💸Is Our Monetary System Fundamentally Flawed?

What’s on the Menu 🍴

Today we’re taking a critical look at the current monetary system…

We’ll also explore why some stocks underperform despite solid fundamentals.

Plus we give some money-saving tips for business owners.

Let’s go!

• Is Our Monetary System Fundamentally Flawed? 💸

• When Sentiment Overwhelms Fundamentals 🙃

• 5 Ways For Business Owners To Supercharge Their Finances 📺 
  
  Today’s newsletter is a 5 minute read.

Is Our Monetary System
Fundamentally Flawed? 💸

In a world bustling with over 160 currencies, each battling inflation, the invisible erosion of purchasing power is a silent threat that impacts us all.

This subtle depletion affects not just our savings but also our everyday buying power, subtly benefiting a select few through complex economic mechanisms.

In wealthier nations, the challenges manifest as wider economic disparities and soaring national debts, which ignite fiery political debates.

Despite technological advances that promise to lower costs, central banks' persistent inflation targets keep nudging prices upward, complicating the path to economic stability.

The financial systems we rely on today evolved from primitive bartering to more sophisticated methods of trade facilitated by the advent of banking.

Early financial instruments in the Middle East and medieval European banking practices laid the groundwork for the expansive financial networks we see today.

But these systems were not without flaws.

You see, the reliance on fractional reserve banking, where banks hold just a fraction of their depositors' funds, has periodically led to financial crises.

Today's global financial system, with the U.S. dollar at its core, continues to face significant tests from persistent high inflation to complex international trade issues.

In response to these systemic failures, the rise of cryptocurrencies like Bitcoin introduces a potential alternative:

• These digital currencies offer decentralized, peer-to-peer monetary systems that operate independently of traditional banking structures.

• They promise transactions at the speed of light, minimizing the need for intermediaries and allowing individuals more direct control over their finances.

• The idea of a decentralized, open-source approach to money could serve the global population better, providing a more stable, transparent, and equitable financial system.

This shift from centralized control to a system where monetary power is distributed among its users could promote fairness and reduce corruption.

As we dive deeper into the historical and technical aspects of money, we uncover the potential for revolutionary changes that could offer greater stability and equity.

By understanding the complexities of our current financial systems, we can better navigate its challenges and work towards solutions that ensure a financially equitable future for all.

 When Sentiment Overwhelms Fundamentals 🙃

Warren Buffett’s mentor Ben Graham famously said that “in the short run the market is a voting machine but in the long run it’s a weighing machine”.

The core idea is that on any given day stocks can moon or sell off based on macro data, short squeezes, news headlines, and any number of factors…

But eventually stocks’ trajectories follow their fundamental earnings and cash flow trajectories.

This certainly seems true when you look at a 10-year chart of the largest companies stock prices versus their operating cash flows:

The trouble is that some stocks can trade uncorrelated to their fundamentals for years at a time. The “long run” can be a very long time to wait!

A great example of that in the current market is Dropbox (ticker: DBX).

Since it’s IPO in early 2018, Dropbox has consistently grown users and revenues despite competition from larger players such as Apple & Google.

In fact, Dropbox has more than doubled its annual cash flows in the past 6 years:

Despite this wonderful financial performance, DBX stock has stagnated since its IPO:

We always say that stock price performance depends on both business performance AND the price an investor pays.

In other words, valuation matters A LOT.

And valuation can fluctuate between the extremes of insanely expensive and wildly cheap.

DBX has seen it’s price to free cash flow valuation multiple fall from a pricey 40X at IPO to a cheap 10X today (50% below the current market average):

While cash flows grew at Dropbox, the valuation multiple on DBX fell, resulting in a weak stock performance.

Investor sentiment is a big driver of valuation multiples in the short to medium term.

Many investors view DBX as competitively challenged.

While that doesn’t seem true given the user growth since IPO, revenue growth has decelerated to single digit %’s in the past year.

That’s been enough to validate bears and keep new buyers away for now.

Was DBX too expensive at IPO? Probably.

Is DBX cheap now? One could definitely argue that point of view.

Regardless, it’s a good lesson that shorter term returns on stocks depend on both good business analysis AND a sound forecast of how valuation will change due to the herd’s shifting sentiment.

Don’t let anyone tell you this investing game is easy!

Video of the Day: 5 Ways For Business Owners To Supercharge Their Finances 📺 

Business owners are risk takers naturally, and they have a unique set of financial planning needs.
In today's video, I'm going to review 5 ways that business owners can have a healthier financial life and more peace of mind.

First up, business emergency funds. This would be in addition to your personal emergency fund.

I’ve seen too many sharp entrepreneurs get blindsided by unforeseen setbacks. From recessions to industry slumps, if you don’t have a financial safety net, it could take years to get your business back on track.

The key here?

Start tucking away funds during those sunny days so you can weather any storm that comes knocking.

Next, let’s talk retirement—no, it’s not just a distant dream.

For business owners, this is about more than just stashing cash; it’s about safeguarding your future with a shield of tax breaks and asset protection.

Business owners actually need asset protection the most.

Whether it’s a Solo 401(k), SEP IRA, or even a pension plan, choosing the right retirement plan can be a game-changer for your financial peace of mind and save you a lot of money in taxes.

The combo of tax savings, retirement security AND asset protection make retirement plans for business owners so valuable.

Third, hire a bookkeeper.

Yes, it costs money, but it will make your life a lot easier. They keep your books pristine and your stress levels down for when tax time comes around.

Now, consider the S-Corp election.

It’s not a magic bullet for everyone, but if done right, electing your LLC to be taxed as an S-Corp can save you a bundle on self-employment taxes.

It’s a delicate dance of maximizing your Qualified Business Income deduction while minimizing taxes, and it might just be worth consulting a tax pro to see if it fits your situation.

Not everyone will be a good fit for S-corp status, and some people go too long NOT electing S-corp taxation when they should. So, it’s a good time for this analysis.

Finally, a word on taxes: pay them quarterly.

Skipping this can lead to penalties and interest that stack up fast.

With interest rates higher these days, IRS interest is even more of a painful (and unnecessary) expense. With services like IRS Direct Pay on IRS.gov, it’s easier than ever to stay on top of this.

Remember, the goal is to keep Uncle Sam happy without overpaying. Adjust your payments based on your current year’s earnings, and avoid the nasty surprise of a tax tsunami. You can either pay 100% of the prior years taxes due (110% if you make over $150,000), or 90% of the current year expected taxes due.

So, whether you’re a seasoned entrepreneur or just starting out, tuning up these financial facets of your business can lead to smoother operations and healthier profits.

Because at the end of the day, it’s not just about making money, it’s about making smart money moves for your business, which impacts your personal life!

Food For Thought 🧠

"The person who follows the crowd will usually go no further
than the crowd. The person who walks alone is likely to find
himself in places no one has ever been before.”
- Albert Einstein

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.