U.S. House approves extending Bush-era tax cuts

WASHINGTON (MarketWatch) -- House lawmakers approved a two-year across-the-board extension of Bush-era tax cuts just before midnight on Thursday, capping off weeks of furious debate and ensuring that rates won't rise on virtually all Americans come Jan. 1.

The bill, already passed by the Senate, now goes to President Barack Obama for signature. It also includes a 2% rollback of Social Security payroll taxes; extends unemployment insurance for 13 months; and brings back the estate tax at 35% for two years on estates of more than $5 million. The House vote was 277-148.

This is a repost from: http://www.marketwatch.com/story/us-house-approves-extending-bush-era-tax-cuts-2010-12-17

NY Senator Charged with Embezzling From His Clinic

ALBANY, N.Y. – Pedro Espada Jr. has been at the center of two of the most tumultuous years the two-century-old New York Senate has ever seen.

Now, the bold and charismatic Bronx Democrat who plied his way from freshman to majority leader in six months stands accused of embezzling state grants he directed to his Bronx health clinic in some New York's poorest neighborhoods to pay for a cool car and a hot night life.

The U.S. Attorney's Office in Brooklyn and state Attorney GeneralAndrew Cuomo on Tuesday indicted the 57-year-old state senator and his son, Pedro Gautier Espada, 37, on six charges stemming from the activities involving the Comprehensive Community Development Corp., a federally funded not-for-profit in the Bronx known as Soundview. They are accused of embezzling more than $500,000 from clinic the senator founded for lavish spending, including a down payment on a $125,000 Bentley and $14,000 in tickets for sports and shows.

The indictment says Espada charged $110,000 in posh restaurants, including $20,482 at his favorite sushi place near his home outside his Senate District in Mamaroneck, and pony rides and a petting zoo at a family birthday party.

"In these difficult economic times, the charged crimes are all the more reprehensible," U.S. Attorney Loretta Lynch said.

Cuomo, New York's governor-elect, decried what he called looting and said the "cruel twist" was "they were using funds that were supposed to go to poor people."

"It's one of the more outrageous abuses of public office that I have ever seen," Cuomo said.

Espada is just the latest Albany politician to be indicted in office, and the second Senate majority leader in three years. But like former Republican Majority Leader Joseph Bruno who is appealing a conviction charge for mixing private business with his state power, Espada vows to take his case to court. Espada called the investigation that lingered throughout his two-year term as a political "witch hunt" by Cuomo.

Few doubt Espada will carry out his threat. He rose from impoverished street fighter in Puerto Rico to Fordham University graduate and boldly manipulated Albany's old-boy political power structure in the Senate. Within days of his election in 2008, his second stint in the Senate, the Democrat formed his "three amigos" coalition with two other Democrats to threaten his own Democratic majority. He demanded leadership positions in part for what Espada said was a needed Latino voice, or the three would join Republicans and end the Democrats' first majority in a half-century.

Espada won.

Then in June of 2009, Espada and freshman Sen. Hiram Monserrate of Queens, then under investigation for a domestic violence incident that would later cost him his seat, carried out the threat. They joined the Republicans, with Espada gaining the title Senate president. More than a month of gridlock ensued, with neither side recognizing the others' authority — even holding simultaneous sessions at one point and locking each other out of the chamber without a clear majority.

But when Democratic Gov. David Paterson appointed a lieutenant governor, in a constitutional gamble upheld in the courts, Espada returned to the Democratic fold. He also gained the powerful and lucrative majority leader's post.

With his bold suits of gold pinstripes in the Senate long dominated by white men in dark blue, the Latino had a charismatic manner in English and Spanish with all lawmakers, and possessed a shrewd political sense.

He became "Pete" to senators of both parties, who voted for him and often castigated him later. Hours before his indictment Espada issued a year-end report of the majority leader expounding on the importance of state grants for nonprofit agencies and taking credit for reforms in the Senate to make lawmakers accountable.

"I am proud to have served as the catalyst for this reform," he stated in a press release the Senate's Democratic majority refused to pay for. After the indictment was released, Espada was immediately stripped of his majority leader title and removed as housing committee chairman.

"Thirty years ago Senator Espada founded the Soundview Health Care Center," said his attorney, Susan R. Necheles. "Soundview has provided high quality health care to thousands of families, children and senior citizens in the Bronx. Today is a sad day for Soundview and a sad day for the Espada family. Senator Espada and his son deny any wrongdoing and we intend to fight the charges in court."

Espada lost his seat in the September primary, with most Democrats clamoring to be seen opposing him. Republicans used Espada's image in what appears to be their successful effort to win back the majority in the November election, pending an ongoing appeal of the vote.

Cuomo said taxpayer funds since 2005 were diverted for the Espadas' personal use.

"There was no doubt he and his son were looting Soundview for a lavish lifestyle," Cuomo, a Democrat, told reporters.

Cuomo said the Espadas could face up to 10 years in prison on each of five embezzlement charges, five years for the single conspiracy count and fines of $250,000 on each charge.

In earlier civil suits, which are still pending, Cuomo accused Espada of siphoning $14 million from his government-funded clinic, breaching his fiduciary duty, and seeking to remove him from the board. Authorities said the difference in amounts represents liabilities on the Soundview books not yet spent, including a severance package of at least $9 million.

"There's a culture in Albany that has been too tolerant of legal violations and ethical absences," Cuomo said.

*This is a repost from: http://news.yahoo.com/s/ap/20101215/ap_on_re_us/us_senator_indicted

Scapegoating: The Response to Underperformance

The institutional money management industry has a split personality.  One half is highly concentrated and stable, consisting of large banks and insurance companies offering generic products.  The other half is unstable, consisting of a large number of money managers offering active money management and specialized services.  In many ways this segment is like the market for restaurants and beauty salons, with customers always in search of new favorites and the latest hot spots.

A combination of private interests and behavioral phenomena provide the basis for the existence of this active segment.  Both frame dependence and heuristic-driven bias play major roles.

Frame dependence occurs as the sponsor divides responsibility for it’s portfolio across several active money managers.  These managers are evaluated relative to benchmarks.  The division of the portfolio gives rise to a mental accounting structure with particular reference points.  This leads investors to react more strongly to outcomes that fall below a reference point than to outcomes that lie above it.  Mental accounting also leads to the view that diversification means having variety across styles rather than maximizing expected returns subject to a fixed return variance.

An important aspect of active money management is scapegoating, or shifting regret to, the manager when returns are poor.  Given the fact that active managers underperform strategic asset allocation, the amount of underperformance may serve to measure the value of scapegoating.

Scapegoating is one explanation for why investors select active money managers.  Another is that investors are overconfident, believing the active managers they hire are likely to outperform strategic asset allocation.  

Forbes 2010 Investment Guide Backtest

It’s that time of the year again!  The time when I take out the back issues of Forbes, Fortune, Smart Money and Kiplinger to compare their hot stock, mutual fund, or ETF for the coming year to what actually happened at the end of the year.  This issue comes from Forbes’ Decemeber 14, 2009 so let’s see their hot picks!

Interestingly enough, this is their “Investment Guide” annual issue but it lacks the typical predictions on ETFs, emerging markets and alternative funds found in previous years.  The one thing they did focus on is a select few Healthcare Stocks.

The Buy

Cross Country Healthcare (CCRN):  At press time, the stock traded at $8.96.  It is trading today at $7.65.  Representing a 14% LOSS per share.

Mednax (MD): At press time, the stock traded at $57.20.  It is trading today at $64.17.  Representing a 12% GAIN per share.

Unitedhealth Group (UNH):  At press time, the stock traded at $28.97.  It is trading today at $36.89.  Representing a 27% GAIN per share.

The Sell

Boston Scientific (BSX):  At press time, the stock traded at $8.27.  It is trading today at $6.55.  Representing a 20% Reward* per share.  A reward would be realized when the investor saved money by dumping this stock if they owned it or they made a profit by shorting the stock.

Health Care Select ETF (XLV):  At press time, the ETF traded at $30.16.  It is trading today at $30.88.  Representing a 2% Missed Opportunity.

Johnson & Johnson (JNJ): At press time, the stock traded at $62.17.  Surprisingly, it is still trading at that price though it yields a pretty nice dividend of 3.47% so, technically that is a Missed Opportunity.

This backtest resulted in a below average rate of return on the buy side with +8.33%.  And, a value of +4.87% return on the sell side.  

The S&P 500’s YTD range is 1101.3 to 1223.9 which represents an 11.1% GAIN.

UPS Requires Photo IDs for Shipping

In the wake of the latest terrorist schemes to mail order a bomb, UPS is now requiring photo identification from customers shipping packages at retail locations around the world, a month after explosives made its way on to one of the company's planes.

UPS said Tuesday the move is part of an ongoing review to enhance security. The directive will apply at The UPS Store, Mail Boxes Etc. locations and other authorized shipping outlets. UPS customer centers have required government-issued photo identification since 2005.

In late October, a printer cartridge on a UPS cargo plane bound for Chicago was stopped in London after explosives were discovered. The package was later traced to a retail location in Yemen.

What can Brown do for you?

This is modified news article found at: Finance.yahoo.com

Hard Work is Here Again!

The free ride in the market is over – for those  investors relying on the sage advice of buy-and-hold.  Don’t expect to make money in the future buying just about anything.  What happened two years ago when stock prices fell through the floor was extremely atypical for stocks.  The market will likely be much more discriminating in determining whom it allows to be a “genius.”

Investors will have to know what they’re buying.  They’ll have to know why they’re buying it and best of all, they’ll have to know when to sell it.  They’ll have to make these tough decisions when the free ride comes to an end, as with what we’re seeing now.

Choppy, manipulated markets put a premium on knowledge and information.  And that means reevaluating what you own, upgrading your portfolio if need be, rebalancing to control risk, and restructuring your portfolio to reduce volatility.

An Investor’s View of Risk

In the real world, investors define risk in a variety of ways.  Mention risk, and many will begin to imagine total, irrevocable, gone-forever loss of their principal.  Fluctuation is not loss of principal.  It is just fluctuation.  Here’s an example that should make the difference clear.  Let’s say you decided that your backyard contains oil. After a million dollars spent drilling, it turns out that there is no oil.  No matter what you do, no matter how long you look at the well, no matter what happens to the price of oil, your money is gone. You have had an irrevocable loss of capital.

Let’s say that you took the same million dollars and bought a diversified investment portfolio (stocks, bonds, hedge funds, proactive asset management).  You then have an unusually bad result the first year, and lose 20 percent of your investment.  Well, you have had an interesting fluctuation, but have not had a capital loss if you can refrain from doing the very worst possible thing and pulling your money out of those investments while the values are down. 

Markets have always recovered in the past. Some took longer than originally anticipated, others faster than anyone can expect.  History indicates that all you must do to recover and go on to acceptable profits is to hang tight.  While an individual stock can go certainly to zero (think Enron, Lehman, and countless others), entire markets don’t.  Except for war or revolution, I am unaware of any market that has gone down without recovering.  As long as we expect the world’s economy to continue to move, the value of the securities markets will reflect that movement. 

Less Is More

Good asset management practices are strategic and evolutionary, not stagnant.  You must keep your long-term goals and objectives firmly in mind while allowing yourself the flexibility to evolve as new research provides better solutions to the risk management problem, or as new market opportunities present themselves.  Discipline is the key to success for the long-term investor.  He or she must not fall into the trap of managing holdings by newspaper headline, sound bites, mindless prediction, gut feelings, or last year’s results.

Developing a successful, modern investment strategy is a lot like gardening.  Both activities require patience, discipline, and faith.  Periodic reviews should be viewed as an opportunity for fine-tuning and corrections, not radical revisions and second-guessing.

How to Protect Yourself From Scam Artists

This list can be endless, but here are common ways many investors get sold on a fly-by-night investment scam.

• Never give any investment advisor a general power of attorney over your account.  Use a limited power of attorney to authorize your advisor to make trades within your account for your benefit.  There is never a reason to name an investment advisor as owner, contingent owner, or joint owner of your account.  It shouldn’t be possible for any other person to ever receive a disbursement from your account.  Your brokerage or trust company should only disburse to you at your home address or to your bank account.  Insist on confirmation of all account activity (this may not need to be sent to you by paper), but easy access to all transactions online should suffice.  Never use your investment advisor’s address as your address to receive statements.
• Select strong custodians for safekeeping of your assets.  Use major brokerage houses or trust companies that are properly insured, audited, and regulated.  Don’t let some Jabba The Hut, little financial institution act as custodian of your assets.
• Remember that if it sounds too good to be true, it probably is.  Con artists almost universally appeal to investor’s greed and unrealistic expectations.  They can’t exist without gullible people willing to believe the unbelievable.  By now you should have a good feel for the range of reasonableness in various investment markets.
• Consider carefully whether you need a guide.  Many investors shouldn’t try to go it alone.  Investing professionally is a full-time job.  It takes specialized knowledge and significant resources.  The field is rapidly evolving.  It takes a great deal of time just to keep up with the research.  Evaluate whether you have the skill, judgment, discipline, and experience to do a proper job.  Your investment plan is your future.  It’s too important to leave to amateurs.  Just because you’ve read some book on how to perform surgery does not make you a surgeon.
• Avoid commission sales.  All financial professionals get paid.  And, of course, all of them have an interest in attracting your business.  You can’t expect any of them to send you to the competition.  How they get paid, however, can have a very significant effect on the nature of their recommendations.  In fact, how you pay for advice may be much more important than how much you pay. 

Home prices falling faster in most metro areas

By The Associated Press

NEW YORK – Home prices are falling faster in the nation's largest cities, and a record number of foreclosures are expected to push prices down further through next year.

The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday fell 0.7 percent in September from August. Eighteen of the cities recorded monthly price declines.

Cleveland recorded the largest decline. Prices there dropped 3 percent from a month earlier. Prices in San Francisco, Los Angeles and San Diego, which had been showing strength this year, also dropped in September from August.

Washington and Las Vegas were the only metro areas to post gains in monthly prices.

The 20-city index has risen 5.9 percent from their April 2009 bottom. But it remains nearly 28.6 percent below its July 2006 peak.

And home prices have fallen in 15 of the 20 cities in the past year.

Prices rose in many cities from April through July, mostly boosted by government tax credits which have since expired. Job worries and record high foreclosures are dampening buyer demand and weighing on prices.

The national quarterly index, which measures home prices in the nine U.S. census regions, dropped 2 percent in the third quarter from the previous quarter.

This is a repost from: http://news.yahoo.com/s/ap/20101130/ap_on_bi_ge/us_home_prices

A New Breed of Financial Advisor

Deregulation, along with advances in Internet Technology, has spawned an entire new breed of professional advisor.  Fee-only advisors can now operate from any place with a plug-in phone line and an Internet connection, bringing low-cost, independent, objective, professional advice of high quality and sophistication right to the investor’s neighborhood.  The clear separation of the sales or brokerage puts the advisor on the same side of the table with the client.  Wall Street’s abuses have been so frequent, and the advantages of fee-only compensation so obvious, that the demand for the new advisors has fueled explosive growth.  While fee-only is a far better way to deliver service and advice, it doesn’t guarantee competence or even honesty.  Investors must still do their due diligence when selecting an advisor.  Investors should get familiar with the SEC’s website or FINRA.  Both sites offer tremendous information for researching legitimate financial advisors.

All that remains is for the individual investor to take advantage of the gifts he has been given.  Everywhere the investor looks, things are better and growing better still.  But the investor must look.  The brokerage industry, the fund companies, and the media all have no deep commitment to providing fundamental education for the investor.  Bad advice is far more profitable than good advice for nearly all players.  Wall Street’s profits are simply not linked in any way to investor profits.  As long as turnover is high, the Street wins either way.  With almost 20,000 mutual funds clamoring for shelf space and public attention, hype is the order of the day in fund advertising.  And, as long as Americans will buy dangerous drivel posing as serious financial commentary, the medial will happily provide it.

America is a land of shocking financial illiteracy.  Few investors have any kind of long-term plan at all; few recognize the dimensions of the problem facing them, yet most are supremely confident of their abilities.  Most indulge in self-destructive financial behavior and lack even basic discipline.  Predictably the results of this muddle are dismal.  Projecting these results forward generates visions of almost unimaginable financial hardship as the boomers march off to retirement without the financial assets to sustain them.

The Fee-Only Alternative to Business as Usual on Wall Street

Traditional Wall Street firms have failed to deliver credible, objective advice.  Their commission-based compensation system irreparably taints the advice process with conflicts of interest and hidden agendas.  But there is a viable alternative to the commission-crazed, churn-and-burn stockbroker.  The independent, fee-only registered investment advisor offers objective advice, superior service, and economical and effective execution

The vast majority of these firms are relatively small, without the marketing clout of the giant institutions.  So, they are not “top of mind” when investors seek out advice.  But they offer a key invaluable advantage: objective advice.  Because a fee-only advisor derives all of his income from fully disclosed fees paid directly by the client, conflicts of interest are virtually eliminated.  There remains no financial incentive that would prevent the advisor from providing the very best advice for each individual.  So, while the advisor may not always be “right” in his counsel, there are no hidden agendas, or conflicts of interest to cloud his vision or taint the relationship.  And, after all, what good is advice if it’s not objective?

The demand for impartial professional advice is enormous and growing.  For instance, since 1989, assets with Schwab’s Financial Advisor Service have grown to nearly a half trillion dollars managed by 5,600 independent registered investment advisors!  Fidelity and Waterhouse are also experiencing exponential growth in similar services, with others entering the fray close on their heels.  Clearly, Americans are looking for unbiased professional advice and an intelligent alternative to Wall Street’s commission-induced conflicts of interest and voodoo-based investment schemes.

The Problem with Hearing it Through the “Grapevine”

My recent post from yesterday talked about how it feels like an eternity when going through a period of negative performance in one’s portfolio.  And how relative pain is remembered more than relative joy during a downturn.  Continuing from that topic: The proverbial “grapevine” makes matters worse.

Marvin Gaye’s hit song, “I Heard It Through The Grapevine” is about gossip, but for our purposes, it is about two investors, one is producing positive returns in his portfolio, the other is producing negative results in his.  This is almost always the case, no matter how bad things may get for our investor, somewhere somebody is making money.  Those people will certainly tell all within earshot, to make matters worst.  Most investors have a very selective memory.  We all seek approval, and we all would like to be considered astute, sophisticated, and successful.

During social gatherings or casual conversations it’s not unusual to stress the positive and repress the negative.  So the investment winners in our portfolios tend to get talked about more than the losers.  Investors with disappointing recent performance will say nothing.  After all, who wants to broadcast failure?  So, the winners brag, and the losers keep silent.  Soon, it may seem to our poor investor like everybody with an IQ over room temperature is making money except him.

So the temptation to second-guess himself grows and grows.  If only his advisor had been more astute, he would be making money too.  Perhaps it’s time to try something else like all those other smart investors are doing.

Once this kind of cycle starts it can deteriorate into a tail-chasing fiasco.  At least dogs that chase their tails remain on level ground.  Investors can dig themselves into a hole as they ratchet themselves ever downward chasing yesterday’s hot stock, hero fund manager, or top performing mutual fund. 

It’s easier said than done, but we have to ignore the grapevine.  And the braggarts of today, will become tomorrow’s silent listener.

The Market Can Beat Up Rambo

America is a can-do country.  Our heroes are action-oriented and full of the right stuff.  Most successful people got that way by using their skills to make something happen.  Rambo claimed authority by showing up with the biggest gun!

Business responds well to can-do, positive, and active management.  If business turns down, there are lots of things a smart business person can do:  Make more phone calls, hire more sales-people, buy advertising, change the product, have a sale, fire the sales manager, buy the competition, increase commissions, or move to a better market.  Success in business depends on active management.

Investing on your own (particularly in stocks, bonds or mutual funds) is a different kind of animal.  It is a very passive activity.  Markets don’t respond to our can-do attitude.  We can’t just whip them into shape. It doesn’t care if you brought a knife to a gun fight.  They have their own flow.  So, we must attach ourselves to the market’s movements and allow it to carry us to our goals.

More often than not, if you have a good strategy in place, the best single thing an investor can do during a disappointing season is nothing.  Of course, this type of thinking can make a successful, can-do, action-oriented, gung-ho investor just a little crazy.  During times of stress, negative performance, or no performance, he wants to do something.  All kinds of self-defeating behaviors come to mind:  Fire the advisor, liquidate the account, move to another brokerage, sell the funds, anything other than sitting still!  The fund that looked so good during last year’s big recovery now looks like a turkey. An advisor who remains focused on the long term, staying put, and maintaining the course of the plan, obviously must be some kind of wimp right?  Any idiot can see things are falling apart and the Rambo in all of us demands action now!

Investor impatience is compounded by a relative pain, relative time problem.  Portfolio downturns hurt a lot more than good times feel good.  it is much more painful to see your portfolio lose one percent than pleasant to see it gain one percent.  And it feels longer.  Two years of back-to-back declines, underperformance, or even just no performance can feel like a lifetime.  And, as we have seen, even a superior portfolio will go through occasional extended periods of disappointment. 

Look Forward NOT Backward!

Smart investors use volatile markets to upgrade their portfolios.  A common mistake investors make during market downturns is that they look backward, not forward.  Investors fixate on lost profits, on what they should have done.  This takes their eyes off what they should be doing to make money going forward. 

You cannot undo the past.  Smart investors don’t miss the future by looking at the past.  They take their lumps, learn their lessons, and do what they can to position their portfolios for the market’s inevitable reversal.  That means smart investors use volatile markets to trim their exposure and adjust accordingly. 

That’s the beauty of the market: at every ups and downs, there’s the probability to profit. 

Bottom line:  Nobody can tell you with certainty the perfect time to invest.  Nobody knows with certainty when a market has bottomed.  What I do believe can be said with a high degree of certainty is that markets move through peaks and troughs.  I can’t guarantee prices will be higher five or ten years from now, but history shows that a consistent investment program produces success over the long term.

First-Hand Experience In Fundamental Economics

Yesterday as my family and I were going into Target (TGT) to browse the toy section for holiday gift ideas, we witnessed a middle-aged man with a cart full of baby products (diapers, wipes, baby lotion, baby shampoo, and a small baby toy) walk out of the store without paying.  There were many people around, some noticed as we did, some didn’t and it was a busy time of day, almost perfect to pull off such a heist.

The man had a determined look on his face, almost a desperate, “I don’t know what else to do” look.  He simply focused straight ahead to the exit and never looked back. 

This is a prime example of how inflation affects America today.  Forget the recent Quantitative Easing solution that is “supposed” to help the economy, in truth all that money that pumped into the system only went to the top-tier citizens of the United States anyway.  The same citizens that caused this demise in the first place!

But, I can relate with the shoplifter, after all I have two young kids of my own, and a baby on the way.  Diapers costs $45 per box of 216 pieces.  Babies go through 8 per day on average.  So, in a little under a month, you’re spending $45 dollars on diapers alone, wipes come to about $20 per box on top of all the other expenses required for a baby.  Crib and crib mattress, sheets for the crib, a changing pad, strollers, car seats, appropriate-sized clothing, formula (if not breastfed), bottles for the milk, bottle warmers, disinfecting bags for pacifiers, bibs, and the list goes on and on!

Desperate times calls for desperate measure, and with the economy the way it is, where jobs are gone, incomes are down or at a plateau, consumer prices are up, the dollar value at an all time low, and lending institutions tightening their standards.  It’s no wonder some can be driven to bunk the system and steal. 

Brace yourselves, my feeling is, more and more people will be driven to do extreme things.

Simplicity Leads to Calmness

A big part of succeeding during volatile markets is staying calm.

When you’re calm, you make much better decisions.  When you’re calm, you don’t overreact to circumstances.  When you’re calm, you think more clearly. 

Being calm prevents you from making mistakes, in trading and in life. 

Of course, knowing you should be calm during crazy markets is one thing; actually being calm is quite another.

One way to ensure that you maintain a measured, calculated approach to volatile markets is by having a clear handle on your financial position and a clear plan of attack.  You do this through simplifying your investment approach.  Instead of choosing four or five stocks out of 7,500 or four or 5 mutual funds out of 19,000 to put in your portfolio, reduce the burden by Indexing.  This way, your costs are low and the probability of success increases in your favor.

The best piece of advice I’ve read about when it comes to trading strategy is the “KISS” concept.  Keep It Simple, Stupid!

I can’t think of any time when simple doesn’t beat complex.  That’s especially the case during volatile markets.

Be A Partaker, Not An Outsmarter

There are two kinds of investors:  Outsmarters and Partakers. 

Outsmarters believe they’re so clever they can beat the system, through inside advice and superior brainpower.  Partakers understand that the best way to make money is to share in the profits of successful businesses, by buying stock in Apple, Cisco, Walmart or McDonalds, for example.

Many investors, especially baby boomers, who are convinced they were born more brilliant than everyone else, begin their investing careers as Outsmarters.  They invariably get outsmarted themselves.

According to Bill Clinton’s autobiography, that’s exactly what happened to them in 1978.  They went into a typical Outsmarter deal-borrowing money to buy land in the Ozarks through Whitewater Development, a company they set up with an insider named James McDougal, along with his wife Susan.  Real Estate is especially tempting to Outsmarters since it’s a game in which the other players often appear to be rubes.  In this case, however, the Clintons and McDougals bought land for $880 an acre from a group that had purchased the property just 19 days earlier for $440 an acre.

The intention of the Whitewater investors was to find people to buy the lots at more than $880 an acre and make a big profit.  But in the end, they found that such buyers did not exist ($440 an acre turned out to be the right number).  The Clintons lost $68,300, according to an accountant’s report they commissioned.

The Clintons are just an example of Outsmarters out there as there are a lot of them.  There are, for example day traders, who think they can profit from tiny ups and downs of stocks over minutes or hours.  I do not doubt that some people can make a profit this way-after all, some people are born with the ability to throw a baseball 100 miles per hour.  But, beyond a tiny fraction of super talented and super-dedicated, day traders eaten up by the transaction costs-the commissions, the spreads between bid and asked prices and the interest incurred in buying stocks on margin.

Other Outsmarters are bottom fishers.  They figure they can identify stocks that have plunged but will soon emerge from the depths.  Occasionally, a smart investor will win by betting on these kinds of stocks, but most of the time…no.  When a stock is exceptionally cheap, there is almost always a reason. 

Remember that a stock that’s fallen can keep falling.  Did Internet Capital Group look like a good buy after it had declined from $196 to $45 in the first four months of 2000?  I sure did, and got burned in the process.  Over the next year it dropped to 34 cents.

Partaking, on the other hand, is the ticket to success in the stock market.  Investing in an index fund with an option to go Inverse (to profit when prices fall) is a way to share in the long-term growth and trend of the U.S. economy. 

My own preference is partaking in the growth of great companies.  Occasionally, it strikes me how incredibly generous the stock market is.  At little cost, I can become a partner in a business like GE, Microsoft or Apple, tagging along on a very profitable ride. 

Avoid Buy And Hold, Sell Your Big Loser!

I’m not a big fan of losing 70% of my money by riding down a stock that I should have dumped.  That’s the problem with buy and hold, it prevents you from selling investments.  You always risk having the big loser.  And that big loser can wreak havoc on a portfolio.

I read a story of a successful investor who, when on straight-to-the-point novice asked what this man’s secret of investment success was, replied simply, “Don’t lose.”

Take a stock that plummets from $100 to $20 per share.  That’s a decline of 80 percent.  But, for that stock to return to $100 per share, that price would have to rise 400 percent!

Now, take a portfolio that declines 50% (and many portfolios have declined 50% or more over the last few years).  The math here is quite simple.  In order to recoup your loss, the portfolio must increase 100 percent.

If you think about that in terms of time, the number of years required to recoup the loss (based on the stock market’s historical annual return of approximately 11 percent) is nearly seven.  In other words, based on historical market returns, a 50% decline in your portfolio shaves roughly seven years off your investment program.

Now, while nobody wants to lose seven years off an investment program, you can afford to play catch-up if you have an investment time horizon of at least 20 to 30 years, especially if you are willing to invest more money when stocks are down.

However, if you are someone in his or her fifties or sixties, the cost of losing big is even steeper.  You just don’t have enough time to make up the lost years as a result of one big hit.

Bottom line:  To everything there is a reason, including selling.  Volatile markets put an even greater premium on selling, as violent market moves can reduce capital gains in a surprisingly short period of time.

Stop Swinging For The Fences!

You don’t have to have your homerun hitters at bat every time to create wealth in the stock market.  A reasonable annual return and time will do the trick.  Swinging for the fences, whether it be concentrating your portfolio in just one or two high-flying technology stocks or buying penny stocks, also increases your chances for that killer loss that will take years to recover.

Indeed, investors who swung for the fences in recent years now wish they had choked up on the bat and slapped some singles.

Remember: The secret of investment success is to continue to set aside money to invest over time, and to generate a reasonable rate of return each and every year while avoiding the big loss. 

That alone is more than enough to make you achieve your financial dreams.

Can Money Managers Add Value To Your Portfolio?

Based on a dismal record of money managers to outperform benchmarks, we have to take the argument that markets are efficient very seriously.  Recent statistics shows that 0.002% of Hedge Fund managers outperform the S&P 500 over a period of 5 years time!

When we go about building our investment strategy, benchmark, style, or passive and active investing, we must consider the overall average performance of each investment class over a period of at least five years.  Doing so, ensures your money has staying power.

In our own practice, we use only institutional-class index funds.  Today it is possible to index almost the entire world.  I think that approach gives us the highest probability of a successful outcome with the lowest risk.  To the extent possible, I want to see predictable results.  I hate underperforming the benchmark more than I would enjoy overperforming.  That makes me pretty much like my clients: risk averse. 

On a side note:

A special thanks to Dr. Karl W. Einolf, Ph.D. of Mount St. Mary’s University for allowing me the opportunity to lecture his Corporate Finance classes yesterday.  It’s truly an honor and I hope I was able to impart some practical knowledge for the students as they go on to graduation and beyond! 

How to Strengthen a Team

I was studying the importance of team work in the Financial Services industry the other day and I realized that too many people are trying to do all the work themselves alone.  At the end of the day, they wonder why they have yet to see any changes in their bottom line. 

Being in a team environment significantly improves your chances of success but once you join or form a team, you need to strengthen it.  There have been many books written about building teamwork, but there are basic elements I have seen that make the most difference.

Align Values

Sharing similar values will strengthen a team.  Examples of values include work ethic, shared vision and goals, compensation of support staff, communication, and investment philosophy. 

Promote Commitment

The best teams are those whose members are committed to the growth of the team, with each member being willing to commit a lot of energy to the team’s success.

Promote Good Communication

Good communication is essential to a team’s success.  As in any relationship, good communication overcomes most problems.  The team should encourage communication by all team members and provide opportunities for team members to share their opinions on how to make the team better.  One of the greatest benefits of a team is the ideas and creativity that can result when the team members are all motivated to improve the team.  All team members should have the opportunity to review and give input regarding all aspect of the team’s activities.

Build In Measurement and Accountability

Every team member should be held accountable for her responsibilities, and team meetings should be held to review accountability.  These meetings motivate all the members to excel, so that they can proudly share their results at team meetings. 

In the long run, working toward parity is best.  If the split is not even, there should be an incentive for all team members to get an equal share as the team’s business grows.

What is Quantitative Easing?

If you follow Financial news, you no doubt have heard of the Fed decision to inject another 600 Billion Dollars into the system by purchasing Treasury Bonds and to “maintain low interest rates” in a strategy dubbed “Quantitative Easing.”

Quantitative Easing (QE) is an extreme monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system.  In short, it is printing money.   

QE can trigger higher inflation or even hyperinflation if too much money is created.  It can fail if banks are still reluctant to lend money to small businesses and households in order to spur demands. 

To put it simply, people who have saved money will find it is devalued by inflation; however those who have debt will see the value of that debt decline.  Those who own homes will see the value of the increase as more devalued dollars are needed to purchase the home.  The value of the debt on that home will decrease as the number of dollars needed to settle the mortgage will remain constant and can be paid with future devalued dollars. 

Before the Fed decided to force this policy on us, maybe they should have taken a popular vote.  Oh wait, voting is a right in democracies not, dictatorships.

GOP Takes House, Democrats Keep Senate

The Republican Party took control of the House of Representatives in Tuesday’s election, dealing a withering blow to President Barack Obama, but Democrats narrowly clung to a majority in the Senate.

Republicans were projected to nab 60 seats in the House, Fox News said, easily exceeding the 39 needed to capture control of the chamber from the Democrats for the first time since 2006.

Rep. John Boehner, the Ohio Republican who is likely to become Speaker of the House, said that Tuesday’s results were a repudiation of big government and sent a message to Obama.

“That message is: Change course,” Boehner said.

Senate Majority Leader Harry Reid, meanwhile, won re-election after a fierce fight with Sharron Angle, one of Election 2010’s most visible tea-party candidates. Republicans were projected to gain at least six seats in the Senate.

“Today, Nevada chose hope over fear. Nevada chose to go forward, not backwards,” Reid told supporters in his victory speech. The embattled lawmaker vowed to press on for jobs, later adding: “The bell that rang wasn’t the end of the fight, but the start of the next round.”

The re-election of Reid sets up a faceoff against Boehner, as he still will oversee the Democratic-controlled Senate — but one with a few more Republicans than in the current session of Congress.

The size of the Republican wave was evident early on. Democrats lost bellwether House contests in Virginia and Indiana, with Reps. Tom Perriello and Baron Hill falling to their Republican opponents in closely watched races. Rep. John Spratt, who chairs the House Budget Committee, fell to Republican Mick Mulvaney in South Carolina after jousting over health-care reform and Obama’s stimulus bill.

Rep. Barney Frank, the chairman of the House Financial Services Committee, won re-election from Massachusetts. Meanwhile, 26-year Democratic House veteran Paul Kanjorski, who wrote major parts of the Wall Street reform bill, lost to Republican Lou Barletta in Pennsylvania.

Before the election, polls showed a majority of Americans were dissatisfied with the economy, with unemployment near 10% and the deficit at a near-record $1.3 trillion at the end of fiscal 2010.

But anger about the economy wasn’t widespread enough to return the Republicans to the majority in the upper chamber. An early win by Democrat Joe Manchin in West Virginia meant that the Senate was on track to stay in Democrats’ hands.

And the Republican tidal wave steered clear of California, as voters were returning Jerry Brown to the governor’s office and fellow Democrat Barbara Boxer was barely keeping her Senate seat, early returns showed.

The two Democrats took on two former tech titans from Silicon Valley and prevailed. Brown defeated one-time eBay Inc. CEO Meg Whitman in his race, overcoming Whitman’s massive $173 million campaign war chest, $141 million of that coming from her personal fortune. Meanwhile, Boxer edged out ex-Hewlett-Packard Co. Chief Executive Carly Fiorina for her seat.

Americans worried about the economy and jobs voted in all 50 states Tuesday for all 435 House seats and in 37 Senate races, as well as for 37 governorships.

Rand Paul, an eye doctor and son of Rep. Ron Paul of Texas, became the anti-spending tea-party movement’s first senator, and kept a Kentucky Senate seat in the Republican Party. Dan Coats’s victory in Indiana gave Republicans their first pickup of the night; he took the seat of retiring Democratic Sen. Evan Bayh.

This is a repost from: Marketwatch

Keep Investing, Even During Bear Markets

Too many people allow their investing habits to be influenced by whether the market is a “bear" market” or a “bull market.”  During “bear markets,” when stock prices are undergoing a general decline (the typical bear market since 1899 has lasted about fifteen months), many investors refuse to invest.  Admittedly, it’s difficult to invest when stock prices fall almost daily.  Nevertheless, the only way you make a long term investment strategy works is to maintain your investing plan during bear markets.  That’s how you build positions to take advantage of bull markets. 

Smart investors buy during bull and bear markets.  When millionaire investors were asked if their investment style differed from bull markets to bear markets, 70% said that they invested no differently.  In other words, to these investors, bull or bear markets are just labels for the same thing; a place to invest and grow your money over time.

Top 5 Reasons Apple Stock Can’t Go Higher

Call me a pessimist.  But, if you’ve been following Apple closely (like we all do in this business), I’m sure you get the feeling that this relentless push to the upside has reached its upper limit.   As of this writing, Apple is trading at $305.29 per share and an analyst made a rather bold prediction that Apple’s stock price will reach $390.00 a year from now or sooner. 

Here are the reasons why this is wishful thinking.  And, to refrain from public humiliation, I will not name those brave Apple cultist-er…analysts.  By the way, I’m a certified Apple ‘Opinionator’ meaning, I have earned the right to criticize this company as I was a PC-turned-MAC convert and back to PC again (see why on number 2)!

1. Their products are too expensive.  Of course, I’m not just talking about the initial sticker shock of their new products for sale.  But, the used Apple product prices are beyond reason to me.  Case in point; found on Craigslist, a 2-year old iMac 24” (base model) listed for $1500.  For that amount, I can get my hands on a PC with four times the computation power and storage space.  Call me crazy, but sooner or later, consumers will wake up to the fact that “being cool” isn’t worth the price tag anymore.
2. Apple product life is too short (but maybe they designed it that way).  Three years ago I decided to see what all the hoopla was about and bought myself a brand new ($2,200) 24” iMac with the anodized aluminum trim and a cool factor of 11 out of 10.  When the thing won’t turn on anymore, I went to the local Apple store to get a repair diagnosis and cost estimate.  And, without writing the 4-letter word in all caps here, I will just say that having the extended warranty run out, a dead iMac and a 4-digit cost-to-repair estimate in my hands did not turn my frown upside down.  If I had given the okay to repair my iMac, my total 3-year cost to own would have been a whopping $3,400!  I asked myself, is being “cool” really worth it? 
3. The Mac OS is not as stable as the company claims them to be (it crashes just as frequently as Vista).   If their Mac OS Snow Leopard – or whatever cat they’re on now, is really rock solid as they claim them to be, then why do they only function under Apple hardware?  If what they produce is of true value, then it would work in a multitude of hardware and software environments.  Windows 7 64-bit and Ubuntu 10 are viable, feature-rich alternatives but best of all, they work with millions of hardware configurations so consumers are not locked in to Apple-specific (expensive) units.  And by the way, Ubuntu is FREE (it’s what CAM Trading relies on for file backups and redundancy).
4. iPad.  What is the point of this product?  My guess is, to look cool in public places!  I can tape three one-hundred dollar bills to my forehead and get more noticed in public than a $600 iPad.  What, the hundred dollar bills on my forehead can’t check email at a Starbucks you say?  You’re right, but who are you to think you’re so important that you can’t wait to get home to check your email on a 200 dollar PC?  Get a life!
5. Apple TV.  For years, Apple has been digging for gold to come up with a viable formula for ultimate sales success.  But, new LCD TVs are here with Netflix-ready and internet access.  This eliminates the need to buy a separate device for streaming movies and shows.  I believe Apple should cut their losses and exit out of that foolish product line. 

I realize that what I’m saying may offend a lot of people, but you can always put your money where your mouth is and prove me wrong by buying a few shares of Apple stock today to hold for a year!

This article should not be construed as financial advice.  In fact, anything written here should not be taken as financial advice and that you should seek the counsel of professionals before making changes to your investment portfolio. 

How Advertising Distorts the Need for Saving

The “branding” of America is the most insidious part of our culture.  Now, entire personalities are subsumed into brands.  Lebron James is a brand.  Jerry Bruckheimer is a brand.  Every supermodel and pop singer is a brand.  There are few places you can escape logos such as the Nike “swoosh” or Mickey Mouse ears.  The brands scream only two messages at us: “You’re not good enough,” and “Spend.”

Advertising is a huge reason why people don’t invest.  Advertising is a shell game that sets us up for the quick thrill, eternal youth in a bottle, sex at the beach by drinking a brand of beer and buying a lot of things that do absolutely nothing for us.  Instead of saving the money we would be spending on some gadget, vehicle, or wardrobe, we could be could be investing in our children and ourselves.  Advertising is the deep end of the ocean.  When we succumb and sink into it, there’s no bottom to the spending. 

Turn Off the TV and Start Saving

The more TV a person watches, the more he/she spends (based on the advertising they absorb).  Actual research by Dr. Juliet Schor from Harvard found that for every extra hour spend watching TV, the subjects spent an additional $208 per week.  On average they spent an additional $2,300 a year in unplanned expenditures. 

TV and Advertising distorts the view we have of ourselves.  Advertising is designed to make you feel uncomfortable about yourself, your possessions, and everything around you.  If you are perfectly secure and comfortable, then you won’t feel the need to buy the thousands of products being marketed. 

Be Careful When Browsing the Internet

Personally, I use the Firefox browser with an Add-on called Adblock.  What this does is prevent website ads from appearing when I visit sites online, thereby removing my temptation to buy some gadget I won’t have use for after two days of purchase. 

The Real Truth about Saving and Spending

If you take away nothing else from this on cutting out the influence advertising has on your life, know this: If you spend less, you’ll quickly save more.  I know this sounds like a big “duh,” but there is a powerful spiritual component to savings as well.  Being in deep debt is a form of slavery-to your creditors.  If you are working just to pay bills, you are shackled to what you owe.  It’s a lonely impoverishing situation. 

Mother Teresa noticed it when she visited the United States:

“There are many kinds of poverty. Even in countries where the economic situation seems to be a good one, there are expressions of poverty hidden in a deep place, such as the tremendous loneliness of people who have been abandoned and who are suffering.”  

Nine Questions to Determine If a Business is Truly an Excellent One

When we think of investing in great businesses we normally try to put on a famous investor’s hat to go with our line of thinking.  Maybe it helps us make better decisions, or maybe, it’s just fun to pretend like we’re Warren Buffett and we’re making investing decisions that will alter the course of history.

I have found that it is easier break this part of the analysis into a series of questions.  Warren Buffett uses a similar approach when he is trying to determine the presence of the consumer monopoly, exceptional business economics, and shareholder-oriented management.

Let’s ask the following questions:

1. Does the business have an identifiable consumer monopoly? 
2. Are the earnings of the company strong and showing an upward trend?
3. Is the company conservatively financed?
4. Does the business consistently earn a high rate of return on shareholder’s equity?
5. Does the business get to retain its earnings?
6. How much does the business have to spend on maintaining current operations?
7. Is the company free to invest retained earnings in new business opportunities, expansion of operations, or share repurchases?  How good a job does the management do at this?
8. Is the company free to adjust prices to inflation?
9. Will the value added by retained earnings increase the market value of the company?

These nine thoughts should spark revelation.  Kind of like trying to figure out if your blind date is a hopeful for the altar.  Ever been married?  Been to college?  Has a good job?  Does he or she snore?

We should do the same thing when we allocate capital to investment. 

As Warren says, “it is better that one act like a Catholic and marry for life.”

Be Proactive Instead of Reactive

We’re probably the only firm in the investment business who doesn’t have CNBC blaring in the background of the office.  We do have computers that can stream live TV but usually it’s to keep up with shows like The Office or World Cup (when they were showing it).  But we rarely tune into CNBC.  One reason is that I’m afraid of what I’ll do if I’m inundated with news all day.

I can see why people get caught up in short-term thinking watching CNBC.  One day feels like a lifetime given all the stuff that is reported each day.  This company’s earnings.  That company’s lawsuit. This new CEO.  That new product.  This hot new IPO.  That new technology.

And the opinions.  Everybody has an opinion on Wall Street, and CNBC makes sure you know everyone’s opinion.  Every minute of every day. 

It’s enough to drive you nuts.  Or at the very least, enough to make you do things in your investment program that you shouldn’t. 

If you asked the reporters at CNBC if what they’re reporting has lasting significance, I doubt they could say yes, and mean it.  So why do they report it?  Because they have a bunch of time to fill.  So they tell you what the producer price index did this month.  They tell you that payrolls declined 2% for the month.  They tell you of analysts downgrades, upgrades, and opinions.  Does any of this truly matter in the long run?  No.

Reacting to news on CNBC or any other financial media outlet is a loser’s game simply because this information may be “news” only to you.  You are not first on the information food chain.  If you read about something in the Wall Street Journal, you’re not alone.  Millions of other investors also read it, and millions more investors knew about it 24 hours earlier when the “news” actually took place.  It’s silly to think that what you hear on CNBC gives you a leg up in the information game.  Chances are, the stock already is reflecting the information by the time you decide to move on the “news.”

Don’t get chased out of stocks (or any financial instrument) simply because of a single news event that the financial media trumpets as being important.  Chances are, that news event is some trivial piece of data whose primary value is to fill air time.

Overcoming Investing Hurdles

I’m sure you have many reasons for not starting an investment program.

• No money.
• No knowledge.
• No time.
• No broker.
• Too old.
• Too young.

I’m sure you think these are legitimate reasons.  They are not. 

There are no good excuses for not investing.  I don’t care how young or not so young you are.  How rich or not so rich you are.  How much you know or don’t know.  It has never been easier or cheaper to invest. 

If you have just $50, there are literally hundreds of investment opportunities awaiting for you, including with our own firm, CAM Trading.  If your employer offers a 401(k) plan, you can invest as little as 1% of your salary.  That means if you make $400 a week, you can invest as little as $4.00. 

Four bucks.

And you don’t need a broker to invest.  You can buy some of the best companies in the world without a broker and for little or no fees.  Nor do you need a broker to buy some of the best mutual funds in the business. 

In short, there are no excuses for not investing.  So, start now and get in the habit of it, you’ll appreciate the results in the future!

Start Them While They’re Young

If your youngster shows an interest in investing, it has never been easier to get him or her started regardless of age.  Once an individual reaches the age of majority (eighteen years in most states), he or she may have an investment account registered solely in his or her name.  Youngsters under the age of eighteen are not permitted to have their own brokerage accounts.  However, several ways exist for parents to introduce interested youngsters to investing. 
Dividend reinvestment plans (DRIPs) may provide an interesting investment vehicle for kids.  Many child-familiar companies offer DRIPs-Walt Disney, Mattel, just to to name examples.  Since many DRIPs permit very small investments, the programs are a good way for youngsters with limited funds to start investing in the stock market.  Through Sharebuilder, youngsters can have an account setup for them to buy stocks in specific dollar amounts automatically.  Don’t have $300 to afford a share of Apple stock?  No problem, Sharebuilder offers fractional share purchases.
If you decide to establish an investment account for a minor, consider carefully how you want the account registered. If you choose to have the account in your own name, you will be responsible for taxes on the account.  The good thing is you will also retain complete control over the account for as long as you want. 
An alternative is to set up the account as a Uniform Gift to Minors Account (UGMA) through reputable brokers like Rydex, Fidelity and Cam Trading. Funds in the account are in the minor’s name and Social Security number and are considered to be owned by the minor.  Dividends paid on the account are taxable, most likely at a preferred tax rate.  The adult custodian is responsible for the account until the minor reaches the age of majority.  Parental control is lost at the age of majority, which can be seen as a downside to UGMAs. 
Lastly, certificates of deposit and savings bonds are okay investments, kids should own stocks or stock mutual funds.  Risk is the last thing your child needs to worry about in an investing program.  He or she needs to capitalize fully on the power of time in their investment program as they have the advantage of time working for them. 

How the Rich Got Rich and Stayed Rich

I’ve been reading a lot of books lately on the consumption lifestyles of the ‘average’ wealthy individual.  No, these are not the stereotypical 'Hip-Hop’ glamour image you see on MTV – there are no oversized gold clocks hanging to their belt lines.  These are folks you’ll likely find shopping at Walmart for the best deals around!  They’ve amassed a sizeable portfolio of businesses, stocks and other investments to get to where they are.  More importantly, they were patient and thought long term.

Here are some of the most common traits found among them.

1. They stayed married an average of thirty-two years.  Divorce is really expensive.  Just ask Donald Trump, or more recently, Tiger Woods!  Donald Trump’s parents (his source of initial wealth) stayed married all their lives.
2. They held on to the same job for a long time.  Job-hoppers have trouble building wealth.  You’ve heard sensational news before of people who worked for UPS (or some other job) for all their lives then suddenly bequeath millions to charity upon their death.  It’s no coincidence that they got so rich when compounding is at work. 
3. They have invested over their working careers: an average of thirty years!
4. They had no investment experience when they started, 85% of the millionaires surveyed knew nothing, but they were eager, lifelong learners and learned as they went along.
5. They considered themselves “frugal.”  Some 80% saved by not spending.  And, those BMWs you see everywhere?  Don’t let them fool you.  98% of buyers of luxury cars are not rich.  The auto makers know this, that’s why they market their brands in rap videos for all the wannabes who are watching.
6. They held investments for more than five years.  Some even longer than ten years. 
7. They used their parents as models for saving and investing.  Of course, when you get older and realize that your parents are not the money role models you can or should follow, then I advise you to hit the local library and find books on the subject matter. 

For a fascinating look into the true lifestyles of real millionaires, turn off MTV and grab a copy of this book: “Stop Acting Rich” by Thomas J. Stanley

Invest Every Month, No Matter How Small the Investment

Being a successful investor is all about keeping your money in play, especially during various cycles in the economy.  When you’re starting out, it’s reasonable to believe that you must deploy your large pile of savings to buying stocks and be done with the process in a matter of minutes.  Success in investing is hardly a one and done activity.  What builds true wealth is investing on a regular basis (at least once a month).

Investing means you’re not spending.

When you don’t invest regularly, you’re not keeping your money in play.  Money that’s not in the market doesn’t reap the benefits of time and compounding.  Of course, many will argue that it would be safer to stay on the sidelines for now, because of current economic conditions.  But the fact is, money that’s not invested in some way is eventually money that’s spent on worthless stuff.  And money that’s spent creates a negative return.

I’m guilty of it too and I still spend on worthless stuff, but the spending on me has been replaced with spending on ‘them’ (i.e., kids).  The stuff you buy usually costs more than the initial price tag.  Homes require insurance, maintenance, utilities, and furniture.  Autos require gasoline, insurance, and maintenance.  Clothing requires cleaning and mending, not to mention new clothes to go with the clothes you just bought.  Computers require Internet connections, printers, toner cartridges, software, and paper.  And so on.  It’s rare to find something that costs no more than the initial price you paid.

If you spend instead of invest, you’re not just losing returns on the money you spend.  The money you spend generates negative return because you spend more money to support the stuff you buy.  That’s why spending is so dangerous (and I won’t even go into the dangers of spending on credit)!  It has a negative multiplier effect and it’s the opposite of compounding rate of returns. 

If you invest every month, even if it is only a few bucks, you rid yourself of money that, if spent, will cost you even more money in the long run.  That’s why it pays to invest even a little amount each month, $15, $100, whatever you can afford.  Don’t wait until you save a larger amount to invest.  The problem with waiting until you accumulate funds is that the money is readily available and tempts you to spend on some foolish toy.  Get the money into your investment account as soon as possible, automate it whenever necessary so it becomes part of your daily life.  You’ll be much better off in the long run.

Five Things to Ignore on the Way to Becoming a Successful Investor

1. Hot Tips.  I’ve found (and Twitter is littered with them) that most hot tips are designed to enrich the person touting them and are rarely researched or present good long-term investments. 
2. Selling when a company is doing well.  Your goal as an investor is to reinvest and compound your profits, not enrich a broker.  If you’ve done your homework, keep on investing. The stock will split and you can buy more shares.  Of course, if your plan is to sell at a certain price point, then follow your plan to the letter!
3. Taking risks.  We all take risks crossing the street, driving to work, getting in and out of the bathtub, eating greasy foods.  The stock market is the least-risky investment vehicle long term.  I’m emphasizing “long term” here because right now, the world has a short-sighted field of view. 
4. Professional advice.  While a heart surgeon can reasonably predict how a bypass operation will go and a lawyer can reasonably predict how an estate plan will avoid taxes, no “professional” is good at predicting or timing the stock market.  Even the best ones fumble from time to time.  If you learn about the various investment vehicles out there, and do what you feel works for you, you will be guided by facts, not promises.
5. You don’t know anything about, so you won’t learn.  I’m always amazed at people’s capacity for convincing themselves they can’t learn.  But many of us have been brainwashed to believe this horrible lie.  We can learn at any age at any time at very little cost.  The information is free and the knowledge is priceless.

Rule of 72

I find the Rule of 72 useful when comparing expected returns between stocks and other investments.  The Rule of 72 says that in order to find out how many years it takes your money to double in a particular investment, choose a rate of return and divide it into 72. 

For example, if the long-run average annual return of stocks is 11%, the Rule of 72 means that, on average, stock returns double every 6.54 years (72 divided by 11).  If the long-run average return on bonds is 5% per year, then bonds double every 14.4 years (72 divided by 5). 

Let’s see what happens to a $10,000 investment, over 26 years, earning 11% per year.  That $10,000 will double nearly four times (26 divided by 6.54).  Thus, $10,000 becomes $20,000 becomes $40,000 becomes $80,000 becomes approximately $151,000.

Now, let’s look at bonds.  Since bonds return, on average, 5% per year, the value of the bond doubles nearly twice in 28 years.  That means $10,000 becomes $36,000 at the end of 26 years. 

Which would your rather own-stocks or bonds?  Of course, looking at the current economic conditions – don’t answer that yet, but the moral of this story:  Your money grows best by investing heavily in stocks!

Why You Should Avoid Speculating in Futures, Options, and Speculative Stocks

It’s happened to me.  It will happen to you.

Your investment program is going along quite nicely.  You’ve made some nice gains on stable blue chip company stocks.  But it has gotten boring and it feels like something is missing.  You hear about people making a killing on speculative stocks.  Maybe even heard it on CNBC or some other “trusted” financial channel how some trader managed to score big on some futures trade.  You don’t want to wait 25 years to get rich.  You want BIG profits now!  So you create room in your portfolio by venturing into the options and futures markets.  You buy gold because, hey why not?  Everyone is doing it and it can only go higher from here! 

In short, you stray from your investment approach, to roll dice. 

Big mistake. 

Making money consistently in the futures and options markets is difficult because you have to be right about the investment and the timing.  Buying stocks is an easier way to make a buck.  As long as you’re right on the stock, your timing need not be perfect.  You can wait until your reasons for buying the stock pan out.  When you buy options and futures contracts, the clock starts ticking immediately.  You can’t afford to be patient, hoping your investment thesis comes to fruition.  With options, you have at most nine months for your idea to develop.  That’s not a long time.  Most options expire worthless.  You shouldn’t think yours will be any different. 

Buying initial public offerings (IPOs) usually is another losing game for individual investors.  The problem with buying IPOs is that the best IPOs are not available to individual investors.  All those Internet IPOs you read about that went from $10 to $60 were never available at the $10 price for individual investors like you and me.  Only the best customers of the of the investment firms taking the company public get a piece of the best IPOs.  Oh sure, you can buy the stock after it goes public and has already jumped 300%.  That’s a bad idea, since many IPOs return to their initial offering price over time.  And if you are ever approached by a broker who wants to sell you shares in the next “hot” IPO, run for the hills.  Any IPO in which that’s offered to you and me is just junk that none of the big guys want.  We consider IPOs to be in the “Speculative Stocks” category since most of them have earnings that are hard, if not impossible, to determine.  

10 Things to Avoid in a Company Plan

Before this gets too winded, I’ll get right to the point.  There’s a lot to cover in this rainy day in Maryland.

1.  Don’t put all of your clothes in one suitcase!  You’ve heard of the same analogy with eggs being in one basket, but honestly, no one harvests eggs anymore and if they do, they usually don’t put it in a basket.  When you travel, you wouldn’t bring ALL of your clothes, some women may not agree but, that just doesn’t make sense. The same principle applies here.  Never invest all of your money in one stock (especially company stock), mutual fund, bond, or guaranteed investment account (avoid at all costs – this is where scammers thrive).

2.  Diversify simply.  All you really need is a growth stock fund, an international fund, and an aggressive fund (sector funds like technology, healthcare).  Keep it simple, but remember nothing is safe in a downturn (except cash or money market funds – although, inflation is its greatest enemy).

3.  Forget about bonds.  In most cases, bonds make sense.  They do not in a tax deferred plan.  You want to grow your principal, not your income.  And putting money in bonds isn’t the safer alternative, either.  Let the free company matching go toward the purchase of other funds that benefit from dollar-cost-averaging. 

4.  Stay put.  Most plan managers allow you the ability to switch from fund to fund through phone or their website.  Take a close look at your allocations once a year in January and plan to re-allocate (usually at no cost).

5.  Look at fees.  All similar index funds have one important difference: their fees or expense ratios.  The lower the expense ratio, the higher the return in index funds.  It’s pretty basic, but they’re all the same.  If they’re not – there’s a mathematical computation error going on within the fund management, and you should avoid those funds, too. 

6.  Forget historical returns.  The funds within your plan are chosen by your HR department and they’re typically clueless about fund performance and how it all works.  So, they end up finding the high-flyers of recent past and they expect these funds to perform just the same.  However, mutual funds depend on the market’s growth to continue producing positive returns and plan participants see the previous growth and they get in at the peak. 

7.  Do the paperwork yourself.  In my previous job, we had a dedicated team of HR people who filled out the forms for the employees, so that all they have to do is sign on the dotted line (though it’s a solid line nowadays).  If you do it yourself, you’ll have a much better understanding of the restrictions and anything else on the fine print.  If you run into trouble, pick up the phone and call the account provider.  They’d love to hear from you, after all it’s your money they’re after!

8.  Open as many accounts as you can.  If you fund a Roth in addition to your company plan (and your gross adjusted income is less than $167,000 for joint filers), go for it.  In fact, I know a wonderful company that can help do this for you.  It’s all compounding tax-deferred and that’s what you want.  The more the merrier is all I’m saying!

9.  Keep and review all statements.  Keep statements in a folder.  See how they’re doing once a year, although you’ll get one per account every quarter.  Also keep in mind that you can deduct the custodial fees if you itemize on your taxes. 

10.  Keep contributing until you die!  Okay, maybe not to that extreme, but as long as you’ve got your company matching, you’ve got free money rolling in.  It’s so easy to forget about that Roth or conventional IRA once you set it up.  If the $5,000 (or $6,000 if you’re over 50 years old) is too much at one time, break it up into smaller portions; that’s $416.66 a month.