Family Investment Center
Dan Danford is a gifted communicator. He has written hundreds of articles and several books. He has taught classes for high school, college, and community groups. He speaks often and served as commentator for a local ABC affiliate television station.
Dan founded Family Investment Center in 1998. In total, he’s been a successful senior officer in five different banking or investment firms since 1984. He earned a Master’s degree in Personal Finance from Kansas State University and an MBA from Northwest Missouri State University. Today, Family Investment Center manages well over $100 million for clients in a dozen states.
Dan is quoted extensively about investing. He’s written for or been quoted in the Wall Street Journal, New York Times, Chicago Tribune, Kiplinger’s, U.S. News & World Report and dozens of other newspapers, magazines, and media outlets.
Dan has served in numerous leadership positions for civic and professional boards including the Missouri Western State University Board of Governors and as treasurer of the St. Joseph Area Chamber of Commerce. He was Chairman of the Friends of the Free Clinic, a support group for the Social Welfare Board in St. Joseph.
Dan has been president of the Missouri Western State University Alumni Association and was honored in 2003 with the Missouri Western State College Distinguished Alumni Service Award.
MS, Personal Finance, KSU
BS, Marketing, MWSU
Assets Under Management:
Dan Danford / Family Investment Center
An analyst’s “target price” is his/her best estimate of a stock’s future price. Since the stock market is an auction where buyers and sellers transact business, the analyst is trying to determine a solid estimate of future price based on company financials, industry trends, and economic factors.
Analyzing stock prices is not an exact science. Ten different analysts will arrive at ten different target prices depending on each one’s weighting of various factors. For traded stocks, they should each be starting with the same set of public financial data, but that entails a hundred or thousand data points for each stock. Plus, each analyst will apply their own process, experience, and judgment to that data.
Additionally, at least part of a stock’s value lies in future (estimated) data. Financial records necessarily look backwards, but the value to a new buyer lies in the company’s prospects. Will sales grow faster or slower in the future? Are margins in the industry rising or shrinking? Does the company have any product innovations in the pipeline? How about their competitors?
So, setting a target price is a judgment call. An informed analyst weighs all the past and future data with their own personal knowledge of the company and industry. From this, they set a target that they expect sometime in the future. Buyers or sellers can then use this target for their own decision-making about the stock.
Let’s say that a certain analyst sets a target for ABC stock at $25 per share. The stock is trading today for $20 per share. If you think this analyst is credible, then you might choose to buy ABC because you could make $5 per share (a whopping 25%) when the share price hits that target (again, timing of that price change is an estimate, too). Or if you question this analyst’s credibility, you can search to see what other analysts estimate for ABC before deciding.
An analyst sets the future target price with little regard to the price today. So, they might set a target price for ABC at $15. If you find that analysis credible, you’d probably decide to wait before buying (until the price falls to $15 or less) or sell if you already own it. Again, this is just one person’s judgment about the future price. You can use the information however you choose.
Importantly, really importantly, no one knows what will happen next with stock prices or any company. The fact that someone is an analyst following a stock does not make them right. They are simply an informed party doing their best to understand the company and landscape. Even the best analysts will be wrong sometimes.
As an investor, you are the final decision-maker. Learn as much as you can, choose credible people or companies for information, and exercise your own judgement when buying or selling. There are a million moving parts and it is impossible to predict the future.
Anything by these four writers: Nick Murray for inspiration. Jonathan Clements for financial insights. Michael Kitces for business savvy. Michael Gerber for systemizing your own business model. There is a vast difference between investing and the business of investing. A lot of people enter the business because they like investing ... it takes a lot more than that to prosper as a professional. Going forward, success will depend less on personality and more on credentials, communications, and processes.
You nailed the issue by asking about monetizing the investment. Without dividends, your only hope is that the company sells out at some future date and that all investors are rewarded. That's a big "if." It is probably more likely in some industries than others, but the general likelhood is low. Crowdfunding seems more to me like marketing than investing ... trying to make friends and customers feel part of a new venture. There is nothing wrong with that, but remember that investment prospects are low. Do it for fun, do it for prestige, do it for personal fulfillment. Don't do it for investment purposes.
The challenge with bonds and bond funds is that the underlying rate of return is very low today. This is a consequence of government policy and it may be a few years until rates are more normal. So, if a bond pays 3%, say, and you buy it today, you will earn 3% less any commission paid to buy it. If you sell it before maturity, you’ll pay a commission then, too. If you hold it to maturity, the bond will mature and the principal amount will be returned to you without a commission.
A bond fund hold hundreds or thousands of these bonds, and passes along interest collected to holders each month. The fund also pays commissions when buying or selling bonds (at substantially lower costs than you or I would pay) and the fund managers earn a fee for their work. Overall, fund shareholders get 1) broad diversification, 2) manager expertise, and 3) considerable convenience in not having to buy or sell individual bonds. I actually think those are a fair swap for the fees charged.
Municipal bond funds are exactly the same except for this difference: since they are “tax-free” the interest rates are generally lower on the bonds. In the example above, the 3% rate might drop to 2%. The cost structure is similar, so the net return to shareholders is also lower. The advantage, for high-income investors, anyway, is that the interest isn’t income-taxable (although the Alternative Minimum Tax will render this meaningless for some taxpayers). Again, for many people, a municipal bond fund can be good value for the costs involved.
As you noted, today is a tough environment for bonds and bond funds simply because rates are so low. It’s hard to overcome that obstacle. But for many investors, bonds are mainly ballast for their diversified stock portfolio and mutual funds offer a good way to accomplish that.
I’ve come to dislike individual municipal bonds for many investors. The market is highly inefficient, and unscrupulous brokers prey on senior citizens who rightfully dislike taxes. The brokerage fees or trading spreads are ridiculously high, even though they are invisible to many buyers. I much prefer muni bond mutual funds for the average investor.
A lot of people think of investing kind of like an account at the bank. So, they automatically ask about the interest rate, or dividend, or yield. And there are many investments that pay interest (usually bonds) or dividends (stocks or various mutual funds). Many free sites on the Internet will tell you a stock's dividend payment history. Dividends are not guaranteed, and the board of directors approves the dividend amount (if any) each quarter.
For stocks, dividend payments are sometimes just part of the return for investors. Many, perhaps most, investments can also fluctuate in value and those fluctuations can add to or subtract from the dividend payments. Total return is the calculation that takes all factors into account. For a particular period, you add in all dividends and add or subtract the change in the investment’s value.
The reason this is important is because many quality stocks don’t provide regular income from dividends. Most large companies, for instance, pay a relatively low cash dividend even though the share price might be expected to rise over time. In fact, this could be good for investors because dividends are taxable and growth in share value is not until you sell the shares. Even then, the capital gains tax rate is much lower than rates for interest or dividends.
Smaller companies – those with the best growth prospects – rarely pay dividends because that extra money can be used to fuel further growth. Would you rather have a cash dividend or have the company invest in machinery to make more money? Many shareholders would prefer potential growth to taxable dividends.
It is true that large companies paying dividends represent the most stable sector of the stock market. These behemoths typically have billions in earnings and thousands of shareholders and employees. They have fewer opportunities for high growth and their revenue streams are constant enough to pay regular dividends. For investors, these are the bluest of blue chip stocks. Perfect for widows and orphans and retirees seeking some income with gentler fluctuations.