5 Key Steps Toward Financial Literacy

Financial literacy, financial capability, financial understanding.

Whatever the name, the core idea is the same: being equipped with the knowledge, skills and tools to manage your money and secure your future.

That’s no easy task, but here are five key money topics you’ll need to understand andput into action to make financial literacy a reality:

• Budgeting. Financial security starts with prudently managing your money on a day-to-day basis. That means spending less than you earn and saving consistently. Try to save at least 15% of your gross pay for short-term goals, long-term goals and unexpected expenses. Do it first and not with what’s left of your paycheck. Track all your expenses and set reasonable spending guidelines. Finally, don’t get caught up in how others are spending and undermine your own budget.

• Insurance. With so many different types of insurance — auto, renters, homeowners, life, disability, health and long-term care — and so many variations of each, insurance can appear daunting. But financial pitfalls abound if you’re not adequately covered. Insurance is at the foundation of any good financial plan. Learn the basics and get the coverage you need to protect your financial well-being.

• Emergency reserves. Stuff happens. And one of the best ways to keep that stuff from throwing you off course or burying you in debt is to set aside money in a separate savings account for emergencies.

• Debt and credit. Debt can be a useful tool, but it can also be a dangerous trap that undermines your financial health. Minimize your use of debt and understand the world of credit and credit scoring.

• Investments. Stocks, bonds, mutual funds, CDs, annuities — the universe of potential investments is massive. Not to mention the dizzying array of account types: taxable, IRAs, Roth IRAs and company retirement plans like 401(k)s. But, confusing as this may appear, investing is not rocket science. Read and learn. And remember, it’s never too early to start investing.

This isn’t a comprehensive list, but if your goal is financial literacy, it pays to gain a basic grasp of these five elements. If you’re not there yet, keep working toward the goal. If you have gaps, find a person or organization you trust to help close them.

Most importantly, turn your knowledge into action.

The USAAVoice Team is committed to providing information that helps to facilitate the financial security of the military community. The advice in our content is grounded in the principles of sound money management and covers a range of topics, including personal finance, retirement, investments, auto, home, life, health and other areas relevant to our business and the audience we serve.

Investing in securities products involves risk, including possible loss of principal.

Views and opinions expressed by members are for informational purposes only and should not be deemed as an endorsement by USAA.

This document is not legal, tax, or investment advice.  It is only a general overview under the federal tax laws.  The law concerning retirement plans is complex, the penalties are severe, and the laws of your state may differ.  Consult your tax and legal advisers regarding your specific situation.

USAA means United Services Automobile Association and its affiliates.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

Source : www.forbes.com

The basics for investing in stocks

Over the long run, stocks have beaten the performance of any other major asset class by a wide margin (refer Box 1). Stocks have proved their worth and deserve a prominent place in any long term investment plan, such as a retirement account. Yet as stocks are volatile which means that by their nature value rises and falls invest with caution. Ideally, stocks should be held to meet medium and long term goals. In other words, money invested in stocks should not be money that you might need in three to five years.




Stocks tend to deliver handsome returns over the long run, but volatile markets may not cooperate with your short-term cash needs. Ordinary shares represent a share of ownership in the company that issues the shares. Stock prices move according to how a company performs, how investors perceive the company’s future and the movement of the overall stock market. The following is a guide to understand stocks and how to invest in them.

Different flavours of stocks


Growth stocks
Growth stocks are shares of companies with the potential to consistently generate above average revenues and profit growth. These companies tend to reinvest most or all of their earnings in their businesses and pay out little or none of their profits to share holders in the form of dividends.Growth companies expand faster than the overall economy, yet you can sometimes find these companies in mature industries. Note that even fast-growing companies are not necessarily good investments if their shares are overvalued.

Cyclical stocks
Cyclic stocks are shares of companies whose sales and earnings are highly sensitive to the ups and downs of the economy. When the economy is performing well, cyclical companies tend to shine.Acontracting economy typically hammers the sales and profits of these companies and hurts their stocks.

Defensive stocks
Defensive stocks describe shares of companies whose sales of goods and services tend to hold up well even during economic downturns. Examples of industries that are substantially insulated from the business cycle are government contractors and producers of basic consumer products, such as food, beverages and pharmaceuticals.

Income stocks
Income stocks pay out a relatively high ratio of their earnings in the form of dividends. The companies that issue them tend to be mature and have limited opportunities for reinvesting their profits into more attractive opportunities. Stocks that pay large dividends are usually less volatile because investors regularly receive cash dividends, regardless of market gyrations.

Small company stocks
Small-company stocks have generated better returns over time than stocks of large companies. Young, small companies tend to grow faster than their larger brethren. But there’s a tradeoff: Small-company stocks are much more volatile than shares of big companies. There are a number of ways of defining what constitutes a small company.

Diversification means spreading your money among many investments to lessen risk. The idea is to avoid a situation in which your investments are concentrated in a few stocks that big declines in the value of just one or two of them wreck your portfolio. You might strive for a mix of stocks that tend to fare well in different economic environments, such as strong, stagnant and inflationary economies.

Perhaps you will want to blend growth and income stocks in the portfolio. The appropriate blend of stocks depends on personal circumstances, including your time horizon (when you’ll need to spend the money) and your tolerance for risk and volatility (your ability to sleep at night when stock prices fall).

How to pick stocks
Broadly speaking, there are two basic approaches to stock picking: one based on an assessment of economic and market factors (known as a top-down approach) and one based exclusively on analysis of individual stocks (a bottom-up approach). Investors— including professionals such as fund managers sometimes combine both approaches in selecting stocks.

Top-down approach
The investor begins with an analysis of the economy, markets and industries. Trends in the economy (employment and interest rates) substantially influence company earnings. As some companies operate all over the world, the analysis must often be global in scope. Stocks tend to perform differently at various points in an economic cycle. For instance, financial companies often do well early in an economic recovery or even in anticipation of a recovery. Commodities-related companies often perform well in the late stage of an economic cycle.

Bottom-up analysis
There are numerous ways to pick individual stocks, some of them quite complex. In general, though, investors prefer companies that deliver solid earnings growth or those whose share prices are cheap relative to the perceived value of the company. Finding the best of both worlds is an even better formula for successful stock picking.

Of course, that is much easier said than done. It’s crucial to understand how stocks are valued. By itself, a stock’s price tells you nothing about its value. A stock that trades for a nickel a share can be expensive, while a stock that trades for Rs 500 per share can be cheap. As mentioned earlier, what matters is how much the share price compares with a fundamental measure, such as a company’s profits or sales. The article published on the 23rd of February 2015 discussed important elements of Fundamental Analysis.

Finding growth
There are many ways to find great growth stocks. Perhaps the simplest is through your own observations. You may dine at a restaurant chain with an interesting new concept that seems to be opening a new facility every week.

Your teenage kids may tip you off to a new store that all their friends are patronizing. Or it could be a technology company that turns out one blockbuster product after another. As a rule, you should invest only in companies that you can understand. You can find past growth rates and estimated future growth rates for earnings and sales in brokerage reports and on the internet.

When to sell
The decision of when to unload a stock is as important as deciding which stocks to buy in the first place. But the decision to sell is often harder than the decision to buy. That’s because once you own a stock, emotional factors come into play. If you own a stock that falls in value, you may want to hold on to it whether you should or not because by selling and locking in the loss you confirm that you made a bad decision. If you own a stock that performs exceedingly well, you may want to hold on because it has treated you so well, even if the stock has become overvalued. The refusal to sell whether due to unrealistic expectations, stubbornness, lack of interest or mere inattention is the downfall of many investors.

As a long-term investor, you don’t want to cash in every time your stock moves up a few dollars. Commissions and perhaps taxes would cut into your gain, and you’d have to decide where to put the proceeds. By the same token, you don’t want to bail out in a panic in the aftermath of a steep market decline. Here are some clues that will tell you when it is time to consider selling a stock, whether or not you’ve made money on it:

Fundamentals change
Whether you own shares in a blue chip company or a company most people have never heard of you need to follow the corporation’s prospects, its earnings progression, and its business success as reflected in such things as its products and services, market share and profit margins. Annual reports, news stories, research reports from brokerage houses and independent analysts, the Colombo Stock Exchange website and investment newsletters are fertile sources of such information. If a company’s basic, fundamental measures start to weaken, it’s time to reconsider your investment. An example might be a fast expanding retail chain whose sales per store suddenly decline after rising for years. Or here’s a more obvious case: Suppose you bought a stock because you had high expectations for a new product. If the product turns out to be a dud, sell.

Dividend is Cut
The progression and security of the dividend are important to any stock’s prospects. A dividend cut or signs that the dividend is “in trouble” meaning that analysts or money managers are quoted as saying that they don’t think the company can maintain its payout to shareholders can undermine the stock price.

Beware, of stocks that give unusually high yields relative to their history or to their industries. The yield may be high because the share price has dropped a lot. This often indicates that investors believe a company will cut its dividend.

You reach your target price
Many investors set specific price targets, both up and down, when they buy a stock; when the stock reaches the target, they sell. Such guidelines can prompt you to take your gains in a timely fashion and to dump losers before the damage gets too painful. Take the simple step of setting a “mental protective stop.” Watch the stock listings and sell any stock that hits your mental stop point.

You can set your sell level anywhere, be it above the current share price or below the current share price. Once you’ve reached your objective, take the money. If the goals you set are very conservative, you might miss some gains from time to time, but that’s better than holding on too long and falling victim to the Wall Street saying: “Bulls make money. Bears make money. Pigs get slaughtered.”

What’s your return?
With any investment, you should judge performance by total return essentially, the change in price plus any dividends you receive while holding the stock. For example, if you purchase a stock for Rs 40, sell it a year later for Rs 50 and receive a Rs2 dividend distribution during the year, your total return is 30% (a 25% capital gain plus a dividend yield of 5%).

Wrap up
Stocks merit a substantial place in your portfolio. Because stocks are volatile assets, they are more suitable for portfolios invested for medium- or long-term goals. Be sure you have a diversified blend of stocks that includes a helping of foreign shares. Do your homework to ensure that you aren't overpaying for the stocks.

http://www.dailymirror.lk/65109/the-basics-for-investing-in-stocks

Before You Invest A Cent, Do This

How can you retire on time and be comfortable in retirement? By saving and investing, of course. But before you put away money in your retirement accounts, you absolutely need to build up your emergency savings account.

More than eight in 10 households (82%) experienced a financial shock in the past year according to new data from the Pew Charitable Trusts. Typical problems included an unexpected decline in income, a hospital visit, the loss of a spouse or a major house or car repair.

More than half of those folks said the resulting financial damage made it hard to make ends meet. Pew talked with 7,000 households and focus groups in three large U.S. cities for the study.

Meanwhile, nearly six in 10 say they are unprepared now for a financial emergency, yet they say retirement remains a major concern.

Here’s the thing: Financial emergencies happen. You will lose the use of your car for some reason. You or a member of your family will end up in an emergency room and need costly care. Somebody will lose a job.

Optimism is great, but at some point in the next five or seven years something could happen. I hope your life is a easy-sailing breeze forever, but you know you will, at some point, have to come up with a few thousand dollars on the spot.

If you have no cash in the bank, that money will come from a relative or from selling something or in the form of a loan you probably don’t want to take out at unfavorable terms. It will hurt you financially and mentally.

If you have already started saving into a 401(k), chances are you will raid the account to get the cash by taking a loan out or by simply emptying it and paying the penalties. That’s what is known in the benefits world as “leakage.”

Be prepared

According to one study, leaks from plans amounted to 40% of our own contributions. That’s real pain over the long term. Aside from the cost of the taxes and penalties, you lose the ability to compound money into a retirement in the future. Time is what you really lose.

How hard would it be to prepare yourself for a nearly inevitable problem? It might take a few months to cobble together the cash, but imagine how much better you would feel sitting on $1,000 in a savings account. Or $2,000.

Keep on going. Before you invest a cent, get your balance up to the equivalent of six month’s salary if you can. Now you’re bulletproof. Your retirement plan or IRA can take in every cent you save and you can rest assured that a short-term emergency isn’t going to demolish your long-term goal — a safe and comfortable retirement.

source: www.forbes.com

7 Things Smart Investors Always Keep in Mind

By Sarika Periwal

1. Have preset goals

Investing your money is a serious business and deserves a well thought out plan. While saving money is always a good idea, you should also know what you are saving money for, and how much you will need to meet that goal. Usual financial goals could include saving enough to buy a home, or planning for investments to supplement your pension, or even having ready access to a certain amount of money in case of medical emergencies. The goals must be set before you can save money for them.

2. Invest first then play
If you clear all your bills before you set aside some amount to invest, you will never have any money left over. What you need to do in a very disciplined manner is to invest regularly in a couple of options and then use the remaining money for your regular expenditures. That way you will always have enough to invest and will work out the difference in your current lifestyle. Skipping a movie a month is a small price to pay for a good investment portfolio.

3. Spread it out over different heads
Just like putting all your eggs in a single basket is ill advised, your investment strategy should also not concentrate only on a single investment option. There are some savings options that you will always find easier to invest in. They are like your comfort zone and if you are not careful you may over invest in an area that does not offer you the best possible returns. Or you may risk much more by investing in a single company’s stocks. Use a commodity trading company after conducting diligent research. That way a single crash in the financial world won’t clean you out completely.

4. Understand your investment
If you are paying a portfolio manager to handle your investments, it is even more important for you to ask what he is doing with your money. You must always understand what you are investing in and the possible risks that you are taking. Yes it is not the most entertaining of subject matters, but financial investments work much better for you if you know exactly what you are investing in. So break out that portfolio and get a gleaning of what every single investment line stands for.

5. Rebalance your portfolio every year
Just as your needs change each year, the focus of your investments may also need to change each year. If you are investing in mutual funds, stocks, or commodities, take time out once a year to see if they are the best performing ones in the field. If they are doing well, leave them alone. If you feel that others are offering better opportunities go ahead and make the change. By simply being aware of what is going on in the market you will be a wiser investor.

6. Pay off loans as fast as you can
A loan is simply making money for the creditor. So you need to ensure that you pay no more interest than is due. If you can collect an annual corpus through wise investing to pre-pay portions of your loans, it is actually a very wise investment in your future.

7. Trust your gut
Though you may not be the best financial wizard in town, you must also trust your own instinct when it comes to taking up investment plans. Just because it sounds good when your broker is hard selling something, is no reason to invest in it. Take a look for yourself. Ask others for their opinion and always trust your gut before making an investment decision.

 

Source:http://www.selfgrowth.com/

Stock Beta and Volatility

Perhaps the single most important measure of stock risk or volatility is a stock's beta. It's one of those at-a-glance measures that can provide serious stock analysts with insights into the movements of a particular stock relative to market movements.

In this article, we're going to first attempt to define the concept of beta values, including some of the theory upon which it's based. Next, we're going to talk about the pros and cons of the measure, while providing insights into the correct use of beta values when analysing a stock.

Beta Values
The concept of beta is fairly simple; it's a measure of individual stock risk relative to the overall risk of thestock market. It's sometimes referred to as financial elasticity. The measure is just one of several values that stock analysts use to get a better feel for a stock's risk profile. As we'll see later on in our discussion, the beta value is calculated using price movements of the stock we're analyzing. Those movements are then compared to the movements of an overall market indicator, such as a market index, over the same period of time.

Beta Rules of Thumb
Beta values are fairly easy to interpret too. If the stock's price experiences movements that are greater - more volatile - than the stock market, then the beta value will be greater than 1. If a stock's price movements, or swings, are less than those of the market, then the beta value will be less than 1.

Since increased volatility of stock price means more risk to the investor, we'd also expect greater returns from stocks with betas over 1. The reverse is true if a stock's beta is less than 1. We'd expect less volatility, lower risk, and therefore lower overall returns.

CAPM Theory and Beta
During our discussions of calculating stock prices, and our follow up discussion of the capital asset pricing model, or CAPM, we explained how we could calculate the expected return on an investment by examining risk-free investments, expectations of the stock market, and stock betas.

For example, by using the following CAPM formula we can calculate the expected rate of return on an investment as:

Expected Rate of Return = r = rf + B (rm - rf)

Where:
• rf = The risk-free interest rate is the interest rate the investor would expect to receive from a risk-free investment. Typically, U.S. Treasury Bills are used for U.S. dollars and German Government bills are used for the Euro.

• B = A stock beta is used to mathematically describe the relationship between the movements of an individual stock versus the market itself. Investors can use a stock's beta to measure the risk of a security versus the market.

• rm = The expected market return is the return the investor would expect to receive from a broad stock market indicator such as the S&P 500. For example, over the last 17 years or so, the S&P 500 has yielded investors an average annual return of around 8.10%.

If we were to translate this CAPM formula into words, we'd say the following:
"The expected return on an investment is equal to the return on a risk-free investment plus the risk premium that's associated with the stock market itself, adjusted for the relative risk of the common stock we've chosen."

Stock beta values are a key element when using the CAPM.

Advantages and Disadvantages of Beta

In the next two sections, we're going to discuss the advantages and disadvantages of betavalues. The outcome of this discussion should be an overall understanding of how to use this measure in practice. For example, you may want to look at a stock's beta before making a purchase decision. That's a good step to take as part of your stock research, as long as you understand what the value is telling you.

Advantages of Beta
The calculation of beta is based on extremely sound finance theory. The CAPM pricing theory is about as good as it gets when it comes to pricing stocks, and is far easier to put into practice when compared to the Arbitrage Pricing Theory, or APT. If you're thinking about investing in a company's stock, then the beta allows you to understand if the price of that security has been more or less volatile than the market itself. That's certainly a good factor to understand about a stock you're planning to add to your portfolio.

If we understand the theory behind beta, then it's easy to understand how emerging technology stocks typically have beta values greater than 1, while 100 year-old utility stocks typically havebeta values less than 1. In fact, in March 2007 Priceline.com had a beta of 3.4 while Public Service Enterprise Group had a beta of 0.57. It's nice when theory seems to work in the real world.

Disadvantages of Beta
We're an advocate of value investing, which includes conducting stock research that focuses on a company's fundamentals and an understanding of financial ratios before investing in a stock. Unfortunately, if you're calculating stock beta values using price movements over the past three years, then you need to bear in mind that the "past performance is no guarantee of future returns" rule applies to beta values.

Beta is calculated based on historical price movements, which may have little to do with how a company's stock is poised to move in the future. Because the measure relies on historical prices, it's not even possible to accurately calculate the beta of newly issued stocks.

Beta also doesn't tell us if the stock's movements were more volatile during bear markets or bull markets. It doesn't distinguish between large upswing or downswing movements. So while betacan tell us something about the past risk of a security, it tells us very little about the attractiveness or the value of the investment today or in the future.

Beta Calculations
You'll find calculated values of beta on all of the major stock reporting websites: Yahoo Finance, MSN Money, and Google Finance all report stock beta values. You can also calculate beta yourself using a fairly straightforward linear regression technique that's available in a spreadsheet application such as Microsoft's Excel or OpenOffice Calc.

In fact, to calculate a stock's beta you only need two sets of data:
• Closing stock prices for the stock you're examining.
• Closing prices for the index you're choosing as a proxy for the stock market.

Most of the time, beta values are calculated using the month-end stock price for the security you're examining, and the month end closing price of the stock exchange.

The formula for the beta can be written as:
Beta = Covariance (stock versus market returns) / Variance of the Stock Market


Alpha Values
Finally, in our spreadsheet we also included a calculation of alpha values. Alpha is a measure of excess returns on an investment, which has been adjusted for risk. It's commonly used to assess the performance of a portfolio manager (such as the case with a mutual fund) as it's an indicator of their ability to provide returns in excess of a benchmark such as the S&P 500.
For example:
• If alpha < risk-free investment return, then the fund manager has destroyed value;
• If alpha = risk-free investment return, then the fund manager has neither created nor destroyed value; and
• If alpha > risk-free investment return, then the fund manager has created value.
Edited Article from moneyzine

 

http://sharemarket-srilanka.blogspot.com

What Is The Intrinsic Value Of A Stock?

Intrinsic value is a topic discussed in philosophy wherein the worth of an object or endeavor is derived in-and-of-itself - or in layman's terms, independent of other extraneous factors. A stock also is capable of holding intrinsic value, outside of what its perceived market price is, and is often touted as an important aspect to consider by value investors when picking a company to invest in.
Outside of this area of analysis, some buyers may simply have a "gut feeling" about the price of a good without taking into deep consideration the cost of production, and roughly estimate its value on the expected utility he or she will derive from it. Others may base their purchase on the much publicized hype behind an asset ("everyone is talking positively about it; it must be good!") However, in this article, we will look at another way of figuring out the intrinsic value of a stock, which reduces the subjective perception of a stock's value by analyzing its fundamentals and determining the worth of a stock in-and-of-itself (in other words, how it generates cash).
For the sake of brevity, we will exclude intrinsic value as it applies to call and put options.
Dividend Discount ModelWhen figuring out a stock's intrinsic value, cash is king. Many models that calculate the fundamental value of a security factor in variables largely pertaining to cash: dividends and future cash flows, as well as utilize the time value of money. One model popularly used for finding a company's intrinsic value is the dividend discount model. The basic DDM is:
Where:
Div = Dividends expected in one period
r = Required rate of return
One variety of this model is the Gordon Growth Model, which assumes the company in consideration is within a steady state - that is, with growing dividends in perpetuity. It is expressed as the following:
Where:
DPS₁= Expected dividends one year from the present
R = Required rate of return for equity investors
G = Annual growth rate in dividends in perpetuity
As the name implies, it accounts for the dividends that a company pays out to shareholders which reflect on the company's ability to generate cash flows. There are multiple variations of this model, each of which factor in different variables depending on what assumptions you wish to include. Despite its very basic and optimistic in its assumptions, the Gordon Growth model has its merits when applied to the analysis of blue-chip companies and broad indices.
Residual Income ModelAnother such method of calculating this value is the residual income model, which expressed in its simplest form is:
Where:
B₀= Current Per-Share Book value
B_n= Expected per-share book value of equity at n
ROE_n= Expected EPS
r = Required rate of return on investment
If you find your eyes glazing over when looking at that formula - don't worry, we are not going to go into further details. What is important to consider though, is how this valuation method derives the value of the stock based on the difference in earnings per share and per-share book value (in this case, the security's residual income), to come to an intrinsic value for the stock. Essentially, the model seeks to find the intrinsic value of the stock by adding its current per-share book value with its discounted residual income (which can either lessen the book value, or increase it.)

Discounted Cash Flow
Finally, the most common valuation method used in finding a stock's fundamental value is discounted cash flow (DCF) analysis. In its simplest form, it resembles the DDM:
Where:
CF_n = Cash flows in period n.
d = Discount rate, Weighted Average Cost of Capital (WACC)
In Ben McClure tutorial DCF Analysis, he goes about using the model to determine a fair value for a stock based on projected future cash flows. Unlike the previous two models, DCF analysis looks for free cash flows - that is, cash flow where net income is added with amortization/depreciation, and subtracts changes in working capital and capital expenditures. It also utilizes WACC as a discount variable to account for the time value of money. McClure's explanation provides an in-depth example demonstrating the complexity of this analysis, which ultimately determines the stock's intrinsic value.

Why Intrinsic Value MattersWhy does intrinsic value matter to an investor? In the listed models above, analysts employ these methods to see if whether or not the intrinsic value of a security is higher or lower than its current market price - allowing them to categorize it as "overvalued" or "undervalued." Typically, when calculating a stock's intrinsic value, investors can determine an appropriate margin of safety, where the market price is below the estimated intrinsic value. By leaving a 'cushion' between the lower market price and the price you believe it's worth, you limit the amount of downside that you would incur if the stock ends up being worth less than your estimate.
For instance, suppose in one year you find a company that you believe has strong fundamentals coupled with excellent cash flow opportunities. That year it trades at $10 per share, and after figuring out its DCF, you realize that its intrinsic value is closer to $15 per share - a bargain of $5. Assuming you have a margin of safety of about 35%, you would purchase this stock at the $10 value. If its intrinsic value drops by $3 a year later, you are still saving at least $2 from your initial DCF value and have ample room to sell if the share price drops with it.
For a beginner getting to know the markets, intrinsic value is a vital concept to remember when researching firms and finding bargains that fit within his or her investment objectives. Though not a perfect indicator of the success of a company, applying models that focus on fundamentals provide a sobering perspective on the price of its shares.

The Bottom LineEvery valuation model ever developed by an economist or financial academic is subject to the risk and volatility that exists in the market as well as the sheer irrationality of investors. While calculating intrinsic value may not be a guaranteed way of mitigating all losses to your portfolio, it does provide a clearer indication of a company's financial health, which is vital when picking stocks you intend on holding for the long-term. Moreover, picking stocks with market prices below their intrinsic value can also help in saving money when building a portfolio.
Although a stock may be climbing in price in one period, if it appears overvalued, it may be best to wait until the market brings it down to below its intrinsic value to realize a bargain. This not only saves you from deeper losses, but allows for wiggle room to allocate cash into other, more secure investment vehicles like bonds and T-bills.

www.investopedia.com

How the 25 Richest Americans Failed Miserably

BY DREW HENDRICKS

Resilience may be more important than luck to your success. One thing these multimillionaires have in common is the ability to bounce back.

It's common knowledge that most entrepreneurs fail at some point. Sometimes it's a colossal failure that results in a startup closing its doors.

Other times, it's just a little hiccup that makes for a great story. Regardless of the severity of the failure, many successful individuals have had just as many defeats as victories, making every entrepreneur just a little bit wiser and stronger.

That doesn't mean that it's an easy pill to swallow. Failure isn't fun.

But if it's any consolation, even the most successful, influential, and wealthy individuals in the United States have also had their fair share of failure at some point. Here's a look at the 25 richest Americans and how they experienced failure.

Note: We excluded the Koch brothers and the Walton and Mars families because they inherited their fortunes.

1. Bill Gates

Have you ever heard of Traf-O-Data? Probably not, but it was Bill Gates' first company. Traf-O-Data was a device that read and processed traffic tapes. The problem was that it never worked and Gates was never able to sell it. Despite the failure of Traf-O-Data, Microsoft co-founder Paul Allen stated, "Even though Traf-O-Data wasn't a roaring success, it was seminal in preparing us to make Microsoft's first product a couple of years later."

Today Gates' net worth is a staggering $77.5 billion, so he must have learned a valuable lesson from that first failure.

2. Warren Buffett

Even the great Warren Buffett experienced a few slip-ups during his storied career. In 1951, Buffett purchased a Sinclair Texaco gas station and wasn't able to turn a profit. But by 1962, Buffett was a millionaire. Even then he still had some learning to do.

In 1962, Buffett began purchasing shares in the New England textile business Berkshire Hathaway, but then the company started to decline. Buffet made a deal with the CEO, Seabury Stanton, to sell back his shares. When the papers were delivered for Buffet's signature, Stanton had changed the deal and made an offer for 1/8 of a point lower. Buffett admitted later that this made him so angry that, instead of selling, he purchased enough shares to take control of the company so he could fire Stanton. To make matters worse, Buffett kept the failing textile business (the historic core of Berkshire Hathaway) open for 20 years before pulling the plug. Today, he calls this decision his "200 billion dollar mistake."

3. Larry Ellison

Larry Ellison (along with his former boss, Bob Mine), founded Oracle in 1977. By 1980, Oracle still hadn't experienced much success, which forced Ellison to mortgage his home in order to secure a line of credit.

Ellison never gave up. After rewriting an IBM paper that focused on the database-programming language SQL, he changed the course of the company by developing the business software that dominated the market in the 1980s. However, Oracle was once again on the brink of disaster in 1990 because orders weren't being fulfilled and the software contained bugs. Ellison responded by firing almost everyone in an effort to put the company's finances back in order and rewarded the salespeople who actually shipped the products. By 1995, Oracle had earned $2.5 billion in revenue.

In 1999, when he tried to best Bill Gates with the Network Computer (NC), Ellison experienced another failure. The NC might have worked today, but in 1999 it was too restricted and expensive for consumers who were only able to go online and store documents, videos, etc., on Oracle's database, which was similar to Google's Chromebook.

4. Sheldon Adelson

Always the entrepreneur, Sheldon Adelson began his career at the age of 12 selling papers and toiletries. Following his service in the army, the Boston native became a mortgage broker and investment adviser. At age 38, Adelson was worth $5 million. Unfortunately, the declining stock market and unwise business ventures caused him to lose his fortune not once, but twice.

Next, he attempted to convert apartments into condos in Boston, but that didn't go very far. Adelson struggled emotionally, mentally, and physically during these times, but he kept marching on. Eventually his love of computers lead him to create the Computer Dealers Expo (COMDEX) in 1979. COMDEX, one of the largest computer tradeshows in the world until 2003, is a big reason Adelson is worth $38 billion today.

5. Michael Bloomberg

Michael Bloomberg was let go from the investment bank Salomon Brothers. Bloomberg has stated that he went on to fund his own company because "nobody offered me a job, I was probably too proud to go look for one, and I said well, why not start your own company?" Over the next three years, Bloomberg perfected his company, which focused on finance, data, and media. The firing of this future mayor of New York City may have been for the best.

Bloomberg's big break came after Merrill Lynch purchased 20 of his terminals. Bloomberg said that during the first year of those challenging early years, "you don't think about the downside. The second year is the difficult one. The third year you see that light at the end of the tunnel."

6. Larry Page

In 1998, Larry Page co-founded a little search engine named Google--a reference to the mathematical term "googol" that represents the numeral 1 followed by 100 zeroes. Although it is now one of the most dominant Internet-service and product providers in the world today, Google has made a few mistakes as well. Do you remember Wave, SearchWiki, and Jaiku? Page, who became CEO in 2001, believes that Google, "probably missed more of the people part than we should have,"which explains why its social-media platform never took off like Facebook did.

Don't expect Page and the Big G to make that mistake again.

7. Jeff Bezos

In 1994, Jeff Bezos left behind his comfortable life in New York City and relocated to Seattle to sell books on the internet. There were some speed bumps in the early days of Amazon. The original name, Cadabra, was very often misheard as "cadaver." Bezos described one huge mistake: "We found that customers could order a negative quantity of books! And we would credit their credit card with the price and, I assume, wait around for them to ship the books."

Over the years, Bezos continued to make adjustments and take risks, and it worked. Today, Amazon is the world's largest online retailer. That success hasn't saved Amazon from experiencing failure here and there, however. For example, the bike-messenger delivery service Kozmo.com, the question-and-answer site Askville, and the Groupon competitor LivingSocial have all been less-than-successful ventures.

8. Sergey Brin

Google co-founder Sergey Brin once had an idea he though was sheer genius: He envisioned a business that allowed people to order pizza via fax machine. Reality set in when he realized that not every pizzeria and customer had a fax machine, which created a big problem for his business plan.

9. Carl Icahn

Carl Icahn is well known as a corporate raider in the business world. Since purchasing a seat on the NYSE in 1968, Icahn has made his fortune by taking over companies like RJR Nabisco, Texaco, Marvel Comics, Revlon, and Western Union.

Despite all of his success, Icahn has experienced a number of failures, such as investing in TWA, which later went bankrupt. He's also been on the losing end of the deal with companies like Blockbuster, Time Warner, and Motorola.

10. George Soros

George Soros, a Hungarian refugee who moved to New York City in 1956, began his career as an arbitrage trader. He developed an enthusiasm and talent as a short-term speculator, which led him to found one of the most lucrative hedge-fund firms, Soros Fund Management, in 1970. In 1992, Soros became $1 billion richer in just one day when he bet against the pound during Black Wednesday. However, he went on to lose $600 million dollars in 1994 after he miscalculated the value of the yen to the dollar. To his credit, Soros has stated, "I'm only rich because I know when I'm wrong."

11. Mark Zuckerberg

In 2004, while Mark Zuckerberg and his team were trying to get Facebook up and running, Zuckerberg also toyed around with a project known as Wirehog--"a peer-to-peer (P2P) file-sharing service that hooked up to Facebook." The idea behind this service was to allow Facebook users to share music, documents, etc. It was a great idea on paper--but Facebook began getting slapped with lawsuits. Thankfully, Wirehog didn't catch on and it was suspended in 2006.

Today, at just 30 years old, Mark Zuckerberg is worth $28.5 billion and is still making and learning from his mistakes: Think Facebook lite, Facebook Gifts, Facebook Home, and Poke.

12. Steve Ballmer

In 1980, Ballmer became the 30th employee at Microsoft. Over the years he held many positions within the company, including CEO from 2000 to 2014. Ballmer made so many mistakes while he was CEO at Microsoft that they were highlighted in an article by Business Insider. Some of his epic mistakes and failures include laughing off the iPhone, Windows Vista, and spending billions trying to take on Google. He was also instrumental in acquiring Danger (parent company of the Sidekick) for $500 million and the Zune.

13. Len Blavatnik

Nicknamed "King" at his holding company Access Industries, Ukrainian-born businessman Len Blavatnik made his fortune in oil and metal companies following the collapse of the Soviet Union. However, the King lost $1.2 billion after getting into the chemical industry. He borrowed money to purchase Dutch producer Basell in 2005 for $5 billion and then borrowed $20 billion more to purchase Houston-based Lyondell. After merging the companies, Blavatnik was unable to pay back the debt and declared bankruptcy. Fortunately for Blavatnik, the company has since been able to turn a profit after becoming free of debt.

In 2011 Blavatnick purchased Warner Bros. Music for $3.3 billion, which he reportedly purchased because "he loves what it can do for him socially."

14. Abigail Johnson

Abigail Johnson has earned her position as president of the family business, Fidelity Investments, by self-admittedly "doing whatever had to be done to right the ship." Johnson is one of the wealthiest and most powerful people in America, despite some serious setbacks. For example, she lost two important clients, an experience that she described as "extremely difficult and, at times, painful, personally, for me and for others."

15. Phil Knight

While at Stanford, Philip Knight wrote a term paper about a business that sold shoes. In 1962, he traveled to Japan and met with the founder of Onitsuka Tiger Co., one of the oldest shoe companies in Japan. When he returned home, he teamed up with Bill Bowerman at the University of Oregon to found Blue Ribbon Sports. Knight sold his first Tiger-brand running shoes from his green Plymouth Valiant at track meets across the Pacific Northwest. Sales skyrocketed and in 1978, the company became Nike.

Although the Air Jordan line gained great success, Nike neglected a growing trend in the late 1980s as the market was leaning toward aerobic shoes. Reebok filled that niche and Nike sales dropped 18%. In 1990, Knight and The Swoosh countered with the Nike Air, which reclaimed Nike's spot as the leading footwear brand.

16. Michael Dell

Michael Dell founded Dell Computers in a dorm room at the University of Texas, Austin, in 1984. By 1992, the 27-year-old entrepreneur had become the youngest CEO to be included in Forbes' list of the top 500 corporations. Dell's company went on to become one of the largest sellers of personal computers in the world.

Unfortunately, Dell also had a long list of failures, with his attempts to get involved in the smartphone, tablet, and even iPod market: There was the bulky Dell DJ that couldn't compete with the iPod, the disappointing smartphone Dell Aero, and the discontinued tablet Dell Streak. In 2013, Michael Dell bought back shares to make the company private.

17. Paul Allen

Paul Allen, worth $15 billion, is a relatively successful man thanks to co-founding Microsoft with Bill Gates. However, he missed out on a huge opportunity after he sold his AOL stocks in the early 1990s missing out on $40 billion.

18. Donald Bren

When you're the wealthiest real-estate developer in the United States, you're definitely a success. After becoming the sole shareholder of Irvine Co. in 1996, Bren controlled "50,000 apartments, 40 million square feet of office space, and 8 million square feet of retail space in Orange County, San Diego, Los Angeles, and Silicon Valley," valued at $15.4 billion.

Bren's business record has been spotless, but his personal life hasn't. He's been divorced three times and was involved in a bitter child-support case. While Bren was victorious in court, the reclusive real-estate mogul had his dirty laundry thrown out to the public, declaring that he "never planned to be a parent to the two children." Bren continues to make money, despite his failed marriages and the blow to his public image.

19. Ronald Perelman

Ronald Perelman learned an important trade from his father: how to purchase a company, reduce debt by selling off superfluous divisions, bring the company back to its core model, and either sit on it or sell it. That strategy worked until he hit a roadblock with Revlon. His investment firm, MacAndrews & Forbes, was unable to take Revlon private, which resulted in a penalty and a conflict of interest that kept him from acquiring Revlon.

20. Anne Cox Chambers

Anne Cox Chambers, ambassador to Belgium under Jimmy Carter, and her sister took over the now privately held media conglomerate Cox Enterprises after the passing of her father. An heiress who continues to increase her wealth, Chambers has experienced a couple of setbacks in relation to running her company. For example, there was once a proposed $4.9 billion deal between Cox Enterprises and Southwestern Bell that fell apart. However, even more embarrassing is the fact that her newspapers "make waves, but not too many." That's not a good reputation to have in a troubled field.

21. Rupert Murdoch

He was born in Melbourne, Australia, but Rupert Murdoch calls the U.S. home. Murdoch's media conglomerate is arguably the largest in the world. It encompasses some of the most-successful television, film, book, and newspaper outlets.

Murdoch is not used to failure, but he took a major hit after purchasing MySpace in 2005 for $580 million. Just six years later, he was forced to sell the once-popular social-media platform for $35 million. Murdoch simply tweeted "we screwed up in every way possible."

22. Ray Dalio

Ray Dalio, "the king of the hedge-fund industry," founded the world's biggest hedge-fund firm in a Manhattan apartment in 1975. While the last couple of years have been a bit rough, Dalio's Bridgewater Associates still has $150 billion in assets.

Dalio's failures have been more apparent in his outlandish behavior. On New Year's Eve in 1974, he got drunk and punched his boss. Around the same time, while at the "annual convention of the California Food & Grain Growers' Association, he paid an exotic dancer to drop her cloak in front of the crowd." Even so, he managed to convince some clients to go along with him when he funded Bridgewater after being fired.

23. Charles Ergen

In 1980, Charles Ergen was just your run-of-the-mill professional gambler until he got kicked out of a casino for counting cards. The next logical step? Get into the business of satellite TV. After selling satellite dishes out of the back of a truck around Denver, Ergen finally got EchoStar incorporated in 1993.

Both EchoStar and Dish Network have been incredibly successful. However, the attempts to expand the company into something more than just a satellite-television provider have not. Ergen purchased Blockbuster in 2011, even while in bankruptcy, in an attempt to create a streaming video service to compete with Netflix. That never happened, and Ergen has continued to fail at acquiring other companies, like Sprint.

24. Harold Hamm

Harold Hamm's story is remarkable. The son of a sharecropper who never attended college, Hamm purchased his first oil rig in 1971. For the next 15 years, he stuck with his Oklahoma oil rig. Business was great in the 1970s, but the 1980s were more challenging. For example, Hamm almost went bankrupt thanks to 17 consecutive dry holes. In fact, things didn't get much better after interest in converting fuel from oil-bearing rock known as Bakken shale began to decline in the 1990s. However, Hamm stuck with the business and his company, Continental Resources, had $3.6 billion in revenue in 2013.

25. James Simons

There's a good possibility that you've never heard of James Simons, aka the "Quant King." This mathematician and code-breaker for the National Security Agency founded the hedge-fund-management company Renaissance Technologies in 1982. Since then, Simons and his company have been unstoppable. Renaissance Technologies is one of the most successful hedge-fund companies.

That's not to say that Simons is perfect. In "The Secret World of Jim Simons" by Hal Lux, it's noted that back in "1997, he folded a middling market-neutral fund into Medallion after just three years. And a mortgage-backed-derivatives fund he backed in 1995 swooned after enjoying two fine years." Simons also helped Bernie Madoff "raise money from others," but he became suspicious and began asking questions that eventually led to a regulatory investigation of Mr. Madoff, according to a Securities and Exchange Commission watchdog report.

Of course, a good leader knows when to change course.

Each one of these successful individuals had to change course at some point. Some may have changed a little bit too late, but they still changed and corrected. While building your company and attaining your vision, be sure to evaluate your viability and continually check your business's health. If you need to change course, don't be afraid to do so, it may just lead you to become number 26 on this list!

Source: http://www.inc.com/