A shocking exposé by the public-interest media group ProPublica reveals just what can happen to you in America if you get old and you don’t have the right system and paperwork in place to protect yourself.
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Savers who put money into traditional IRAs and 401(k)s get a nice tax break. Contributions up to an annual limit exempt some of your earnings from taxes, so if you fund one of these accounts, you get to not only set money aside for retirement, but pay the IRS a little less.
But because your contributions to a traditional IRA or 401(k) plan go in on a pre-tax basis, the IRS wants you to leave your money alone long enough for it to serve as income for retirement. As such, there’s a 10% early withdrawal penalty that generally applies to distributions from these accounts taken prior to age 59 1/2.
Now there are a few exceptions. IRAs, for example, allow you to withdraw up to $10,000 to purchase a first-time home. You can also tap an IRA early to pay for higher education.
Image source: Getty Images.
But even if you’re able to take an IRA or 401(k) withdrawal without incurring a penalty, doing so prior to actual retirement could hurt you in a very big way. Here’s why.
It’s a matter of lost investment gains
Clearly, a 10% early withdrawal penalty has the potential to cause you financial harm. But even if you’re able to avoid that penalty, raiding your IRA or 401(k) might harm you financially in another way.
The money in your IRA or 401(k) shouldn’t just sit in cash. Ideally, you’re investing that money so your balance grows nicely over time. As such, any dollar you remove from an IRA or 401(k) early is money you can’t keep investing. And the consequences there could be huge.
Let’s say you take a $10,000 withdrawal from your IRA at age 35 to purchase a home. But let’s also assume you then don’t retire until age 70. Furthermore, let’s assume that your IRA portfolio delivers an average annual return of 8%, which is a bit below the stock market’s average.
By missing out on the opportunity to earn 8% on your $10,000 withdrawal over 35 years, you’re losing out on almost $148,000 of retirement income. That could potentially constitute a few years’ worth of bills for your senior self, depending on what your costs turn out to be.
Be careful even when taking a withdrawal after age 59 1/2
Once you turn 59 1/2, you can remove funds from your IRA or 401(k) without having to worry about a penalty. But even then, it’s important to be careful.
Let’s say you’re thinking of removing $20,000 from your 401(k) to renovate your home at age 60. That money is yours free and clear of penalties. But let’s also assume you’re not retiring until age 68, and that your portfolio delivers a yearly return of 6% in your 60s (since, by then, it’s good to shift to more conservative investments).
Losing out on a 6% return on $20,000 over eight years means missing out on about $32,000 in retirement income. That’s still a notable sum. It could, for example, end up being money you need to pay for healthcare down the line.
The fact that the IRS imposes early withdrawal penalties on IRAs and 401(k)s is actually sort of a good thing, since it may be the factor that helps you stay disciplined and avoid tapping your savings prematurely. But even if you’re able to avoid a penalty, it still pays to try not to take a withdrawal from your IRA or 401(k) until you’re actually retired and absolutely need that money.
“Looks like someone is trying to take more than $10,000 from us.”
That’s the message my husband typed to me on a Monday morning in October. By the time I wrote back, he was on the phone with our bank. The weekend before, someone walked into a bank branch, pretended to be one of us, and took thousands of dollars from our checking account.
We joined the tens of millions of Americans who each year are victims of identity fraud, where criminals steal a bank or credit card number and use the personal information to achieve illegal financial gain.
We were lucky in so many ways, most notably that our bank reimbursed our losses within 36 hours.
What we learned is this: The many steps we take to safeguard our personal data don’t always work.
Experts suggest creating strong passwords with extra layers of authentication, changing them often, and not using the same one on multiple accounts.
Having text alerts on your credit and debit cards for all transactions can also thwart illegal activity in real time, as can email alerts when someone tries to change an email or address associated with your account.
You should do all these — and we did — but they wouldn’t have prevented the fraud we experienced. Our data was already out there for the picking.
Hacks that expose the personal financial information of Americans soared to a record high of 3,205 in 2023, according to the nonprofit Identity Theft Resource Center. That total includes breaches of companies across many industries such as healthcare, utilities, financial services, and transportation.
A well-known example of this was the massive Equifax data breach in 2017 that affected 147 million Americans — including us. That motivated us to freeze our credit reports at Equifax, Experian, and TransUnion.
“At this point, all of our information is out on the dark web,” Suzanne Sando, senior analyst for fraud and security at Javelin Strategy & Research, told me. “It’s now just a matter of when is it going to be used against me.”
‘Huge time suck’
Here’s what else we learned: Knowing how to respond to one of these frauds after they happen is also crucial — and time consuming.
Because of my past reporting on this subject, I knew we needed to act quickly. We checked our other accounts — bank, credit, and retirement — for any suspicious activity. There was none. We then met up at our local bank branch to shut down the old account, establish another, and identify which upcoming transactions to allow to go through.
It took more than two hours, and we weren’t close to done.
“Fixing a run-in with identity fraud, it’s a huge time suck,” Sando said, “and people don’t necessarily have the time to do it.”
My husband fortunately was able to take the day off and spent the afternoon undoing automatic transactions from the old account and rerouting them to the new one. I also took off the day from work and headed to our local police precinct to file a report to provide to other financial institutions if the fraud followed us elsewhere.
Our local precinct took our report immediately. That’s not often the case for identity theft, according to Identity Theft Resource Center CEO Eva Velasquez, because it’s so hard to solve these cases.
Several factors worked in our favor, she said. In New York, the total amount stolen — which ended up being $11,300 — made the crime a Class D felony, which includes thefts of more than $3,000 but less than $50,000.
The bank also gave me copies of the withdrawal slips, which became critical evidence. The criminal made the withdrawals under my maiden name, albeit misspelled on each slip. It’s a name that hadn’t appeared on my checking account for well over a decade.
The slips also showed where the withdrawals occurred: three bank branches in south New Jersey — nowhere near New York City, where we bank regularly. That meant the perpetrator was likely captured on surveillance tape at the bank.
“I’m sure that played into their increased willingness to give you the report,” Velasquez said of the police, “and to make that a priority.”
Getting that report was more than many fraud victims receive. But five months later we still don’t know how this happened or who did it.
A detective assigned to the case told me about a month ago that the police department was working on issuing a subpoena for the security cameras in the bank branches. When I visited the precinct on Friday for another update, the detective was in court and unavailable.
“We need more streamlined processes so that people know where to start,” Velasquez said, “and they don’t have to relive this nightmare over and over.”
It’s a nightmare that more and more people are forced to face. Almost 7 in 10 people said they had previously been the victim of an identity crime, according to a general population survey of 1,048 people that ITRC conducted last year.
A survey of 144 ID theft victims who reached out to the nonprofit in 2022 found that almost two-thirds said their issues were still unresolved months after discovering the fraud.
The lasting impact of identity fraud
Like so many things in life, the impact of identity fraud often depends on the resources available to you.
“Some people will look at a $100 loss and go, ‘That sucks, but it’s not that big of a deal’… and other people will say, ‘This is going to derail everything, that was all that I had left after I paid my bills to buy groceries. I can’t feed my family. I can’t keep the lights on,'” said Velasquez, the ITRC CEO.
We were fortunate. We had a financial cushion to fall back on if we had not gotten our money back as quickly as we did.
Still, we encountered hassles. We spent the next weeks getting late fees and interest charges waived because some bill payments were denied. We also had to scramble to make sure a maturing CD was deposited into the new checking account, rather than the old one.
But the financial fallout was largely limited.
That’s not how it always is for many people who have their credit histories ruined, loans denied, and employment opportunities lost due to the lingering effects of fraud. After all, the type of fraud I experienced cost 15 million Americans $24 billion in losses in 2021, according to Javelin’s latest data.
And there’s the emotional side, too. For me, it’s unnerving to think that someone is walking around impersonating me. Could it happen again? Possibly.
The ID theft victims ITRC surveyed often reported feeling violated and having trust issues — and 16% considered suicide, up by double since 2021.
“The emotional impacts are increasing,” Velasquez said. “People are feeling even more vulnerable and unable to recover.”
Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
Nvidia (NASDAQ: NVDA) just reported another quarter of explosive growth, with revenue and net income climbing in the triple digits into the billions of dollars. The artificial intelligence (AI) chip leader scored big as more and more companies flocked to buy its top-performing chip and related products and services. And Nvidia’s revenue even reached a record at more than $22 billion.
Meanwhile, Nvidia’s stock has soared about 285% over the past year. Even after these gains, Nvidia still remains a great stock to buy thanks to its solid future prospects. But there’s another way to benefit from Nvidia’s growth — without even owning the stock. And that’s by investing in companies that work hand in hand with this chip giant, and two perfect examples are leading cloud service provider Amazon (NASDAQ: AMZN), through Amazon Web Services (AWS), and server giant Super Micro Computer (NASDAQ: SMCI).
Why would you want to do this? Because it offers you the best of both worlds: Nvidia’s growth along with exposure to another top-notch business operating in other compelling areas. Let’s take a closer look at each.
Amazon
Amazon’s AWS is the world’s leading cloud services provider, and it also generally drives overall profitability at the company. AWS offers clients a wide variety of cloud solutions, and in recent times, it’s put the focus on AI, investing in technology infrastructure and in supporting clients across their AI projects.
By buying Amazon shares, you can benefit from Nvidia’s growth because the company’s graphics processing units (GPUs), or the chips powering AI, are found in AWS’ offerings. And at AWS, you’ll also find various Nvidia products and services such as the Nvidia AI Enterprise platform to accelerate AI development. Late last year, AWS and Nvidia even announced an extension of their collaboration to include new projects, such as work to create the world’s fastest AI supercomputer — powered by Nvidia GPUs of course.
And since so many companies already use AWS, it’s likely they’ll stick with the cloud services provider when they’re looking for Nvidia products and services. All of this represents a huge revenue growth opportunity for Amazon moving forward.
On top of this, when you buy Amazon shares, you also benefit from the company’s e-commerce business, which is another area with top growth prospects and a solid earnings track record. So, trading for 41x forward earnings estimates, Amazon makes a top buy right now.
Super Micro Computer
Supermicro is a seller of servers, storage systems, full rack scale solutions, and related products. Now here’s where things get exciting: The company uses a building blocks method of constructing its products so that it assembles a rack, for instance, according to the customer’s needs.
And Supermicro monitors Nvidia’s product development so that it can ensure its own products are compatible — and ready to integrate the Nvidia innovation as soon as it’s released. Supermicro also maintains this collaborative relationship with other chip companies like Advanced Micro Devices and Intel so it’s able to benefit from the growth of all players in the space.
As a result, Supermicro offers customers a customized product, powered by the world’s fastest chips as soon as they hit the market. In the most recent quarter, the company said it saw record demand for systems at rack scale, incorporating chips from Nvidia and other market leaders.
Supermicro’s earnings have roared higher in recent times thanks to its close work with these AI chip giants, and in the fiscal year 2023 — 30 years after the company launched — it reported its first $2 billion quarter. Now, the company predicts revenue for the current full fiscal year to climb at least 101% to $14.3 billion.
All of this means that when the leading chipmakers win, so does Supermicro. And that makes the valuation of 40x forward earnings estimates look pretty reasonable for this top AI growth stock.
Should you invest $1,000 in Amazon right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool recommends Intel and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
You Don’t Have to Buy Nvidia to Benefit From Its Explosive Artificial Intelligence (AI) Growth. You Can Buy These 2 Stocks Instead. was originally published by The Motley Fool
In September 2023, financial expert Dave Ramsey offered critical advice to a 61-year-old Arkansas woman, Teresa, with no money and plenty of debt. Her story was featured in a YouTube video titled “I’m 61 and Have No Money!“
With an annual income of $67,000 and debt of roughly $69,000, the woman — and her disabled husband — have serious concerns about their current and future financial well-being.
After learning more about her debt — including a student loan and two personal loans, one of which she used to purchase a $26,000 tractor — Ramsey didn’t mince words.
Don’t Miss:
“Broke people don’t have $26,000 tractors.” He pointed out that her inability or unwillingness to sell the tractor, even at a loss, is holding her back from taking a step forward in improving her situation.
Ramsey encouraged the woman to get serious about her financial circumstances. He stressed the importance of taking drastic action to reduce and even eliminate debt.
He stated, “If I’m in your mode I’m so scared I’m going crazy…I’m selling the tractor, I’m selling the car, I’m going to get a two-thousand dollar car. I’m going to work like a crazy person.”
This advice was intended to help the woman understand just how serious her situation has become.
Trending: Can you guess how many Americans successfully retire with $1,000,000 saved? The percentage may shock you.
Despite his straight-to-the-point advice, Ramsey provided a reassuring perspective, suggesting there is plenty of hope for a better future.
“If you’ll get this mess cleaned off, you’ll have plenty of money to save and invest. But you’ve got so many payments coming out, there’s no room in your budget to invest — and that’s why we tell people to clean their debt before they take advantage of max (retirement contributions).”
Teresa is not alone in her financial struggles. Her situation mirrors a growing trend in the United States, with many households struggling to manage debt while investing for retirement.
A recent report by Nationwide noted that 50% of retired survey respondents are considering a return to work out of fear of running out of money.
Ramsey doubled down on the fact that it’s never too late to save for the future if you make the right moves.
“You’re trading a $26,000 tractor for $150,000 in your retirement.”
Consulting a financial adviser can provide additional guidance and support for those struggling with debt. Financial advisers offer personalized strategies to manage debt, create effective budgets, and work towards long-term financial goals. They can help with everything from debt management to retirement planning and everything in between.
Read Next:
*This information is not financial advice, and personalized guidance from a financial adviser is recommended for making well-informed decisions.
Chris Bibey has written about personal finance and investment for the past 15 years in a variety of publications and for a variety of financial companies. He is not a licensed financial adviser, and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Bibey believes the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.
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This article Dave Ramsey Calls Out A 61-Year-Old With ‘No Money’ — ‘Broke People Don’t Have $26,000 Tractors’ originally appeared on Benzinga.com
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Presidents cycle through the White House, but Wall Street remains unfazed about the next leader—for now. Despite the looming uncertainty over the Oval Office occupant by year-end, banking heavyweights are bullish on the market’s prospects, predicting a rally regardless of who takes the oath in January.
Analysts told Fortune that the whims of incoming politicians—particularly in these early stages of the elections—are merely “background noise” for the time being, adding they’re more focussed on continuity of economic performance as opposed to proposed policy.
With a significant political event on the horizon, business titans will inevitably be pressed for their outlook.
Jamie Dimon, CEO of JPMorgan Chase for example, told CNBC at Davos that President Trump had been “kind of right” about certain issues.
The man who previously described himself as “barely a Democrat” has butted heads with President Trump, but cautioned President Biden against dismissing MAGA supporters, adding: “Can we stop that stuff and actually grow up and treat other people respectfully and listen to them a little bit?”
Likewise, the CEO of ChatGPT maker OpenAI, Sam Altman, said although “a lot is at stake” in the next election, he believes AI and America in general will be “fine.”
Speaking to Bloomberg, also at Davos, Altman said: “I think elections are huge deals. I believe that America’s going to be fine, no matter what happens in this election.”
But as noise, tensions and uncertainty around the highest office in America increases towards the end of the year, Wall Street experts had the same advice: don’t base portfolios on politics.
Too early to care
There’s plenty to keep investors occupied at the moment: When will the Fed lower the base rate? Will inflation rebound? Might geopolitical tension cause economic disruption? Will jobs hold steady? And can consumers remain robust?
Although an election could sway a number of these factors, some analysts said they’re not overly paying attention to political maneuvers right now.
“Markets don’t really care at this stage,” said Paul Donovan, Chief Economist at UBS Global Wealth Management. “Investors are not pricing in anything about the election outcome in November, which remains complicated.
“There is an assumption that former U.S. President Donald Trump would win the Republican nomination, so what’s happening at the moment is merely background noise.”
In further conversation with Fortune, Donovan’s UBS colleague Tom McLoughin explained markets will hold steady until the landscape is more defined.
McLoughin, who is UBS’s Americas Head of Fixed Income and Municipal Securities, added markets will become more “preoccupied” with election news after the summer.
Goldman Sachs is likewise keeping its cards close to its chest.
In a note sent to Fortune this week, analysts Dominic Wilson and Vicky Chang wrote that although the election has the potential to be a “major market event” it is hard to position outcomes at this stage.
An end-of-year rally
Like many economic issues at the moment, analysts are divided on the details but reach a general consensus on the trajectory of the economy.
For example, economists widely agree that a soft landing is likely to happen during 2024 and that the Fed will begin cutting rates around the middle of the year.
And while bull and bear outlooks split the market, generally, economists agree that when the political uncertainty comes to an end in Q4 2024, the market will see an uptick.
On the bullish side, Bank of America’s Steve Suttmeier, Chief Equity Technical Strategist, said the S&P 500 could tip over the 5,000 mark.
According to his calculations over the 24 cycles from 1928 to 2020, the SPX has been up an average of 75% of the time with a “solid” average return of 7.5%.
However, that performance varies across the year, with the note seen by Fortune outlining that the S&P500 often struggles between January and May, “prior to much stronger returns for the rest of year four, punctuated by a June through August summer rally and November through December post-election relief rally.”
From a long-term, secular bull perspective, he added: “The 2022 to 2023 … pattern and our secular bull market roadmap charts also suggest that the S&P500 spends some time above 5000 in 2024.”
Citigroup is also expecting to see equities trade well in 2024 with Alex Saunders, Citi Research’s quantitative global macro and asset allocation team head, telling Fortune the assets tend to trade well in election years, particularly if an incumbent, like Joe Biden, is running.
A mean-reversion is also often expected post-election, with asset prices and historical returns settling back into their long-term trajectory.
JPMorgan’s global market strategist Meera Pandit isn’t as sold on the bullish outlook, as from her dataset—from 1932 to present—S&P 500 returns on average were 6.2% during election years vs. 9.6% during non-election years.
However, Pandit agreed that in Q4 investors can expect some optimism.
“Markets tend to be more volatile in the lead-up to the election, but after election day, that source of uncertainty is cleared, and, regardless of the result, markets move on and refocus on the fundamentals,” she wrote in a note supplied to Fortune.
“In fact, median returns in the first three quarters of an election year were 1.9% compared to 3.1% in the fourth quarter going back to 1936.”
Portfolios and politics
Despite this trajectory—the exception to Pandit’s data being 2000, when the outcome was eventually ruled by the Supreme Court, and 2008, when the first bubbles of the financial crisis were emerging—the analyst encouraged investors to keep their eyes on the long game instead of making portfolio decisions based on politics.
“Although uncertainty can create opportunity, investors often make their worst mistake during uncertain times, which can sometimes take years for portfolios to recover from,” she wrote.
“Political opinions are best expressed at the polls, not in a portfolio. One cardinal rule investors ought to follow: don’t let how you feel about politics overrule how you think about investing.”
Despite voters often thinking the economy performs better under their preferred candidate—thus potentially impacting their choices—Pandit outlines this is likely not true.
Under both Obama and Trump, for example, returns on the S&P were around 16%.
As such, she adds, “macro conditions, like ultra-low interest rates … were a more influential driver of above-average returns during those periods, rather than the policy prescriptions each president espoused.”
Vanguard research challenges the commonly held notion that elections trigger market volatility. Examining the 100 days before and after elections from 1984 to 2020, volatility stood at 16.5% and 15.9%, respectively—both lower than the overall 17.9% during that period.
JPMorgan, though slightly cautious about volatility, aligns with Vanguard’s advice on how investors should navigate elections, emphasizing: “It’s natural to be concerned about elections, but historical data indicates they are a nonissue for your portfolio and the markets.”
This story was originally featured on Fortune.com
Not everyone believes they will retire one day: 15% of Americans overall said they don’t plan to retire at all, and younger people as a group were less confident than their fellow workers, a new study found.
More than one in five younger Americans have no plans to retire, and 21% of Hispanic participants said the same, according to TIAA Institute’s latest report, “State of Financial Preparedness in a Diverse America.”
The biggest reason to skip retirement? The inability to save enough. Social reasons, such as having a sense of purpose, avoiding boredom and career enjoyment, were also reasons not to retire, participants said.
“If most people are planning for retirement but can’t follow their plans, that’s a call to action for employers, policymakers, financial advisors, retirement services providers and others. We need to better identify the steps we must take to give people the resources they need,” Surya Kolluri, head of the TIAA Institute, said in a statement.
Source: TIAA Institute
Less than half of people still working were confident they’d retire one day. Young Americans and Hispanics were tied for lowest confidence, with more than a third in each demographic responding as such.
The survey included responses from 1,684 adults between the ages of 22 and 75 years old, who represented a mix of demographics, including age and racial and ethnic groups.
TIAA Institute also found Americans had little to no liquid investable savings — 26% of Black participants, 26% of Native American participants and a quarter of Hispanic Americans have none, the survey found — and three in 10 respondents said they’d be unable to pay for a $2,000 emergency. People are more likely to have no liquid investable assets (15%) or under $50,000 (29%) than to have more than $500,000 (19%), the survey found.
Read: Retirement planning for Gen X and millennials: To make it effective, make it bite-sized
For about three-quarters of current retirees, Social Security was the top retirement source, followed by more than half who said employer pensions. But that may not be the case for younger workers — almost half of participants between 22 and 34 years old said they don’t expect to take advantage of Social Security or pensions when they retire.
Two-thirds of people did have a retirement account, such as the 401(k), but almost a quarter of people didn’t know how much they had saved, including 24% of those currently retired and 22% planning to retire.
Welcome back to Distributed Ledger. This is Frances Yue, crypto and markets reporter at MarketWatch.
The first approved bitcoin
BTCUSD,
ETFs have now been trading for two weeks, with BlackRock and Fidelity leading the race after the U.S. Securities and Exchange Commission greenlighted such products on Jan. 10.
Some crypto investors now are hoping to see ETFs based on smaller cryptocurrencies, such as ether
ETHUSD,
also receive the SEC’s approval down the road.
However, it may be too early to get excited, according to Stephanie Breslow, partner and co-head of the investment-management group at law firm Schulte Roth & Zabel.
Find me on X at @FrancesYue_ to share any thoughts on crypto or the newsletter.
The securities debate
“Bitcoin itself is not a security. Nobody even was able to identify an issuer,” Breslow told Distributed Ledger.
“But for other crypto, there is still a dispute in many cases between the SEC and other market participants about which cryptocurrencies are securities, and whether the crypto that were once securities are still securities,” she said.
SEC Chair Gary Gensler once said that bitcoin was the only crypto he was prepared to publicly label a commodity, rather than a security.
In June, the SEC separately sued crypto exchanges Coinbase and Binance. While the lawsuits contain different allegations, both contend that the companies ran unregistered securities exchanges. Both lawsuits are still ongoing.
In July, U.S. District Judge Analisa Torres ruled that Ripple Labs’ crypto token XRP
XRPUSD,
is not a security when sold on digital-asset exchanges to the general public, but that Ripple’s sales to sophisticated institutional investors did qualify as an unregistered sale of investment contracts, in violation of federal law.
In October, the same judge refused to let the SEC appeal the decision.
It’s important to watch the developments and rulings of such lawsuits, according to Breslow. “Those court cases are not in themselves directly about whether you could have an ETF, but I do think that finding the boundaries between what is and what isn’t a security will be relevant to which crypto end up being capable of being wrapped into ETFs,” Breslow said.
“If the SEC is thinking that a given crypto is a security and that various exchanges should not be trading it [and] it shouldn’t be open to U.S. markets, then likely they would not be allowing an ETF around that crypto,” she added.
Still, even if a crypto is not considered a security, there remains the question of whether the market for it is large and rational enough, according to Breslow.
“In the case of bitcoin, it is very widely traded. Something that is more thinly traded wouldn’t really support an ETF,” she said.
Trump’s stance on crypto
As former U.S. president Donald Trump cruises toward the Republican Party nomination for the 2024 presidential election, some crypto supporters are putting their faith in a potential second Trump administration.
However, a careful look at Trump’s term in office could cast doubt on those hopes, writes MarketWatch’s Chris Matthews.
“Bitcoin, it just seems like a scam,” Trump told Fox Business in 2021. “I don’t like it because it’s another currency competing against the dollar.”
In 2019, amid controversy over Facebook’s Libra cryptocurrency project, Trump lamented that the value of cryptocurrencies is “based on thin air.”
Read more about it here.
Crypto in a snap
Bitcoin fell 6.2% in the past seven days and ether lost about 12.2% during the same period, according to CoinDesk data.
Must-reads
- Terraform Labs files for bankruptcy following crash of its stablecoins in 2022 (MarketWatch)
- ‘It was just a facade’: CEO charged with stealing $150 million in crypto scam (MarketWatch)
Thinking about buying stocks as the new year begins? You might want to press the pause button.
No, I’m not recommending that you avoid the stock market altogether. That could prove to be a mistake over the long term. However, Warren Buffett has some words of wisdom that I think every investor should heed. Take Buffett’s advice: Don’t buy any stock in 2024 unless it passes this straightforward test.
Image source: The Motley Fool.
The Buffett test
In Buffett’s annual letter to Berkshire Hathaway (BRK.A 0.50%) (BRK.B 0.53%) shareholders released in 2014, he explained a test that he and his longtime business partner Charlie Munger applied before buying any stock. Munger passed away in November 2023, but it’s a safe bet that Buffett will still employ this same process in 2024.
There are two steps to Buffett’s test:
- Determine if you can “sensibly estimate an earnings range for five years out or more.”
- If the answer to the first step is yes, buy the stock only if its price is reasonable compared to the lower end of the estimated earnings range.
You might wonder if Buffett sometimes bends the rules. For example, would he still buy a stock if it passed the test but the overall economic picture looked uncertain? Would he buy the stock if Wall Street hated it? The answer is a resounding “yes.” He wrote to Berkshire shareholders nearly a decade ago:
In the 54 years we [he and Munger] have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.
Easier said than done
While the Buffett test for buying stocks is straightforward, it’s easier said than done. The most difficult part is estimating earnings for a company for the next five or more years.
Buffett readily acknowledged that he and Munger had frequently been unable to estimate future earnings with any degree of confidence, saying that this was “usually the case.” When this occurred, he stated succinctly, “[W]e simply move on to other prospects.”
He also noted that he and Munger had made mistakes in buying stocks at times. Staying within their “circle of competence” helped minimize such blunders, but it didn’t completely eliminate them. This is an important point. Investors will be better equipped to estimate future earnings for the stocks in industries with which they are familiar.
Two stocks that pass the Buffett test in 2024
Buffett hasn’t bought many stocks in recent quarters — evidence that he isn’t finding many that pass his test. However, I think some stocks pass the Buffett test in 2024.
D.R. Horton (DHI 0.64%) is one of them, in my view. Buffett initiated a stake in the homebuilder in 2023. Despite its shares soaring 70% last year, D.R. Horton trades at only 11.4 times expected earnings. That makes the stock attractively valued even if the company barely increases its earnings at all over the next five years.
But D.R. Horton should be able to deliver solid earnings growth. The U.S. still suffers from a severe housing shortage. With the Fed hinting that interest rates should come down somewhat in 2024, the company should be able to build and sell increasingly more homes for years to come.
Now for a stock that Buffett doesn’t own: Meta Platforms (META 1.39%). It’s fair to say that Meta doesn’t fall into the legendary investor’s circle of competence, so he probably wouldn’t feel comfortable estimating its future earnings. However, Wall Street appears to believe that it might pass the Buffett test. Meta’s price-to-earnings-to-growth (PEG) ratio based on analysts’ five-year earnings-growth projections is a low 0.79. Any PEG ratio below 1.0 is considered to be an attractive valuation.
Meta has grown its earnings by an average of close to 8.5% annually over the last five years. Its financial performance has improved, though. If we assume that the company will increase its past earnings growth only slightly, the stock looks reasonably valued.
Buffett’s really simple alternative
Each investor should follow Buffett’s two-step process on their own before buying any stock in 2024. But don’t worry if you aren’t comfortable estimating earnings. Buffett has a really simple alternative that doesn’t involve his test at all.
He argued in his letter to Berkshire shareholders in 2014 that most investors would be better off putting their money in low-cost S&P 500 index funds instead of trying to pick individual stocks. Buffett even predicted that anyone who follows this advice “is virtually certain to get satisfactory results” over the long term.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Berkshire Hathaway and Meta Platforms. The Motley Fool has positions in and recommends Berkshire Hathaway and Meta Platforms. The Motley Fool has a disclosure policy.
In a strategic move that has effectively caught the attention of the crypto space, Microstrategy has once more fortified its Bitcoin portfolio, strengthening its position as the largest corporate holder of BTC globally.
MicroStrategy Boost BTC Holdings
In a recent filing on December 27, the United States Securities and Exchange Commission (SEC) announced that business intelligence software company, Microstrategy has increased its Bitcoin holdings by 14,620 BTC valued approximately at $615.7 million.
“On December 27, 2023, MicroStrategy Incorporated (“MicroStrategy”) announced that, during the period between November 30, 2023, and December 26, 2023, MicroStrategy, together with its subsidiaries, acquired approximately 14,620 bitcoins for approximately $615.7 million in cash, at an average price of approximately $42,110 per bitcoin, inclusive of fees and expenses,” the report stated.
It added:
As of December 26, 2023, MicroStrategy, together with its subsidiaries, held an aggregate of approximately 189,150 bitcoins, which were acquired at an aggregate purchase price of approximately $5.895 billion and an average purchase price of approximately $31,168 per bitcoin, inclusive of fees and expenses.
The founder and Chairman of Microstrategy, Michael Saylor also announced the company’s substantial BTC purchase via his X (formerly Twitter) handle. This move has sparked curiosity among crypto enthusiasts and investors, prompting questions about the crypto investor’s ultimate strategy and motivations behind the company’s accumulation of substantial amounts of Bitcoin.
Microstrategy’s strategic BTC investment also stealthily comes as the anticipation of Spot Bitcoin ETF grows. The significant BTC purchase raises the possibility of the company having information that could place it in a strong position to potentially profit from the Spot Bitcoin ETF craze while simultaneously leading the 2024 Bitcoin bull run cycle.
BTC price above $43,000 | Source: BTCUSD on Tradingview.com
MSTR Stocks Surge Amidst Bitcoin ETF Frenzy
As Microstrategy ramps up its BTC portfolio on one front, concurrently, the company witnesses a surge in its stock value. The business intelligence software company has seen its MSTR stock performance skyrocket by over 300% in 2023. At the time of writing, the price of MSTR is trading at $613.80 with a 15.25% increase in the past five days according to Market Watch.
This price surge can be largely attributed to the expectations surrounding the Bitcoin Spot ETF in the United States. The crypto industry is presently watching as the SEC approaches the crucial deadline to either deny or approve Spot Bitcoin ETFs. The final date of the SEC’s Bitcoin ETF decision has already been scheduled for January 10, 2024.
Featured image from Milk Road, chart from Tradingview.com
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