I apologize to the few of you that come and read these blogs - I haven't written in a while. That's largely due to the lack of an internet connection, but also because I've moved. I gave up waiting for the phone to ring while I was in Idaho and headed down to Las Vegas about a week ago. I felt living where I wanted to work would give me a better chance at starting a career.
So far it's been a stressful job hunt. I've only been in town for about a week, but I spend many hours in the library researching and applying for jobs. I haven't limited myself to professional positions either - although I would love a PR job. The trouble is there are many qualified people out of work these days and jobs everywhere are scarce.
I've had several interviews for a variety of job types: restaurant server, office assistant, marketing rep...some of these I'm still waiting to hear back on. Today I got a legitimate callback on a marketing position with MasterCraft and have an interview on Friday! Think happy thoughts!
All in all I am in good spirits. I'm happy that I'm giving this life a real shot instead of being passive about my future. It was hard to leave my girlfriend Alicia in Moscow, but I needed to begin my life/career.
I have not given up in investing and I remain almost entirely invested still. Today we saw a huge rebound after yesterday's awful market showing. Economic pundits have begun to predit a bottom to the market, but I remain cautious.
I'm holding on to the couple of put options I own (through November anyway) because I think things may still go lower. But the moment I get a job and a paycheck, you'd better believe I'll be snatching up as many depressed shares of good companies as I can!
Tuesday, October 28, 2008
Thursday, October 16, 2008
Brace Yourself For The Aftershock
Before I get into this post, let me apologize if I come across as overly negative. I genuinely believe in capitalism and a long-term positive outlook to the stock markets. That's why I continue to add to my stock positions, even as the markets crumble and businesses fail.
But there's no point in trying to convince yourself it's not raining when you're getting drenched. Beating your head against the wall will not change the fact that our nation is in a recession and things are going to need some time to get better.
Our current mess is due in a large part to sub-prime lending and the subsequent repackaging and reselling of those securities. But I believe the sub-prime mortgage mess is only phase one. Phase two is option-ARM (adjustable rate mortgage), and I think we'll be feeling this aftershock in the not so distant future. I wrote last month about the option-ARM mess here, but an article on the Motley Fool caught my attention. Kristin Graham wrote an article titled "The Next Housing Catastrophe Waiting to Strike" and it includes some interesting research about the looming option-ARM crisis.
I strongly recommend you read the article, but since I'm sure some of you won't, I'll paraphrase.
First, take a look at this graph.
As you can see, in 2007, many sub-prime mortgages rates began resetting. This means the low introductory rate that many homeowners were enjoying reset to a higher default rate. Consequently, the monthly mortgage payments went sky-rocketing, and now we are where we are.
But look at the graph again and you may notice in mid-2009 many option-ARM mortgage rates begin resetting. According to Graham's research, some $500 billion in option-ARM mortgages are going to have their rates reset between 2009 and 2012.
That's a lot of resets, but that's not even the scary part.
According to Graham, the average Californian homeowner with an option-ARM currently owes 109% of the value of their home. Roughly 60% of option-ARM mortgages are in California, Graham says. When the monthly payment jumps, how many people do you think are going to stick around when they owe more than their house is worth.
It's their own fault. By not making the full monthly mortgage payment (as option-ARM's allow you to do), they set themselves up for disaster.
However, as we have already found out, one person's mess can really stink up the backyards of all of their neighbors.
So while I continue to advocate seeking out good companies with solid fundamentals like a high return of investments (ROI), I am afraid things will only get worse for the short term.
You are left with several options, and these can vary in terms of return and risk. For a low risk and low return for the short term, you can seek out bonds and CD's. In fact, some places are paying in the 4% range for a 1 year CD so shop around.
Those with a slightly higher risk tolerance can look into put options like I do. With put options, you are betting that the share price of a company will decrease over a certain period of time. These days, that's not too hard of a guess. But options include risks that many people aren't comfortable with. I would encourage anyone considering options to read about the characteristics and risks of options.
The old money in your mattress can work too, although it's hard to get much growth that way. I would encourage anyone to at the very least seek out a high-yield savings account or money market account. For example, INGDirect offers a 2.75% savings account, or a 4.00% 12 month CD. That 4% over the next couple of years might let you sleep better at night than risking the wild waters of the stock markets. Either way, starting to save today will allow the miracle of compounding interest to pad your nest egg.
But there's no point in trying to convince yourself it's not raining when you're getting drenched. Beating your head against the wall will not change the fact that our nation is in a recession and things are going to need some time to get better.
Our current mess is due in a large part to sub-prime lending and the subsequent repackaging and reselling of those securities. But I believe the sub-prime mortgage mess is only phase one. Phase two is option-ARM (adjustable rate mortgage), and I think we'll be feeling this aftershock in the not so distant future. I wrote last month about the option-ARM mess here, but an article on the Motley Fool caught my attention. Kristin Graham wrote an article titled "The Next Housing Catastrophe Waiting to Strike" and it includes some interesting research about the looming option-ARM crisis.
I strongly recommend you read the article, but since I'm sure some of you won't, I'll paraphrase.
First, take a look at this graph.
As you can see, in 2007, many sub-prime mortgages rates began resetting. This means the low introductory rate that many homeowners were enjoying reset to a higher default rate. Consequently, the monthly mortgage payments went sky-rocketing, and now we are where we are.
But look at the graph again and you may notice in mid-2009 many option-ARM mortgage rates begin resetting. According to Graham's research, some $500 billion in option-ARM mortgages are going to have their rates reset between 2009 and 2012.
That's a lot of resets, but that's not even the scary part.
According to Graham, the average Californian homeowner with an option-ARM currently owes 109% of the value of their home. Roughly 60% of option-ARM mortgages are in California, Graham says. When the monthly payment jumps, how many people do you think are going to stick around when they owe more than their house is worth.
It's their own fault. By not making the full monthly mortgage payment (as option-ARM's allow you to do), they set themselves up for disaster.
However, as we have already found out, one person's mess can really stink up the backyards of all of their neighbors.
So while I continue to advocate seeking out good companies with solid fundamentals like a high return of investments (ROI), I am afraid things will only get worse for the short term.
You are left with several options, and these can vary in terms of return and risk. For a low risk and low return for the short term, you can seek out bonds and CD's. In fact, some places are paying in the 4% range for a 1 year CD so shop around.
Those with a slightly higher risk tolerance can look into put options like I do. With put options, you are betting that the share price of a company will decrease over a certain period of time. These days, that's not too hard of a guess. But options include risks that many people aren't comfortable with. I would encourage anyone considering options to read about the characteristics and risks of options.
The old money in your mattress can work too, although it's hard to get much growth that way. I would encourage anyone to at the very least seek out a high-yield savings account or money market account. For example, INGDirect offers a 2.75% savings account, or a 4.00% 12 month CD. That 4% over the next couple of years might let you sleep better at night than risking the wild waters of the stock markets. Either way, starting to save today will allow the miracle of compounding interest to pad your nest egg.
Wednesday, October 15, 2008
Holdings Update Take 2
Well after yet another monumental day of losses on Wall Street, I thought I'd keep up my promise to inform you faithful few what your's truly owns....
As of closing time October 15, 2008 I own shares of:
- Actuate Corp (ACTU)
- American Oriental Bioengineering (AOB)
- Enterprise Products Partners (EPD)
- Global Industries LTD (GLBL)
- General Steel Holdings (GSI)
- Intellon Corp (ITLN)
- Melco Crown Entertainment LTD (MPEL)
- NovaMed Inc (NOVA)
I also own put options for GSI, Alcoa and The Great Atlantic & Pacific Tea Company.
For a rough introduction to put options, you can refer to my previous post here.
On Monday, feelings were good and optimism was high on Wall Street as the markets flourished, with the Dow, Nasdaq and S&P 500 all climbing over 11%. Well today it rained on our parade, with the markets giving up those gains begining yesterday.
Such is the state of the market these days. Brief moments of upward movement, followed by punishing days of freefall. If you look at my holdings(the non-option ones), you can quickly see that my portfolio has taken a large hit too.
But I haven't stopped investing.
There's a technique that's called dollar-cost averaging. Basically, you plan to buy shares of a company in stages. For month one, you buy $200 worth of shares and continue to do so for a certain amount of time. Many investors buy in thirds - or for 3 months. That way, if in the short term the share price falls, you can scoop up more shares for the same amount of money ($200). The flip side is if the share price rises, you're getting fewer shares for your money. The idea is that you protect yourself against short term price drops and can average out your cost basis (cost you've paid per share).
It's fortunate that I've continued to pick up shares along the way, because almost all of my initial purchases are now deeply in the red. The theory goes, if you liked the company at $15/share, you must love it at $5/share. Of course, if the value is dropping for a valid reason (i.e. the company is going bankrupt) then you should likely sell. But with the current market conditions, many good companies are being thrown out with the bathwater. It's up to us to go find those opportunities.
As of closing time October 15, 2008 I own shares of:
- Actuate Corp (ACTU)
- American Oriental Bioengineering (AOB)
- Enterprise Products Partners (EPD)
- Global Industries LTD (GLBL)
- General Steel Holdings (GSI)
- Intellon Corp (ITLN)
- Melco Crown Entertainment LTD (MPEL)
- NovaMed Inc (NOVA)
I also own put options for GSI, Alcoa and The Great Atlantic & Pacific Tea Company.
For a rough introduction to put options, you can refer to my previous post here.
On Monday, feelings were good and optimism was high on Wall Street as the markets flourished, with the Dow, Nasdaq and S&P 500 all climbing over 11%. Well today it rained on our parade, with the markets giving up those gains begining yesterday.
Such is the state of the market these days. Brief moments of upward movement, followed by punishing days of freefall. If you look at my holdings(the non-option ones), you can quickly see that my portfolio has taken a large hit too.
But I haven't stopped investing.
There's a technique that's called dollar-cost averaging. Basically, you plan to buy shares of a company in stages. For month one, you buy $200 worth of shares and continue to do so for a certain amount of time. Many investors buy in thirds - or for 3 months. That way, if in the short term the share price falls, you can scoop up more shares for the same amount of money ($200). The flip side is if the share price rises, you're getting fewer shares for your money. The idea is that you protect yourself against short term price drops and can average out your cost basis (cost you've paid per share).
It's fortunate that I've continued to pick up shares along the way, because almost all of my initial purchases are now deeply in the red. The theory goes, if you liked the company at $15/share, you must love it at $5/share. Of course, if the value is dropping for a valid reason (i.e. the company is going bankrupt) then you should likely sell. But with the current market conditions, many good companies are being thrown out with the bathwater. It's up to us to go find those opportunities.
Sunday, October 12, 2008
A Safe for Safety?
In my previous post I wrote about put options as a way to hedge risk in times of uncertain markets. It's a bit tricky and options trading isn't for everyone, but you CAN make money in times like these.
As you may be hoping, there are other options when it comes to investing in wild times like these. For example, sales of Campbell's soup (CPB) have profit up 46% on the year. With inflation driving prices of many consumer goods up, middle-America appears to be loading up with some old-fashioned staples.
Another example of the times is sales of safes. Companies like Sentry Safe and Gardall are reporting sales increasing 50% over the previous year. Unfortunately for us, Sentry Safe and Gardall are privately held companies, but they serve as examples for what we should be looking for.
Some people may be concern that as the nation's economic situation deteriorates and jobless rates rise, crime will rise too. This is a pessimistic view, but it may pay to be prudent.
Self-defense and law-enforcement tool maker Taser (TASR) is currently suffering from a lawsuit stemming from an incident in 2006, but can we imagine Taser's sales increasing? The share price is down nearly 67% on the year, but that could represent a good entrance point.
Now I'm not necessarily recommending you run out and buy shares of Campbell or Taser, but perhaps it wouldn't hurt to take another look. After all, Campbell is only down 2.46% on the year, compared to 36% for the Dow. Campbell has also paid out its quarterly dividend this year - a friendly 2.93% and recently announced it was raising it's dividend 14%.
With the market as crazy as it is these days, consider what sort of companies can profit in downturns and sell goods or services that people won't cut out of their budget. Dollar stores are reporting booming business these days. Dollar Tree (DLTR) is up 35% on the year.
It's currently hunting season here, so best of luck bagging a solid company!
As you may be hoping, there are other options when it comes to investing in wild times like these. For example, sales of Campbell's soup (CPB) have profit up 46% on the year. With inflation driving prices of many consumer goods up, middle-America appears to be loading up with some old-fashioned staples.
Another example of the times is sales of safes. Companies like Sentry Safe and Gardall are reporting sales increasing 50% over the previous year. Unfortunately for us, Sentry Safe and Gardall are privately held companies, but they serve as examples for what we should be looking for.
Some people may be concern that as the nation's economic situation deteriorates and jobless rates rise, crime will rise too. This is a pessimistic view, but it may pay to be prudent.
Self-defense and law-enforcement tool maker Taser (TASR) is currently suffering from a lawsuit stemming from an incident in 2006, but can we imagine Taser's sales increasing? The share price is down nearly 67% on the year, but that could represent a good entrance point.
Now I'm not necessarily recommending you run out and buy shares of Campbell or Taser, but perhaps it wouldn't hurt to take another look. After all, Campbell is only down 2.46% on the year, compared to 36% for the Dow. Campbell has also paid out its quarterly dividend this year - a friendly 2.93% and recently announced it was raising it's dividend 14%.
With the market as crazy as it is these days, consider what sort of companies can profit in downturns and sell goods or services that people won't cut out of their budget. Dollar stores are reporting booming business these days. Dollar Tree (DLTR) is up 35% on the year.
It's currently hunting season here, so best of luck bagging a solid company!
Tuesday, October 7, 2008
Limbo Time! How Low Can You Go?
Perhaps it's time to dust off your Chubby Checker Limbo Rock album and find a broom stick... It may be time to get low!
After an abysmal market performance on Monday (10/6), Mr. Market followed it up by falling another 5%. In fact, all three indices (Dow, NASDAQ, S&P) suffered 5-6% losses.
Needless to say, these brutal days on the street can be rough on us average investors. It's not fun to watch your stake in a company fall lower in value, day after day. That's why I invest with a long-term mindset, and I understand that short-term falls are not unexpected.
That being said, wouldn't it be great if there were a way to protect yourself from the short term losses. There is. They're called put options.
In markets as volatile as these, it sometimes pays to employ other trading techniques other than the simply buy and hold. That's not to say buying and holding won't work out in the long run. After all, that's what we're after. But why not protect your investment a bit and earn some money while you're waiting for the long run?
Simply stated, put options represent the "option" to sell a stock at a certain price at a later date. You don't need to own the stock itself, but you're agreeing that on XX/XX/XXXX, you'll sell shares of the stock at a set price.
An example: Let's say Google (GOOG) is trading at $345/share right now. You think that in the long run the share price will go up, but think in the short term the price may fall. In markets like todays, that's not a bad bet. So you can buy a put option contract which generally represents 100 shares at a certain price. For the March 2009 expiration date, you can buy a put contract at $39.50/share, with a strike price of $320.
This means that for $39.50/share, you're buying the right to sell 100 shares of (GOOG) at a price of $320/share, on March 20, 2009. It will cost you $3,950 to buy that contract (100x39.50). It's important to remember that options are just that, options. You have the option to sell those 100 shares, but are not required to.
In fact, the real value with options comes from its leverage. Let's say prior to March 20, 2009, Google's share price has dropped below $320/share. Your put option is now in-the-money and has gained in value. Now if you'd like, you can close your position, thereby forfeiting your right to sell those shares later down the road, but pocketing the profit.
I'll give you a real example from my own portfolio to explain better. I own shares of General Steel Holdings (GSI). Due to the growing global financial crisis, building slow-downs and a variety of other factors, the stock price is quite depressed lately. But I also own put options of GSI. I own put contracts for the November 2008 expiration date, with a strike price of $7.50. This means in November, I can sell my 100 shares for $7.50/share. It cost me $2.05/share to buy this, so roughly $215 per contract after commission.
Since I bought the contracts, GSI's share price has fallen quite a lot. However, this means my contracts have increased in value since my strike price is above the share price. While each contract cost me $205, minus commission, it is now worth $320/contract. If the share price stays low and the date for my sell option gets closer, the value will continue to increase.
Of course, there is the chance that GSI's share price could increase, and my option will lose value, but what do you think is most likely in the next two months? It's a rough sea out there, but there are still ways to make money. Think of put options as a way to protect your investment in a company.
As always, this isn't a recommendation for GSI or for its put option. This is also a very very brief introduction into one of the many ways to use options to invest. Options can involve greater risk and are not for all investors. I implore you to do your own research and talk to a financial advisor if you'd like. There are many financial professionals out there who know gobs more than I do. But I want to make sure you aren't running from the market with your tail tucked. More than 80% of the companies publically traded U.S. stocks are down this year. This includes solid companies like Apple and General Electric.
These current lows represent a great time to get invested into a solid company. Ask Warren Buffet. But also consider protecting your investment for these short-term downturns.
***Remember, you can subscribe to this blog and you'll be notified via email whenever I publish a new post!***
After an abysmal market performance on Monday (10/6), Mr. Market followed it up by falling another 5%. In fact, all three indices (Dow, NASDAQ, S&P) suffered 5-6% losses.
Needless to say, these brutal days on the street can be rough on us average investors. It's not fun to watch your stake in a company fall lower in value, day after day. That's why I invest with a long-term mindset, and I understand that short-term falls are not unexpected.
That being said, wouldn't it be great if there were a way to protect yourself from the short term losses. There is. They're called put options.
In markets as volatile as these, it sometimes pays to employ other trading techniques other than the simply buy and hold. That's not to say buying and holding won't work out in the long run. After all, that's what we're after. But why not protect your investment a bit and earn some money while you're waiting for the long run?
Simply stated, put options represent the "option" to sell a stock at a certain price at a later date. You don't need to own the stock itself, but you're agreeing that on XX/XX/XXXX, you'll sell shares of the stock at a set price.
An example: Let's say Google (GOOG) is trading at $345/share right now. You think that in the long run the share price will go up, but think in the short term the price may fall. In markets like todays, that's not a bad bet. So you can buy a put option contract which generally represents 100 shares at a certain price. For the March 2009 expiration date, you can buy a put contract at $39.50/share, with a strike price of $320.
This means that for $39.50/share, you're buying the right to sell 100 shares of (GOOG) at a price of $320/share, on March 20, 2009. It will cost you $3,950 to buy that contract (100x39.50). It's important to remember that options are just that, options. You have the option to sell those 100 shares, but are not required to.
In fact, the real value with options comes from its leverage. Let's say prior to March 20, 2009, Google's share price has dropped below $320/share. Your put option is now in-the-money and has gained in value. Now if you'd like, you can close your position, thereby forfeiting your right to sell those shares later down the road, but pocketing the profit.
I'll give you a real example from my own portfolio to explain better. I own shares of General Steel Holdings (GSI). Due to the growing global financial crisis, building slow-downs and a variety of other factors, the stock price is quite depressed lately. But I also own put options of GSI. I own put contracts for the November 2008 expiration date, with a strike price of $7.50. This means in November, I can sell my 100 shares for $7.50/share. It cost me $2.05/share to buy this, so roughly $215 per contract after commission.
Since I bought the contracts, GSI's share price has fallen quite a lot. However, this means my contracts have increased in value since my strike price is above the share price. While each contract cost me $205, minus commission, it is now worth $320/contract. If the share price stays low and the date for my sell option gets closer, the value will continue to increase.
Of course, there is the chance that GSI's share price could increase, and my option will lose value, but what do you think is most likely in the next two months? It's a rough sea out there, but there are still ways to make money. Think of put options as a way to protect your investment in a company.
As always, this isn't a recommendation for GSI or for its put option. This is also a very very brief introduction into one of the many ways to use options to invest. Options can involve greater risk and are not for all investors. I implore you to do your own research and talk to a financial advisor if you'd like. There are many financial professionals out there who know gobs more than I do. But I want to make sure you aren't running from the market with your tail tucked. More than 80% of the companies publically traded U.S. stocks are down this year. This includes solid companies like Apple and General Electric.
These current lows represent a great time to get invested into a solid company. Ask Warren Buffet. But also consider protecting your investment for these short-term downturns.
***Remember, you can subscribe to this blog and you'll be notified via email whenever I publish a new post!***
Monday, October 6, 2008
A Sub-10k Day
I woke up this morning and turned on my laptop, ready to face the day and catch up on the news from the East coast. MSN Messenger started up and on the news of the day pop-up thing that comes with it, I was stunned to see a headline about the Dow falling below 10,000 points.
Immediately I headed to Google Finance to check out what the heck was going on. By mid-day the Dow, NASDAQ and the S&P 500 were all past the negative 8% mark.
But since Congress passed the bailout bill, we should be rebounding in the markets, right? Not exactly. The bailout was designed to prop up banks and support the broader economy. It was created to avoid depositors running on the banks in a mass account withdrawal. It was not intended to boost the individual prices of individual stocks. Ebay's income statements and business fundamentals haven't changed because of the bailout.
The 10,000 point mark is "psychologically important", according to many economists and financial experts. The last time the Dow was at 10,000 was in March, 1999, when it was on its way up. 10,000 points itself doesn't mean much. But since it's been 9 years since we've been at this level, it does show that our progress since '99 wasn't sustainable at that rate.
Remember, this mess was created because of a bubble in the housing and mortgage industry. Eventually bubbles pop. Markets correct themselves.
It was a painful day in terms of my own holdings. Fortunately I own not just basic shares, but other somewhat tricky market things like options - more importantly, put options. In a very brief explanation, that means I can still make money even if the share price drops.
What does today mean for the average investor? Well, the broader markets rebounded in late afternoon trading today, making their way back towards a less frightful -3.5 to -4.3% range. Individual stocks rallied, with some ending up in positive territory on the day.
This simply goes to show that the market can be a wild beast. Trying to time the market bottom is virtually impossible, as I wrote about in this previous blog. An investor's best bet is to take some time finding companies with a sound business plan. Look for companies who have produced solid earnings growth, year after year.
In times like these, take a look at dividend paying companies like Johnson & Johnson (JNJ), Coca-Cola (KO) or Enterprise Products Partners (EPD). All three of these companies have at least a 2% dividend, paid each quarter. While all three are not immune to a broad market downturn, dividends can be a nice way to offset the selloff, especially if you re-invest them. As always, this isn't necessarily a recommendation to run out and buy these three companies, but perhaps taking a look at their cash flow and income statements wouldn't hurt.
Regardless of the broader market and the current recession, there are a great many companies in the world who operate solid businesses and manage to make money year after year. When companies like these get swept up in the turmoil of the greater market, it creates opportunities for investors like us who understand it won't always be like this.
Take a breath. Realize it's not the end of the world. McDonald's (MCD) won't go bankrupt anytime soon. Look for the value in good businesses and invest with confidence for a brighter day.
Immediately I headed to Google Finance to check out what the heck was going on. By mid-day the Dow, NASDAQ and the S&P 500 were all past the negative 8% mark.
But since Congress passed the bailout bill, we should be rebounding in the markets, right? Not exactly. The bailout was designed to prop up banks and support the broader economy. It was created to avoid depositors running on the banks in a mass account withdrawal. It was not intended to boost the individual prices of individual stocks. Ebay's income statements and business fundamentals haven't changed because of the bailout.
The 10,000 point mark is "psychologically important", according to many economists and financial experts. The last time the Dow was at 10,000 was in March, 1999, when it was on its way up. 10,000 points itself doesn't mean much. But since it's been 9 years since we've been at this level, it does show that our progress since '99 wasn't sustainable at that rate.
Remember, this mess was created because of a bubble in the housing and mortgage industry. Eventually bubbles pop. Markets correct themselves.
It was a painful day in terms of my own holdings. Fortunately I own not just basic shares, but other somewhat tricky market things like options - more importantly, put options. In a very brief explanation, that means I can still make money even if the share price drops.
What does today mean for the average investor? Well, the broader markets rebounded in late afternoon trading today, making their way back towards a less frightful -3.5 to -4.3% range. Individual stocks rallied, with some ending up in positive territory on the day.
This simply goes to show that the market can be a wild beast. Trying to time the market bottom is virtually impossible, as I wrote about in this previous blog. An investor's best bet is to take some time finding companies with a sound business plan. Look for companies who have produced solid earnings growth, year after year.
In times like these, take a look at dividend paying companies like Johnson & Johnson (JNJ), Coca-Cola (KO) or Enterprise Products Partners (EPD). All three of these companies have at least a 2% dividend, paid each quarter. While all three are not immune to a broad market downturn, dividends can be a nice way to offset the selloff, especially if you re-invest them. As always, this isn't necessarily a recommendation to run out and buy these three companies, but perhaps taking a look at their cash flow and income statements wouldn't hurt.
Regardless of the broader market and the current recession, there are a great many companies in the world who operate solid businesses and manage to make money year after year. When companies like these get swept up in the turmoil of the greater market, it creates opportunities for investors like us who understand it won't always be like this.
Take a breath. Realize it's not the end of the world. McDonald's (MCD) won't go bankrupt anytime soon. Look for the value in good businesses and invest with confidence for a brighter day.
Saturday, October 4, 2008
Early Birds and Children's Toys
I just read this fairly distressing article about the jobless rate and the state of the economy. It hits home since I'm a recent college grad and have been job hunting for months now, unsuccessfully.
The article got me to thinking about investing though, and what we can do to protect ourselves against harsh times like this.
Virtually every financial advisor would tell you to have at least 3 months of salary set aside in case of an emergency. This is sound advice, and something I'd love to be able to do - if I could start my darn career!
But accumulating 3 months' salary to simply set aside can be a daunting task. We all have numerous bills to deal with every month, and let's not discuss if you have children! I once read an article that said the average cost to raise a child in a typical middle-class lifestyle could reach upwards of $1 million after 18 years! Scary!
That's why I believe getting started early on an investment account or some type of savings is incredibly important. Even if you don't have children yet, you may face that mountain of financial responsibility someday. Wouldn't you feel better if you had some cash to buy your daughter a stuffed animal?
Most of us can probably find a way to save $50 a month. For some of you, that could simply be brewing your own coffee and not stopping by Starbucks so frequently. I took a look at what $50 a month could bring you, over the past 12 years.
To begin with, $50/month since January 1996 is $8,050 total. But if we put that money into a company we're familiar with, say Johnson & Johnson (JNJ), today that would be worth $26,910.50. And why not buy Johnson & Johnson? After all, they make a ton of products that you'll probably buy for a new child like no-tear children's shampoo.
A return of 234% isn't something you should expect from every investment you make, but JNJ has many of the attributes of a solid company that you should look for. They pay a healthy dividend of 2.78% and have paid it since 1987. Their CEO has been with the company since 1998, and the company has a net profit margin of over 18%.
While this isn't necessarily a recommendation to run out and buy Johnson & Johnson, perhaps it couldn't hurt! My point is simply that the earlier you start investing money into companies with solid fundamentals, the sooner you can sleep better at night, even if a financial crisis like this current mortgage mess comes along.
>> By the way, I run all of the "what if" simulations through the website I invest with, Sharebuilder.com. They don't pay me or anything to recommend them, but I wholeheartedly do so. This link will take you to their "What If I Had Invested" tool, and it's free to use!
The article got me to thinking about investing though, and what we can do to protect ourselves against harsh times like this.
Virtually every financial advisor would tell you to have at least 3 months of salary set aside in case of an emergency. This is sound advice, and something I'd love to be able to do - if I could start my darn career!
But accumulating 3 months' salary to simply set aside can be a daunting task. We all have numerous bills to deal with every month, and let's not discuss if you have children! I once read an article that said the average cost to raise a child in a typical middle-class lifestyle could reach upwards of $1 million after 18 years! Scary!
That's why I believe getting started early on an investment account or some type of savings is incredibly important. Even if you don't have children yet, you may face that mountain of financial responsibility someday. Wouldn't you feel better if you had some cash to buy your daughter a stuffed animal?
Most of us can probably find a way to save $50 a month. For some of you, that could simply be brewing your own coffee and not stopping by Starbucks so frequently. I took a look at what $50 a month could bring you, over the past 12 years.
To begin with, $50/month since January 1996 is $8,050 total. But if we put that money into a company we're familiar with, say Johnson & Johnson (JNJ), today that would be worth $26,910.50. And why not buy Johnson & Johnson? After all, they make a ton of products that you'll probably buy for a new child like no-tear children's shampoo.
A return of 234% isn't something you should expect from every investment you make, but JNJ has many of the attributes of a solid company that you should look for. They pay a healthy dividend of 2.78% and have paid it since 1987. Their CEO has been with the company since 1998, and the company has a net profit margin of over 18%.
While this isn't necessarily a recommendation to run out and buy Johnson & Johnson, perhaps it couldn't hurt! My point is simply that the earlier you start investing money into companies with solid fundamentals, the sooner you can sleep better at night, even if a financial crisis like this current mortgage mess comes along.
>> By the way, I run all of the "what if" simulations through the website I invest with, Sharebuilder.com. They don't pay me or anything to recommend them, but I wholeheartedly do so. This link will take you to their "What If I Had Invested" tool, and it's free to use!
Friday, October 3, 2008
Bailed out... what now?
Now that our government has passed a version of the $700 billion economic bailout plan, investors are wondering when the market will start to reflect that positive news. This week was the third worst week ever, in terms of points lost. Many investors saw investments wiped out as they bet financial giants like WaMu would recover or be helped by the bailout.
Yet the real issue behind this whole economic mess is the housing bubble. The markets likely won't make a full recovery until the housing market has hit the bottom. And when is that, you might ask...
Well, over the past 8-10 years housing prices soared. Meanwhile, wages and salary played the part of the tortoise and slowly crept along. It's unlikely that the housing market will bottom out until home costs reach a reasonable level. That's not to say that stories like this should be expected very often.
So what's the average investor like you or I to do? If the markets aren't going to cooperate, should we just pull our money out of stocks and hoard the cash?
Well let's take a look at an example of a well-known company over the past year: McDonald's. You could say that the golden arches operate a fairly recession-resistant business. No matter the state of the economy, we're going to crave our Big Mac's and those deliciously over salted french fries.
Starting on October 1, 2007 with a $100 investment in McDonald's and putting another $100 in each month to date, we'd end up with a total investment of $1,300 and a total market value of $1,368.30. While a 5.3% return may not seem like much, compare that to a negative 23.61% return from the S&P 500.
It hasn't been a pretty year in the markets, but as you can see, there are still some great companies out there.
Another example of a smart money move right now could simply be putting your money in a money market account. I opened one for my girlfriend the other day with just $500 and overnight she had made 8 cents in interest. Not too bad for doing nothing.
My point isn't that you should by McDonald's (although it may not be a bad choice). You also shouldn't hide your head in the sand and wait for the government to sort out the economic mess. What you should be doing is seeking out good companies with solid fundamentals and a management team with their investors best interest at heart.
For those interested, I look for companies who have a long history of paying dividends (increasing them ideally) and management teams who are invested in the company themselves and have been with the company for a long time. A relatively low price to earnings ratio (P/E) and a high return on equity (ROE) are also good to look for. You can find all of this information very easily on a website like Google finance or the Motley Fool.
Happy hunting!
Yet the real issue behind this whole economic mess is the housing bubble. The markets likely won't make a full recovery until the housing market has hit the bottom. And when is that, you might ask...
Well, over the past 8-10 years housing prices soared. Meanwhile, wages and salary played the part of the tortoise and slowly crept along. It's unlikely that the housing market will bottom out until home costs reach a reasonable level. That's not to say that stories like this should be expected very often.
So what's the average investor like you or I to do? If the markets aren't going to cooperate, should we just pull our money out of stocks and hoard the cash?
Well let's take a look at an example of a well-known company over the past year: McDonald's. You could say that the golden arches operate a fairly recession-resistant business. No matter the state of the economy, we're going to crave our Big Mac's and those deliciously over salted french fries.
Starting on October 1, 2007 with a $100 investment in McDonald's and putting another $100 in each month to date, we'd end up with a total investment of $1,300 and a total market value of $1,368.30. While a 5.3% return may not seem like much, compare that to a negative 23.61% return from the S&P 500.
It hasn't been a pretty year in the markets, but as you can see, there are still some great companies out there.
Another example of a smart money move right now could simply be putting your money in a money market account. I opened one for my girlfriend the other day with just $500 and overnight she had made 8 cents in interest. Not too bad for doing nothing.
My point isn't that you should by McDonald's (although it may not be a bad choice). You also shouldn't hide your head in the sand and wait for the government to sort out the economic mess. What you should be doing is seeking out good companies with solid fundamentals and a management team with their investors best interest at heart.
For those interested, I look for companies who have a long history of paying dividends (increasing them ideally) and management teams who are invested in the company themselves and have been with the company for a long time. A relatively low price to earnings ratio (P/E) and a high return on equity (ROE) are also good to look for. You can find all of this information very easily on a website like Google finance or the Motley Fool.
Happy hunting!
Tuesday, September 30, 2008
How'd We Get Here?
These are tumultuous times we live in. Banks are failing on what seems like an everyday basis. The stock markets are on an insane roller coaster - free falling one day and rebounding (somewhat) the next. Monday (9/29) saw the largest single-day point drop in history: 777 points lost on the Dow. Why? Because the House of Representatives failed to pass the economic bailout plan. But the most terrifying part of Monday's historic drop?: An estimated $1.2 trillion was lost in the equity markets yesterday.
$1.2 TRILLION.
It kinda makes that $700 billion requested by Bush and the Treasury seem not as scary eh?
Thankfully the market rebounded today, recovering 485 of those lost 777 points. So what's going to happen now? Congress is working on getting another economic bailout plan passed. The public is so far unaware of the details of the plan. It's likely that something will pass - our economy will be in dire straits if nothing is passed.
But how did we get here? How did our great nation, proud and wealthy, find itself sinking deeper and deeper into a financial depression? How did it come to needing $700 billion in taxpayer dollars as our only hope in warding off further economic disaster? Some of my faithful readers (as few of you as there are!) have asked me to put in simple terms the reasons for this fiasco. I'm no economist, and have only a loose grasp on the details, but I'll do the best I can.
During the past 7-8 years, our nation has been booming with growth. Stock markets were steadily climbing, the housing market was thriving and average Americans were enjoying more and more of the good life.
Credit was easy to come by. I was only 18 when I started receiving countless "pre-approved" credit cards offers in the mail. I'd get 5-10 a week.
With a growing housing market and easy mortgage loans to come by, people found out they could purchase their dream home at an amazing interest rate. Then they figured in a couple of years, they could refinance their mortgage at a lower rate and their house would have increased in value - thus gaining precious equity. [Equity is essentially the amount of money you have paid back towards the original loan for your home.]
Yet there was a catch. Banks and lending agencies were granting loans to people who probably would not normally qualify for such a high amount. Literally, a person making a $40,000/year salary could qualify for a loan to purchase a $500,000 house - assuming he or she shopped around. Remember those Countrywide commercials on TV?
The loans that these people were qualifying for were also tricky loans. They were option ARM loans (ARM meaning adjustable rate mortgage - the interest rate can change) (option, meaning the person taking out the loan could opt to pay only a portion of their monthly payment and have the remainder tacked on to their principle). Next came the downturn of the housing market when growth began to slow and homes weren't being appraised as highly.
This meant that after a year, or 18 months, when the adjustable rate of the home owner's mortgage went up, Mr. 40k/year couldn't afford to make the higher payments. So what happened? John Doe would opt to pay only a portion of his monthly payment, and add the rest to his total amount owed. What ended up happening is the amount owed for the house started to rise, and eventually overtook the amount the house was worth.
At this point, people started giving up. They stopped making their monthly payments, and some simply walked away from their houses. As this started happening more and more, the banks and other lending institutions started feeling the pinch. They had loaned out money, and now were not getting their return. More and more homeowners found they couldn't afford their homes and more and more lenders were forced to foreclose on the houses.
With a backlog of houses that were sitting empty due to foreclosure or abandonment, banks and lending institutions began writing off the losses on their financial statements. It started relatively small, but eventually institutions were writing off billions of dollars in losses. This scared investors (rightfully so) and they began withdrawing their investments in companies like AIG, Bear Stearns, Lehman Brothers etc.
Investors weren't the only ones taking their money of the these companies. Banking customers who kept their deposits with banks like Washington Mutual started emptying their accounts too.
Sometimes in a matter of a few hours, the share price of some of these companies fell to just pennies. Investors, individual and institutional alike, lost billions and billions of dollars.
And that is essentially where we are today. That's the short and not very detailed account of why our government is asking for $700 billion and why things are so scary on the stock market right now.
Yet out of the ashes of this financial catastrophe will arise a few stronger companies whose prospects and fundamentals are solid. It's these companies that will allow investors a chance to secure their future financial freedom. That's why I'm looking anxiously at the market right now, licking my chops. There are some amazing companies whose share price is depressed right now due to this crisis. But it will pass, and the share price will rise. Perhaps it's time for you to get in on some great companies!
$1.2 TRILLION.
It kinda makes that $700 billion requested by Bush and the Treasury seem not as scary eh?
Thankfully the market rebounded today, recovering 485 of those lost 777 points. So what's going to happen now? Congress is working on getting another economic bailout plan passed. The public is so far unaware of the details of the plan. It's likely that something will pass - our economy will be in dire straits if nothing is passed.
But how did we get here? How did our great nation, proud and wealthy, find itself sinking deeper and deeper into a financial depression? How did it come to needing $700 billion in taxpayer dollars as our only hope in warding off further economic disaster? Some of my faithful readers (as few of you as there are!) have asked me to put in simple terms the reasons for this fiasco. I'm no economist, and have only a loose grasp on the details, but I'll do the best I can.
During the past 7-8 years, our nation has been booming with growth. Stock markets were steadily climbing, the housing market was thriving and average Americans were enjoying more and more of the good life.
Credit was easy to come by. I was only 18 when I started receiving countless "pre-approved" credit cards offers in the mail. I'd get 5-10 a week.
With a growing housing market and easy mortgage loans to come by, people found out they could purchase their dream home at an amazing interest rate. Then they figured in a couple of years, they could refinance their mortgage at a lower rate and their house would have increased in value - thus gaining precious equity. [Equity is essentially the amount of money you have paid back towards the original loan for your home.]
Yet there was a catch. Banks and lending agencies were granting loans to people who probably would not normally qualify for such a high amount. Literally, a person making a $40,000/year salary could qualify for a loan to purchase a $500,000 house - assuming he or she shopped around. Remember those Countrywide commercials on TV?
The loans that these people were qualifying for were also tricky loans. They were option ARM loans (ARM meaning adjustable rate mortgage - the interest rate can change) (option, meaning the person taking out the loan could opt to pay only a portion of their monthly payment and have the remainder tacked on to their principle). Next came the downturn of the housing market when growth began to slow and homes weren't being appraised as highly.
This meant that after a year, or 18 months, when the adjustable rate of the home owner's mortgage went up, Mr. 40k/year couldn't afford to make the higher payments. So what happened? John Doe would opt to pay only a portion of his monthly payment, and add the rest to his total amount owed. What ended up happening is the amount owed for the house started to rise, and eventually overtook the amount the house was worth.
At this point, people started giving up. They stopped making their monthly payments, and some simply walked away from their houses. As this started happening more and more, the banks and other lending institutions started feeling the pinch. They had loaned out money, and now were not getting their return. More and more homeowners found they couldn't afford their homes and more and more lenders were forced to foreclose on the houses.
With a backlog of houses that were sitting empty due to foreclosure or abandonment, banks and lending institutions began writing off the losses on their financial statements. It started relatively small, but eventually institutions were writing off billions of dollars in losses. This scared investors (rightfully so) and they began withdrawing their investments in companies like AIG, Bear Stearns, Lehman Brothers etc.
Investors weren't the only ones taking their money of the these companies. Banking customers who kept their deposits with banks like Washington Mutual started emptying their accounts too.
Sometimes in a matter of a few hours, the share price of some of these companies fell to just pennies. Investors, individual and institutional alike, lost billions and billions of dollars.
And that is essentially where we are today. That's the short and not very detailed account of why our government is asking for $700 billion and why things are so scary on the stock market right now.
Yet out of the ashes of this financial catastrophe will arise a few stronger companies whose prospects and fundamentals are solid. It's these companies that will allow investors a chance to secure their future financial freedom. That's why I'm looking anxiously at the market right now, licking my chops. There are some amazing companies whose share price is depressed right now due to this crisis. But it will pass, and the share price will rise. Perhaps it's time for you to get in on some great companies!
Friday, September 26, 2008
Debates, Banking and Shortages
Tonight the nation watched as presidential hopefuls Senators McCain and Obama debated the state of the economy and their ideas for foreign policy. My own politics aside, I felt that both sides delivered some interesting points regarding their vision of the future. Some I agreed with, and some I did not.
Like many Americans I was eager to hear about the state of the economy and what McCain and Obama planned to do about it. Many of us have heard about the proposed $700 billion bailout plan for our nation’s banks and lending institutions. Both Obama and McCain agree that action must be taken, but were somewhat divided on what route to take.
Obama said tonight that he would like to keep taxes at their current levels or lower them for 95% of working Americans. According to Obama, only people earning more than $250,000 a year would face a tax increase. Obama said he would also close corporate loopholes for tax purposes and encourage tax breaks for businesses that don't export jobs overseas.
McCain argued that government spending has gotten out of control and he would attempt to reign in it. Pork-barrel spending and earmarks have become widespread and at time fraudulent, McCain said. For those of us to don't immediately recognize those terms, McCain is basically saying that his fellow Congressmen and women are spending too many tax payer dollars on their own personal projects. He would look to drastically reduce, or freeze spending on everything but none essential programs. McCain said these programs would be defense, veteran’s affairs and entitlement programs.
Our nation's two primary presidential candidates spoke on several other issues, but for the purpose of this blog, I was mainly interested to hear what they had to say about the economy. I suspect this debate, as well as the outcome of the bailout plan will have a large impact on the stock markets next week. For those who are interested - the latest information about the proposed $700 billion plan is that a bi-partisan (dems and reps) agreement should be reached sometime Sunday.
The next thing of interest today was the failure and subsequent purchase of Washington Mutual bank. JPMorgan Chase bought WaMu's banking operations ($307 billion in assets) and deposits ($188 billion) late last night. JPMorgan's price tag? Only a one-time payment of $1.9 billion to the FDIC. This is the single largest bank failure in history. To put it comparatively, the previous record holder (Continental Illinois in 1984) had $67.7 billion in assets - adjusted for inflation.
Needless to say, this bank failure was huge and the stock market reacted accordingly today. The Dow, NASDAQ and S&P 500 were all in the red for most of the day with only the Dow and S&P ending the day slightly positive.
As you can imagine, many stockholders have watched their portfolio values move up and down with the daily fluctuations in the market. It has not been an overly pleasant ride. I myself am down some 20% to date overall - though not all stock picks are in the red. And yet as long as I still believe in my initial valuations and quality of the business, I'm not tucking tail and running. I still believe that in the longer term (3-5 years), each and every one of my initial investments will end in the positive. Of course not every investment will double my money, or even prove to get back to break-even. But until a company's business is somehow changed, I'll keep my money in it even when the market is throwing a temper tantrum.
My final thought of the evening.... gas. I've been keeping my eye on several energy/oil companies lately, looking for a solid investment at a time when oil is off its 52-week high. Having come across a company I'm interested in (Shaw, Alicia: if you're reading this you know where I'm looking), I took a little time to learn about oil/gas and supply. It led me to this article about a looming gas shortage.
I'm not a fan of fear-mongering, and I'd like to think I'm a little more environmentally conscious than the next guy; but when I read articles about a coming shortage, I see opportunity. I'm no "oil-man", and I long for the day when we can burn a renewable, clean fuel source for power. But I have dreams and goals like everyone else and I'd like to be able to fund my future. Oil prices have been (gratefully) depressed lately, but supply and demand is simple economics. If I had a spare $1,000 to toss into a company right now, I'd give some serious thought to making it an energy company for the time being.
As always, doing your own research is strongly advised before purchasing and stocks or securities. And I remind you that I have no formal training or education in any form of finance or accounting. I'm merely condensing what I've gleaned from my own reading and passing it along to whoever may be interested. That being said, I think the most successful investor is one who buys when others are fleeing (read: buy when there's blood in the streets).
Like many Americans I was eager to hear about the state of the economy and what McCain and Obama planned to do about it. Many of us have heard about the proposed $700 billion bailout plan for our nation’s banks and lending institutions. Both Obama and McCain agree that action must be taken, but were somewhat divided on what route to take.
Obama said tonight that he would like to keep taxes at their current levels or lower them for 95% of working Americans. According to Obama, only people earning more than $250,000 a year would face a tax increase. Obama said he would also close corporate loopholes for tax purposes and encourage tax breaks for businesses that don't export jobs overseas.
McCain argued that government spending has gotten out of control and he would attempt to reign in it. Pork-barrel spending and earmarks have become widespread and at time fraudulent, McCain said. For those of us to don't immediately recognize those terms, McCain is basically saying that his fellow Congressmen and women are spending too many tax payer dollars on their own personal projects. He would look to drastically reduce, or freeze spending on everything but none essential programs. McCain said these programs would be defense, veteran’s affairs and entitlement programs.
Our nation's two primary presidential candidates spoke on several other issues, but for the purpose of this blog, I was mainly interested to hear what they had to say about the economy. I suspect this debate, as well as the outcome of the bailout plan will have a large impact on the stock markets next week. For those who are interested - the latest information about the proposed $700 billion plan is that a bi-partisan (dems and reps) agreement should be reached sometime Sunday.
The next thing of interest today was the failure and subsequent purchase of Washington Mutual bank. JPMorgan Chase bought WaMu's banking operations ($307 billion in assets) and deposits ($188 billion) late last night. JPMorgan's price tag? Only a one-time payment of $1.9 billion to the FDIC. This is the single largest bank failure in history. To put it comparatively, the previous record holder (Continental Illinois in 1984) had $67.7 billion in assets - adjusted for inflation.
Needless to say, this bank failure was huge and the stock market reacted accordingly today. The Dow, NASDAQ and S&P 500 were all in the red for most of the day with only the Dow and S&P ending the day slightly positive.
As you can imagine, many stockholders have watched their portfolio values move up and down with the daily fluctuations in the market. It has not been an overly pleasant ride. I myself am down some 20% to date overall - though not all stock picks are in the red. And yet as long as I still believe in my initial valuations and quality of the business, I'm not tucking tail and running. I still believe that in the longer term (3-5 years), each and every one of my initial investments will end in the positive. Of course not every investment will double my money, or even prove to get back to break-even. But until a company's business is somehow changed, I'll keep my money in it even when the market is throwing a temper tantrum.
My final thought of the evening.... gas. I've been keeping my eye on several energy/oil companies lately, looking for a solid investment at a time when oil is off its 52-week high. Having come across a company I'm interested in (Shaw, Alicia: if you're reading this you know where I'm looking), I took a little time to learn about oil/gas and supply. It led me to this article about a looming gas shortage.
I'm not a fan of fear-mongering, and I'd like to think I'm a little more environmentally conscious than the next guy; but when I read articles about a coming shortage, I see opportunity. I'm no "oil-man", and I long for the day when we can burn a renewable, clean fuel source for power. But I have dreams and goals like everyone else and I'd like to be able to fund my future. Oil prices have been (gratefully) depressed lately, but supply and demand is simple economics. If I had a spare $1,000 to toss into a company right now, I'd give some serious thought to making it an energy company for the time being.
As always, doing your own research is strongly advised before purchasing and stocks or securities. And I remind you that I have no formal training or education in any form of finance or accounting. I'm merely condensing what I've gleaned from my own reading and passing it along to whoever may be interested. That being said, I think the most successful investor is one who buys when others are fleeing (read: buy when there's blood in the streets).
Thursday, September 25, 2008
A Time To Panic
Well it has been yet another exciting and interesting week in the world of finance. Unless you're completely holed up in a cave, you've likely heard something about $700 billion being ask for by President Bush to try and boost the U.S. financial system.
Make no doubt about it, that is a ton of money. The cost of the Iraq war is nearing this amount ($582.45 billion at the time of writing this), or we could send some 23 million American students to public college for free. Wouldn't that be great?!
But let's consider what could happen if our government doesn't act...
If we let capitalism run its course and kill off the companies that made the poor decisions regarding mortgage-backed securities and sub-prime loans, we would say adios to some enormous financial institutions. Forget for a second that we have already seen Bear Stearns, IndyMac and Lehman Brothers fail. Let's look at Fannie Mae, Freddie Mac, AIG, Goldman Sachs and Merrill Lynch.
Freddie and Fannie have both been responsible for a combined $5 trillion in mortgages. That's enough money to pay off over half of our national debt. And yet this year these two companies were essentially taken over by the government because they had made too many bad bets.
AIG recently was granted an $85 billion bailout loan from Uncle Sam to keep it afloat. The company is in the insurance industry...perhaps you've heard of them.
Goldman Sachs is thanking its newest investor (read: savior) Warren Buffet. He invested $5 billion into the company; allowing it a breath of fresh air and a real chance to survive. But let's not forget that Goldman no longer exists as an independent investment firm. The government changed that up, making Goldman a traditional bank now...not really different than Wells Fargo.
Merrill Lynch had to be bought out by Bank of America for it to survive.
If none of that had happened, it's not a far stretch of the imagination to think that we'd be in a second Great Depression.
So back to that $700 billion. What Bush is proposing is that he uses that money to buy the bad assets from these financial institutions. This way, their books are in better shape and in return these institutions will begin lending money out again.
Our nation and our economy rely on these giant financial institutions moving money around and lending it out - allowing for capitalism to function. When banks aren't lending money, people can't buy things like homes and, as we've seen, the whole system goes to hell.
Do I believe that a $700 billion band-aid is going to fix what ails the economy? No. The whole problem stems from lenders granting loans to John and Jane Doe who simply over-extended themselves and were allowed to keep spending. But something needs to be done and perhaps helping out some of these institutions can be a start.
Now would seem like a terrible time to begin investing in the stock market. As I've just said, banks and investment firms have been in a death struggle trying to keep their heads (and financial books) above water. As with many scary times, perhaps it's best to keep your money tucked away under the mattress until the skies clear and things are a bit more certain, right?
I disagree. And the world's greatest investor of all time disagrees. Buffet has said that "it is best to be greedy when others are fearful, and to be fearful when others are greedy." Can you smell the fear in the air?
I've written about the wild ups and downs in the stock markets recently. It can be a stomach-curling experience to watch your hard-earned dollars losing value. But on the other hand, there are a great number of strong, long-lasting companies who have had their value decrease through no fault of their own.
Does anyone really believe that Pfizer (PFE) or Coca-Cola (KO) have anything to do with sub-prime mortgages? And yet Pfizer is down 18.64% on the year and Coke is down almost 18%. Both companies pay a healthy dividend and have for years. Does anyone really think that Pfizer or Coke is going to go out of business anytime soon?
Now this isn't necessarily a recommendation for either company. I personally don't own shares of Pfizer or Coke, but I wish I did. Dividend paying companies are a sure way to keep your portfolio healthy when the sky appears to be falling.
So my final thought.... is this a time for panic? I say emphatically no! Instead, I see a lot of opportunity and value in the market these days. But don't just take my word for it. I suggest heading over to a website like the Motley Fool and read some of their free articles. An hour or two spent on that website always reminds me that a long-term approach to investing is the best and most successful way to go!
Make no doubt about it, that is a ton of money. The cost of the Iraq war is nearing this amount ($582.45 billion at the time of writing this), or we could send some 23 million American students to public college for free. Wouldn't that be great?!
But let's consider what could happen if our government doesn't act...
If we let capitalism run its course and kill off the companies that made the poor decisions regarding mortgage-backed securities and sub-prime loans, we would say adios to some enormous financial institutions. Forget for a second that we have already seen Bear Stearns, IndyMac and Lehman Brothers fail. Let's look at Fannie Mae, Freddie Mac, AIG, Goldman Sachs and Merrill Lynch.
Freddie and Fannie have both been responsible for a combined $5 trillion in mortgages. That's enough money to pay off over half of our national debt. And yet this year these two companies were essentially taken over by the government because they had made too many bad bets.
AIG recently was granted an $85 billion bailout loan from Uncle Sam to keep it afloat. The company is in the insurance industry...perhaps you've heard of them.
Goldman Sachs is thanking its newest investor (read: savior) Warren Buffet. He invested $5 billion into the company; allowing it a breath of fresh air and a real chance to survive. But let's not forget that Goldman no longer exists as an independent investment firm. The government changed that up, making Goldman a traditional bank now...not really different than Wells Fargo.
Merrill Lynch had to be bought out by Bank of America for it to survive.
If none of that had happened, it's not a far stretch of the imagination to think that we'd be in a second Great Depression.
So back to that $700 billion. What Bush is proposing is that he uses that money to buy the bad assets from these financial institutions. This way, their books are in better shape and in return these institutions will begin lending money out again.
Our nation and our economy rely on these giant financial institutions moving money around and lending it out - allowing for capitalism to function. When banks aren't lending money, people can't buy things like homes and, as we've seen, the whole system goes to hell.
Do I believe that a $700 billion band-aid is going to fix what ails the economy? No. The whole problem stems from lenders granting loans to John and Jane Doe who simply over-extended themselves and were allowed to keep spending. But something needs to be done and perhaps helping out some of these institutions can be a start.
Now would seem like a terrible time to begin investing in the stock market. As I've just said, banks and investment firms have been in a death struggle trying to keep their heads (and financial books) above water. As with many scary times, perhaps it's best to keep your money tucked away under the mattress until the skies clear and things are a bit more certain, right?
I disagree. And the world's greatest investor of all time disagrees. Buffet has said that "it is best to be greedy when others are fearful, and to be fearful when others are greedy." Can you smell the fear in the air?
I've written about the wild ups and downs in the stock markets recently. It can be a stomach-curling experience to watch your hard-earned dollars losing value. But on the other hand, there are a great number of strong, long-lasting companies who have had their value decrease through no fault of their own.
Does anyone really believe that Pfizer (PFE) or Coca-Cola (KO) have anything to do with sub-prime mortgages? And yet Pfizer is down 18.64% on the year and Coke is down almost 18%. Both companies pay a healthy dividend and have for years. Does anyone really think that Pfizer or Coke is going to go out of business anytime soon?
Now this isn't necessarily a recommendation for either company. I personally don't own shares of Pfizer or Coke, but I wish I did. Dividend paying companies are a sure way to keep your portfolio healthy when the sky appears to be falling.
So my final thought.... is this a time for panic? I say emphatically no! Instead, I see a lot of opportunity and value in the market these days. But don't just take my word for it. I suggest heading over to a website like the Motley Fool and read some of their free articles. An hour or two spent on that website always reminds me that a long-term approach to investing is the best and most successful way to go!
Friday, September 19, 2008
Wild Week!
Yowza has it been a wild week on Wall Street! This past week has seen the largest single-day drop since the 9/11 (Monday) and also the largest single-day gain in 6 years (yesterday). The last two days (Thursday and today) have seen the market rebound strongly and I'm thankful that I kept my money in the stocks that I own. General Steel Holdings (GSI) is up 9.35% today as I'm writing this.
In fact, I recently read an interesting study from the University of Michigan that supports keeping your money in the stock market for the long-haul. The Towneley Market Timing Study was originally done in the early 1990s, and found that 95% of market gains occurred on only 1.2% of the trading days from 1963-1993.
I'll say that again. 95% of the market gain happened on 1.2% of the days. That's incredible!
Of course the idea is to own the stocks during that 1.2% of the days, and have your money is something safe like short-term Treasury bills for the other 98.8% of the time. This is called timing the market and is virtually impossible. A perfect market timer would have turned a single $1 investment in 1926 into $690 MILLION by the end of 1993. You can imagine how often that happens. As stated by the Towneley study:
"The financial results of perfect timing are indeed attractive. Yet they are virtually unreachable. In terms of the monthly data, for example, if a market timer is right 50% of the time, the probability of executing a perfectly timed investment strategy is 0.5 raised to the 816th power -- or nearly zero."
So what is an investor to do? Well, obviously you want your money in play for that important 1.2% of days. Ultimately the safest choice is to buy and hold for a long time period. I'm looking to hold onto my stocks for a 3-5 year range. That's not set in stone though. Generally, there's no real reason to sell a stake in a solid company so long as the fundamentals of the business don't change.
Am I glad that I had my money in the market for yesterday and today? Heck yes. Was it a painful Monday and Wednesday (drops of 504 points and 449 respectively) on the Dow? Heck yes. But I'm not attempting to time the market. I'm attempting to build wealth over the long run and after rallies like Thursday (9/18) and today (9/19) I remain confident that I'll be successful.
By the way, as I'm finishing up writing this, GSI is now up 10.58% on the day. :-)
In fact, I recently read an interesting study from the University of Michigan that supports keeping your money in the stock market for the long-haul. The Towneley Market Timing Study was originally done in the early 1990s, and found that 95% of market gains occurred on only 1.2% of the trading days from 1963-1993.
I'll say that again. 95% of the market gain happened on 1.2% of the days. That's incredible!
Of course the idea is to own the stocks during that 1.2% of the days, and have your money is something safe like short-term Treasury bills for the other 98.8% of the time. This is called timing the market and is virtually impossible. A perfect market timer would have turned a single $1 investment in 1926 into $690 MILLION by the end of 1993. You can imagine how often that happens. As stated by the Towneley study:
"The financial results of perfect timing are indeed attractive. Yet they are virtually unreachable. In terms of the monthly data, for example, if a market timer is right 50% of the time, the probability of executing a perfectly timed investment strategy is 0.5 raised to the 816th power -- or nearly zero."
So what is an investor to do? Well, obviously you want your money in play for that important 1.2% of days. Ultimately the safest choice is to buy and hold for a long time period. I'm looking to hold onto my stocks for a 3-5 year range. That's not set in stone though. Generally, there's no real reason to sell a stake in a solid company so long as the fundamentals of the business don't change.
Am I glad that I had my money in the market for yesterday and today? Heck yes. Was it a painful Monday and Wednesday (drops of 504 points and 449 respectively) on the Dow? Heck yes. But I'm not attempting to time the market. I'm attempting to build wealth over the long run and after rallies like Thursday (9/18) and today (9/19) I remain confident that I'll be successful.
By the way, as I'm finishing up writing this, GSI is now up 10.58% on the day. :-)
Wednesday, September 17, 2008
Another Gloomy Day on the Street
As expected, in reaction to the news that the Fed is bailing out AIG with a $85 billion loan. It seems like every day when I head to CNN.com that I read about investors sweating another financial crisis. Thankfully I have a longer-term mindset. I know that day to day gyrations in the marketplace are common. Instead I direct my attention to what the market does over a longer period of time, say 3-5 years.
In fact, today I purchased more shares of American Oriental Bioengineering (AOB). Why? Well because it's still an great company and it's even cheaper than when I originally bought into it! I take solace in the fact that since 2004 AOB has had net incomes of $7, $13, $29, $43 and an estimated $62 million this year. That's impressive year over year growth! I feel even better when I read about others who feel the same way about this company.
But don't take my word for it. Or stockpickr's either. I advise doing a little research of your own. Try "googling" a company that interests you and see what you can find about their business success. Or better still, head over to The Motley Fool and give their CAPS service a try....it's free!
Most importantly of all, start early and keep saving and keep investing! No one wants to work their whole life and investing in solid, value companies is a great way to ensure you enjoy the years to come.
In fact, today I purchased more shares of American Oriental Bioengineering (AOB). Why? Well because it's still an great company and it's even cheaper than when I originally bought into it! I take solace in the fact that since 2004 AOB has had net incomes of $7, $13, $29, $43 and an estimated $62 million this year. That's impressive year over year growth! I feel even better when I read about others who feel the same way about this company.
But don't take my word for it. Or stockpickr's either. I advise doing a little research of your own. Try "googling" a company that interests you and see what you can find about their business success. Or better still, head over to The Motley Fool and give their CAPS service a try....it's free!
Most importantly of all, start early and keep saving and keep investing! No one wants to work their whole life and investing in solid, value companies is a great way to ensure you enjoy the years to come.
Monday, September 15, 2008
A Dark Day on Wall Street
Well today Lehman Brothers (LEH) filed for bankrupcy. This is the company that helped finance the construction of the railroads in the 19th century. These guys have been around for almost 160 years! And yet despite decades of prudent investing and a solid business, Lehman couldn't pull itself out of the mortgage mess.
It's been an UGLY year on Wall Street.
Take a look at this chart and you can see just how bad this year has been.
I took a look at the chart too and I don't fret. Why? Sure, in the YTD the market has been in a gut-wrenching spiral downward. I've watched my portfolio sink deeper into the red. But here's the catch. I'm not a short term sort of guy. I'm much more interested in what happens when I buy and hold.
So I dragged the time-frame indicator on the bottom of that chart back over to 1990. And you know what - the chart looks a lot different! THOSE are the kinds of results that matter to me, the long term kind. That's why I'm eying this painful market downturn with an eager eye. With so many great companies on sale, how much money I can make in the next 18 years is essentially limited by how much I can plunk into those solid companies right now!
It's been an UGLY year on Wall Street.
Take a look at this chart and you can see just how bad this year has been.
I took a look at the chart too and I don't fret. Why? Sure, in the YTD the market has been in a gut-wrenching spiral downward. I've watched my portfolio sink deeper into the red. But here's the catch. I'm not a short term sort of guy. I'm much more interested in what happens when I buy and hold.
So I dragged the time-frame indicator on the bottom of that chart back over to 1990. And you know what - the chart looks a lot different! THOSE are the kinds of results that matter to me, the long term kind. That's why I'm eying this painful market downturn with an eager eye. With so many great companies on sale, how much money I can make in the next 18 years is essentially limited by how much I can plunk into those solid companies right now!
Friday, September 12, 2008
Holdings Update
Today I bought shares of American Oriental Bioengineering (AOB). I've been waiting to be able to do this! :-)
Thursday, September 11, 2008
My holdings...
Well I mentioned that I would share with whomever was reading these what I was investing in. I won't lie to you, it's taken some major cojones to keep plowing money in a market that just keeps falling. But I'm confident in the companies that I've bought and believe that in the long run they will prove to be wise investments.
Currently I own shares of :
Melco Crown Entertainment (MPEL), General Steel Holdings (GSI), Global Industries (GLBL), Actuate Corp (ACTU), NovaMed Inc. (NOVA), Akami Technologies (AKAM) and iShares Lehman Aggregate Bond (AGG).
There are a number of other stocks that I would love to buy, but currently just don't have the capital laying around. These include: American Eagle Outfitters (AEO), American Oriental Bioengineering (AOB), Horsehead Holding Inc. (ZINC) and Starbucks (SBUX).
Currently I own shares of :
Melco Crown Entertainment (MPEL), General Steel Holdings (GSI), Global Industries (GLBL), Actuate Corp (ACTU), NovaMed Inc. (NOVA), Akami Technologies (AKAM) and iShares Lehman Aggregate Bond (AGG).
There are a number of other stocks that I would love to buy, but currently just don't have the capital laying around. These include: American Eagle Outfitters (AEO), American Oriental Bioengineering (AOB), Horsehead Holding Inc. (ZINC) and Starbucks (SBUX).
Monday, September 8, 2008
Turning Beer Money Into Early Retirement
**Originally posted in September, 2008, this has been updated to reflect the deep impact the current economic recession has had on stock valuations. The examples using Honda Motor Company and Apple have been adjusted to reflect the current value of the stock.**
So relatively recently - we'll say May of this year - I became interested in the stock markets and everything Wall Street. Perhaps it's because I'm starting to feel older. It could have to do with finally graduating college and facing the prospect of the real world. For whatever reason though, I've become a financial news junkie. Hour after hour of my free time has been spent pouring over articles on the Motley Fool, the Wall Street Journal, The Street, Google Finance and a number of other online sources. There is an incredible amount of information on the web regarding stock markets.
Throughout all of the literature I've read, there has been one common message: START EARLY. The numbers don't lie - statistically the S&P 500 has returned roughly 10% annually since it's inception. That means a $10,000 investment in 2000 in a broad market fund would now theoretically be worth $19,487.17. The recession has had an enormous impact on the value of stocks over the past ten years, and we're essentially back to where we were in 2000. But for the sake of argument, let's use the historical number of a 10 percent return.
Of course in 2000 not everyone had $10,000 to just set aside - I know I didn't. As a sophomore in high school working a PT job in a grocery store, I probably didn't have $1,000 to set aside! But, I remember cashing those $350 paychecks every two weeks and blowing it things I thought I needed: cds, gas, McDonald's and party supplies for the weekend warrior in me. I think back about all the money I've spent on "party supplies" over the past nine years and I wince when I consider how much it could be worth now.
That being said, I wouldn't take back very many of the priceless moments spent with friends over the years that cost money. You should work to live, not live to work. What's the point in earning money if you never take the time to enjoy it? Of course if I had simply pared down my spending just a bit - say take a weekend off a month - I'd likely have a nice pile of change right now.
Example:
Let's say I spent roughly $20/weekend on partying. Over the course of the past 9 years, that's probably a fair average. If I had stayed in one weekend a month, I'd have saved $2,160 over the past 9 years [($20 *12)*9]. That's a decent amount of money by itself. But let's say I put that money into a decent company whose name I knew - we'll do Honda. Since Dec. 31, 1999, Honda (HMC) is up over 38%. It has also paid out dividends (those wonderful moments when a company gives its shareholders some of it's income), but I'm gonna reinvest those. The market value would now be worth $3,208.10 today. That's a difference of over $1,048 if I had simply saved that $20/month!! I don't know about you, but a $1,048 vacation sounds really nice right now.
We'll do one more. Let's say for some reason I was clever enough to invest that $20/month in Apple. You know, the company that makes your iPods, iPhones and MacBook Airs. That investment of $1,920 over the course of these past 9 years would today be worth $17,885.80! That's a gigantic difference! With that money today I could effectively pay off my student loans from college. Hot damn!
My point isn't that it's super important to pick the next Apple or Wal-Mart or Google. Not every company is going to experience that kind of growth. But what is important is that you start now. The sooner you begin setting some money aside the sooner it can start bringing you some returns on it.
If you're reading this, that's a great first step. But I don't claim to know everything about investing. To be honest, I don't know much beyond what I've read from people far wiser than I. But if you're interested in reading more I'm going to try and post a blog on investing on a recurring basis. Also, I encourage you to visit some of the websites that I've found to be a treasure hoard of information. I go to The Motley Fool, Google Finance, MSN Money and The Street for a few.
So relatively recently - we'll say May of this year - I became interested in the stock markets and everything Wall Street. Perhaps it's because I'm starting to feel older. It could have to do with finally graduating college and facing the prospect of the real world. For whatever reason though, I've become a financial news junkie. Hour after hour of my free time has been spent pouring over articles on the Motley Fool, the Wall Street Journal, The Street, Google Finance and a number of other online sources. There is an incredible amount of information on the web regarding stock markets.
Throughout all of the literature I've read, there has been one common message: START EARLY. The numbers don't lie - statistically the S&P 500 has returned roughly 10% annually since it's inception. That means a $10,000 investment in 2000 in a broad market fund would now theoretically be worth $19,487.17. The recession has had an enormous impact on the value of stocks over the past ten years, and we're essentially back to where we were in 2000. But for the sake of argument, let's use the historical number of a 10 percent return.
Of course in 2000 not everyone had $10,000 to just set aside - I know I didn't. As a sophomore in high school working a PT job in a grocery store, I probably didn't have $1,000 to set aside! But, I remember cashing those $350 paychecks every two weeks and blowing it things I thought I needed: cds, gas, McDonald's and party supplies for the weekend warrior in me. I think back about all the money I've spent on "party supplies" over the past nine years and I wince when I consider how much it could be worth now.
That being said, I wouldn't take back very many of the priceless moments spent with friends over the years that cost money. You should work to live, not live to work. What's the point in earning money if you never take the time to enjoy it? Of course if I had simply pared down my spending just a bit - say take a weekend off a month - I'd likely have a nice pile of change right now.
Example:
Let's say I spent roughly $20/weekend on partying. Over the course of the past 9 years, that's probably a fair average. If I had stayed in one weekend a month, I'd have saved $2,160 over the past 9 years [($20 *12)*9]. That's a decent amount of money by itself. But let's say I put that money into a decent company whose name I knew - we'll do Honda. Since Dec. 31, 1999, Honda (HMC) is up over 38%. It has also paid out dividends (those wonderful moments when a company gives its shareholders some of it's income), but I'm gonna reinvest those. The market value would now be worth $3,208.10 today. That's a difference of over $1,048 if I had simply saved that $20/month!! I don't know about you, but a $1,048 vacation sounds really nice right now.
We'll do one more. Let's say for some reason I was clever enough to invest that $20/month in Apple. You know, the company that makes your iPods, iPhones and MacBook Airs. That investment of $1,920 over the course of these past 9 years would today be worth $17,885.80! That's a gigantic difference! With that money today I could effectively pay off my student loans from college. Hot damn!
My point isn't that it's super important to pick the next Apple or Wal-Mart or Google. Not every company is going to experience that kind of growth. But what is important is that you start now. The sooner you begin setting some money aside the sooner it can start bringing you some returns on it.
If you're reading this, that's a great first step. But I don't claim to know everything about investing. To be honest, I don't know much beyond what I've read from people far wiser than I. But if you're interested in reading more I'm going to try and post a blog on investing on a recurring basis. Also, I encourage you to visit some of the websites that I've found to be a treasure hoard of information. I go to The Motley Fool, Google Finance, MSN Money and The Street for a few.
Subscribe to:
Posts (Atom)
