Wisdom of Rich Dad

f you have financial knowledge, people who know you might view you as a very valuable commodity – a free money manager. All too often, the person asking you to invest his or her money is the person who knows a little something about investing – just enough to get into trouble. If you’re nailing double-digit returns this year, why couldn’t you repeat the performance year after year, right?

The Problems with Investing for Others
You may think that investing for someone else is just a way of helping out a friend, but the thing is, when you start investing for other people, particularly your friends, you enter a world of complications that you might not have foreseen when you started out.

Legal Matters
Managing a friend’s money is a sticky business and if you go through with it you may be breaking the law. Investment professionals must be registered with the Securities and Exchange Commission or have a federal license. They are heavily regulated by the government and by trade organizations like the National Association of Securities Dealers, for the protection of consumers. If you invest for a friend for compensation, you could be breaking laws that are in place to protect investors from people who aren’t qualified to have discretionary control over others’ accounts.

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As good as dividends have been for investors in Canada, in quarters ahead there could be grounds for further rejoicing. The pace of dividend hikes is picking up, corporate cash balances have climbed to Olympian heights, and dividend-payout ratios have room to climb.

So far in 2012 nearly a third of dividend announcements have raised payments to investors. That’s the highest rate since 2006, according to a CIBC World Markets Inc. report by economist Peter Buchanan. The trend has been up since the second quarter of 2009, when only 5% of dividend announcements specified higher payments.

The capacity to raise dividends keeps on expanding. Cash balances on corporate balance sheets recently surpassed $500 million in Canada, an amount equal to about 30% of Gross Domestic Product (GDP). Normally, corporate cash balances are about 10% of GDP.

The pressure to share the wealth is mounting. Not only are shareholders pushing for greater distributions but so are groups seeking economic growth, jobs, and reductions in government deficits. Even business-friendly Prime Minister Harper may be getting into the act: the federal budget due in late March mayimpose penalties on CEOs who hoard cash.

As executives and Boards of Directors feel the heat, it wouldn’t be surprising to see them dipping more into their cash coffers to raise dividends. They could also allocate more to share buybacks, additionally boosting shareholder value. Capital expenditures will also likely be ramped up, generating cost savings and revenue growth that contribute to shareholder value over the longer term.

According to CIBC World Markets, the dividend-payout ratio for companies in the S&P/TSX Composite Index stands at 41% (based on average earnings over the last four quarters). Considering the historical median is 45%, there would seem to be room for this ratio to grow.

In fact, there is some possibility the payout ratio could rise substantially above the historical norm, if comparable (commodity-based) stock markets are any guide. Notably, the companies in Australia’s main stock market index, the S&P/ASX 200, pay out 65% of their earnings in dividends.

In Canada, the utilities, industrials, and materials sectors have the most room for dividend increases. Their payout ratios are the lowest relative to their respective historical averages. Energy, consumer-discretionary and telecom sectors have the least room.

From 2010 to 2011, corporate profits in Canada rose 15% to $208 billion, further augmenting cash reserves. As a percentage of corporate assets, cash currently stands at 7%, up substantially from 4% a decade ago (financial companies excluded).

The materials and energy sectors have been mainly responsible for the growing cash piles. CIBC World Markets says an in-house study found that companies with twice normal cash balances had a 7% chance of raising their dividend in a quarter, compared to 4% for companies with payout ratios 25% or more below their norm.

Does the little guy stand any chance anymore? Is anyone looking out for us?

Probably not. The world has become pretty unfriendly to entrepreneurs and self employed people so we have to take care of ourselves. Just keep your eyes wide open when it comes to the management of your financial resources. Understand how the game really plays.

Most financial representatives, whether stock brokers, money managers, financial consultants or otherwise, work for organizations known as broker/dealers. Broker/dealers, as the name implies, sometimes act as brokers and sometimes, they act as direct dealers (owning a position) in securities. These organizations are licensed by the Federal Government (the Securities and Exchange Commission, or SEC) to sell securities, collect money from customers, and execute transactions. Because they receive commissions, they can have a conflict of interest with their customers, but when they act as dealers, the problem is even worse.

Very frequently, broker/dealers, especially the big Wall Street wire houses will acquire positions in securities. You`ve seen movies where the sales managers get on the “horn” and tell the brokers which stocks to move that day. There would be extra commissions if they move those stocks. Brokerage firm sometimes take positions in securities for many legitimate reasons, and when those positions need to be moved, the natural buyers are the clients of the firm. Those buys are not necessarily the best buys for the clients and those buys are certainly not being made for the clients` benefit. Unfortunately, they`re frequently made to benefit the broker and his broker/dealer.

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For many investors, buying a stock is much easier than deciding when to sell it. Buy recommendations are prevalent and stem from a wide variety of sources, including investment newsletters, analysts, stockbrokers and investment managers. However, few offer much advice on when it is best to sell a stock. Here are five tips on when it might be time to sell.

It Hits Your Price Target
When initially buying a stock, astute investors establish a price target, or at least a range in which they would consider selling the stock. Each stock purchase should also include an analysis on what the stock is worth, and the current price should ideally be at a substantial discount to this estimated value. For instance, selling out of a stock when it doubles in price is a worthy goal and implies that an investor thinks it is undervalued by 50%. It is difficult for even the most seasoned investor to come up with a single price target. Instead, a range is more realistic, as is deciding to sell off the position as it is rising, in order to lock in gains.

A Deterioration in the Fundamentals
Along with keeping track of a firm’s stock price after establishing a price target, monitoring the performance of the underlying business is important. A key reason to sell is if the business fundamentals decline. In an ideal world, an investor will realize a deterioration in sales, profit margins, cash flow or other key operating fundamentals before the stock price starts to decline.

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Robert Kiyosaki

Years ago I had a conversation with a young man about 401(k)s. “I have a question for you,” he said. “I’ve read that you say 401(k)s are the worst investments, but I don’t understand why you say that.”

“What is it that you don’t understand?” I asked.

“Well,” said the young man. “Most employers match your contribution. For instance, my employer matches up to four percent of my salary. Isn’t that a hundred percent return? Why is that a bad investment?”

“It’s a bad investment,” I said, “because it’s your money to begin with.”

He looked puzzled and perplexed.

“Listen,” I said, “if it weren’t for 401(k)s, your employer would have to pay you that money as part of your salary. As it is, they still pay it, but only if you give up four percent of your existing salary in to a retirement account where you have no control. And if you don’t, well the employer comes out ahead. It’s your money, but they’re in control.”

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~Kim Kiyosaki~

I’m working out at my gym last week and I notice one of the trainers, Mark, talking to a police officer dressed in full uniform, gun and all. I asked him if she was going to train with him. He shook his head in frustration and said, “She’s been coming in and talking to me for months. She wants to lose about thirty pounds, but she’s just not willing to do what she needs to do to lose the weight.”

Then he laughed and added, “I guess as long as she has her gun and her Taser she doesn’t need to be too fit or too fast.” I asked Mark, “Why do you think she won’t commit to train with you?” “I don’t know.” was all he said.

About a half hour later, Mark came up to me in the middle of my crunches and said, “I think the main reason why people don’t commit to exercise is that they don’t want to be uncomfortable. They don’t want to work hard. They don’t want to push themselves.” Then he made a statement that I think is the key to success in anything you take on. He said,

“You have to be comfortable with being uncomfortable.”

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