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!

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).

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!

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. :-)

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.

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!

Holdings Update

Today I bought shares of American Oriental Bioengineering (AOB). I've been waiting to be able to do this! :-)

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).

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.