Wednesday, February 28, 2007

Delaying My Tax Filing

You heard me right, MoneyMan hasn't even attempted to do his taxes yet. But, as some of you may have heard, and as some of you procrastinators may be happy to hear, there is a reason to wait to file your taxes later this year.

The gist of the story is that many brokerage firms have been requesting filing extensions and plan to be sending out restated 1099 forms due to some late changes in the tax laws last year. This would require you to refile your taxes if you used any information in the original forms they sent out.

So if you haven't opened your W-2 envelope, pulled out your calculator, sharpened your pencil, bought your tax software, or done any of the other fun things associated with tax season, breathe easy.

I'm not looking forward to my taxes this year. I always prefer to do them myself because they help me to understand how the decisions I make during the year impact my tax bill, and they help me to plan some tax strategies for the following year.

One example of this is when I noticed last year on my state and city tax forms that I could deduct any interest I received on US Government securities, such as treasury bonds. I told myself I would have some income to put on that line this year (as long as the rates made sense), and as a result I started putting more of my savings into Treasury bills, which have actually been yielding more than my ING Direct savings account this year, in addition to having the favorable tax status.

So anyway, I recommend doing your taxes yourself, but I also recommend that you wait until the middle/end of March if you will be reporting any 1099 income that might be in danger of a restatement.

Tuesday, February 27, 2007

Stock Market Decline

So the big news in the markets was the decline today. Let's recap the pain:

  • The DJIA closed down 416.02 points, or 3.6%, to finish the day at 12,216.24
  • This was the worst point decline since the index fell 684.81 points, or 7.3% on Sept. 17, the first trading day after the September 11th attacks
  • This was the worst percentage decline since the Dow fell 3.6% March 24, 2003, not long after the beginning of the Iraq war
  • The NASDAQ was down 96.99 points, or 3.86%
  • The S&P 500 was down 50.33 points, or 3.47%
  • The drop seems to have been sparked by a 9% overnight drop in the Chinese stock market that spooked people before trading opened in the US

I thought it was interesting to read that a computer glitch was partly responsible for some of the market decline. Apparently the DJIA wasn't being calculated correctly during the day due to heavy trading volume, and when they switched to a backup computer to do the calculation, the result was an immediate 200 point drop in the index, which no doubt spooked investors even further.

For those of you who missed it, I wrote about how my unofficial market barometer was pointing towards a correction a month or so ago, but this is not an "I told you so" post. I am still an agnostic on the near term movements of the market. I don't know if today's trading signals a major correction is in the works, or if it is a great buying opportunity. I can tell you that I'm glad that my 401(k) rollover didn't go into effect yet, because I will most likely be buying into my funds at lower prices sometime next week.

Anyway, I'm happy when prices go down, and if your investment outlook is 10 years long, I think you should be happy too.

If you do pick individual stocks, now might be a good time to have a watch list of stocks that you will buy if they become undervalued. Allthough, I think it will take a lot more than a day like today to create some real buying opportunities.

In other words, don't worry unless you're retired and in the process of selling your investments.

Monday, February 26, 2007

Identity Theft on Blogger!

I recently found another MoneyMan on blogger! Actually his blog is pretty good and by no means do I think any one person could own the rights to use the name "MoneyMan."

Anyway, he's a TV/radio personality and all I am is a regular old person. Check it out and let me know what you think.

Save Money By Doing It Yourself

I have a few contractors in my family and I have spent some time working with them on different projects... new bathrooms, decks, roofs, kitchens, flooring, moulding, tiling, doors, closets, aluminum siding, painting etc... From doing these things, I got a general feel for how they are done and also a general feel for how much things cost.

If you can do some of the more basic home repairs by yourself, you can save a ton of money over the long run, and you can also get the feeling of satisfaction you get when you complete a job.

One example I have is plumbing. I know many people who are clueless about the basic workings of a toilet, or how to clear a clogged drain. In most cases, you can solve a basic clogged drain with a plunger. In some cases, it involves some tools such as an auger.

If you're interested in learning how your household plumbing works, a book I highly recommend is Complete Plumbing (Stanley Complete Projects Made Easy). I have found this book extremely useful because it is filled with full color photos, demonstrations of how things work, and details on how to do particular projects such as installing a new sink, redoing a bathroom and yes, even unclogging a drain.

Once you start thinking you have to leave everything to "experts" and realize these kinds of things are things that almost anybody can learn, I think you'll find yourself saving a lot of money. There are books available on almost every topic you can imagine. Get out there and learn!

(Of course if you don't have the time or if the jobs are particularly sensitive, involving building codes and major work, you will have to at the very least consult a licensed practitioner.)

Saturday, February 24, 2007

Taking Things Apart

Gratuitous link: I'm extremely curious by nature, and I spend a lot of my non-finance time making things, fixing things, and in general, taking things apart. Needless to say I was happy to stumble upon a site called the other day.

Basically, each blog entry on the site involves a few photos of the site owners or someone else taking apart some kind of device- electronic or otherwise. They don't just take the cover off either. They separate virtually every component right down to the circuitboard.

I usually take a few quick shots with my digital camera when I take something apart, in case I forget where the pieces go when I want to put it back together. This is a whole site full of pictures like that.

Anyway, if you're curious about this sort of thing, it's at least worth a look.

Starting Up A Roth IRA

A friend of mine who is 24 years old and still only a couple years out of college recently made an excellent decision to open up a Roth IRA at TDAmeritrade.

He'd read a bunch articles describing Roth IRAs (, he looked at the tradeoffs between investing in traditional vs. Roth IRAs, he asked me some questions about where I thought social security was going to be when he retired in 2047 (don't count on anything, I told him) and most importantly, he found a bunch of retirement savings calculators through Google and saw how much his savings could grow over time if he started today.

He funded his account with $500 (it still counts as a 2006 contribution since he's doing it early in 2007), and the next question he had was: what the hell do I do now? He logged onto TDAmeritrade's site, but being an investment newbie, he had no idea what any of the words meant, and no idea where to go from there.

So I gave him some advice that I would give to anyone in his situation.

First of all, I told him that his money was currently sitting in a money market fund at TD Ameritrade, so even though it isn't earning him much, he can take his time figuring out where to go from there and not feel like he has cash rotting idly away.

He asked me if he could put it in an investment that was guaranteed not to lose any value. I told him he could find something similar to that, but that nothing could ever really have such a guarantee attached to it.

I also told him that, given his 40 year time horizon, he could afford to take on more risk and most likely earn much higher returns over the long run. I recommended he use his $500 to buy shares of an Index Fund, particularly, an S&P 500 Index Fund and even more particularly, the Vanguard S&P 500 Index Fund. I felt that an individual stock would be too risky for him, since neither of us have been following individual stocks lately, and I felt that an actively-managed mutual fund would more likely than not underperform the S&P 500 over the next 40 years, and charge him high fees in addition to all of that.

Before I suggested he log on and make the trade, I asked him another question: are you planning to put any more money in soon? He said he would be able to put another $500-1000 in sometime over the next couple of weeks. As a result, I recommended he wait until he put that next deposit in, then buy the fund shares using a single trade. TDAmeritrade charges $10 for Internet equity trades, and given the relatively modest sum he was talking about, it was worth saving the extra transaction fee.

So that's where he's going to go. Over the next few years, I think he is going to educate himself a lot more about investing, and I'm going to recommend he add some other asset classes to his Roth IRA portfolio, in particular small-cap funds (I am a big fan of Dimensional Fund Advisors index funds in this category) and international funds. I am going to recommend he set target weights, stick to these over time, and strive to keep costs down wherever possible.

When he gets more steady employment (he currently works without benefits), I'm going to recommend that he participate in his employer's 401(k) program, if it gets offered to him, and that he do this via automatic deductions from his paycheck.

I'm also going to give him my copy of The Motley Fool Investment Guide : How The Fool Beats Wall Streets Wise Men And How You Can Too, which is an easy read investment primer. If it interests him, I have a library full of books he can use to explore from there.

The most important point I wanted to get across to him was that investing isn't some kind of black magic. It is something anybody can learn, and, given the right set of expectations (that stocks will perform better than the alternatives over the long run, offering returns somewhere in the neighborhood of 10% per year), it is something anybody can excel at.

Thursday, February 22, 2007

Michael Lewis on Private Equity vs. Mutual Funds

I caught a Michael Lewis (author of the fantastic book "Liar's Poker," which introduced many a young fellow to the world of Wall Street) opinion piece on my Bloomberg terminal today and I felt it was worth passing along. You can read it here.

His basic premise is that there are some investments that rich people can make, i.e. private equity investments, that the middle class cannot. He further argues that the rich make 20% annual returns off of their private equity investments while the middle class are happy with their mediocre mutual fund returns.

I have only had one recent brush with private equity, and that came when Yankee Candle (NYSE:YCC), a company whose stock I owned, was bought out by a private equity firm. I had a lot of questions as to whether or not that transaction was on the up-and-up, but I'll save those for another blog entry.

I don't think this is as big a deal as he makes it out to be. Private equity returns run in cycles just like every other asset class. Yes, you have to have a lot of money to invest in PE funds in most cases, but this is an investor protection, not a scam designed to make money for the rich. Private companies don't have to provide the kinds of disclosure public companies do, and as a result I think they make for riskier investments. If you're rich and you lose your $1m investment, chances are you can shrug it off. If $1m is your entire net worth and you lose it, chances are you are not going to be able to recoup the losses.

Has anyone else had any experience investing in private equity funds and care to shed some light on the subject?

Wednesday, February 21, 2007

Why Aren't Personal Finance Bloggers Wealthy Yet?

Just to pass this along, I read a great blog post at entitled "Why Aren't We Wealthy (Yet)?"

One of the basic criticisms of personal finance bloggers goes something like this "If you're so smart and know how to be rich, what are you doing sitting around writing a blog?

Super Saver's first answer to the question hits the nail on the head: "More Time Needed." Most personal finance bloggers (me included) aren't blogging about get rich quick schemes. But, a lot of the advice in the good personal finance blogs can help a person to get rich over a period of years.

When I say good personal finance blogs, I am talking about a very small percentage of the blogs out there, probably about 2% of them.

One of my pet peeves is all of the trash that people in the personal finance blog community spew forth every day of the week. To come up with a typical post, they link to a "Top 10 Ways To Save Money" link at, they list the 10 ways, and they write very little of their own content to supplement it. I have to admit I have been guilty of this as well on occasion, but I am really getting fed up with what I'm seeing out there.

If one more person tells me to give up coffee, pop, or find my latte factor, I am probably going to hit them with a roll of pennies. Of course, they are probably going to collect those pennies and use them to buy a latte, but at least I will have had the satisfaction of blasting them in the face with a heavy, blunt object.

I think I'm going to start writing a weekly post where I find a boring/useless/blatantly stolen, or otherwise incorrect post on someone else's blog, and I'm going to call them out for it. It won't win me any friends in the PF Blogging community but I think it will go a long way towards calling out people who really need to be called out. Bloggers beware!

Mobile Banking

I've been hearing more and more about mobile banking lately, and I'm on the fence. On the one hand, it would be really handy to check your account balances, pay bills, and make transfers from the comfort of your mobile phone. On the other hand, I'm not too sure how secure it would be, how the Internet speed would be, and whether or not I would actually want to make transactions on that tiny cellphone screen I have.

Bank of America recently announced that it is going to be offering mobile banking this year, with initial rollout expected in March.

The Wall Street Journal also had a good piece on mobile banking today, and from that story, it is clear that this is soon going to become a standard service offered by most banks. Among other potential pitfalls, the Journal mentions that unencrypted text messages (which some banks would use to update customers with account balances) are prone to being intercepted by hackers, and that mobile devices such as blackberries are increasingly becoming targets of viruses.

I'm a big believer in technology, though, and I think mobile banking will catch on and over the next few years, it will become more popular, particularly in the US. The Journal notes that "fewer than than 1 percent of Americans use mobile-banking services, compared with 3 percent in Western Europe and Japan." While I think it is strange to compare 1 percent with 3% and act like that is a big difference, I definitely think there is plenty of room for growth in the space.

Would I want to be an early adopter? No way!

How To Get A Good Night's Sleep

If you're like me, one of the things that really brings you down at work is a lack of sleep. I really have trouble getting to sleeep some nights, with the result being an extremely tired morning the next morning, and a difficult day at work.

I think the root of my problem is the weekend/weekday differential. What I mean by this is I typically try to get into bed around 10 during the week. Sometimes this goes later, and very rarely does it go any earlier. In fact I would say the median time I'm asleep is 11:30pm, and I wake up at 6am for a total of about six and a half hours of sleep, which never feels like enough. On the weekends however, I tend to stay up late, usually till 2am, and I end up sleeping in (when I can) to 10 or 11 in the morning.

This screws up my biological clock. Come Sunday night, I'm not tired enough to go to bed early. I could go to bed at 10 and just lay there for like five hours wide awake. This messes me up for a few days, I end up missing out on sleep, and when the next weekend comes around, I do it all again.

I looked around the Internet for some advice on how to get a better night's sleep, and I stumbled upon a fellow by the name of Dr. William Dement at Stanford, who is the author of this page full of good sleep tips.

Some of the other tips include:

  • "If you can't fall asleep within 20 minutes, get up and do something boring until you feel sleepy"
  • "Have a light snack before bed" - an empty stomach or one that is too full can interfere with sleep
  • Use sunlight to set your biological clock - he recommends getting up and turning your face towards the sun for 15 minutes every morning to let your body know it is time to wake up

Any other tips on getting a good night's sleep? While it isn't particularly personal finance related, I think that sleep is one of the most basic prerequisites to anything you do.

Tuesday, February 20, 2007

Earn Extra Money by Participating In Focus Groups

I've heard of a lot of things people do for side income over the years, but I think one of the most efficient ones I've found is volunteering for the occasional focus group.

Some years back I was introduced to a guy who makes his living getting people together to fill focus groups for companies. I gave him my information (age, marital status, current job title etc...) and every once in a while when something opens up that I qualify for, he gives me a call to do a quick screening interview. If I qualify for the group, I'll sign up to go to someplace in manhattan, usually the headquarters of an advertising agency, and give my opinion on a particular product or service.

The average focus group lasts about an hour and a half, and the average pay is about $100-150. Every once in a while it is more than that, particularly when they are looking for people who fly frequently for business, or some other kinds of executives. Another bonus is that they usually provide some food- sandwiches, cookies and things like that.

I see this as a very efficient use of my time if I can do it after work. I can use it as a place to get dinner, and I earn about $100 an hour. Of course, I can't put in many hours doing this because I don't get that many calls and because they discourage you from signing up for focus groups too much.

The typical focus group is probably what you would expect. You sit in a room with a moderator and a group of people roughly your age. There is a big mirror or window, behind which stands one or two people and a video camera. The moderator asks a bunch of questions and you react to things, usually advertisements or new product concepts.

I won't talk about any focus groups in specific because they make you sign a waiver agreeing not to discuss what went on in the group, but in general the groups I have been to have been very interesting. I've seen new products before they were introduced, tasted a few new drinks before they were introduced, and given some feedback on some advertising campaigns that I have never seen since.

One word of advice I have is to be friendly with the person who fills the groups and above all, show them that you are reliable. The person filling the groups needs to know that I will be there when I say I will be there, and I have never missed a group or showed up late.

Another piece of advice is that you shouldn't lie. If it's a focus group for people in the market to buy an SLR digital camera and you don't know an SLR from a hole in the ground, you are going to be wasting everyone's time by going to the group and even the best BSer probably won't be able to last an hour without exposing themselves as someone who is only there for the money and the free food.

The best part of focus groups is that they are stress-free money. You have to give nothing but your opinion, so you can go in there relaxed and come out happy, carrying an envelope full of cash, which they always give you in big bills in an envelope on your way out.

Anyone have some other ideas for some high-paying side jobs?

Should You Be Getting Overtime has a fairly interesting piece entitled "Should You Be Getting Overtime."

I haven't worked a job with an hourly salary for a few years now, and even though I know I'm not entitled to get overtime, I was very interested to read this opening paragraph "If you've been putting in extra hours, you might be entitled to extra pay. Whether you're hourly or salaried, blue-collar or white-collar, if you've been giving your boss more than 40 hours per week, you're due time-and-a-half for each hour of overtime, unless you fit into one of the exceptions."

For a brief moment, I pictured myself getting 10-20 hours of overtime pay every week.

Unfortunately, though, the article went on to explain that there are certain exemptions, and I fall into the "exempted" category, meaning that I am not entitled to overtime.

According to the article, the three criteria that make you exempt from overtime pay are that:

1) You receive flat salary, rather than hourly wage.

2) You earn the same amount each pay period (regardless of how many days or hours you've worked).

3) Your weekly salary is equal to or greater than $455. (The minimum may be higher in some states.)

However, if you don't fall into one of the categories above and your boss is not paying you overtime, he may be doing something illegal. Check into your local labor laws, and you might have some extra money coming your way.

401(k) Rollover Update

I finally got a check for the funds in my old 401(k) last week, and it took me a few days to get around to sending it in to my current 401(k) plan sponsor. I had the day off yesterday (President's Day) and took about a half hour to go through the paperwork one last time and tell them how I want the money split up (I used the same percentages as I make in my current 401(k). I mailed the forms and the check to my new sponsor today. Now all I have to do is wait a couple of weeks and hope I didn't fill anything out wrong.

For those of you who have been asking... the amount was about $15,000. I put this money away in 1999-2001. About $2,000 of it was the result of my old company's matching program, so I'm glad that I took advantage of the free money back then.

Thursday, February 15, 2007

Continue Your Education For Free

As a mentor and professor once said to me- you should never stop learning. In particular, the subject he taught was business, so he recommended getting a subscription to the Wall St. Journal, or some other business magazine so that, once you finished college, you could continue reading "case studies" about how certain businesses approached particular problems or opportunities. Things are constantly on the move in the business world, and the concepts you learn about might not change, but they are applied in new and different ways every day.

I took his advice to heart, and being a naturally curious person by nature anyway, I've tried to keep up with things happening in the world around me, looking for opportunities of my own.

The Wall Street Journal will cost you about $150 for an annual subscription, which includes paper delivery every day (except Sunday), as well as online access.

However, if you don't want to subscribe to the journal, you can always continue your education for free.

Obviously, the first place that comes to mind is the Internet. Many newspapers have websites that let you read some stories for free, and many blogs (such as the one you are currently reading) are worth their weight in gold.

Another place you can hit up is your local public library, where you can often get many magazines and periodicals for free. When I first got out of college, I would try to stop by the library once a week to read some of the more expensive magazines such as the Harvard Business Review, The Journal of Finance (whose forthcoming articles you can read here), Fortune, Forbes, etc... You don't have to read the whole magazine, just pick a few stories that interest you.

My library also offers an extensive online catalogue. Whenever I feel like I need to learn a new skill, or brush up on something, I just head to the database, where I can find pretty much any book that isn't brand new, as well as some of the more recently published titles. If my local branch doesn't have the book in stock, I can simply request it online, and in a week or so, it will be waiting for me to pick up. This is a completely free service that my tax dollars pay for, so I am more than happy to take advantage of it. If I find a book I will want to refer to time and time again, I will usually head over to my favorite category at and pick it up there.

Another new learning tool I've been getting into more lately is the iPod I got for Christmas. Granted, the iPod isn't free, but you can use it to download a ton of free lectures and other course material from some different universities. For example, UC-Berkeley makes quite a bit of lectures, syllabuses, homework assignments etc... available through iTunes. A quick link over to the site shows that they offer info on Arts and Humanities, Computer Science, Chemistry, Biological Sciences, Engineering, Social Sciences, Natural Resources, Physical Sciences, and Information Science. Stanford also offers some course material through iTunes. The best part about them is that they're all free.

A Wall Street Journal article today "Yale on $0 a day" also mentions that Yale University "has announced it will produce digital videos of undergraduate lecture classes and make them available free to the public. This academic year, it is taping seven classes -- from Introduction to the Old Testament to Fundamentals of Physics -- to be posted online this fall." If this catches on, it might give people an even better reason to get their hands on a video iPod.

A final thought on the iPod education... in case you missed the recent coverage, check out this ESPN article on how baseball players are using iPods to study film. I didn't have one for a long time, and I never knew what all of the fuss was all about (I had a generic MP3 player for a while), but the iPod has really become a cultural phenomenon. I have to admit I am a convert, and I don't give much credence to recent stories about iPod/iTunes sales slowing down. Who knows? It still might be a good time to get in on AAPL stock, depending on whether or not you think this product, and other new products from Apple are going to become "must-haves." The value investor in me balks at the 30x trailing P/E ratio and the hype around the company, but when I think about the potential role iPods could end up playing in our daily lives in the coming years, it at least makes me stop and think.

I didn't think I was going to go there with the last paragraph, but I did, so I'm going to slap the "investing in stocks" tag on this one, along with "increase your income," because I believe if you continue to learn, you will make yourself more valuable to your employer (or to another employer) and use that value to increase your income.

Wednesday, February 14, 2007

Fortune Magazine's "Ten Stocks To Last A Decade"

In the year 2000 (cue Conan O'Brien skit), Fortune Magazine wrote an article where it named "Ten Stocks to Last a Decade." Bill Barker over at The Motley Fool took a look back at the stocks named in that article and how they have performed since then. The results speak for themselves:

  • Broadcom (BRCM)..... -78%
  • Charles Schwab (SCHW)..... -51%
  • Enron..... oops
  • Genentech (DNA)..... 121%
  • Morgan Stanley (MS)..... 0%
  • Nokia (NOK)..... -45%
  • Nortel Networks (NT)..... -96%
  • Oracle (ORCL)..... -53%
  • Univision..... -42%
  • Viacom...... Kind of hard to explain

For those of you who aren't familiar with Enron, the company was one of the most notorious bankruptcies of all time, the stock ended up being worthless, and many of its executives faced jail time. One even committed suicide.

Viacom is hard to explain because it spun off some units in the ensuing years, so it is more difficult to track.

I was curious what a portfolio made up of $1000 of each stock purchased in 2000 would look like today, so I put together this table (you may have to scroll down pretty far due to formatting issues):

ReturnValue in 2000Value in 2007
Morgan Stanley0%
Total Portfolio Value9,000 5,560
Total $ Loss3,440
Total % Loss-38.2%

So as you can see, the total loss would have been on the order of -38.2%.

I did some research on Yahoo Finance, and according to their historical pricing, if you had invested $9,000 in the iShares S&P 500 Index (IVV) in August of 2000, you would have $9,492 today, for a gain of about 5%.

The lessons I take away from this are similar to some of the lessons John Dorfman wrote in his final bloomberg column (see my previous post on this): don't listen to the experts, out-of-favor stocks are the best road to capital gains, and perhaps most importantly, predicting the market with consistency is extremely difficult.

So unless you think you can pick stocks better than Fortune magazine (which some people can), you are probably best limiting your equity investments to low-cost, highly diversified index funds that will allow you to match the market's overall returns every year.

Tuesday, February 13, 2007

Getting Things Done

I wanted to quickly mention a book that I recently read and felt the need to recommend to my readers: Getting Things Done: The Art of Stress-Free Productivity by David Allen.

It is basically a walkthrough of a system that Allen has developed over his years as a "personal productivity consultant" for executives and organizations.

You might already have a good system for organizing and prioritizing your work, but I can guarantee you that you'll be able to improve some of your weak areas by reading this book. You can read some more specifics and reviews on Amazon, and I may bring up some of the info in later posts, but let me just pick out a particular area I was able to improve after reading the book: filing.

I have never been a great filer. I have plenty of space, plenty of folders, and no shortage of reference material, current projects, and other assorted paperwork in and around my desk at work, but I have never been satisfied with my filing system. The folders are always hard to read, the stuff is always hard to find, and things always end up looking untidy and unprofessional.

David Allen helped me change that. He suggests buying a labeler, using only one folder per file hanger, and creating an alphabetically sorted reference system. As he mentions in the book, there is something about using an automatic labeler (such as the Brother P-Touch) that changes your entire relationship to your filing system. After going through all my files, labeling them properly, and resorting them about a month ago, I have exponentially increased my ability to both find the reference documents I need, and keep my desktop clear of the bits of paper that always seem to pile up as the months go by.

Anyway, just wanted to pass that along... anyone else read that book and care to comment?

Nine Market Lessons from John Dorfman

John Dorfman has written a stock market column on Bloomberg for about nine years, and recently announced he will be leaving to spend more time at Thunderstorm Capital, an investment firm he founded in 1999.

His columns have been good over the years, and his investment style has a decided value ( tilt to it. I was particularly excited to read his final piece when I saw the title: "Nine Lessons I Learned in the Past Nine Years." I think it's worthwhile for any potential investor to review these lessons, and to look up some of his older columns. They make for some good reading.

His nine lessons were (and I quote):

"1. Out-of-favor stocks are the best road to capital gains.
2. Don't be swayed by what Wall Street analysts say.
3. High portfolio turnover is not necessary for good results.
4. The investment value of a stock is independent of whether it has been moving up or down.
5. Predicting the market with consistency is extremely difficult.
6. Predicting the economy is probably even harder.
7. High valuations alone aren't a good reason to sell a stock short.
8. High profits alone are no reason to invest in a stock.
9. Dialog with readers was one of the best parts of my experience as a columnist."

Number four on the list jumped out at me the most. Time and time again, I have seen people buy a stock, watch it go up 10%, then tell the entire world about what a great investment they made. They might not know a thing about the company or its prospects, but they feel validated that the stock went up 10% in the week or month since they purchased it. If it goes down 10% the next week or month, all of a sudden it is a bad investment and they look for someone to blame for recommending them such a lousy stock.

For most of us, a long-term investment strategy is most appropriate and over the long term, the returns you get from a common stock investment will reflect the true value of the underlying company. In the short run, a stock can run up 10% because of a mention on Cramer's Mad Money, or fall 10% because of a fire at a warehouse. These are the kinds of price movements that in most cases have nothing to do with the true value of the company, yet will cause many people to buy or sell a stock in panic.

As Warren Buffett often says "in the short run, the market is a voting machine, in the long run it is a weighing machine." If you choose to go the road of investing in individual stocks, you would be well served to keep Dorfman's nine lessons in mind.

Monday, February 12, 2007

The Subprime Mortgage Default Opportunity

Subprime mortgages have been in the news quite a bit lately, and the news has not been good for subprime borrowers and people who own stock in subprime mortgage lenders. For those of us in the market to buy a home, however, I think the news is actually very good.

If you have a high credit score, you can usually get a mortgage at a pretty good interest rate, let's call it somewhere around 5.8% for a 30-year mortgage today, according to However, if you have a low credit score, you are considered a risky borrower, and must therefore pay "subprime" rates sometimes well in excess of the 5.8%.

During the housing boom of the past 5-10 years or so, many people with shaky credit histories, low incomes (as compared with their mortgage payments), and low credit scores were able to borrow money to buy houses as banks relaxed their guidelines around granting loans to these "subprime" credit risks. They used tools like adjustable rate mortgages, interest-only mortgages, and other creative kinds of financing to get people into their homes (or to buy them their investment properties).

This was all well and good in the low interest rate environment we've enjoyed for a long time, but as interest rates have come up over the past few years, these shaky buyers have been increasingly unable to make their mortgage payments and going into default.

The big news that put subprime defaults on the map recently was HSBC's profit warning, where it said that it was going to increase its provision for loan losses by 20%. This warning was followed by others, all of which blame increasing subprime loan defaults for unexpectedly poor results.

Dan Green over at The Mortgage Reports Blog has been following the news and even created a category- subprime shakeout - on his blog for the related news.

I have been silently cheering a housing market decline for the past couple of years because I recently got married and have been saving money to buy a house. With the way the market has overheated, it became clear to me that I would never be able to afford one (especially in New York) unless prices came down. Like a lot of people in the USA, the housing boom simply priced me out of the market.

Mortgage defaults may be a good catalyst to drive prices down. As people realize they can't make their monthly mortgage payment, one of their options is to sell their house and try to use the proceeds from the sale to pay off the mortgage. They truly become "motivated sellers" and will make price concessions to get the house sold so they can stop hemorraging cash via large monthly mortgage payments. Home prices are usually based on comparable sales, so if one home in a neighborhood is sold at a "below market" price, the price tags on other houses in the neighborhood will usually come down as well. This could present a great opportunity to buy a home for a decent price.

Now before you villify me for cheering a housing price decline, let me clarify a point here. I'm not hoping that families are put out on the street. That is the last thing I want. Instead, I want to see speculators and investors leave the market.

I think a big cause of the housing boom was investors buying second and third homes as speculative properties, hoping prices would go up and planning to "flip" the homes for a quick profit. I personally know some people who did this and these people are currently sweating bullets because the quick profit did not materialize. Instead, the value of the homes and condos they bought have actually declined, leaving them stuck with adjustable mortgages bearing rates that are moving higher and higher. If they sell, they will realize a loss, but that is a risk and it is all part of the game they were playing.

At any rate, for all of us who have been hoping to buy a home, but felt hopelessly priced out of the housing market due to speculative excesses, we can let out a silent cheer each time we see a subprime mortgage lender report that defaults are rising. As the motivated sellers run for the exits, we will be there with open arms, ready to take the home off of their hands for 20% down and 25% off of the asking price. We just need to be ready for the opportunity.

I'll leave you with one of Warren Buffett's mantras for investment success: "Be greedy when others are fearful, and be fearful when others are greedy." I am in no way a real estate expert, but I think the next few years might offer some opportunities to be greedy in the housing market.

Sunday, February 11, 2007

Change of Control Covenants

In a previous post about credit default swaps, I briefly mentioned how leveraged buyouts(LBOs) can cause stress for bondholders of the target firm.

With all of the easy money floating around in the economy, LBOs have been on the rise for the past few years.

For those of you who aren't familiar with LBOs (wikipedia), they are basically transactions where one company borrows a whole bunch of money to buy another company. The new debt ends up on the books of the target company.

New debt makes existing debtholders very unhappy, because it means the company has even more fixed obligations (ie principal and interest payments) to pay, which makes it less likely that any single debtholder will get the interest and principal they have coming to them. When the bond becomes more risky, the market price declines, causing a paper loss for the holder.

Something I've been hearing a lot about in the credit markets lately is designed to combat this "LBO Risk" that bondholders face, and this is the addition of so-called "change of control" covenants ( in bond documents.

Basically, investors have been pushing to include provisions (called covenants) in new bond issuances that say the company selling the bond must agree to do certain things, such as maintain a certain debt/capital ratio, interest coverage ratio, or some other metric that would prevent it from taking on too much additional debt and in effect screwing the current debtholders over.

"Change of control covenants" have been getting a ton of notice in the investment community lately due to the increased LBO activity. These covenants are specifically geared towards the threat of leveraged buyouts and in general they say that the bondholder has the right to "put" the bond back to the company if there is a "change of control" event, ie a buyout. This gives them reassurance that they can sell their bonds back to the company for essentially 100% of face value if the company gets bought out. If they didn't have such a provision and the company became the target of an LBO, the only way they might be able to unload their bonds would be for something less than 100% of face value (75% maybe).

According to a story in the Feb 8 issue of the Wall Street Journal ("Bondholders Fight Back as Deals Raise Debt Risks") recent issuers that have included change of control provisions include Home Depot, Black & Decker, Alcoa, Xerox, Federated Department Stores, and Owens Corning.

Fitch, one of the 3 big bond ratings agencies, put out a piece assessing Motorola's LBO Risk, and determined that some of MOT's debtholders would be out of luck in the event of an LBO. The article gave a specific example showing how two of MOT's debt issuances have some LBO protection, but the others do not:

"In terms of change of control provisions, while the indentures related to the
$400 million 7.5% debentures and $400 million 6.5% debentures enable bondholders to put the bonds to the company upon a 50% change in ownership, the bond indentures related to the $1.2 billion 4.6% senior notes and approximately $530 million 7.625% senior notes lack any change of control provision."

For those of you who invest in bonds, you might want to take a second look at your indentures and at least be aware that your bonds could lose considerable market value if the company that issued them becomes the target of a leveraged buyout. If you have some kind of a change of control covenant in the indenture, you can be assured that you have additional protection against what many consider to be a "worst-case scenario" for bondholders (an LBO without any covenants).

For those of you who just appreciate being kept up to date on current topics in the world of finance, you might want to read some more about this topic.

Here's a research report with a decent take on LBO Risk (.pdf).

Here's a recent Bloomberg piece on the market's reaction to Gap Inc.'s percieved LBO risk.

And finally, another Bloomberg piece that talks about how investors are paying up for change of control covenants.

A final thought, most people I know who follow the bond/credit markets agree that we are at a high point in the cycle. Yields are low, spreads are low, t is incredibly cheap for risky companies to borrow money, LBO activity is high, corporate debt issuances are on the rise, and as with everything else, "what goes up, must come down."

Wednesday, February 7, 2007

401 (k) Rollover Update

Another milestone in my 401 (k) rollover process has been reached today! I received an email notification today that my rollover application has been accepted and my former employer's plan has cut me a check that I should be getting in 7-10 days. I tried logging on to the site to check if my balance had gone down to zero, but it would not accept my logon information. Hopefully this means I am now done with this account forever.

Now I have to get the paperwork for depositing the check into my current employer's plan ready so that I can deposit the check as soon as it comes in.

Sunday, February 4, 2007

The Value of a Saturday at Work

Many people bristle at the thought of working on the weekends, but every now and then it might pay you to go into the office on a Saturday. I went in for 6-7 hours yesterday and I was able to get a ton of stuff accomplished.

The biggest benefit is the lack of distractions. The kind of work I do often involves long periods of concentration, working out numbers, trying different solutions, and seeing which fit the best. The chances of getting 2 straight interruption-free hours of work during the week are practically zero for me. There are always coworkers coming over to interrupt me, phone calls to be answered, "urgent" emails, or other things that throw me out of whatever it is I was working on.

Yesterday, I had absolutely none of that. I had complete control over my day, and I used the time to get through some work that was particularly frustrating to try to do during the week.

The second biggest benefit is just the amount of time it adds to your week. There are only a certain number of hours I can work in five days without feeling fatigued, burned out, or just plain sick of the place. I estimate that to be somewhere around 60 hours. After that, I am not as effective. Working on Saturday gave me a fresh day, and some more work hours that I did not have to squeeze into my five day week. Knowing how much I was getting done, realizing I could leave whenever I wanted, and not having coworkers asking me for things also made the day incredibly stress-free.

I was also amazed at how pleasant the commute was. Instead of taking the bus and the train to work, I was able to drive all the way in because there was no traffic. I found a parking space pretty easily, and I made it in to work in about half the time it usually takes me during the week.

Another big benefit is that I ran into a fairly high-ranking company executive while I was there. We had a brief chat in the elevator. A chance meeting, but if that person talks to my boss's boss, or if I am ever applying for a job change into their area, it is the kind of thing that tends to leave a good impression.

Finally, just getting all of that work out of the way is a benefit in itself. I am going to feel much better when I get into the office on Monday and I'm not immediately hit with the giant workload that I had when I left on Friday.

There are downsides too, especially if it becomes necessary or expected for you to work on Saturdays, and they start to interfere with your personal life. I didn't have anything in particular to do yesterday, so it was completely my choice to go in and work. If I was asked to go in, I'm sure I would have resented it. I feel like my weekends are mine, and I should be able to use them however I want to.

Anyway, I am not going to make this a habit, but I think a Saturday every now and then (once every few months or so) could be a great tool for getting through a pile of work, reorganizing, and refocusing.

If you've never done it before, I recommend you try working on Saturday once or twice, and pay attention to how you feel while you're doing it. If you're like me and you don't have to go in, but can do so every once in a while to catch up, it's probably a good use of your time. It will make you a more valuable worker, and over time, your salary should grow to reflect that value.

Please remember that I'm not aiming this advice at people who feel overworked and hate their jobs. If you feel like you have to work weekends just to keep up with your workload, if your boss expects you to come in over the weekend, or if you work ungodly hours during the week, I would seriously rethink your decision to remain in your current job. You might be getting well paid, but is all of that stress really worth it?

Thursday, February 1, 2007

The Best Medium Duty Shredder I Could Find

I've been shopping around for a paper shredder for a few months now, and I have finally settled on one. My wife and I got tired of tearing up all of our old financial records, credit card applications, and other identity-revealing documents and were looking for an easy way to deal with it all.

After seeing my father go through two cheapo $30 shredders in a year, I figured it would be worth it to pay up for a shredder that would be able to handle a decent load (such as a few pages stapled together, or maybe even an unopened credit card solicitation) without burning out the motor. I don't want to have to replace it anytime soon.

If you don't have a shredder in this age of digital identity theft, I think you are making a big mistake. Having your personal information, credit card applications and other miscellaneous information floating around in unsecured trash bins and trash bags is practically a recipe for someone to steal your identity and create all kinds of trouble for you. My mail gets delivered into a locked mailbox and as a general rule I shred anything with personal information on it before I throw it in my clear plastic paper recycling bag.
There are a ton of shredders in the $20-60 range that advertise 8 sheet capacity, are very cheaply made, and probably only good for extremely light use. My brother recently threw out a Staples brand shredder because a cheap plastic gear in the motor simply wore down after a few months.

Instead of risking one of these cheaper models, I decided I was willing to pay more like $80-$100 to get some better quality shredding power. The one we have at work would be my ideal shredder. It can take like 20 pages at a time and it stands about five feet high, but I didn't think it would be practical for my apartment, or my budget.

After reading some reviews and poking around a bit, I think I found what I was looking for- the Fellowes Powershred PS-77Cs 12 sheet Confetti Cut Shredder (pictured above in my livingroom) , which I paid about $96 for on Amazon (with free shipping). It advertises 12 sheet capacity, which is a little more than the cheap ones, and it got some great reviews around the Web.

I've only had it for one day, but sofar, so good.

The thing weighs about 30 lbs, and almost all of the weight is concentrated in the tough shredding apparatus that sits on top of the basket. I have to admit it was a bit bigger than I expected when I opened the package, but it's not that much bigger than the size of an ordinary wastebasket. In the photo, you can compare it to my briefcase and the copy of the Wall St. Journal (financial analyst's best friend) that's poking out.
This shredder also has one of those slots for ripping apart a CD or a credit card. I haven't had the opportunity to try that out yet, but I am looking forward to it.
A bonus feature is that it has technology that shuts off the shredder motor if your hands get too close to the opening. I don't have kids, but sometimes my little nieces and nephews come over, and they do the darndest things. This will hopefully make sure that sticking their fingers in the shredder isn't one of those things.

I've already thrown a bunch of stuff in there that I had been waiting to get rid of, and the machine handled them beautifully. I even threw in a new Citicard application that I got today, without even opening the envelope. The machine ate it up, burped, and begged me for more.

Ok, I'm getting a little ridiculous, but anyway you can tell I'm pretty happy with this thing sofar. As a sidenote, I am a big fan of well-made, heavy-duty office supplies. There is just something intrinsically satisfying about well made tools that you use often. I also have a 60 sheet capacity PaperPro stapler at work that works fantastic, and I'm thinking about getting a high-capacity 3 hole punch.
I've also decided to try out this Amazon PriceWatch site that I've been hearing about recently. Supposedly, if the same product you ordered is listed for less on Amazon within 30 days of your purchase, you can request a refund for the difference. This site will automatically track the price of this product for me, saving me the trouble of going to the Web site every day.
I'll make a mental note to write an update in 6 months or so about how well the shredder is holding up, and link it back this post.
If you know of a better shredder in this price range, or think I paid too much- I shopped around and this was within a few dollars of the lowest price I could find including shipping- please post the info in the comments section to share with other readers.
Happy shredding.

7/10/08 Update: I've owned this shredder for about a year and a half now and it still works as good as the day I got it. It is still a thrill to toss an entire junk mail envelope into the thing without even opening it and watch the machine devour the entire thing- fake plastic credit card and all. One thing I will recommend is that you do not buy the bags that come with this thing. They are a waste of money. When the bin fills up, I just dump it into a clear plastic bag with the rest of my paper recycling. I've never had any problems with this machine and the only maintenance I've done is to oil it (using common household vegetable oil, not the nonsense "shredder oil" some companies sell) a couple of times, following the directions in the instruction manual.
I think the $100 I spent on this shredder was a bargain for what I got and this thing is really built to last.

12/4/08 Update: Almost two years of household use and this thing is still cranking away like the day it was born. I have had absolutely no trouble with this shredder and it has seen a great deal of use. My neverending stream of junk mail and credit card solicitations goes in, and a downy, fluffy pile of paper shreds comes out, ready for disposal. I still take pleasure in shredding entire unopened envelopes full of junk mail, and have found the shredder handy for getting rid of other confidential information as well.

Another update as of July 2013- this thing is shredding like Eddie van Halen in 1982 (for those of you non music fans this is a good thing). I've owned it for five years now and it literally still shreds like new. I've oiled it like 2x a year since I've had it but other than that no fuss and no maintenance. I'm absolutely thrilled that paid up for this thing. I would have been on my 5th $25 shredder by now so I definitely saved money in he long run. Built like a tank!

(As somewhat of an aside, around the same time I bought this shredder, I bought a cheap $150 vacuum. The past few times I've tried to use it, the hose has gotten detached and the belt has slipped, causing the awful stench of burning rubber. It no longer picks up the little white things like it used to. I think my next vacuum is going to be a more expensive, but much more reliable Electrolux. I've found that buying a quality item often ends up costing less in the long run, and I think vacuums are the same as shredders when it comes to that.)

12/20/2014 Update: So I was using this shredder tonight and I wondered "how long has it been since I bought this beautiful piece of equipment?" I logged on and realized it has been something like seven years! In seven years, I haven't had a single problem with this thing. It still opens its mouth and devours any and all junk mail without even so much as a pause. I've shredded old credit cards, old CDs with data on them, multi-sheet stacks of paper... you name it, this thing has eaten it. I have to admit that I haven't oiled it very much over the years, but I'll try to correct this soon. Even so, it still runs incredibly smoothly. I will never hesitate to pay up for a Fellowes shredder again (assuming I ever need to buy another one- this one may outlast me.)