8 Proven Money Lessons From “The FALCON Method”

The FALCON Method Summary

👇 The FALCON Method video summary 👇

The FALCON Method Lessons

1️⃣ Invest in stocks

In the vast world of investments, including stocks, options, bonds, mutual funds, and commodities, it’s easy to feel overwhelmed. Professionals spend years studying these options, but how can regular folks like us know which ones are best? Luckily, some experts have shared valuable insights.

One of these experts is Warren Buffett, renowned for his investment success and wisdom. In a letter to his shareholders in 2011, Buffett highlighted three main investment categories and singled out his favorite.

The first category is currency-based investments, like bonds. Bonds are essentially loans where the issuer (often a company or government) borrows money from investors and promises to repay it with interest in the future. However, there’s a risk with currency-based investments: if inflation rises, the value of your investment may decrease.

Buffett’s second category is unproductive assets, such as commodities like wheat, oil, and gold. Unlike productive assets, these don’t generate additional income for the investor; they rely on selling them at a higher price later.

The third and most favored category by Buffett is productive assets, which are excellent for wealth building and consistent income generation.

Productive assets, like businesses or rental real estate, aren’t tied to a specific currency and can be valued against other assets like gold. They also generate additional income, such as rental income from real estate.

Among productive assets, company shares stand out. When you buy shares of a company like Coca-Cola, you become a partial owner, entitled to a portion of its profits in the form of dividends. Plus, you retain the underlying value of your shares, which can be sold on the market at any time.

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2️⃣ Understand how the company makes money

So, we’ve established that stocks are top-tier investments, but simply choosing the right asset type isn’t enough to secure your financial future. To invest wisely, it’s crucial to grasp how companies function and how to assess them.

A helpful concept for understanding companies is the “black box,” as described by author David van Knapp in his book “Sensible Stock Investing.”

In this analogy, a company is like a black box with input and output pipes. As an outsider, you can’t see inside the box, but you know that companies exist to make money, so more cash must flow out than in. This perspective directs our focus to analyzing these cash flows.

Input pipes include revenue from sales and equity sales, like when a company issues new shares. It’s essential to monitor these inputs, especially equity sales, as they can dilute the value of existing shares.

Examining output pipes is equally important. These include ongoing expenses, debt payments, and acquisitions, along with taxes on profits.

When evaluating a company, profits are paramount. How a company utilizes its profits reveals its potential as an investment. Look for three key uses of profits:

First, dividends, which reward shareholders and indicate a company’s ability to generate returns.

Second, share buybacks, where a company purchases its own shares, reducing the number in circulation and increasing their value.

Third, retained earnings, which are reinvested into the company for growth.

The beauty of the black box metaphor lies in its practicality. It reminds us not to dwell on what we can’t see but to focus on what we can observe—the crucial areas that drive a company’s success.

3️⃣ Invest for the long term

Ever dreamed of being a successful stock trader, lounging on a beach with your laptop, racking up profits? Well, for most of us, that’s just a fantasy. The reality is, trading frequently can be risky and often leads to losses. Instead, many investors opt for a more traditional approach called quantum investing.

Quantum investing involves ranking stocks based on specific criteria, like dividends per share, and then buying the top-ranked ones. These stocks are held for a set period, typically a year, before being sold and the process starts anew.

While quantum investing has its benefits, like removing emotional biases from trading decisions, it also has drawbacks. For instance, it may involve investing in unfamiliar companies, which can be risky and unwise.

Enter the FALCON Method, a different take on traditional quantum investing.

Like quantum investing, the FALCON Method aims to minimize emotional decision-making. However, it diverges by advocating for a “buy and hold” strategy, prioritizing long-term investments. The idea is to hold onto stocks, earning dividends over time and selling when their value increases.

Moreover, the FALCON Method recommends investing only in well-established, reputable companies. This approach reduces risk and provides more confidence compared to investing in unknown companies.

By following a structured process that minimizes human biases, the FALCON Method ensures that the selected stocks are high-quality investment opportunities. This approach helps investors avoid costly mistakes and increases the likelihood of success in the stock market

4️⃣ Invest only in top quality companies

Now that we’ve decided on a “buy and hold” strategy focusing on well-known companies, let’s dive into the specifics of the FALCON Method and create a list of potential investments. But which household names should we consider?

The FALCON Method zeroes in on a specific group of companies that have been consistently paying dividends for at least 20 years without reducing the payout.

Why the emphasis on dividends? Because they are the most reliable indicator in corporate reports.

Unlike other financial metrics, such as revenue, which can be manipulated, dividends represent transparent payments made by companies to their shareholders.

While 20 years of dividend payments may seem like a long time frame, it’s actually a smart practice for two reasons.

First, it allows us to gauge how a company’s management behaves during challenging times, like economic downturns. Second, consistent dividend payments indicate a company’s stable earning power.

Companies with dependable earnings tend to outperform, which is why investors love those with consistent dividend payments. This is also why the S&P 500 index includes a group of companies known as the Dividend Aristocrats, which have increased dividend payments for over 25 consecutive years.

However, focusing solely on the Dividend Aristocrats has its drawbacks. For one, why limit ourselves to the companies in the S&P 500 index? There are countless opportunities beyond these 500 firms. Additionally, if a company maintains the same dividend payment for two consecutive years, it’s removed from the Dividend Aristocrats list. The FALCON Method takes a more adaptable approach, focusing on companies with a long history of dividends without reductions.

While a strong dividend record doesn’t guarantee a great investment, it’s definitely a positive sign to consider.

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5️⃣ Don’t overpay for your stocks

inding a good deal is always satisfying, but in today’s digital age, sellers are well-informed about the worth of their goods. Still, bargains exist, especially in investing. If you can snag a discount, it’s like hitting the jackpot because over time, the price of your investment will likely rise to match its true value.

The trick is understanding that every company has a market-assigned price, which changes daily. This price often differs from the company’s true value, determined by its assets, financial health, and potential. By assessing a company’s true worth and considering the historical price of its shares, investors can buy shares when they’re cheaper than usual.

This strategy works because humans set prices, and we’re influenced by emotions like greed and fear. During market panics, for example, investors sell shares at low prices, presenting opportunities for savvy investors to buy quality companies at a discount.

However, going against the crowd isn’t easy. It means going against market trends and requires knowledge and a bit of courage.

It’s essential to note that this market trend works both ways. Just as prices fall during market downturns, they rise during periods of optimism. While it might be tempting to buy into soaring stocks like Amazon or Google, wise investors avoid buying into hype at inflated prices.

6️⃣ Stick to your own criteria

Now that we’ve narrowed down our list, it’s time to apply more advanced financial indicators for further refinement.

The FALCON Method relies on three main indicators: dividend yield, free cash flow yield, and shareholder yield.

Dividend yield measures the dividend a stock will produce compared to its price. It’s calculated by dividing the expected annual dividend by the current stock price. For example, if a share in Microsoft costs $10 and is expected to pay $1 in dividends, the dividend yield is 10 percent.

Free cash flow yield, often overlooked by investors, assesses the relationship between a company’s free cash flow and its market price per share. This is calculated by dividing the company’s free cash flow per share by its current market price per share. For instance, if Amazon’s free cash flow per share is $2 and its share price is $20, the free cash flow yield is 10 percent.

Shareholder yield indicates how much money a company returns to its investors through dividends and share buybacks. Share repurchases occur when a company buys back its own shares, increasing the value of remaining shares and future dividend payments. To calculate shareholder yield, add dividends and share repurchases and divide by the market capitalization of the company.

When applying these filters, establish minimum values for all three indicators. Avoid setting them too high, as even moderate values can be meaningful. If a company passes one filter, it still needs to meet the criteria of the other two.

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7️⃣ Rank the companies and only buy the best

In the fourth step of the FALCON Method, we don’t just rank stocks based on simple factors. Instead, we use something called weighted multifactor ranking, which considers multiple factors and assigns weights to each factor.

Let’s illustrate this with an example. Suppose we’re ranking two companies, Stock A and Stock B, based on three factors: dividend yield, free cash flow yield, and shareholder yield. We’ll assign equal weights to each factor, meaning each factor contributes 33.3 percent to the final score.

Stock A has yields of 5, 7, and 10 percent, while Stock B has yields of 10, 5, and 12 percent. By multiplying each yield percentage by the weight and adding them together, we calculate the final scores. Stock A’s score is 7.3, and Stock B’s score is 8.9.

While the example above uses familiar factors, the FALCON Method recommends incorporating new metrics that haven’t been used before. One such metric is a modified version of the Chowder Rule, which compares a stock’s current dividend to its potential for future growth.

The Chowder Rule adds a stock’s dividend yield to the percentage by which its dividend has grown in the last five years. If the dividend yield is above 3 percent, the growth percentage must exceed 12 percent; otherwise, it must exceed 15 percent.

However, focusing solely on a five-year timeframe may overlook crucial data. To address this, the FALCON Method suggests constructing multiple Chowder Rules with different timeframes (one, three, or five years) and using each as a factor in the weighted ranking.

8️⃣ Use your own judgment

Up to this point, the FALCON Method has relied on quantitative indicators to minimize psychological bias. However, subjective judgment can still be valuable when used cautiously, especially in the final stage of stock selection.

By deferring judgment until this stage, we ensure that all remaining stocks are exceptional investment opportunities. Here’s what to consider in making your final decision.

First, focus on the ROIC indicator, which stands for return on invested capital. This metric evaluates how efficiently a company’s management allocates its resources to profitable activities. A higher ROIC indicates better capital utilization.

Additionally, be wary of cyclical stocks, which experience wild price fluctuations. For example, consider the ten-year price history of Chevron Corporation, where prices swung dramatically due to market volatility in the oil and gas sector.

Investing in cyclical stocks may seem appealing, but it often entails significant risk. Predicting the bottom of a cyclical downturn is challenging, and volatile markets can lead to rapid losses. Moreover, cyclical investing contradicts the FALCON Method’s buy-and-hold philosophy, which emphasizes steady, long-term growth.

While qualitative judgment based on factors like ROIC and trading patterns can provide insights, it should serve as a final guide rather than the primary decision-making tool.

The first four steps of the FALCON Method have already identified top investment opportunities through structured rules and robust financial indicators. While no investment strategy is perfect, the FALCON Method, like its namesake, is precise and effective in hunting down exceptional investment opportunities.

The FALCON Method Review

The FALCON Method offers a precise and rational approach to investing, emphasizing thorough company evaluation and a commitment to long-term holdings.

Its systematic process focuses on identifying reliable dividend-paying stocks and employs strict filters to eliminate poor investments. By following the FALCON Method’s steps and utilizing its recommended financial indicators, everyday investors can increase their chances of growing wealth and generating passive income.

Put the FALCON Method into practice by conducting your own analysis. Start by compiling a list of companies from well-known indices like the Dow Jones Industrial Average or the S&P 500. Focus on identifying companies with a history of consistent dividends, and begin your investment journey with confidence!

🔥 Daily Inspiration 🔥

Living without a definite major purpose promises nothing but a scant living.

You may get by in life without a Definite Major Purpose, but you will never get ahead.

Definiteness of purpose is the starting point of all achievement.

Financial goals in particular should be specific, definite, and measurable.

You should know what you plan to earn, by when, and how you plan to do so.

The greatest advantage of financial security is the peace of mind that comes from knowing that, whatever challenges life brings, you are equipped to deal with them.

You will be better at whatever you choose to do because you can focus on opportunities instead of struggling to eke out a living.

— Napoleon Hill