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Are you Getting Bad Money Advice from Friends & Family?

Tuesday, October 25th, 2016

There is always that relative or friend who gives a recommendation on what to do in financial situations, and while well-intentioned, it may be a poor financial idea.

First, it is important to understand who the person giving the advice is. If the advice is coming from your Uncle Joe who works as a car salesman in New York, it may not be great advice.

Nothing against your Uncle Joe, car salesmen, or New York residents, but rather I use this to illustrate the point that he may not have the credibility to give financial recommendations. The reason I used this analogy is to tell a similar story from my past.

Back in 1977, I saved up $2,000 and was ready to purchase a stock mutual fund. My dad, who was a car salesman in New York talked me out of the decision. He believed it was a terrible mistake and that I would lose everything in the risky stock market.

I have learned over the years the stock market is not a risky place; instead it is a great place to grow your wealth over the long-term. As it turns out, that $2,000 I was looking to invest would have been worth $42,000 today.

The point of this story is, you should question the credibility of the person giving the financial recommendations. You should also always ask the person to lay out a clear picture of the financials in question.

If they cannot explain the financial impact, you should again question the recommendation. It is always important to let the numbers speak louder than the words.

Two common mistakes people hear from their friends and family is to avoid credit cards at all costs, and to buy a house as soon as you have enough money saved.

Not using credit cards is a terrible mistake, as it is important to build credit over time and prove that you can pay off debt. The stronger your credit is, the better the rate you receive on loans to buy a car, house (when the time is right), or whatever it may be. Plus, by using credit cards you can earn great rewards.

Credit cards can be a great financial decision if you don't go overboard with debt and you pay them off monthly. If used unwisely they can create problems, as credit card debt accrues high interest very quickly.

The other recommendation of buying a house may not make sense for everybody. Renting is a great option that allows for flexibility.

If you are unsure where you will be in the next few years, buying a house may be a terrible decision. It is also important to consider the opportunity cost of the money you use to buy a house. Simply, if you didn't buy a house, you could have invested the funds elsewhere.

Over the past 20 years, the average price of homes has appreciated by an annual rate of 3.2% and the S&P 500 has appreciated by an annual rate of 9.9%. This demonstrates a significant opportunity cost had you bought a house instead of investing in the stock market.

As with any financial decision, it is important to analyze the numbers. Do not allow your emotions and wants to control your decisions, but rather look at the numbers.

The company of the week is Johnson and Johnson (JNJ). The current price is $114.09 and the 52-week range is $94.28-$126.07. JNJ is a great company with many well-recognizable name brands including Tylenol, Listerine, Neutrogena, and Neosporin.

Although the company is recognizable and well-liked, we must understand if we are getting a good value with the business.

Price/sales of 4.34 is a positive, as it is below the industry average of 5.86. Price/earnings of 19.9 is well below the industry's lofty average of 45.61. Sales have increased by 1.5% over the last 12 months and EPS is up 9.3% during the same timeframe.

The balance sheet looks strong, as the company has a liquid current ratio of 3.08 and a low debt/equity of 36.2%. JNJ pays a nice dividend of 2.8% and it only uses 39.65% of its earnings to pay the dividend.

Looking forward to December 2017, estimated EPS of $6.71 gives us a target sell price of $110.72.

JNJ has many positives, but through the course of history we have learned it is important to not overpay for the earnings of a company. 

Do you have a question or a company you would like us to take a look at?
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