of the most important -
and underrated - ingredients in any successful venture.”
- Richard Branson

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.