money can be one of the most powerful tools in the world in fact if it's used correctly money can do a tremendous amount of good and it can also be used in very wasteful ways it can be squandered we see examples of people wasting their money all the time well the same thing can happen in a portfolio not all money is used the same in some cases money can be used to rapidly grow the value of a portfolio through consistent compounding compounding means you're growing your cash flows you're growing your gains over time and all of us want to compound as fast as possible so in this video I outlined the three best ways to compound your portfolio quickly we're going to be going over all three in detail and I also added in how not to quickly compound your portfolio there's going to be many examples of things that investors are doing right now that do not lead to compounding so I believe this will be an informative video where hopefully we can become a better investor now of course we have some other news we'll getting to in this episode as well Apple for example has said that they're going to support RCS messages that is Google standard or the Android standard for messages alongside the iMessage what does this mean for Apple what does it mean for their remat we'll be discussing in further detail the big Formula 1 event in Vegas has started in a softway bumpy road one of the drivers already had his vehicle injured by an unsecured drain in the road this was a bad way to start this event so we're going to be looking at what happened here exactly what this means for the rest of the event and who's to blame and then finally one of the things that we're told as investors is that we need a listen to The Experts the guys in suits that go on TV and they give big warnings about the future of the economy the state of the markets and what's going to happen in the short term these experts all have something in common they dress nice and they give you fearful takes on the market everything is scary everything's going to go down there's a recession right around the corner we've seen it repeated by the same group of experts over and over again now these experts also have one other thing in common they've all been completely wrong so in this episode we're going to be looking over why we often repeat this mistake of listening to the same people the same people being wrong and we still listen to them so obviously we have a lot to get to let's go ahead and start off now for those of you who are new to the channel we have thousands of new people joining every single day this portfolio the passive income one that you're looking at here is a real portfolio we're not paper trading we're doing this real we're doing it live and we're doing it with an extreme amount of transparency more than you'll typically see I share everything I'm doing I share all of the portfolio gains all of the losses when this went in the red during covid I showed the losses I was $20,000 in the red and I also show the gains we've had a remarkable performance over the past two years by really honing in the investment strategy and learning a lot about compounding the entire goal of investing is to have money work very hard for you so all of us are saving money we're budgeting we have some money that we want to invest we want that money to grow over time having having money grow over time and work for you is compounding so literally everything we're doing in investing is trying to compound money and the discussion we're going to have right now is how to do that as quickly and efficiently as possible with taking on the least amount of risk so let's go ahead and start off there's three basic ways to compound a stock portfolio and we're going to go over each of them and I sometimes see a lot of people get this relationship confused or mixed up so let's go ahead and try to clarify it the first thing we can do number one is buy companies that reinvest their cash flows at high rce here's a simple explanation of what return on Capital employed is if a company goes to the bank to get a loan to start their business and the terms are that their loan is a 12% interest rate their cost of capital is 12% so now the company's getting that loan at 12% their cost of capital is 12% and let's say that same company reinvests it and earns an 8% return in this case the company's losing money they're destroying wealth because their cost of capital is 12% and the return on capital is 8% I don't think I need to point out the math here but their cost of capital is higher than the Returns on Capital now you might think that this scenario is bizarre and it would never happen in the real world well let me tell you many companies are doing this right now their cost of capital is much higher than the Returns on Capital so when you have a company in this scenario they are destroying wealth they are destroying value in your portfolio and you should not hold companies which have a persistent cost of capital higher than the Returns on Capital now let's say that we find a better company this company goes to the bank and they get a cost of capital of 12% the same exact cost of capital but this company has a more efficient business model they have a better product with more pricing power instead of reinvesting at 8% they can reinvest at 22% even though the cost of capital is the same this company's earning a high rate rate of return so it's actually generating wealth for you the investor this company will create wealth over time so even though this term return on Capital employed may seem a little bit financial and difficult to understand it's actually an incredibly simple concept it simply means that we invest in companies that have high Returns on Capital employed we do not invest in these companies that have low Returns on Capital employed because they will destroy wealth they won't create it this has been a major focus of my portfolio literally every company in my portfolio has a long history of High Returns on Capital employed they're very effective at creating wealth in some cases these companies can be more expensive than others seemingly by the PE Ratio but over time they consistently generate more wealth for the investor an example of this is Costco I've held a holding in this company since 2018 so I've been a long-term Costco investor I've always liked this company but I've understood why it's so good at generating consistent returns consistent wealth for the investor let's go ahead and take a look at qualm this is the website that's available to all patreon members let's go down here to the ratios even all the way back in 2000 Costco was generating a return on Capital employed of around 16% so let's for example say that the cost of capital is on average around 10% that's the price associated with selling Equity to generate capital or getting a loan from the bank we have a 10% cost of capital Costco has consistently been above that Mark since 1996 this company has generated on average somewhere around 17 % in fact in the most recent years it's been as high as 22% 24% 23% what does this mean when the cost of capital is 10% and Costco consistently generates 22% Returns on Capital employed the company's making money for the investors so even though Costco trades at a high PE ratio a 33 a 35 and it's done so many times in the past that can dissuade a lot of investors from buying this company but I'd much rather own Costco at a 334 PE ratio than own an airline let's take a look at Delta Airlines for example here's Delta Airlines Returns on Capital employed and this is from roughly the same time period over the past 20 years we know there's times where Airlines can generate some money it's been up to 25% in the past but then there's entire decades where it has incredibly low if not negative Returns on Capital employed and if we put the same cost of capital for Delta Airlines it's right there over half of the years of its life it has in under a 10% rce destroying wealth for the investor and the stock price follows this rce Delta Airlines returns since 2013 are 27% total 27% returns in a decade Costco's returns over the same time period are 367 and Costco's PE ratio the multiple it's traded at has been higher the entire time so out of the three ways we compound our portfolio quickly we need to find companies that can reinvest their cash flows at a a high rate of return for a long period of time those are the ones that really have the best returns now let's go ahead and move on to number two once we found a company that we believe will have a persistently High rocce we also want to try to find companies that have a very clear return of capital strategy in this case we want to find companies that will use their cash flows for BuyBacks increasing your equity in the company my portfolio is called the passive income portfolio which most people commonly associate that with dividends and they're not in correct Dividends are a form of passive income but there's also another way that companies can return Capital back to you the investor that is through BuyBacks almost every single company I invest in does Buybacks in fact most of them do a tremendous amount of BuyBacks but maybe the most successful example of using BuyBacks effectively in my portfolio is Apple this company has been an incredible outperformer over the past 5 years I've now literally doubled my money in total with it but I'm up over five times on my very first purchases of Apple this company has been an incredible stock performer and one of the biggest things to credit the incredible compounding in Apple's stock price is BuyBacks BuyBacks have been a major factor in its compounding now it's difficult to fully appreciate the impact that BuyBacks have had on Apple but we can do so by looking at the shares outstanding chart this simply illustrates over time how many shares the stock has or the company has outstanding in a given quarter so as we can see this goes way back in history all the way to 1985 Apple had at the time 13.8 billion shares outstanding in 1987 when Apple was a younger company this company started to increase the share count this is delution they needed to do this to raise funds to raise capital for the company to pay their employees so during this time period Apple was a delu of company increasing the amount of shares outstanding now during the peak shares outstanding Apple had roughly $26 billion of shares in 2013 this is the most shares outstanding that they've ever had and they nearly doubled it over the past 10 years but then the company was taken over by Tim Cook and they decided to Institute a new policy putting any extra cash flow first into BuyBacks and reducing the shares outstanding over time and then you can see the precipitous decline in shares outstanding going from 26 billion 25 23 22 and 2016 in 2019 it was down to 18 billion and it continued on great gradually declining in shares every single quarter over this past 10 years Apple has bought back over 10 billion shares outstanding the impact that this has on your shares that you own is tremendous in fact they've reduced shares at a compound annual rate of 4.7% so this has generated roughly a 5% return for shareholders every single year for the past 10 years this Baseline of performance is incredibly valuable to the investor and it makes the company very difficult to not go up in price reducing shares outstanding also has the impact of directly increasing every single Financial metric of the company for example the free cash flow per share goes up quicker when the shares outstanding go down part of the reason that Apple has grown their free cash flow per share so fast is their BuyBacks Apple's earnings on a per share basis the EPS is also increased dramatically by the company chopping down these shares Warren Buffett has also stated that a big reason that he invested in apple was the clarity over their share reduction policy he knew that they were going to continue doing BuyBacks at a high rate and he thought that that would limit the downside when I study companies that do really well I notice a common theme most of them that have done well for a long period of time they tend to do a heavy amount of BuyBacks so when I look for companies to compound my portfolio quickly I also look for companies that do aggressive BuyBacks now after we have a company that has a high return on Capital employed a company that does consistent BuyBacks the next of course is a company that uses it it cash flow for dividends meaning that the company Executives return the cash back to me the shareholder so then I can reinvest that dividend at a high rate of return so this puts you in the seat of the executive the same type of analysis you would use to judge whether an executive is doing a good job tracking them by the rce well you can do the same thing for yourself when you're paid a dividend you're put in the situation of needing to reinvest that money and you want to reinvest it at a higher rate of return so the way to use dividends effectively and compound a portfolio quickly is to do precisely what you've been doing all along finding companies that have high roce finding companies that have clear buyback programs and finding more companies that pay their excess cash flow on dividends dividends is the other form of passive income but Dividends are a bit different than BuyBacks because the dividend puts the money back in your pocket you're in the driver's seat and you need to reinvest it effectively and some of the dividends I get add a tremendous amount of cash flow to my portfolio for example vich alone pays $755 that's every 3 months other companies like Texas Roadhouse pay me $250 Microsoft just paid me $ 110 S&P Global just paid 167 even MasterCard and Apple pay dividends that are no insignificant amount $90 $70 I track my dividends month over month and this chart shows the growth in my dividend income over time and you can see overtime the growth in dividends generally speaking all earn ear more in dividends every single year as these companies increase their dividend payout I've also mapped this out every single year while I earned nothing in dividends in 2017 the dividend income grew consistently $445 $1,800 in 2020 I earned $3,300 in 2021 $6,295 in 2022 it was all the way up to $7,600 so far as of October I'm up to $5,150 I'll be a little bit below 2022 but that's because in 2022 I had a little bit higher yielding dividend companies this year I focused more on ones that have higher rocce and higher buyback but either way Dividends are an important component in your total return and they give you an important opportunity to reinvest your cash flow in a very effective way the way that I look to reinvest my cash flow effectively with dividends is by either looking at a company on the watch list seeing if any of these companies are on a dip or I look at my own portfolio I use the dip finder in qualm to identify companies that are on a dip I might take advantage of these dips and the lowered stock price as an opportunity to use my dividends to buy back into these companies at reduced prices but the most important aspect of dividends is the reinvestment using them to buy more of number one companies that reinvest their cash flows at high rocce and companies that return cash flow through BuyBacks if you can find those ones dividends can be a powerful force in continuing to compound the portfolio now the next part of this I believe could be equally as important and this is going to highlight a lot of mistakes that I believe investors are making this is how not to compound your portfolio quickly let's go ahead and look at some of the examples here first of all you buy a stock because of the dividend yield that is something that still many investors do today if you buy a stock because it pays a high yield but the company has a low return on Capital employed the company does not have a consistent buyback policy you're probably going to end up with companies like Ford companies like Delta Airlines a lot of utility companies and ones that simply do not have the effective growth rate of other companies and you're going to find yourself consistently being left behind in the market these companies can be referred to as value traps but simply put this is a misunderstanding of what the primary focus should be first we need to find companies that have effective business models High Returns on Capital and then we use the dividend in order to increase our share count in those companies next up we have a company that relies on defensive Acquisitions now this is more of a Nuance discussion I don't think companies that do Acquisitions are inherently bad in fact I think it's great when a company does what's called tuck Acquisitions those are small Acquisitions of smaller companies that complement the company's main business model but when you find a company that's consistently trying to grow through defensive Acquisitions and the Acquisitions don't add to a consistent creation of value that's not a company that I would want to own an example of that is AT&T buying Warner media that acquisition created no wealth for AT&T and many other Acquisitions that AT&T did actually destroyed wealth for the shareholders in general Acquisitions are a risky thing and I'd rather find companies that do not have to do defensive Acquisitions or really big Acquisitions at all and if I do find a company that's doing an acquisition I like them to be infrequent next up we have a company that's paying down debt many cases a lot of companies have taken out tremendous amounts of debt at low interest rates but eventually those low interest rates are going to change they're going to have to refinance that debt at a much higher interest rate so a lot of companies focuses right now is paying down current debt levels and that's not going to generate the type of returns that I believe investors are looking for so I believe right now it's better to find companies that already have low amounts of debt and do not have to focus the next years on paying down debt next up we have companies that award Executives employees huge bonuses and stock awards we've seen it before there's been many companies that have done this they are created for the executives and the employees and in many cases they transfer value and they transfer wealth out of the Investor's hands into the employees and Executives hands a great example of this over the past 5 years has been Snapchat and then finally we should also look at companies that have pet projects and things that they spend their cash flow on that do not create value for the shareholder keep in mind that when you're Shar shareholder of the company you are literally an owner of the company so if the company's wasting money they are wasting your money you have to be careful about the money you spend you have to be careful about your home budget we should look for companies that do the same so we see companies that waste money keep in mind they're wasting your money if you're an investor and that really summarizes some of the main things that I look to avoid when I'm trying to compound my money quickly now keep in mind there's no perfect investment there's no company that meets all of these qualifications perfectly but there's one meet it closer than others so my goal in compounding money effectively and quickly is simply finding companies that meet these attributes as close as possible and investing in them heavily so hopefully you thought that was helpful let me know what you think in the comments now let's go ahead and move on to some of the news of the week first of all we have the Formula 1 event it's now starting in Vegas and of course before they actually have the main race they do a couple practice races this is so that drivers can get some tips they can hone in their cars they can fix problems the practice races are very important but in this this case we had something disastrously bad happen only 8 minutes in on the first practice here's a camera view of it wow stop the car engine off is the is the command on the dashboard but that car was going to stop itself either way that seemed like a fairly catastrophic failure he had a catastrophic failure as he hit something on the course now it's actually difficult to see how bad that was from the driver's View so let's go ahead and take a look at some other [Music] angles here's one last view of [Music] it did you get that now right away something was wrong with the track and what was wrong with the track was a water line a water drain had not been properly sealed to the track this isn't an issue when a car is driving over this at 20 or 30 mph but when a car drives over it at 200 mph that's an entirely different scenario in this case the force of a vehicle driving that quickly over the top of it literally ripped the top right off damaging the vehicle so this was not only a catastrophic failure but it was also embarrassing this is the opening ceremony the opening event in Vegas and they had this simple of an oversight not checking if the drains were properly sealed so obviously this is not the right way to start off the event from The Wall Street Journal they say the incident led to the second practice session being delayed until 2:30 a.m. local time at which point fans were sent home due to lack of available staff quote it's unacceptable from the Ferrari team they're the ones that had their vehicle damaged and these vehicles that were really damaged the Ferrari are up to around $15 million in value so this isn't like getting a fender bender and having to fix your vehicle these are some of the most expensive vehicles in the world now one thing I'll point out is a lot of people are pointing blame at Vegas or the city of Vegas as if they're responsible for this at all and I don't believe that's the appropriate party to blame there is one party responsible for inspection of the track and making sure it's up to standard that is Formula 1 they check off the track saying it's up to standard and they did so in this case now obviously there's going to be a few delays but the track is being fixed and the is going to go on in terms of the schedule they say the race itself will start at an unprecedented 1: p.m. local time on Saturday making it 1:00 a.m. on the East Coast an early morning across the Atlantic I think this will ultimately be just a bump in the road and the event will turn out to be a big success that's my prediction because what I hear from people that are there currently is that it feels like it's New Year's celebration every single day for 3 Days that's the level of excitement that people have the cars are fast the cars are loud the track is awesome and the Oman of the city around only adds to that effect so fingers crossed for vich holders that it goes well this weekend now moving on we finally have the news that apple is capitulating to the EU once again they say that their iPhones will support RCS in 2024 RCS means Rich communication standards and it's a new standard for text messages quote later next year we'll be adding support for RCS Universal profile the standard is currently published by the GSM Association they continue on saying We Believe RC Universal profile will offer a better interoperability experience when compared to SMS or MMS those are the current forms of text message being supported by Apple now they also continue on with the most important sentence right here this will work alongside iMessage that is the key word that they add in alongside IM message apple is making somewhat of a capitulation but they're not going the whole way they're meeting them halfway there so basically what this means is that text message will now work better with imessage it'll have better quality you'll have better videos when you share them with people with iPhones so this will make it so it's a little bit better if you have a buddy that does not have an iPhone but at the same time Apple's still trying to distinguish thems and continue on with that Mo by first of all making it so that Androids do not have iMessage you cannot install iMessage on an Android and that makes sense because it would not support things like Apple pay and many other features that come hand inand with imessage so there is still a distinguishing factor between iMessage and RCS the other big thing I would note is Apple's already confirmed that RCS will still be the green bubble so the most important factor which is that symbol that you do not have an iPhone that's still at play so I think this is Apple carefully navigating what they're willing to give up and what they're not willing to give up and I think they've done it well in this case now next up up I want to highlight some of the things we've been told all year by these so-called experts here's one of the experts from JP Morgan this was March of 2023 he was asked of whether or not he's still confident in his recession call in 2023 no I'm not questioning it at all he says he's not questioning his recession call at all he's bearish in that interview calling for a bad recession and then he follows that up one month later with this interview saying that there's going to be a washing out in the US and and also in in bond yields but that doesn't get us past the washing out process that has to occur first that's what we're going to see over the next several quarters that was 8 months ago and the stock market's up 16% now at the same time we have other people even outside of JP Morgan that have given harsh warnings about the future Muhammad Lan is one that continually warns about the Doom and Gloom of the future here's a video of him eight months ago um you've been banging on you know banging the drama about the FED being too late is a Cession at this point now unavoidable in the US it is not unavoidable but unfortunately the probability is going up what is unavoidable is stagflation and we seeing growth coming down and we're seeing inflation remaining High and the FED is finally catching up to developments on the ground but it still has some way to go he warned 8 months ago that stack flation was unavoidable the FED can't possibly get inflation down which of course they've been doing all year long the reason that we've recently had this rally was because inflation's falling faster than expected so he's been proven wrong in this example now this isn't new for Muhammad L Aon he's been consistently wrong on many calls despite the fact that he continues to get a lot of publication a lot of press one of his most famous calls was being bearish in March of 2020 at the very bottom of the stock market in March he was warning about the future painting a grim picture just as recent as a month ago we had yet another expert go on a TV and give his assessment of the potential upside and downside in the market so then we look at sort of upside versus downside right and you know could there be another 5 6 7% upside in equities of course right uh but if there is a downside it could be 20% downside right now of course so far stocks have ripped higher since this interview and the inflation numbers have been better than expected the problem with these type of interviews when experts come on and give their doomish predictions about the recessions and the economy and everything going on is not only does it distract from a long-term value investing approach but it's also just very short-term in nature and we know that nobody can accurately predict the market in short term that's been something proven time and time again yet these experts continue to attract media attention and they continue to get the spotlight no matter how many times they're proven wrong the person that I listen to that I think has a better grasp of the markets and a more accurate portrayal of the future is Warren Buffett here's Warren Buffett's expert opinion his opinions over time and his forecasts of how the stock market will do this country will do very well um and and in particularly it will do well for business business has done very well you know the Dow went from 66 to 10,000 Plus in the 100 Years of the 20th century and we had two world wars and nuclear bombs and flu epidemics and we you know you you name it cold war there's always there always there's always problem s in the future there are always opportunities in the future and in this country the opportunities have won out over the problems over time the baby that's being born today in the United States I mean I think on a probability basis that's the luckiest individual that's ever been born and I think that they will do very well in life in all kinds of ways on a probability basis uh better than existed when when I was born letter this year you really took aim at some of the politicians who who have been going around saying that things aren't aren't going well in this country you said that that things are strong here is that a shot at thinking we don't need to make America great again well America America's never been greater uh I mean you could look at you know where we stand I mean it it it will be greater in the future but America's never been greater I mean this this is the best time to be alive in the history of the world I mean in terms of medicine transportation entertainment you you name it or just in terms of aggregate wealth notice how Buffett does not give doomish takes all the time he's not scaring people out of the market he is advocating for people to not bet against America to stay invested and to ignore the people the politicians the people on TV trying to scare you out of the market and this isn't just during the good times here's an audio recording of Warren Buffett in 2009 during the midst of the greatest financial crash our country has ever faced but overall we move ahead and we not only move ahead we move ahead at a pretty damn rapid rate when you think about it I mean when in the 20th century we had a seven for one Improvement in in in living and we did that you know we had slavery for a long time we had blacks counted as three fists of a person we didn't let women vote for 130 years or thereabouts I mean we have we have we were wasting human potential and we still are but we were doing it more so for for centuries but we do keep moving forward and kind of fits and starts and right now we're sputtering somewhat in terms of the economy but uh the opportunities will will will win in the end uh and you know your kids will live better than and uh you you live and your grandchildren will live better and we will find more and more ways to find easier and better ways to do things that we haven't even dreamed of we're almost always a buyer of stocks over time I mean that we we I have no idea where they're going to be in 10 days or a year or two years but over time we we'll do very well America you can't really M with America we've got the secret sauce and doesn't work all the time perfectly but you just look at where we go Milestone after Milestone and never bet against America a lot of investors focus on negatives they look at experts on TV they look at people like Jeremy Gran and predicting Doom and Gloom and they even look at other YouTubers that constantly have flames in their thumbnails that does attract a lot of attention but as for me I'm going to remain optimism and I'm going to continue betting on great companies so if you want to follow my journey over time and see the mistakes I make and the companies I do well on just make sure you subscribe to the channel that's all for now see you in the next one
