Watch Your Wallet

Smallcap Screen Part II - Lotus. Jiangbo and Huifeng

2011-11-06T08:18:00.000-05:00

Ok, so maybe I should call this a microcap screen, but for now lets ignore the semantics.
I finally got around to checking into Lotus Pharmaceuticals. They use essentially the same corporate structure as Skystar, controlling a china-based entity through "contractual arrangements." They also executed a reverse split in 2010, yet the shares still trade for less than a dollar. I'm going to rule this one out as well. (If you want to know why, refer to my previous analysis.)

The final 2 similar-looking pharmas that show up on the list are Jiangbo Pharma and Huifeng Bio-Phar. I am going to save myself some work and assume that these companies also have a similar corporate structure as Skystar. To repeat: I'm not saying these are necessarily bad structures, I'm just saying they don't offer me enough certainty to invest my hard-earned money. You are free to make your own determination.

Smallcap Stock Screen - Investment Ideas

2011-10-29T17:51:00.001-05:00

Although I don't recommend most people invest in individual stocks, I do keep a (very) small portion of my investable funds in an account I actively manage. My results have been decent. I have a few stocks I track regularly and have been in and out of them a few times over the years. I've also done some experimenting with options (failure), shorting (great success), and various other securities. At the moment, I'm about 50% cash in the account and have kept my eyes open for potential ideas.

(Note: almost everything (except for a long term holding or 2) in this account and every company mentioned below falls into the category of speculation, not investment. An investment, upon thorough analysis, promises security safety of principal and a satisfactory return.)

Though I try to stay away from the smaller end of the spectrum due to the higher risk I associate with tiny companies, I figured I might run a screen on the small end of the market to see what popped up. To that end, I did a screen of microcap stocks with market caps below $20 million, P/Es below 12x, 5 year average ROEs above 15%, trailing 12 months EPS above zero, and 5 year revenue growth above 10%.

The result was a list of 24 stocks for further investigation.

One thing that immediately stood out to me on the list was the pharmaceuticals. There were four of them on the list with similar sounding names: Huifeng Bio-Pharm (HFGB), Jiangbo Pharma (JGBO), Lotus Pharma (LTUS), and Skystar Bio-Pharm (SKBI). They all had P/E ratios of 1.13 or below and also made me immediately skeptical.

Starting at the beginning, I pulled up a yahoo finance quote on Skystar. The stock trades for $2.15 per share and had a 52 week high/low of $1.39 and $10.58, respectively. All else equal, I'd rather buy a stock at its high than its low, so this was a positive sign. I did a quick calculation and if I bought this stock today at $2.15 a share, then sold it for $10.58, I would make a 392% return. (conversely, the people who bought it at $10.58 and sold it today are looking at an 80% loss).

I also noticed it traded only 580 shares last friday, or about $1,200 of total volume, showing that the stock is very illiquid. If I owned shares of this company and needed to sell for any reason, the lack of potential buyers in the market could mean I would have to take a discount on the prevailing market price to sell them. Though this is a risk, you can also see this as a positive. If a lot of people aren't buying the stock, chances are very few people follow the company and you might notice something others have missed. If the stock ends up being a true winner, people will eventually come around to realize the value of the company

I have no idea what the company does, so I decided to pull up its most recent 10-K. They might as well paint a bird on this thing and fly it above Busch Stadium because it looks like one giant red flag to me. The first page was enough to turn me off, and this rarely happens to me:

"We were incorporated in Nevada on September 24, 1998. We are a holding company that, through our wholly owned subsidiaries in China, Skystar Bio Technology Co.(Skystar Jingzhou) and variable interest entity (“VIE”), Xi’an Tianxing Bio-Pharmaceutical Co., Ltd. (“Xi’an Tianxing”), researches, develops, manufactures, and distributes veterinary health care and medical care products in the People’s Republic of China (“PRC”).

All of our operations are carried out by our subsidiaries in China and Xi’an Tianxing, which the Company controls through contractual arrangements between Xi’an Tianxing and Sida Biotechnology (Xi’an) Co., Ltd. (“Sida”), the wholly owned subsidiary of Fortunate Time International Limited, the wholly-owned subsidiary of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”), which became our wholly owned subsidiary in 2005.

Such contractual arrangements are necessary to comply with PRC laws limiting foreign ownership of certain companies.

Through these contractual arrangements, we have the ability to substantially influence Xi’an Tianxing’s daily operations and financial affairs, appoint its senior executives, and approve all matters requiring shareholder approval. As a result of these contractual arrangements, which enable us to control Xi’an Tianxing, we are considered the primary beneficiary of Xi’an Tianxing.

On August 21, 2007, Xi’an Tianxing invested $68,550 (RMB 500,000) to establish Shanghai Siqiang Biotechnological Company Limited (‘Shanghai Siqiang’). Xi’an Tianxing is the 100% shareholder. Shanghai Siqiang serves as a research and development center for Xi’an Tianxing to engage in research, development, production and sales of feed additives and veterinary disease diagnosis equipments."

In addition to Xi’an Tianxing, Skystar Jingzhou also manufactures and distributes veterinary medicines including aquaculture medicines in China."

So Skystar is an Arizona-based holding company that set up a complicated ownership structure to comply with (ie, get around) Chinese restrictions on foreign ownership of companies. The company's main line of business is selling veterinary health care and medical care products in China.

As a general rule, anything involving a Special Purpose Vehicle (SPV) or a Variable Interest Entity (VIE) makes me nervous. VIEs, as Bloomberg puts it, are a "post-Enron version of Special Purpose Vehicles." The fact that Xi'an is a VIE means that Skystar stands to benefit the most from the company, but it does not own more than 50% of the company. Only being able to "substantially influence" rather than "completely control" the company's main subsidiary is a huge red flag for me.

The page also referenced a Cayman Islands based corporation used as part of the ownership scheme.

All of this shit might be on the up-and-up, but the number of huge risks on page 1 of the 10-k are enough to make my head spin, and I haven't even gotten into the specific kinds of products the company sells yet. There's the risk of being tiny, the risk of doing business in China, the risk of not controlling your main source of income, etc. etc. After doing a little further research on the internet, I came across a publication about "Investing and Operating in Restricted Industries in China" It looks like this type of ownership structure has been put in place a number of times and as far as I can tell, it looks like a way for Chinese firms to raise capital from American and other investors.

A few other great tidbits from the 10-k: The company leases a building in China that the chairman owns for about $24,000 a year. The company also had accounting issues: "On December 17, 2010, the Company filed an 8K with the SEC disclosing the termination of Frazer Frost, LLP (“Frazer Frost”) as our independent auditors effective as of December 13, 2010." They replaced their auditors. They identified material weaknesses in their accounting and internal audit functions and finally, they disclosed this:

"Conflicts of interests between the duties of our officers and directors who are also management members of Xi’an Tianxing to our company and Xi’an Tianxing may arise. As our directors and/or executive officer (in the case of Mr. Lu), they have a duty of loyalty and care to us under U.S.and Cayman Islands law when there are any potential conflicts of interests between our company and Xi’an Tianxing. We cannot assure you, however, that when conflicts of interest arise, these individuals will act completely in our interests or that conflicts of interests will be resolved in our favor. In addition, they could violate their legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between us and them, we would have to rely on legal proceedings, which could result in the disruption of our business."

I work at least 11 hours a day, 5 days a week. There is no way I am risking my hard earned money on an equity ownership interest in a setup like this. Even if the China operation does make enough money to one day pay some back to shareholders in the US, who knows if they will ever even be able to get the funds out of China without the government intervening? I'm passing on this one. Though the stock quote might go higher in the next few years, to me the risk is not worth the potential reward.

One thing I definitely do give the company credit for being straightforward and disclosing risks in its filing.

I think I've had enough smallcap action for one day. I assume the other pharma companies on this list are similar to Skystar and plan to report back any findings when I get the chance to look into them. Hopefully this gives you a sense for the kinds of things I look for in an investment/speculation. There will be many other pitches to swing at, so I dont mind letting this one go by. In this case, the ownership structure was so risky in my opinion that it didn't even matter what the financials looked like.

The most useful things I've ever purchased

2011-10-01T13:57:00.000-05:00

Time and time again I've gotten household/automotive appliances (eg: george foreman grill or a $20 paper shredder) that have either broken or I've stopped using. Below are a few items I've gotten off of Amazon over the years that I have found to be well made and gotten a lot of use out of and I have no hesitation recommending.

1) Giant, Powerful Scissors.

Ok well maybe they refer to them as "Tin Snips" but these things are awesome, and amazingly useful. According to Amazon: "Super sharp blades easily cut through sheet metal, aluminum sliding and more ." I've used these to cut through so many things I can hardly keep count. In particular, they are good on packaging. The hard plastic packaging that most electronics seem to come in most days can be easily disposed of with this thing. It also eats right through whatever plastic ring in a package may be securing the item inside. Do yourself a favor and get the twelve inch ones. Whenever you need scissors on steroids, keep these handy.

2) Tire Inflator

I've had this Slime compressor for about a year and it is great. Throw it in your trunk and you will never have to pay a dollar at the gas station each time you want to inflate your tires. This particular model is pretty heavy duty and feels like it will last a long time. Plus, when you get that inevidable flat tire only to find out your spare needs 40 pounds of pressure, this thing will be there to help you out. It will also get you to the gas station if you discover a nail has slow-leaked your tire flat overnight. As a bonus, it also comes with attachments to inflate things like bicycle tires, basketballs and other inflatables.

3) Aeropress

If you need single serving coffee, forget about the tasteless pods that everybody seems to be buying these days. The Aeropress is the way to go. The reviews on Amazon speak for themselves. I've had mine for over three years now and it is the only thing I use to make coffee at home. This is especially good for people who (like me) enjoy strong coffee. Read all of the Amazon reviews if you don't believe me.
Being a finance person, I'm not a big fan of buying crap you don't need or can't use, but this stuff is either incredibly useful and built to last forever (the snips), saves you money and gives you peace of mind (the tire inflator), or saves you money and gives you delicious life-giving coffee (the AeroPress) and I'm willing to go out on a limb and recommend all of the items above. As long as you can comfortably afford them, you won't regret buying them.

S&P Downgrades US Government Rating from AAA

2011-08-06T00:25:00.000-05:00

Late this evening, S&P announced it is downgrading the US Government's credit rating to AA+ with a negative outlook.
If we learned anything from the financial crisis of 2008, it is that investors should do their own credit analysis and not rely on what the rating agencies say. That is why, to me, the downgrade itself is a non-event.

I'm not saying there won't be reaction in the the markets. There may be a reaction, but in my opinion, if people react to S&P's release, they are reacting to the wrong thing because all it does is state some things we already know about the country.

The only reason I see this as an event is the headline value. People who have never even heard of S&P are going to be treated to plenty of headlines about this downgrade (and chances are all they are going to read are the headlines). This could put fear into the markets. Political talking heads will blame both parties (Republicans: see what happened on the Democrats and Obama's watch?? Democrats: see what the GOP brinkmanship did to the country??) but it is the fault of both parties that we are in this current position.

It has been apparent for some time now that the US government is in an unsustainable financial position. We spend too much money. We spend more than we earn, so we have to take out loans. It is a basic problem that every person reading this blog can easily understand: if you spend more than you earn for a long period of time and borrow heavily to keep up your lifestyle, you end up with an ever-growing pile of debt.

Did you really need S&P to tell you that?

I don't see the S&P announcement as a bad thing. Maybe it will cause more people to investigate our government's finances and figure out how to fix them. We can do it the right way (cut spending/entitlements, IMHO) or the wrong way (increasing revenues, A.K.A. tax increases), but if we do nothing, it puts the future status of the USA at risk and as a US citizen, that is my least preferred outcome.

I'm not going to turn on the TV or read a financial news article this weekend and suggest you do the same. If you want, go to the us government website and read about what government expenditures look like and where the money comes from.

A few good reads

2011-07-24T20:07:00.002-05:00

I came across a post by Jason Cohen called Rich vs. King in the Real World: Why I Sold my Company for the second time in the past few months today and highly recommend you check it out.

He talks about the way cash in the bank affects your lifestyle and makes the point that the relationship is not linear.

I'm now as jealous of Jason as I am of Scott Adams and his Dilbert Money, but I don't begrudge either of them their well earned financial freedom.

By the way, you are correct- I haven't posted anything in a long time. I'm still keeping up with the markets though. One blog I started reading regularly over the past few years is called Zero Hedge. I recommend you check it out if you're looking for some good reading. They write a lot more than I do and take an interesting, alternate view you won't see on a lot of the big financial news websites.

My comments on the current state of the market are as follows: I haven't seen a truly positive headline in years, gold is shooting through all time highs, interest rates are practically nothing, the dollar continues its decline, the US may default on its treasury debt, yet the equity markets have seen a strong rally since they recently bottomed out in 2009.

I'm most of the way through a pretty good book called More Money Than God: Hedge Funds and the Making of a New Elite (Council on Foreign Relations Books (Penguin Press)). It is a history of hedge funds, tracing managers and styles from the early days of the industry to today. In my opinion, the author has a pretty strong agenda - pushing his viewpoint that hedge funds are good for the economy and shouldn't be strongly regulated - but aside from the few opinion sections, the book is a great read sofar.

The Best Vacuum I Could Find

2011-04-09T16:28:00.001-05:00

SEBO X4 - the best vacuum I could find.

A while back, I wrote a post about the best medium-duty shredder I could find. The moral of that story was that I was tired of burning out the motors on cheap shredders or sitting in front of them feeding one sheet at a time, so I spent a little more on a better quality shredder. I ended up with a powerful little machine that destroys junk mail like a savage, shreds 12 sheets at a time and has been doing an incredible job of protecting me from ID theft for over four years now. By paying more for a quality applicance, I actually saved myself money in the long run and it really cemented my philosophy that you should be prepared to pay up for a quality appliance. Buying one well-made (and likely costlier) product that you don't have to replace is ultimately cheaper than buying five cheap ones, and it is also so much more satisfying to use.

At the end of that post, I mentioned that the next appliance I had on my radar for an upgrade was my vacuum. There are few appliances as basic and essential to a clean, hygenic dwelling place than a vacuum.

My old vacuum was a piece of junk bagless upright. I threw it out a while back and I don't remember the exact model name or number, but it was a sub-$100 model similar to the Dirt Devil UD40285 Featherlite Bagless Upright.

It was great at first. Nice suction, always worked, had shiny new parts and attachments. But after a few months, it started getting on my nerves. It seemed to have a weak motor and wouldn't pick up the little stray pieces of lint and string I could see in my carpet. I felt like I was following my vacuum around picking up whatever it missed.

It was also a major pain to clean. When I bought my previous vacuum, I didn't give it too much thought. I figured it would be great to get a vacuum without bags because I'd save on the price of buying new ones when the old ones filled up. I figured when the dirt container got full, I would just dump it in the garbage, put it back in the vacuum, and get back to cleaning up. Right?

Wrong.

The dirt reservoir was an incredible pain in the neck. Cleaning it made me feel like Mike Rowe in an episode of "dirty jobs." After you've tired yourself out by vaccuming (in my case moving furniture out of the way to get under tables and chairs), you bring this container chock full of dust over to the garbage can, turn it upside down, and watch as a mushroom cloud of dust rises from the can, putting the stuff you just took out of the carpet back into the air in tiny, microscopic particles. I tried everything to keep the dust down when cleaning out the container- putting it inside its own plastic bag, emptying it really slowly, covering the garbage can as quickly as possible... but nothing I did got rid of the fact that cleaning the vacuum put the dust back into the air.

Not to mention the fact that it was impossible to get the entire container clean. Dust stuck EVERYWHERE inside the vacuum, on the sides of the reservoir, in the little mesh cover at the bottom of the intake, on the underside of the lid... it was dust city inside that thing and the problem only got worse over time.

The vacuum also had a cheap belt which started slipping after about 6 months of normal use. For those of you who have had a vaccum with a slipping belt you'll know what that meant- burnt rubber smell every time you use the vacuum.

I began to dread vacuuming and I cursed that machine every time I laid eyes on it.

I finally gave up and began looking for a replacement. I wanted something like my shredder- a quality workhorse. I was willing to pay whatever it took (within reason) to get an animal of a vacuum. I figured if I had to replace a $100 vacuum every year, I could pay $800 to $1000 for a quality machine that would last me 8-10 years, and I would have a cleaner house and less stress in the meantime.

After doing a lot of research online, I realized a few things. The first is blasphemous because I'm writing this post on Google's excellent blogger platform and I think the company does amazing things, but I realized that when you are trying to research a consumer product, google search results are becoming pretty bad. I'm not going to get into it, but I think that link sums up the problem pretty well.

Once I got around that issue, one name keep coming up again and again when I looked for a quality vacuum. Yes, it was expensive, but it seemed like everyone who touched it raved about it.

That vacuum? The SEBO Automatic X4.

You can check this vacuum out elsewhere on the web. I've found a targeted search for the Automatic X4 brings up a lot more useable results than just looking up "vacuum cleaner reviews," due to the issue with the google mentioned above.

I've used this vacuum for over a year now and I have to say it has been awesome. In no particular order, I'll tell you what I like about it:

The bags- gone are the days of fighting with my wife over who has to clean out the vacuum. The bags are great, they hold a lot of dirt, and I havent found the need to replace them very often. (I used 2 this year).
The power- this vacuum sucks up everything my old vacuum missed, partly due to the motor and partly due to....
The automatic height adjustment- when you turn on the X4, a little green light goes on that says it is either raising or lowering the height of the vacuum according to the floor it is sitting on. This ensures that the rotating brush is at the ideal height to agitate the carpet and knock loose any dust, dirt, paper, pet hair etc... so it gets sucked out of the carpet and into the bag.

The engineering- there are so many little design elements of this German made vacuum that show you someone put a lot of thought into it. For starters, the entire brush comes out with the click of one button. This makes it incredibly easy to clear off all of the hair and string that accumulate on a vacuum roller brush over time. There is also something called the "instant use wand" that I've found very convenient for getting into tight spots without messing around with external attachments. You just grab a handle on the vacuum and pull it out, then when you're finished with the space behind the computer or on your baseboards, you put it right back in to reactivate the main unit.
It lays completely flat- I've never had a vacuum that went completely flat before and it has been handy in a number of situations, particularly when vacuuming under furniture.
It works great on carpets as well as hard floors- I think this is because of the automatic adjustment. It goes from my livingroom to my kitchen without a hitch.
The belt has a lifetime warranty- the belt, the part that transfers twisting power from the motor to the brush, is guaranteed for life. If it ever slips, smells, or breaks, I know I can get it fixed for free from a Sebo dealer (and surprisingly enough there is a dealer pretty close to me. I'd never heard of SEBO before so I figured it would't be easy to find.) I think part of the reason they are able to offer this warranty on the belt is because it has an automatic shutoff feature. For example, if you suck up the power cord from your computer and it jams up the roller, the sebo will detect this and shut it down. I think that other (ie cheap) vacuums would overheat or strip the belt when this happened.
Overall durability- this is not the prettiest vacuum on the market. In fact, I have the blue model and it looks almost antiquated. It doesn't look like a spaceship with the Dyson ball inside of a clear, futuristic-looking case, but it is extremely well made and I think it is going to last for a long time.
It works- even though I've devoted a lot of words to this review, vacuuming isn't something I like to think about very much. When you have a vacuum that doesn't pick up all of the dirt, or smells funny, or is hard to push around, or takes a lot of time to adjust on the fly, it becomes a small, but unnecessary source of stress. I don't have to fight with this vacuum. Plain and simple, it does the job and creates a clean home for me and my family.

I've been trying to think of some negatives about this vacuum and I'm not coming up with much. However, here is what I dislike about it sofar:

Looks- as mentioned above, the X4 is not the most attractive appliance I've ever owned, but I really don't care how it looks. It sits in the closet when not in use.
Replacing bags- this will cost money over time, but as I discussed at length above, I think the cost is minimal and vastly preferable to fighting with a bagless.
Takes time for the height to adjust- if you go from a hard floor to a carpet, you will have to wait a bit before you start vacuuming. Not a big issue, but something to keep in mind.
The price- Make no mistake, this is an expensive vacuum. However I think in the long run it costs less to buy a high quality appliance like this than a bunch of cheap ones that will have to be replaced over time.

Overall, I've been very happy with this purchase, and even though I've only had it for a bit over a year, I'd highly recommend you consider it the next time you want to buy a vacuum. I'll post updates over time to let you know how it has been holding up. If you have any other comments (good or bad) please feel free to leave a comment.

Happy vacuuming.

Warren Buffett's 2010 Letter to Berkshire Shareholders

2011-02-27T23:10:00.000-05:00

So as of a couple of weeks ago, the market was up almost 100% since the 12 year low reached in March 2009. It was also up 7% since the beginning of this year. I have to agree with the headline in the linked article though- this feels like "the unhappiest bull market ever."

Maybe it is just what I focus on, but despite the numbers on the big board, all of the other news seems pretty negative for the average US investor. In fact, it's downright depressing if you think about it. For example, some of the major themes that have pounded into our skulls for the past couple of years are:

1) The FED has been printing money and flooding it into circulation, devaluing the US dollar
2) China's economy is going to overtake the US economy by 2018
3) We are entering a "New Normal" era of low stock returns, low GDP growth, deleveraging, etc. I think this view is most convincingly espoused by Bill Gross and his colleagues at PIMCO
4) The US government has bailed out shareholders at the expense of taxpayers, (more about that here and here, here (it bailed out people who couldnt pay for their mortgages also)). It also put other costly programs into place,
5) Based on pundit's views, state governments are headed for bankruptcy also
6) Stocks are overvalued - note this is a more recent trend
7) Unemployment is high in the US. We are losing manufacturing jobs hand over fist. We no longer make stuff in the US, we are a "knowledge economy"
8) The rich are getting richer, at the expense of the poor

Oh, not to mention the social security crisis starting now as the baby boomer generation reaches retirement age and global warming (to anyone on either side of the debate, im not taking a stance on global warming, merely saying it is often in the news). These are all off the top of my head.

Combine these with the myriad personal financial problems each of us might be having - job security, sickness, disability, disease, divorce, credit card debt, foreclosure, car repairs, taxes, home maintenance, rent (which is too damn high by the way)- and it seems like the situation is pretty hopeless.

However, among this host of negative news, Warren Buffett's 2010 letter to shareholders arrived this weekend as a beacon of hope.

I suggest you read the letter yourself, but I just wanted to give you my $0.02 and call out some of the more interesting/informative parts of the letter.

Almost right off the bat, Buffett wrote something that you won't hear very often from the talking heads on CNBC in the current unhappy environment:

I agree with Warren and I don't share what seems to be the prevailing sentiment that the US is doomed to failure. This is why I invest the biggest portion of my retirement savings in US equity index funds. Put simply, I believe in the American system.

"Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders
for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

...We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead."

The next part of his letter that I liked (and anyone who has studied Buffett will be familiar with) is the section entitled "Intrinsic Value - Today and Tomorrow." In it, Warren talks about the three components of intrinsic value (which is the only value you should care about), specifically as it relates to Berkshire. You're better off getting the details from his letter, but I'd summarize the components as 1) Investments (stocks, bonds, cash equivalents) 2) earnings from sources other than investments and insurance underwriting and 3) (the most subjective category) "the efficacy with which retained earnings will be deployed in the future." I recommend you check that section out.

The highlight of the letter came near the end, however, in a section entitled "Life and Debt." Buffett reprinted a letter from his grandfather Ernest to his uncle Fred. In the letter, Ernest tells Fred that he has saved him $1,000 cash and is giving it to Fred on his 10th wedding anniversary. Ernest recommends Fred keep this money as a reserve in a safe deposit box so he can easily get at it. He writes "You might feel that this should be invested and bring you an income. Forget it -- the mental satisfaction of having $1,000.00 laid away where you can put your hands on it, is worth more than what interest it might bring..."

I checked an inflation calculator, and $1,000 back in 1939 would be the equivalent of about $15,425 today.

Buffett says they take a similar philosophy at Berkshire and will always keep $10 billion of liquid funds on their balance sheet in extremely safe but low yielding investments such as treasuries and other short term securities. He quoted investment advisor Ray DeVoe who said "More money has been lost reaching for yield than at the point of a gun."

Truer words have never been spoken, and although you hear it from most financial advisors, I'll say it again- build up your own reserve fund and put it somewhere you know you will be able to get at it. You will earn basically nothing for investing in treasuries or in your typical FDIC insured savings account right now, but you will sleep safely at night knowing that a financial setback won't knock you off your feet.

The rest of the letter hit on a number of the usual Berkshire areas: the difficulty of continuing to grow given Berkshire's huge size, the story of how he met Lorimer Davidson at GEICO, reviews of all of Berkshire's businesses, the often meaningless figure known as GAAP net income, Berkshire's culture, repeated requests to spend money at the annual meeting etc...

All in all, another great letter from the Oracle and well worth your time. I like to say that if I was only allowed to read one investment newsletter a year, it would be Buffett's shareholder letter. If you care about investing or saving, do yourself a favor and head over to http://www.berkshirehathaway.com/ and read this year's letter.

If you haven't read the previous years' letters, do that too.

It's Expensive to be Poor

2009-05-20T21:20:00.002-05:00

I read a pretty compelling story online today called "The High Cost of Poverty: Why the Poor Pay More", written by DeNeen Brown for the Washington Post. It raised some issues that you might never think of, sort of "hidden taxes" on being poor.

Having grown up in pretty modest means myself, I am pretty familiar with the amount of time you waste when you don't have much money or your own house. Poor people have to spend time at the laundromat waiting for clothes to wash and dry every week (I have done this) and time waiting for multiple public transportation connections to get to work every day (I have done this too). But the article points out that it is sometimes impossible for poor people to go to the big grocery stores where the middle class shop for discounted food. They have to buy their milk and butter from the local corner store, costing them significantly more.

The article also points to high rates charged by check cashing places as a cost of being poor, but I'm not as convinced that they are a necessity. For example, a man quoted in the story pays a fee to have the check cashing place pay a bill for him... it seems to me that fee (at least) is avoidable).

In any event, this article is an eye-opener (and includes a pretty memorable exchange between a man and the checkout person at a grocery store) that I think is worth a few minutes of your time. If you are in this situation- you're not alone. If you're not- be thankful for what you have.

Richard Bernstein's Investment Guidelines

2009-04-18T09:01:00.004-05:00

A blurb in the Wall Street Journal's "Heard on the Street" section caught my eye as I was on my way in to work last week:

"Overheard - Most people gush thanks (or occasionally spit bile) in their farewell address. Richard Bernstein, whose 20 years at Merrill Lynch drew to a close on Wednesday, went 10 steps further. In a final note, having thanked colleagues and clients, the bank's chief investment strategist signed off with 10 guidelines. All are worth remembering, but perhaps the last resonates strongest: 'Leverage gives the illusion of wealth. Saving is wealth.'"

This caught my eye and I made a mental note to see if I could find the complete list of 10. Lo and behold, through the magic of the Internet, I found the guidelines on seeking alpha.

They are the following:

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than income or cash-flow statements.

7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

I thought these were some pretty good observations. Number 1 definitely hit close to home for me. As I've grown my savings more over time and seen the impact a huge market downturn can have on the value of certain stocks, I've begun to pay a little more attention to income. Although I still believe capital gains are where the big payoff comes from in stocks, income is something tangible and shouldn't be overlooked. Number 5 is pretty important as well... over the past 2 years, people have seen every single asset class in their "diversified" portfolios sink almost in unison. Many were operating under an illusion of diversification and when the tide went out, we saw who wasn't wearing a bathing suit.

I cocked my head sideways when I read number 4 because I think nothing fuels a bull market more than cheering and a rush to buy. I kind of see his point though. He is saying bull markets are more the result of assets being unfairly punished and undervalued prior to the bull market than the actual enthusiasm during the bull market. In my opinion, you can't have one without the other so this is kind of a circular argument.

This list reminded me of another post I made a while back on nine market lessons from John Dorfman, a Bloomberg columnist who retired a while back. For the sake of completeness and comparison, I list Dorfman's lessons here:

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

Maybe one day I'll come up with my own list, but I have no plans to retire anytime soon :)

A Year off Work, With Pay

2009-04-15T21:58:00.003-05:00

I came across an interesting article in the New York Times (which I rarely read, since I prefer the WSJ) about a lawyer who is getting paid $80,000 to take a year off from work. Apparently the big NYC lawfirm Skadden is offering some of its workers a year off at 1/3 of their salary as a way to reduce costs and retain employees during the current economic downturn. Since this particular woman made $240,000 a year, her drastic paycut still leaves her with a pretty hefty salary so she decided to take the year off and tour around the world.

I don't blame her. I would take this deal if I could (though I am sure I wouldn't be able to travel and would only just be able to scrape by on 1/3 of my salary). I've worked with people at big lawfirms like this in the past and I know the kind of grueling schedules they put in. I put in these kinds of hours myself for certains stretches throughout the year and over time it tends to get to you. A break like this would be a most welcome relief.

But of course I am not getting this deal. And neither are you. But we can dream.

What would you do if you got this offer?

Buffett Invests in Chinese Electric Car Company

2009-04-14T19:44:00.004-05:00

Fortune published a recent article describing Berkshire Hathaway's purchase of a 10% stake in BYD, a Chinese electric car manufacturer last fall. I didn't really notice this announcement when it came out, but it was a decent-sized investment at $230 million for the 10% stake.

Looking at the net income graph in the article, it looks like BYD earned about $180 million in 2008. Dividing that by 10 gets about 18 million of earnings, or a P/E of about 12.7x. (This is just to give you a general sense of valuation, see this site for the current P/E of the S&P 500. Not sure if this site gets the calculation right or not, but I found it after a brief google search).

The reason this acquisition caught my attention is because (as others have noted), Buffett broke some of his own rules to make it. I don't see how an auto company could ever meet his criteria for an excellent business (for more on his criteria, see my review of Buffettology, particularly the 9 questions). I don't think he understands the industry either. It seems like this investment was more likely the brainchild of David Sokol, chariman of MidAmerican Energy and Charlie Munger than it was of Buffett.

I don't have much of an opinion either way but I do note that it continues the trend of Berkshire making acquisitions outside of the United States.

How to Become As Rich As Bill Gates

2009-04-09T19:55:00.002-05:00

I came across this pretty instructional post written by Philip Greenspun that offers some simple steps showing how you can become as rich as Bill Gates. It's funny I had this vision in my head that Gates was more of a self-made man but as it turns out, he came from pretty fortunate circumstances. Interesting stuff.

I haven't been posting all that much lately, but there has been much to absorb in the markets. There has been no shortage of negative headlines. We can't go a day without a new company being bailed out or a headline about a financial catastrophe of epic proportions.

I think people are starting to get numb to it all.

I hope Twitter is a Fad

2009-04-01T23:01:00.002-05:00

I hope Twitter is the POG of this decade and that after a few years it sinks into oblivion, never to be heard from again. I really don't get it. You couldn't pay me to go on to Twitter and write that im tying my shoe or read about someone else tying theirs. But a lot of people are talking about it.

The reason I hope it fades away is that it would really ruin my faith in humanity to find out that we've stooped as low as making this kind of thing an integral part of our daily lives. Reading about some guy who is buying eggs, or some gal who is getting a new key made. Really?

I hope it's a fad.

Buffett Invests in Harley Davidson

2009-02-04T23:02:00.003-05:00

As many of you know, I'm an avid Warren Buffett follower, so I was interested to read that Buffett agreed to buy $300 million of debt issued by Harley Davidson (NYSE: HOG) yesterday.

(Note: many people use Buffett and Berkshire interchangably, as if he makes every decision at the company he runs. While I am sure this is not true, I often use the two interchangably as well, so whenever you see me mentioning Buffett and Berkshire in the same entry, assume I'm referring to Berkshire Hathaway in all cases unless I specify otherwise. I promise to try to be more precise in the future.)

Harley announced that it was selling $600 million of senior unsecured debt to two investors: Berkshire Hathaway (Buffett's company), and Davis Advisors, LP, which is Harley's biggest shareholder. According to an article I read, Buffett hasn't invested any other money in Harley besides this purchase. The notes are a pretty sweet deal. Though unsecured, they are senior in the capital structure which means they get paid pretty quickly if the company goes bankrupt. I am not sure what Harley's capital structure looks like, but being that Berkshire bought the notes, I'm willing to bet that Buffett or someone at BRK took a good look at it and feels there is a good chance the notes will be repaid when they mature in 2014. The best part of the deal? They pay FIFTEEN PERCENT INTEREST. So for lending Harley $300 million now, Buffett will collect a check for $45 million each year for the next five years. That's a total of $225 million in interest, plus the return of his original principal.

Harley plans to use the money for its consumer lending unit, ie to lend money to people so that they can afford to buy its motorcycles. I don't follow the company too closely, but apparently it is in the midst of a turnaround plan.

The stock jumped something like 15% yesterday on the news that Buffett was "investing" in the company. I noticed it fell about 7% today. I think it's pretty crazy when people view Berkshire buying preferred stock (as he did recently with Goldman Sachs) or loaning money via a debt purchase as some kind of an endorsement from Buffett that the company's equity is undervalued. If he thought Harley was undervalued, he could have bought the entire company, which has a market cap of only about $3 billion compared with Berkshire's $30 billion pile of cash. But he didn't. Instead he chose to lend them money for a relatively short period of time at a high interest rate. Being one of the few people with $30B cash in hand during a financial crisis helps Buffett to get some very favorable investment opportunities.

I noticed that Moody's poured icewater on the announcement by immediately downgrading Harley Davidson Funding Corp., which is the fundraising arm of Harley's consumer finance unit. This will make it more expensive for the unit to raise money, which is not a good thing. Though Moody's does not directly come out and say it, it appears that the new $600M of debt was the catalyst for the downgrade.

In any event, I assume Buffett did his homework on this one and in the end he will get his 15% per year.

Is now a good time to buy stocks?

2009-02-02T23:36:00.004-05:00

I get this question a lot: "Is now a good time to buy stocks?"

It's actually pretty easy to answer this right now. But first you have to ask yourself a few questions:

1) Do I need the money I would be using to buy stocks? Your answer should be no. If you are planning on using this money for a down payment on a house in less than 5 years, then you should not be buying stocks with it. If you need to live off this money and couldn't afford to live your life without it, then you should not be buying stocks with it. Stocks are risky and you could lose every cent you put into them (not the most likely scenario, but a possibility that you can't completely ignore). Another way to phrase this question would be "Do I have a long time horizon of 20-30 years?"

2) Do I understand the difference between investing and speculating? Most people do not. If you want a good explanation, read The Intelligent Investor by Benjamin Graham. (I actually own this version of the book, which is hardcover and will hold up better over time, but the one I linked to first is cheaper.)

3) Do I have the time and skill to research individual stocks? If your answer here is "no", this does not rule out stocks as a whole but to me it would rule out purchasing anything but a small amount of individual stocks. Instead, I would personally invest in index funds and look for the lowest fees possible.

You'll notice I didn't mention anything about the market. This is because I don't know if it is high or low right now as compared to where it will be in a couple of months or years from now. I do know that equity investments look more attractive to me (and to Warren Buffett and Scott Adams) than they did a year ago, but I'm not going to make any forecasts.

And yes, the rumors are true: you have me to thank for the recent market declines. One of my 2006 year-end wishes was for lower stock prices in 2007 and although it took until 2008 for the market to fully grant it, my wish was fulfilled. Thank you, Mr. Market. You really helped my retirement years by allowing me to buy your shares so cheaply in 08 and hopefully for the next couple of years as well.

Please invest responsibly.

Oh, and for the majority of my readers who rely on a salary like me, you should worry more about your job than where you invest your money. Now is not the time to be slacking off at work trading stocks when you should be working to dodge the next round of layoffs. That said, there are some great bargains out there.

CEO Compensation

2009-02-01T03:20:00.003-05:00

So we all know that CEOs are paid ridiculous amounts of money. I've often thought that if I spent a week or 2 as CEO of a major corporation, I'd be set for life. I would be able to pay cash for a pretty nice house and then only work to pay my basic bills every year. Not only would one paycheck be more than I make in a few years, but I'd also get the nice golden parachute to boot.

Our new president is very public about his disdain for CEO salaries, and as I read in today's Wall St. Journal, Sen. Claire McCaskill (D., Mo.) has now introduced a bill to limit CEO salary to no more than what the president earns: $400k a year. The next sentence was a classic and I applaud the authors of the story for putting it in there: "In 2007, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein earned that much in about two days."

Two days!

I gotta get me one of them jobs.

New Fico Credit Score

2009-01-29T22:33:00.002-05:00

An article in the Wall Street Journal caught my attention on the train in to work today. I'd heard the credit bureaus were coming up with a new credit score calculation called "FICO 08", but I wasn't sure when it was coming into play. According to the article, TransUnion is going to begin offering the score today, but it could be months or years before it comes into common use and consumers can find out their own scores.

Supposedly the new methodology will make credit scores more accurate at predicting defaults, which will allow lenders such as mortgage companies to more properly price loans to consumers.

My FICO score is very high (I don't think much has changed since the last time I looked at it), but the problem I've run into being in my late 20s is that my credit history is relatively short, which worked against my credit score. From what I've read in the article, FICO 08 is supposed to correct this somewhat:

"The score, which will still range from 300 to 850 -- the higher, the better --
is fine-tuned to do a deeper analysis of subprime borrowers or those with "thin"
or young credit histories, according to Fair Isaac. More consumers with accounts
in good standing should also see their scores increase slightly, says Tom Quinn,
vice president of global scoring solutions at Fair Isaac. Overall, Fair Isaac
predicts FICO 08 will improve the accuracy of lending decisions by as much as
15%."

Not life-changing news by any stretch of the imagination, but as someone who is potentially in the market to buy a home, it piqued my interest.

Personal Finance Blogger Falls off the Map

2008-11-27T07:51:00.004-05:00

One of the PF (personal finance) blogs I've read regularly for the past few years is PF Blog, which detailed "MM's" (the author) quest to reach $1 million net worth by the age of 40 in the year 2016. When he was roughly 27 years old at the end of 2003, the author's net worth was approximately $132,000 (details here) and this had grown to about $885,000 as of the end of May 2008 (details) at the age of 32. If I'm following his story right, he is a Microsoft employee who was sent over to Asia to work overseas. He is pretty well paid and has a side business he used to generate extra income.

At the end of May, his portfolio was worth about $900,000. 30% of this was in 12 stocks he selected himself, with roughly $20k in AIG, $20k in American Express and other positions, with a heavy concentration in financials, which he felt were becoming undervalued. Another 12% was in US mutual funds, 30% in international mutual funds, and the remaining 30% was in cash, divided between the US Dollar and the Chinese Yuan.

Unfortunately, May 2008 is the last time he posted a net worth update. Since then, the S&P 500 Index has fallen from about 1400 to about 750, a decline of almost 50%, and his blog has been relatively silent, except for some irate comments made by readers. Some of my favorites are "Even though he seems to have abandoned his blog I hope he wasn't ignoring the market and sold out of his AIG position with at least a little something. He bought it at $62 and its now essentially worthless." and "I made a copy of his portfolio with where it stood in May and since then it has lost about $148,000 from those May prices."

I have enjoyed reading his posts over the past few years and I have to say he was much more diligent that I've been in terms of posting frequency. Some months he made 30+ posts. He also kept meticulous records of his net worth and updated them monthly for five years. That required an incredible amount of discipline and was an extremely valuable case study for everyone reading his blog. I didn't agree with everything he's written (for example I am not a fan of taking short-term zero interest credit card loans and putting the money into a bank account, which I believe he does to earn extra income), but I've been a fan of the site. His English and writing skills aren't fantastic, but they were good enough to get his points across.

So why has he stopped posting? I can think of a few reasons. I know that many people find it hard to look at a stock portfolio that has fallen in value. During down markets, I always hear the phrase "I don't even open my 401(k) statement anymore." Looking at your 401(k) statement is hard enough, but going through the detailed analysis that "MM" goes through each month probably gets pretty grueling when your net worth, which is heavily exposed to the stock market, is taking 30% hits.

Also, if he is like me and every other working person, he is probably facing increasing demands and stress at work lately. With layoff announcements in the news every day, it can be hard to focus on the work you have to do, and companies often cut back on staff without cutting back on work, placing increasing demands on those who remain behind. This would not leave much free time for him to devote to his blog, which is most likely not a priority in his life.

I don't think the reason he has stopped posting is embarassment about recent net worth declines, as some of the commenters on his site seem to suggest. For example, I think this comment was a bit harsh: "MM was very quick to post his net worth updates when things were going well, now he's essentially abandoned the blog. And I guess I do see what you mean by that certain "hubris" and "ego" he used to display. I just shrugged it off though as another finance blogger who thought he was some sort of pro stock picker. They are a dime a dozen."

Some other commenters also talked about another blog - "Millionaire Mommy Next Door" and suggested it had fallen off the map as well, but a simple google search would have answered that question - her account was hacked and she moved to a different domain.

I do think we will hear from MM again when he gets more time on his hands, but for now, wish him the best as he copes with the financial crisis.

(Fear not readers, my next post will be one of my long-anticipated net worth updates, a special "financial crisis" edition. I am sure you are all waiting with baited breath.)

How Scott Adams Manages His Money

2008-10-21T21:51:00.003-05:00

I came across an interesting blog post the other day... it was written by Scott Adams, the creator of Dilbert, describing how he manages his money.

Statements like this make me very jealous:

"When I first started making serious Dilbert money, I let experts manage half of it, and I managed the rest, as a hedge against both the experts and myself."

Can you imagine making "Dilbert money"? Me neither. I'd imagine Dilbert money amounts to a pretty tidy sum.

But I digress. The part of the post that most interested me was this part: "The experts invested in Enron, Worldcom, and a number of other companies that promptly exploded. The experts reduced their portion of my money by about a third over five years. (The experts work for one of the most respected financial institutions on Earth, by the way.) My own investments did better, precisely because they were more diversified. So now I handle my own investments, probably incompetently."

I smiled when I read that. One of the biggest lessons the current financial crisis has driven home again and again is that nine times out of 10, the so-called "financial experts" aren't worth the paper their MBA degrees are printed on. Tens of examples appear in the papers every day. From the "geniuses" who created the whole mess by engineering clever securities to the Wall Street research analysts who scrambled to lower their price targets and ratings every time the market dropped 15% this year, the majority of "experts" were outed as frauds. If you had followed their advice, you would find yourself extremely poor right now.

I went to school with these people. I worked with them in investment banks and I worked for the companies they peddled their wares to. Half of the time I couldn't follow what they were saying and the other half I couldn't understand why someone would want to take the kinds of risks they were talking about taking, or why someone would want to hedge against the risks they were trying to get them to hedge against. Warren Buffett warned that derivatives were a "ticking time bomb" back in 2003 a warning that put a bad taste in my mouth for the "financial engineering" I was just beginning to get exposed to at the time. Derivatives and complex financial instruments got really popular though. The big stars at the companies I worked for were those who understood the lingo, who could create increasing layers of complexity to get around accounting rules and "redistribute" risk. Incidentally, these kinds of people were also the big stars at Enron. (And ended up being relocated for their troubles).

I'm getting into rant territory, so I'll stop here. I realize a variation on this theme has been repeated thousands of times over the past hundred years or so. The most recent one I read was Andrew Lahde of Lahde capital, who wrote a similar rant when he recently quit his job. I highly recommend you read the letter he sent to his shareholders- if nothing else, it's quite an entertaining read. (And I think Lahde money would actually make me more jealous than Dilbert money.)

In an interesting twist, Adams ended his blog post with an endorsement for stocks:

"In order to diversify more, I started migrating money over to the stock market during this recent plunge. The market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn't matter how I invested, or it is a once-in-a-lifetime stock buying opportunity. It was an easy decision."

Not quite the same reasoning Warren Buffett gave, but an endorsement nonetheless. When America's preeminent corporate cartoonist starts endorsing stocks, is it a buy signal? You make the call.

One final note: I received an email misinterpreting my prior post as "calling a market bottom." Re-read my posts. I would never call a market bottom. My argument is that stocks are selling at more attractive prices now than they were last year, but nobody is treating them that way.

Warren Buffett Recommends Buying American Stocks

2008-10-18T13:42:00.000-05:00

I started this post on October 11th and never got around to finishing it. Fortunately, Warren Buffett himself finished it for me with his op-ed in the New York Times on October 16th. I can't say it any better than he did, so I'm not even going to try. Let me first show you what I wrote, then I'll add a link to Buffett's letter.

"I feel like I need to preface anything I write about investing in stocks with the following disclaimers:

1) You should only invest money you can afford to lose in the stock market

2) You should not have a high allocation to stocks if you are close to retirement

3) You should be prepared to see the value of your holdings drop 50% without worrying

That said, I want to make the following statement: now is a good time to buy stocks. And bonds.

How can I say this, when the markets are at 10 year lows and when we've had the worst week in history? Who am I to contradict the headlines?

Let me put it this way: were you happy buying stocks a year ago, when the market was at its peak and the dow was above 14,000? Chances are, you were. (I wasn't.)

When I see Tiffany & Co. selling for $22 a share.. it makes me happy."

I'm not calling a market bottom, and neither is Buffett. That said, people are now fearful and I'm happier in equities right now (see the three disclaimers above) than I am in anything else.

To see how he finished my post for me, I highly recommend you read Warren Buffett's Op-Ed in the New York Times.

What should I do with my 401(k) during the financial crisis?

2008-09-14T12:08:00.002-05:00

The headlines are not good right now, for example:

The New York Times: "Where to keep your cash as investments crash"
CNN Money: "EU Policymakers worried about shaky financial markets"
Reuters: "Wide financial sector fears to drive market"
Bloomberg: "Greenspan says financial crisis may be 'Once in century' event"
Associated Press "Emergency meeting on Lehman rescue resumes"

Major companies are failing (or at least, their futures are in question), for example:

Above mentioned Lehman Brothers is frantically looking for a buyer. The company's stock has fallen from a 52-week high near $70 to last Friday's close of $3.78 per share.
Washington Mutual has fallen from a 52-week high near $40 to Friday's close of $1.75 per share.
American International Group has fallen from a 52-week high near $70 to last Friday's close of $11.49.
The list goes on: Fannie Mae, Freddie Mac, Citigroup, Merrill Lynch and others

The fallout has been a decline in stock prices. My 401(k) is down 13% year to date, with the biggest percentage losses coming from the category of my international investments. My international fund is down 23% and my emerging markets fund is down 30%. The S&P 500 index fund which holds the bulk of my assets is down just about 13%. My best performer by far is the fixed income fund That's up 3.7 year to date. My account value is about $63,000, with a loss of approximately $9,000 year to date.

So I'm giving in. On Monday morning I plan to sell everything and put all of my money into the fixed income fund. The stock market is rigged in favor of the rich. I'm going to wait until we hit bottom and then put all of my money back into stocks.

Just kidding. If you've been paying any attention to my posts about my investment philosophy, I am fully prepared for years like the one we're currently having. If you want to put your money in stocks, you have to have the stomach to watch the value of your holdings drop 50% without batting an eyelash. The current market environment is nothing new. Between now and 30 years from now, I expect stocks to perform better than my alternatives: bonds, bank accounts, gold, cash, etc... They are not going to go up every year.

So what should you do? Besides rebalancing if your holdings have strayed 5 percentage points or more from your target allocation, I recommend doing absolutely nothing. Keep buying more stock at cheaper prices. When we have our next inevidable bull market, you'll be happy you did. More importantly, when you retire, you will have more money than you would if you put your money into bonds over the years.

Of course, if you have 5 years or less until retirement, the above does not apply. If you have a long time until retirement, however, rest easy.

I also think this is a great opportunity for active investors. Some great companies are getting battered by the headlines above. Mr. Market is running scared and doing foolish things. I personally don't have the time to study and make individual stock selections, but if you do, I'd imagine you can find some pretty attractive bargains in this market.

What is the best money advice you've ever received?

2008-07-26T09:13:00.005-05:00

I recently read an article on Yahoo about the smartest money advice some people ever got and I found it interesting. I always enjoy reading things like that. My favorite was "Don't Follow the Herd" by Robert Schiller:

People do not trust their own judgment but go along with the crowd, even when they can see truth. In a world populated with such people, there are investing opportunities for people who make the effort and do the work see clearly for themselves.

After reading it, I started thinking to myself - what's the best money advice I ever got? I thought back to the books I read that first got me interested in investing years back and all of the Warren Buffett and Peter Lynch nuggets I know by heart. I thought about Peter Lynch's admonishment not to put any money you will need in 3 years or so in the stock market. I thought about Buffett's quote that "investing is most intelligent when it is most businesslike." I thought about a book I read recently- The Richest Man in Babylon by George Clason and the simple investing lessons it offers. (By the way, I liked this book.)

I thought about all of those things, then I realized they weren't really advice, they were just things I read in books. Then I realized the best advice I ever got was the example of my parents while I was growing up. They never had big salaries, but they were frugal and worked hard to send my brothers and sisters and I through school. They never wasted money on fancy things like new cars. They never got me the newest fad in sneakers, and I was always one of the last people to get the new video game console. I didn't like it then, but I appreciate it now.

What is the best money advice you've ever received? I welcome you to share it below. And before you point it out- admittedly, my answer was kind of a cop out but trying to come up with the best single piece of advice I ever received would be kind of like trying to pick the best movie I've ever seen, or the best book I've ever read... way too difficult to pick one but I could rattle off the top 20 or so if I took some time to do it.

To get the juices flowing, here are some more "best money advice" articles, in no particular order:

The Best Financial Advice Ever
Advice from the always-interesting Free Money Finance
The Best Investment Advice I Ever Received - this one is a link to a book on Amazon that I'm thinking about either getting or borrowing from the library. Check out the "Search Inside" feature for some previews.

Should I put "MBA" in my title, on my business card, etc...?

2008-06-18T20:28:00.005-05:00

Over the course of my career, I've held jobs at fortune 500 companies, investment banks and small firms. Every now and then, I've come across people who make the huge mistake of using the MBA designation in their title.

For example, I'll get the occasional email with a signature in it, or see a business card or a "Linked-In" profile that reads like this:

John X. Smith, MBA
Accounts Payable Reconciliation Manager
Phone: 555-555-5555

This usage is absolutely wrong and it is one of my pet peeves. You can be proud that you have an MBA, but do me a favor- never use it in your title. The first thing I think when I see something like this (and it is almost always true) is that John X. Smith got an MBA at night school at a community college or on the Internet and has never worked in a professional setting before. Presenting yourself like this instantly brands you as a neophyte and if you make mistakes in things as minor (though admittedly subtle) as this, who is going to trust you with major responsibilities? The MBA is not a professional designation like a PhD or an MD. If you put MBA after your name, it just looks like you're trying too hard to impress people.

If you don't want to take my word for it, take a look at this piece in the Wall Street Journal, entitled "Why you should leave "MBA" off your card".
I've also seen this issue come up on Linked-In pages and it is usuall people in the IT field or something. I hate to pick on people, but check out this page [Actually, I had a link to a page with someone using MBA in their title, but this page has since been removed. I'm having second thoughts about picking on people in particular, so I'm not going to replace it. You can easily find it by just doing a search for "Joe Smith, MBA" on Google] I just did a totally random search to find someone using MBA in their title on linked-in and found this person. Looking at their education, I see it took them four years (most likely night school) to get an MBA from the Illinois Institute of Technology which almost perfectly fits my above thesis.

In closing, unless you really want to grind my gears, NEVER use "MBA," "M.B.A," "Master of Business Administration" etc... in your title. Feel free to mention that you have an MBA in your resume, or in your corporate bio etc... but don't use it as a part of your title or you end up looking unprofessional.

And while I'm on the topic, don't EVER call yourself "an MBA." This profile on LinkedIn is a good example of someone I would never want to work with. First of all, the person seems pretty psycho about LinkedIn and lists himself as a "networking king." Second of all, he uses MBA in his title. Third, he calls himself an MBA, writing "As an MBA with 7+ years of corporate experience..." I'm stopping right there.

Moral of the story: you have an MBA degree, you're not a doctor. Keep it in the background and let your work prove your worth.

By the way, no offense at all meant towards someone who got an MBA at night school at a community college. I don't care where you got your degree. In fact, I don't even care if you have a degree if you're an honest, intelligent person who does good work. I've just noticed a correlation between night school or internet MBAs and the use of "MBA" in their title.

I encourage you to read all of the comments below and decide for yourself.
EDIT- 11/19/2010: I've come around in my thinking since writing this original post, thanks to many of the comments below. In the majority of circumstances, I still think you should not use MBA in your title or on your business card. However, some people have told me that in certain industries/companies, the business card is used as a "mini-resume." I can't verify this as I haven't worked in any of these industries, but if this is indeed the case, I'm less against it than I would otherwise be. I still get annoyed when other people with MBA degrees walk around saying "I'm an MBA" and expect people to bow down to their greatness. Let your work and your attitude prove your worth- don't just lean on a title.

New Jersey Housing Prices Fall

2008-03-28T21:20:00.003-05:00

I came across a pretty interesting blog recently- http://www.njrereport.com/. It publishes news stories and examples of New Jersey homes being offered well below previous purchase or asking prices (which it refers to as "comp killers" because when they sell for lower prices, they serve as comparisons ("comps") for other homes being sold nearby and therefore drive down prices in an area.) Perhaps the most interesting part of the site is the comments, so be sure to check out the discussions when you're reading posts.

I think the blog is written by a real estate broker in NJ who very correctly called a top in the NJ real estate market in 2005.

It's an interesting read if you're following the real estate market, or if you're in the market to buy a house in NJ (or the northeast in general).

So where am I in the process? I'm still on the sidelines for a first home. I got married in 2005, at or around the top of a real estate bubble in one of the most overpriced areas in the country. I realized it would have been impossible for me to responsibly buy a home at that time, even though people with significantly lower incomes and down payments were doing so all around me. It was very easy to look at the numbers and see that I couldn't afford jack at that time. I posted about this a few times in the past, and I'm still waiting for prices to fall further. The news has been getting more and more encouraging, but prices are still ridiculous. I'm hoping real estate price declines continue, I'm hoping nobody bails out the people who took on mortgages they couldn't afford, and I'm continuing to build my down payment savings in the meantime. I hope to buy sometime in the next couple of years. I'm not worried about "missing a bottom" because I know once real estate prices fall, they don't generally bounce right back up, they tend to stagnate for a while.

How am I going to know when the time is right to buy? First of all, I'm definitely not going to try to pick a bottom. What I am going to do is continue to update my calculations of what my wife and I can afford on one salary, and when something looks both affordable and attractive to me, I'm going to go for it. I'm not too worried because my rent is pretty cheap for the time being. Right now, prices in general are still pretty ridiculous. I either need to save a lot more money, or see prices come down a lot before I really focus on the home buying process.

Profiting From the Bear Stearns Trade

2008-03-25T21:14:00.002-05:00

So we all know that JP Morgan offered to buy Bear Stearns for $2 a share a week or so ago. And by now we also know that JP Morgan increased its bid to $10 a share a few days ago.

This seems like one of the easiest "quick buck" trading opportunities I've seen in a long time, for anyone brave enough to have acted on it. When the initial $2 bid came out, it was so grossly low that many people (myself included) initially thought it was a typo. Bear Stearns employees thought it was crazy, many analysts thought it was crazy, media pundits thought it was crazy, and the market also thought it was crazy... bidding up the stock so it traded at or around the $6 a share level (give or take a few).

It would have been easy to place a bet on an increased bid by buying the stock or the calls after the initial announcement and selling them after the bid went to $10.

"If it was so easy, why didn't you do it, moneyman?"

Well for one, I'm really not a trader by nature. I do have a small trading account so that I can nibble here and there, but I don't have any cash in the account right now. For another, it would have been very risky. In hindsight it's pretty easy to have seen this coming, but before an offer comes out in writing, you're treading on thin ice. If the market had taken a nosedive, or if the due diligence process showed some more skeletons in Bear's closet, that increased bid may have never materialized.

Still, I follow the stock market pretty closely and this was one of those rare situations where it seems like EVERYBODY saw it coming. I'm sure plenty of people profited from the Bear Stearns trade over the past week or so. Even so- many, many more lost their shirts in Bear Stearns stock over the past few years, most notably the employees, most of whom will be laid off sometime in the near future.

How to Pack For A Business Trip

2008-03-01T16:42:00.008-05:00

My job requires occasional business travel, and while some people might think business trips are a great way to see the world on someone else's dime, I have to say it's not all that glamorous. In fact, most times all you really see is an airport, a hotel room and a conference center or a meeting room in an office building.

I've actually traveled pretty extensively on both buses and planes throughout my life. The greyhound bus was my primary travel route to and from college, and it often required a 2 or 3 stage trip to traverse the many hours it took to get from home to my dorm. Having dealt with everything from delayed departures to missed connections and the heavyset person with the seat belt extender sitting next to you, I learned a few things about how to travel comfortably and I figured I would share them here with anybody who wants to listen.

I've learned over time that the biggest predictor of how your trip is going to go is how much you have to carry with you. I became a big proponent of packing light after my first trip home from college via bus. I made the mistake of bringing my acoustic guitar home with me (a mistake compounded by the fact that I didn't even have a guitar case. I carried it in one of those big black contractor's garbage bags). And my laundry. And some books. Needless to say, things went badly for me. I was forced to put two of my bags under the Greyhound bus, which delayed my boarding the bus and prevented me from getting a good seat. I didn't have anything to do in my seat but read a newspaper that bored me after about 30 minutes. I tramped through the Port Authority with bags digging into my shoulder, looking like an out-of-towner/traveler and potentially a good target for muggers or pickpockets. I bumped people with my bags when I boarded the subway, and the worst part of all, the door of my LIRR car didn't open at my stop and I had to rush back two cars, with my guitar bumping shoulders and heads and everything like that. After this 5 hour-2 connection greyhound bus odyssey into New York's Port Authority, a subway ride, and a ride on the Long Island Railroad lugging all of this stuff with me, I vowed that never again would I travel with much more than a book bag on my back, if I could help it.

I've even extended this traveling light philosophy to shorter trips. I commute 1 hour to work every day via bus, subway, and foot. As anyone who's ever commuted on the NYC subway can tell you, the less stuff you have, the easier it will be to find a place to stand comfortably during rush hour. I've been looking for a businesslike briefcase that I can carry to and from work to replace the heavy faux leather briefcase I currently carry, but haven't had any luck sofar. If anyone knows of anything like this (more professional than a messenger bag but lighter than the typical briefcase, with an outside pocket for a newspaper and an umbrella) let me know.

So, my setup for business travel is based around a few things that I want out of a trip:

I want to be able to move quickly wherever I am
I want to be able to get through airline security with a minimum of hassle
I want to be able to get on the plane without checking any luggage
I want to be comfortable on the plane
I want something to do during the trip to make it go quicker
I want to be able to get off the plane quickly without waiting for luggage that may or may not appear on the luggage carousel
I want to carry my business clothing with a minimum of wrinkling/need for ironing
I want to have everything I need and be prepared to handle unexpected situations

Packing light gets me 2/3 of the way there. For an excellent discussion of packing light, one of the sites you absolutely have to read is Doug Dyment's One Bag - The Art and Science of Travelling Light.

From the above endorsement, you might have guessed that I like to travel with only one bag, a carry on that can fit my stuff and fit in the overhead bins on an airplane. The smaller the bag, the better, but the bag I usually use for business trips (which I bought on the recommendation of One Bag) is the Red Oxx Air Boss. It is slightly bigger than I would ideally like, but I need it to hold a laptop, so the size is pretty necessary. The good thing about this bag is that it is soft sided so as long as you don't over-stuff it, you can fit it into an overhead bin fairly easily.

Getting Through Security

When going to the airport, I always pack with security checks in mind. If you're prepared, you can get through security pretty quickly. If you're not, it can be a huge, embarrassing hassle.

For those of you who don't fly much, a quick walk through of the airline security drill is appropriate.

When you arrive at the terminal, the first thing you need to do is to go to one of those kiosks and print out your e-ticket, if you don't already have your boarding pass. I recommend going online and registering for your flight the night before if possible, because it's one less thing you have to do when you get to the airport.

From there you proceed to the security screening area. If you don't want to get held up there, you'll want to be prepared for things they will probably make you do:

Take off your shoes
Take off your jacket (this includes an overcoat as well as a suit coat/sport coat you might be wearing underneath
Take all of the metal things out of your pocket and put them in a tray to run through the x-ray machine
Take your laptop and put it in its own tray to run through the x-ray machine
Take your liquids, which should be in small containers of 4oz or less inside of a clear plastic bag, and put them in a tray to run through the x-ray machine
Have your boarding pass out to show to the guard as you walk through the metal detector

If you're not prepared for the steps above, you can be sure that security will catch you on at least one of the above and send you back to the line to do it right. This holds you up, but possibly even worse, it holds up the people in line behind you and makes the security team pretty upset. Preparation is key here because I can't count the number of times I've seen someone send a bag through with a laptop only to have security ask them to take the laptop out. Invariably the laptop is in the center of the bag, wrapped with clothes and undergarments, and the person struggles to get it out without revealing their tightie whities to the world. The liquid rule can be even worse, especially if someone's big bottles of hair gel or shaving cream are scattered throughout the bag, and too big for security so they have to throw them out.

Taking off your shoes is easy enough. The right way is to slip them off and toss them in a bin to go through the x-ray machine. The wrong way is to have some kind of 8 inch high heeled boots that lace up to your knees and take 10 minutes of fumbling or sitting on the dirty floor to get off.

Taking off your overcoat/jacket can be another story entirely. The right way to do it, if you've prepared in advance, you ideally have nothing in the pockets that can fall out. You whip the jackets off and stuff them in a bin. This is opposed to the wrong way where you have a giant, bulky jacket with 10 pockets and small smooth bits of metal in each pocket. You go to take it off and nickels start hitting the floor along with keys, your lucky matchbox car, and a small bouncing ball that you chase around the security area. To top it off- oh $hit, you left your boarding pass in the pocket and as you pass through the metal detector, the guard asks you for it and you fumble around and point to the x ray machine.

Taking the metal things out of your pocket is something you can plan for in advance. If you have some kind of an outer pocket in your bag, you can take all of the metal keys, cell phone, blackberry etc... out and put them in the bag either before you go to the airport, or right when you walk in the door. In other words, somewhere that is not the security table where you have 20 people waiting behind you in line. If you don't plan this right, you'll walk through the metal detector with keys, a phone, a beeper, and a matchbox car in your pockets. You'll have to go back and empty them, forgetting you have a spare key in the little key pocket of your jeans and take a third trip back to the scanner.

Ideally, your laptop has its own compartment in your carry-on bag that you can get to very easily. You unzip, take the laptop out, put it in a tray and run it through the machine. If you don't do this right, you will have to dig through your bag, messing up your careful packing scheme, pull out your laptop and then try to squeeze it back into the bag on the other side of the scanner.

The liquids thing is easy as well. Have your liquids in a quart sized ziplock bag that is easily accessed from an outside pocket of your carry-on bag. They're all in one place, they are all under the maximum legal limit, you toss the bag into a tray and through the machine it goes. If you're not prepared, your bag goes through the x-ray machine with the liquids inside. The security guard rolls their eyes and says "whose bag is this?" They make you open it up and they dig through your underwear to find your full sized bottle of shampoo. They toss it in the garbage. They find your travel sized lotions and perfumes after a few minutes of digging and admonish you that your liquids have to be in a clear bag the next time.

Your boarding pass should always be folded up in the same place on every trip. I can't stress this enough. I use my shirt pocket. I always keep it there, and I always know where it is. I pull it out as I walk to the metal detector and show it to the guard. If you do this wrong, you will leave your boarding pass in your bag and it won't be ready to show the guard. Even worse, you won't remember where you put it, causing you to empty every pocket in your pants and jacket, go through all of your bags only to find it after 10 minutes folded neatly in your wallet.

If you follow the guidelines above, I can almost guarantee that you will get through security quickly every time (depending on how many people in front of you are unprepared and hold you back). If you're running late for a flight for some reason, delays at security can mean the difference between making it on to the plain and being forced to spend a night at the Peoria, IL Airport Marriott while your daughter performs her first piano recital back at home, or some similar scenario.

Boarding the Plane

Boarding the plane is another crucial step in the process. Hopefully you've picked out and reserved a pretty good seat by checking out SeatGuru.com before the flight. I recommend standing as close to the front as possible before they start boarding the plane. This way, when they call your boarding group, you can scoot right on. Normally I would say it's no big deal since you have an assigned seat, you can wait until whenever you want to get on the plane. However, I've noticed many more people carrying laptops (even non-business travelers) and things over the past few years, and the overhead storage bins seem to fill up pretty quickly, so I recommend getting on as soon as your group is called to board to ensure you have a place to store your bag.

In-Flight Entertainment

My favorite in-flight diversion is watching a movie either on a portable DVD player, or as I've been doing recently, a video Ipod. I like the video Ipod because it takes up very little space, but the portable dvd player gets the edge in terms of screen size and picture quality. If you're at all a fan of movies (and I can't think of anybody I know who isn't), nothing makes a flight fly by faster than immersing yourself in a movie as soon as you've reached cruising altitude. You can play Russian Roulette waiting to see what the in-flight movie will be, but I do not recommend it because you might find yourself watching Gigli or Maid in Manhattan and contemplating jumping out the window.

I recommend using cushioned headphones on your flight, ideally noise-cancelling headphones that can drown out the drone of the engine and allow you to escape the world around you. Earbuds just do not work. You have turn the volume up so high to drown out the noise around you, and this will a) damage your eardrums over time, causing you to go deaf at an early age and b) disturb the people sitting around you. Cushioned headphones keep your sound in and to a pretty good extent, keep the surrounding sounds out, especially if you have noise reducing headphones.

I've tried three different kinds of headphones over the past few years, and they have all had their ups and downs. First was the AKG Acoustics K26P Foldable Stereo Folding Headphones. These were a pretty decent pair of headphones for traveling. They had good sound quality, folded pretty small into a little carrying bag, and did a pretty good job of sealing sound out and in. However, they broke on me. They have a little plastic hinge that helps the earpiece fold and this thing broke, making them useless. It was impossible to fix them with krazy glue and the warranty had expired so I tossed them.

My next set of headphones I really liked were a set of Maxell Noise-Cancellation Headphones I bought at Wal-Mart. They were my first experience with noise-reducing headphones, had these really big comfortable cushions and folded up reasonably well (though not as small as the AKG ones). I really got a lot of use out of these headphones, but after a while, I stopped getting sound out of one ear. I played around with it to no avail, but I'm guessing a connection was severed somewhere when i bent the wires, and after a couple of movies with left channel sound only, I decided it was time to get a new pair.

I didn't go cheap on my next set, though I wasn't willing to pay a few hundred for a set of BOSE noise reducing headphones. Instead I settled on my current set, (which I've only used on one flight) and they seem to work pretty well. After reading some reviews, I settled on the Logitech Noise-Canceling Headphones I found on Amazon.com for $50. So far, they work great, and one of the reasons I got them was they came with their own semi-hard shell case that also had a pocket to hold a video Ipod.

The hard shell case has pluses and minuses. On the plus side, after breaking two pairs, I am treating these headphones like a baby and the case really helps with that. On the downside, it adds a little bit of bulk and wouldn't fit in the magazine pocket of the seat in front of me comfortably, so its sort of a question as to where to put the case during the flight.

I think I solved that problem with a carabiner. I'm going to clip the carabiner to the case and this way I can hang it from the webbing of the pouch on the back of the seat in front of me to keep it out of the way.

Before going on the flight, I make sure to set this up as my primary food/entertainment option during the flight. I've found it pretty easy to toss a couple of powerbars along with the ipod, the headphones and the battery (it takes one triple A battery to power the noise-reduction feature) into the headphone case. By throwing a couple of snacks in there before the trip, it prevents me from buying the $3 cookie or the $5 sandwich from American Air. I really miss the old days and the free in-flight meals.

From there, I settle in to the flight (preferably with an aisle seat for easy access to the bathroom), watch my movie, and I'm as comfortable as can be as time floats by.

Carry-On Bag

If you frequently travel on planes, it makes sense to have a pretty good carry-on bag. For a while I had been using the rolling duffel bag from this 6 piece Eddie Bauer luggage set (its the bag tilted on the left). It is a decent bag but it is kind of heavy due to the apparatus for the rolling handle, the handle tends to stick, it has no shoulder strap, and it cannot stand upright on its own, which made it a pain in the neck to lug around an airport.

After my last trip with this thing, I got pretty fed up and I immediately ordered the Red Oxx Air Boss. Though I haven't used it yet, I know it is going to be a big step up from my previous bag. The Air Boss was designed with input from Doug Dyment of the previously mentioned "onebag.com" and it seems to have everything I'm looking for. I know many will balk at the $225 price tag but for me having a bag that I won't have to replace anytime soon due to its lifetime warranty was worth paying up for. Since I haven't actually used it yet, I can't recommend it, but if you want to read some reviews, check out what people have had to say, including Brad at Onebagger, Flyertalk.com, Lornitropia.net, and last not but least, Doug Dyment's review. Also check out Dyment's page on choosing a carry on bag while you're on the site. One quick first impression of the Air Boss- it seems bigger than I thought it would be. In fact if you pack it pretty full, it will look like a big stowaway bag with a strap on it, something you might want to avoid. If you do decide to order one of these bags, be sure to get a tape measure and get a good sense of what the dimensions are before you make the purchase.

What to Pack

Finally, the most important thing you can do in order to travel light is to pack as little as possible. I'm not going to go into a detailed packing list here. You can find many of those on google. What I am going to say is that you should bring as little as possible, and you can figure out how much this really means by trial and error.

Good luck!

Tax Rebate Blues

2008-01-25T00:05:00.000-05:00

Today the government announced that people will be getting tax rebates. Unfortunately (fortunately?) my wife and I make too much to get one. It's kind of funny because we don't make that much more than the limit and we live in one of the most expensive cities in the world (NYC). A couple making a combined $190k in Peoria, IL is probably a LOT "wealthier" than a couple making that much in New York City. I think there should be some kind of a cost of living adjustment depending on where you live for rebates like this, as well as for things like the limits on Roth IRAs.

I know you're all getting out your "world's tiniest violins" and saying "cry me a river." I hear ya. I realize we're lucky to make as much as we do. Although, I worked 15 hours today so I wouldn't say its all luck. Would you?

Diamond Ring Rebate

2008-01-23T20:42:00.001-05:00

Did you buy a diamond ring or other diamond jewelry somewhere in the 1994-2006 timeframe? (I did- got engaged during this period). Well, you may be eligible to receive a rebate from DeBeers, which recently settled a class-action lawsuit.

Just wanted to pass that along. I know a few bloggers and readers of this blog may have gotten married during that period. You might only get 50 cents, or you might get $200 from what I've been hearing. It's at least worth going to the website and filing your claim.

Fed Rate Cut

2008-01-23T20:15:00.000-05:00

So we just got an intra-meeting 75 basis point cut. I guess the Fed's job is to prop up the stock market now. I'm not a huge economics expert, nor do I really care one way or the other what the Fed does with rates at the moment. However, it looks pretty obvious that the move was done due to declines in global stock markets and a desire to prevent such declines in the US.

Best Place to Park Cash

2008-01-21T11:40:00.000-05:00

By the way, I've been looking around for a while now, and currently I think my best option for investing short-term cash is the ING Direct Electric Orange checking account. If you'll recall, when I first got the opportunity to open one of these accounts I declined , but later, I decided to go for it.I'm getting a 4.9% APY since my balance is at least $100,000 and I haven't seen any rates out there that beat it. I did recently sign up for an Emigrant Direct account because I know their rates have been higher than ING Direct's saving account rates at different times in the past. However, since I have so much cash right now (relatively speaking, for me), the rate ING offers me is better than my alternatives so I haven't put anything into Emigrant yet. When I do eventually buy a house, I won't qualify for the higher rate at ING Direct and I will have to evaluate which of the two make more sense for me at that time.

Anyone see anything that beats 4.9%? I've seen some CDs yielding a bit higher at some smaller online banks, but I'm not too interested in opening up a bunch of different accounts just to chase a tiny bit of yield.

401(k) In the Red

2008-01-21T11:02:00.000-05:00

I have to admit, it's a strange experience to log in and see my 401(k) balance squarely in the red. My total portfolio has lost 9.6% of its value sofar this year, with my small-cap funds (13% of my current balance) down about 14%, my index fund (60% of my current balance) down 9.5%, my international funds down about 7% and my fixed income fund (3% of my current balance) up .3%.

Everything is down except for my fixed income fund. If you recall from my 2006 year in review, I historically haven't even had any fixed income allocation in my retirement account. However, I added some in '06, my reasoning being that "I decided to put a small amount of my retirement money in a fixed income fund purely for the sake of diversification so that in the years when equities are in the red (and I know these years are coming!), I will be able to look at my portfolio and see that at least one of my investments is up. The fixed income fund underperformed my stock investments this year, returning 5%."

I guess that time has come! These days, I almost wish I'd put even more into the fixed income fund back then :)

In a way, I am thoroughly entertained by everything going on in the market right now. It was easy to see we were in the midst of a housing bubble, and it was even easier to see that we were in the midst of a credit bubble. I've written about both over the past few years. For people in my age group, these are the second and third bubbles we've had the fortune of observing (the first being tech stocks in the late 1990s). I guess the moral of the story is that if it seems too good to be true (housing prices increasing 20+% every year, tech stocks increasing 50%+ per year, credit being incredibly easy to obtain), stay away from it. If you time it right in the short term you might do well, but you have to get out at the right time. I don't think anyone out there can time markets successfully on a consistent basis, so you're better off not even trying.

By the way, a brief update on Moody's: the stock is sitting right near a 52 week low just under $34 a share. I don't want to jinx it, but I have been picking some up in my trading account. Remember its extremely risky to put money into individual stocks. I'm only investing an amount I could comfortably lose without losing any sleep. MCO reports earnings in the early part of next month and I anticipate some reaction (positive or negative) to the reported earnings as well as the outlook. If you take a step back from the current environment you'll see a company generating good free cash flow and high margins. As long as it survives the current significant threats, I think the company will continue to show great returns and hopefully the market will reward this.

Finding Bargains in Your Amazon.com Shopping Cart

2008-01-16T20:31:00.000-05:00

I buy a ton of stuff off of Amazon.com. I've been using the site for about 10 years now and bought everything from books (my first purchase was "The Intelligent Investor" by Ben Graham) to socks, to toys and many things in between. I have an amazon.com credit card and it gives me extra reward points when I shop on the site.

Anyway, I started noticing something about a year ago. When I added items to my shopping cart but didn't check out, I would come back a few days later and and click on my shopping cart to find a few alerts reading something like:

The price of the book "The Intelligent Investor" has decreased from $13.95 to $9.99 since you added it to your cart.

Basically Amazon keeps a record of the prices of things in your shopping cart and lets you know when they go up and down.

I've found this pretty fascinating from a few different standpoints, the primary one being finding bargains on items that I would like to have, but don't need right away at the prices they're currently listed for. To take advantage of this feature, I add basically anything I might want to my shopping cart, and sign in every now and then to see if anything has been updated. Sometimes the price reductions are so good that they'll convince me to buy the item right away before they get raised again.

It's also interesting to see how much prices actually fluctuate. Over the course of a month, my purely unscientific survey has shown the average item's selling price changes at least twice.

I started noticing this about a year ago, but it might have been happening for a lot longer... not sure if this is something everybody knows about.

One thing I also wonder about is whether or not Amazon lowers prices specifically to get a customer to buy something. For example, maybe they have some software program that checks what items someone has had in their cart for a while, and this triggers them to lower the price a certain amount on certain items as an inducement to make the purchase. I'm sure if they tracked customer responsiveness to price changes like this over time, they could figure out some pretty effective incentives that would drive sales increases.

I'm also curious if Amazon offers different prices to different customers at certain times, though I doubt they can practice much, if any, price discrimination.

Anyway, I guess the takeaway is to play around with this yourself, especially if you use Amazon and haven't already discovered this on your own. Add some items that you might want to buy at lower prices and then just wait for Amazon to make you an offer you would accept. For example, I have a 42 inch LCD tv in my cart right now. If Amazon tells me the price has decreased a few hundred dollars below where it is now, I might consider buying it.

This is basically the same approach I take to investing in individual stocks. I have a list of the companies I want to own, but I wait for the market to offer them to me for the right price before I'm willing to buy. Please note that I stole this approach from Warren Buffett, but he stole it from Ben Graham anyway, so I don't think he will be too angry. (For more reading on this, you might want to learn about who Mr. Market is).

Moody's Thoughts on the Causes of the Subprime/Credit Crisis

2008-01-13T12:24:00.000-05:00

I recently happened upon a paper written by Moody's as part of its "Global Financial Risk Perspectives" series entitled "Archaeology of the Crisis" where the rating agency attempted to "dig a little deeper" to discover the causes of the current credit crisis. It is sort of complex and not aimed at the general investing audience, but I found it to be a pretty interesting read nonetheless. While I know that past results don't predict future performance, I do think you can learn a lot from studying market bubbles/blowups and hopefully avoid finding yourself invested in one in the future.

Moody's basic thought is that the roots of the crisis are deep and entrenched, meaning you can't just pin it on a few little things. It presents a list of seven observations that I'll discuss a little below:

1) Incentive structures in the financial markets are flawed. My read on this was that people working for banks are paid (and paid very well) based on current performance without taking the long-term impact of their decisions into account. Put more simply, people are looking to make a quick buck. Moody's goes into how this applies to traders at investment banks but I'd also note that this applies to people like mortgage originators and real estate brokers. Their commissions are paid when people buy houses. Whether or not the person defaults on a mortgage and loses his/her home down the road does not matter to the broker, so at the height of the real estate bubble, they were just stuffing anyone they could into homes they couldn't afford. The basic short-term nature of incentive structures in the financial markets inevidably introduces more risk into the system.

2) Regulators and policymakers, looking to maximize growth, don't limit banks enough to prevent financial crises. What Moody's seems to be saying here is that bank regulators such as the Federal Reserve could prevent crises by requiring banks to keep much more cash on hand to deal with problems, but then banks wouldn't be able to earn any money. Since policymakers have implicitly agreed that letting banks grow and make money is a good thing, they accept the risk of the occasional crisis.

3) "The mystifying interaction between credit risk and the economic cycle." That's how Moody's third point reads, but I will admit I had a hard time understanding their argument here until I read the next sentence "Another problem is the difficulty of measuring risk over time." I think the crux of this argument is that the people who measure risk (rating agencies, risk management departments at banks etc...) have trouble doing so because their measurements are impacted by the cyclicality of the economy and it is hard to separate structural risk from cyclical risk, because their measurements are based on the current state of the world around them, which may or may not be in the midst of an unrecognized bubble. This is a pretty arcane topic and I might not be reading it right, but let me try giving an example...

In the late 1990s before the equity market bubble burst, people were saying that risk premiums were lower, so stocks were less risky than they have been historically, and their sky-high valuations were therefore justified. These people were having trouble looking at risk from a long run perspective and were just using the results of the current market cycle which led them to believe that the world had somehow changed. It turns out the world hadn't changed, the markets were just coming to the peak of a huge uptick in the cycle. I think the London Business School paper "Global Evidence on the Equity Risk Premium" does a better job of explaining this than I could:

"Over the last decade of the twentieth century, US equity investors more than trebled their initial stake. In real terms, they achieved a total return (capital gain plus reinvested dividends) of 14.2 percent per annum. During the last five years of the 1990s, US equities achieved high returns in every year, varying from a low of twenty-one percent in 1996 to a high of thirty-six percent in 1995. Many investors became convinced that high corporate growth rates could be extrapolated into the indefinite future. With steady growth rates, equity risk appeared lower. Simultaneously, there appeared to be a decline in the premium sought by investors to compensate for exposure to equity market risk. This drove stock prices onward and upward. Surveys suggested that, in consequence, many investors expected long-run stock market returns to continue at double-digit percentage rates of return.

Then the technology bubble burst... With markets having fallen, investors started to project lower returns into the future."

4) Difficulty in tracing risk. The crux of the argument here is that all of the structures that developed in the past 10 years or so (mortgage security pools and wrappers, pools of pools, risk transfer structures etc...) were complex and opaque. The investors who purchased the risky investments like mortgage loan pools had less information than the people who created them, so it was hard for them to truly measure what kind of risks they were taking. For example, if I borrowed $200k to buy a house, the mortgage originator might sell that mortgage to an investment bank who would combine it with other mortgages into a pool, then sell off chunks of that pool to a hedge fund under various degrees of risk assumption. The hedge fund manager would never get a chance to look at my financial records, yet he owns an investment that is partially dependent on my ability to make my mortgage payments on time. The shady mortgage broker might have lied about my income on the application as a result of the incentive structures discussed in point 1 above, but the hedge fund manager would have no way of knowing that. In addition, the bank who created the security might have made some assumptions or variations to the way the loan pool was created that were buried in some 100 page prospectus that the fund manager might not have been able to discover. The way the whole process worked made it difficult to state exactly what the risks were in the security the ultimate investor owned.

5) Confusion over the definition of "liquidity." The paper gets even more arcane here, so I don't blame you if you get sick of this entry and click out to somewhere else, but to me, Moody's seems to be sort of going on the defensive here. It mentions that there is a misconception that "highly rated securities are necessarily liquid." The agency's argument is that when it gives securities a high rating based on the issuer's balance sheet, it does not necessarily mean that there will always be an orderly market for buying and selling the security, ie while the credit risk of the security might be low, the market risk might still be very high. This seems to be what happened to many of the mortgage-backed securities. As everyone decided that mortgages were toxic, it became difficult to find any buyers for the securities, so even though the majority of mortgages underlying the securities might still have been performing as expected, the securities would only sell at extremely low valuations in the market.

6) No satisfactory valuation paradigm in the credit markets. As we all know, there is often a disconnect between market prices and underlying economic values. Moody's is saying here that the models people were using to value the credit securities that came out in the past 10 years or so were inadequate, and additionally that no adequate models exist.

7) "Spurious precision" in a complex system. Basically what Moody's is saying here is that financial reporting is discrete and precise. Banks have to put a value on their liabilites and assets as of certain dates (usually quarter end for their 10-Qs and 10-Ks) yet the values of some assets and liabilites cannot be precisely estimated, as pointed out in point 6. This leads to huge writedowns and further panic in the financial system.

I am sure our current market conditions and the ultimate fallout (the extent of which we don't know yet) will be well studied in the future but I think the above points do get at some of the main causes of the current crisis in the financial markets.

2008 Market Decline

2008-01-09T20:50:00.001-05:00

So, I take some time off from posting for the new year and the market tanks.

First of all, Happy New Year to all of my readers. I hope you were able to take some time off around the holidays. I found it hard to pry myself away from work, but I managed to do so and really enjoyed the downtime.

The Dow closed at 13,500 on December 26th and has since fallen about 1,000 points. Hopefully there's more to come (allthough the market rallied today). People are as pessimistic as ever on the future of the housing market, gold is nearing $900 an ounce, oil touched $100 a barrel for one brief trade (but based on the rumors I've heard it was the minimum contract amount and the trade was just done by a person looking for bragging rights).

Looks like it's going to be an interesting year.

Bespoke Investment Group's Blog

2007-12-30T11:05:00.000-05:00

I came across Bespoke Investment Group's blog yesterday while surfing around the Interweb and found it interesting enough to recommend that you head over there and check it out. From what I've read, the company does small financial research projects tailored (hence the term "Bespoke," which is a term mainly used in the UK to describe customized or individually tailored clothing etc...) to a client's needs. It looks like most of the stuff they show is the type of research someone with access to Bloomberg or some other market data provider can do, but not everyone has a need for access to these tools (mainly due to cost), so Bespoke grab the info and run a report for you on a one-off basis as needed. I'm curious what their pricing is like.

I wouldn't suggest you base your entire investment philosophy off of the things you read on Bespoke's web site because a good portion of it is technical analysis and I'm not a big fan of that. However, they do have some interesting charts and comparisons that could lead to some ideas for further research. For someone like me who follows the markets, I like occasional looks at high-yield spreads and how 2006's best and worst performing stocks did in 2007. I can't talk about their service because I haven't used it, but it seems interesting.

I also liked their piece on Yale University's Endowment Fund and I remember reading the Yale Endowment Fund case study back in business school. The Yale fund's annual report, which they link to in the blog, makes for some interesting reading but don't expect them to reveal too many secrets in there.

Save For Your Kids Retirement via a Variable Annuity

2007-12-17T19:34:00.000-05:00

I read an interesting personal finance article by Jonathan Clements in the Wall Street Journal today. He talked about a bunch of ways to teach your kids about money. Now, I'm not going to be your typical blog where I list the ways and a brief summary of each one, then put my own spin on it. Bloggers who do things like this are lazy, unoriginal hacks who are basically just stealing their work from other people.

I am, however, going to key in on one particular idea I hadn't considered before. When I read about it, I thought it was the first time I'd ever read about it, but it turns out after consulting a June 2005 Clements article on teaching kids how to save I realized came across the idea a few years ago. (As an added bonus, if you read Clements' 2005 article along with the one above, you get a better picture of the actual dollar amounts he saved for his kids, offered for allowances etc...)

The idea is investing in a variable annuity to fund your child's retirement.

You heard me right, retirement, not school, not college, not graduate school, not weddings... RETIREMENT. Saving for your kid's retirement.

For most people, this is very low on the list of priorities. However, for people who are more financially comfortable, just think about how long that compounding period is... about 60 years if you put money in when the child is born. If you invest $2,000 and earn market returns of about 9% for 60 years, your child will end up with about $352,000 for retirement. Add contributions of just $100 a year to that initial $2,000 investment and your child will end up with $547,000. Add contributions of $335 a year and the initial investment will turn into about a million dollars in 60 years.

The reason why he opted for a variable annuity rather than a Roth IRA is that his kids would need to have income in order for him to contribute to a Roth IRA and being an infant at the time, the kid probably didn't have any income. The variable annuity allows for tax-deferred growth without an income requirement. (Incidentally when his daughter got her first job waiting tables or something, he opened a Roth for her.)

Sometimes when I look at my own retirement projections I wish I had another 30 years to tack on to let the really good compounding take effect at the end. In effect, if you open an account for your kids, this is what you're doing.

Does anyone have any thoughts on this? I think it might be something interesting to look at if I'm looking for alternatives for my child's birthday money etc... Of course I think I'm going to have my hands full with saving to help them through college first, but this is always something to think about. It's also pretty clever.

Maximize Your 401(k) Contribution Before Yearend

2007-12-16T10:59:00.000-05:00

For those of you like me looking to maximize your 401(k) contribution for 2007, you most likely only have one paycheck left to do so so this is a quick reminder to make sure you've done that. I've been monitoring my contributions throughout the year and it looks like I will have to increase the percentage withdrawn from my next paycheck in order to reach the limit. I like the 401(k) because it reduces the taxable income I report to the government (and due to my salary combined with my wife's salary, we're priced out of Roth IRA contributions).

So take a look at your last pay stub and check what your year-to-date 401(k) contributions are. Subtract that number from the $15,500 and figure out how much you'll have to contribute out of your next paycheck to max out the contribution. Then go through your company's payroll system (luckily I can do mine online) and make the necessary adjustments.

And then remember- if you contribute $15,500 a year for 23 years and get a 9% annual return on your investments (a fair assumption for the stock market, in my opinion), you'll end up with just over a million dollars.

How Much Do Your Neighbors Make?

2007-12-13T22:12:00.001-05:00

If you're like me, you're curious about what people make. Madame X over at "My Open Wallet" has a fantastic post where she asked her readers for details on their ages and incomes. A bunch of them responded and it makes for some fascinating reading. You can read the salary responses here.

I had a few thoughts as I read through the replies:

1) Her readers have pretty high incomes. There were a good percentage of respondents who made 100K and up.
2) She must have a TON of readers. The volume of responses was pretty huge.
3) Many people who higher salaries are unhappy with all of the time they spend at work. In otherwise, they get bummed out about it from time to time. So do I.

Edit: also check out networthiq.com for a glimpse into the networths of your neighbors. Allthough some are clearly fictitious, it's worth a look.

What Should The Average House Cost?

2007-12-10T20:50:00.000-05:00

I've been trying to talk about my view that home prices need to fall further, but seekingalpha.com did it better than I could. Check out this discussion of home prices. They argue that the price of the average home should be somewhere around 3.2 times median household income, where it has been for the past 30-40 years. Put in today's terms, they argue that the median home price should be 3.2 times the estimated 2008 median annual household income of $52,134, or $166,829. This represents a 40% drop from the current levels just above $200,000.

I agree with that math.

Of course, you could make the argument that home prices don't necessarily need to have a correlation with household income, or that the ratio of around 3 times income no longer applies. However, I think you'd be kidding yourself.

How Many Ounces of Gold Does It Take to Buy the Average House?

2007-12-08T23:01:00.000-05:00

Investmenttools.com has some pretty interesting housing price graphs. One of them shows how many ounces of gold it has taken to buy the average house over the years.

Another shows how many shares of the Dow Jones Industrial Average it takes to buy the average house. It's interesting to note that chart looks very different from how many US dollars it takes to buy the average house. Back around 1980, it looks like it would have taken about 110 shares of the DJIA to buy the average house, whereas now it is more like 22 shares. This shows how much stock price increases have outpaced housing price increases over the past 25 years or so.

As a side note- amid all of the doom and gloom, the index fund that 60% of my 401(k) contributions are going into has returned 8.7% this year. It seems like the sky was falling for some reason or another every week this year (primarily because of subprime headlines). All of the resets, the foreclosures, the dollar falling etc... and yet a stock market index fund still quite handily beat returns on most other financial products such as CDs and savings accounts. Thanks to my modest allocation to international and emerging markets funds (up about 16% and 50%, respectively), my overall 401(k) portfolio is up 11.3% on the year. Not too shabby.

Online Banks: Stop With The Ridiculous Savings Account Rate Comparisons

2007-12-04T21:56:00.001-05:00

I got a flyer in the mail from eTrade financial today, advertising the "complete savings account". It showed a chart that has become all too familiar to me as I've been shopping around for another online bank recently.

On the left was a big bar the size of the empire state building, it had 4.70% in HUGE PRINT at the top of the bar. This is the rate on E*Trade's Complete Savings account. Next to it was this tiny little bar that said 0.50% at the bottom, in tiny print. This was labeled "National Average."

For years, online savings and moneymarket accounts have been making this ridiculous comparison. They compare the rates on their high-yield accounts to this puny "National Average," which the E*Trade footnote says comes from Informa Research Services, Inc.

To put it simply, this is a ridiculous apples-to-oranges comparison, but it seems like every single online bank does it.

What if BMW started running commercials where it raced its newest model against a 1997 Buick Regal, then proclaimed victory when it won the race? We would all laugh at that, because it's a ridiculous comparison.

The "National Average" includes rates that almost nobody in their right mind should be accepting on savings deposits. It includes all of the brick and mortar accounts like my Chase savings account, which currently yields a paltry 0.7%. Do you want to know how much cash I keep in that account? Practically zero.

If you're promoting yourself as a high yield savings account, don't compare yourself to a different category (the broad universe of savings accounts). Compare yourself to your peers just like any consumer with half a brain will do. For example, JD at Get Rich Slowly has a great survey of 12 online high yield savings accounts with rates current as of December 3, 2007. Taking an average of these rates gets me 4.66%. Want to guess why E*Trade isn't using this average in its marketing materials? That's right. It's hard to make .04% look sexy when you put two columns next to eachother in a chart.

Sorry to go off on a rant, but online banking industry, it's time to stop this. I'm calling you out!

In fact, I propose (if it hasn't already been done) that bankrate.com or some other high-visibility banking organization come up with a more appropriate standard average against which online banks can compare their high-yield savings account yields against. I know the banks must be doing this internally already. I think it's time for it to catch on in the consumer world so crazy comparisons like the one I got in the mail today stop getting sent around.

Plan to Bail Out Subprime Mortgage Holders

2007-12-02T13:35:00.000-05:00

You might have read about plans to prevent certain subprime mortgage rates from "resetting" to higher rates in the next few years in the papers lately. If you have, you fall into one of two camps. The first camp is people who have subprime loans and are terrified of the reset that's coming up because it will push your mortgage payments up to unaffordable levels. If you're in the second camp, you're angry that idiots who took out bigger mortgages than they could afford to buy homes they couldn't afford will be bailed out, preventing them from being forced to sell and allowing home prices to come back down to more reasonable levels.

If you've read my prior posts about buying a house, you probably know that I'm firmly in the second camp. As I talked about in "The Subprime Mortgage Default Opportunity," I thought these painful resets would force people to sell and help the housing market to correct.

Don't get me wrong, I'm in favor of helping the needy. People whose homes were destroyed by a natural disaster deserve to be bailed out. People in other unfortunate circumstances deserve to be bailed out. However, people who bought houses they couldn't afford do not deserve to be bailed out.

So where are we in the bubble/bust cycle? I've been following some interesting posts in a blog called "Misha's Global Economic Trends Analysis" and I think he has a good illustration where he overlays the US housing market on a graph of Japan land prices during that country's bubble and bust from 1980-2004. According to that chart (and most experts), we're in the early stages of a decline. I don't know for sure what to believe, but I sure hope it falls a lot further so that honest, hardworking people can afford to buy a decent house to live in.

By the way, my current favorite source for housing market related news is Patrick.net's Housing Crash News. Its updated daily with stories around the web about the overinflated housing market in the United States.

A Good Site For Valuation Related Matters

2007-11-19T21:09:00.000-05:00

Ok, so he doesn't format his excel spreadsheets very nicely, but hey I don't hold that against him. The guy wrote some of the most respected textbooks in the field of valuation/corporate finance. I'm talking about NYU professor Aswath Damodaran, and I'd like to suggest you take a look at his website sometime.

I don't know when he put this mission statement up, but I think it's fantastic:

"I am lucky enough to be in a field where a little knowledge and some experience goes a long way, and achieving guru status seems relatively simple. What I do know is neither profound nor earth shattering, but I would like to share it on this site. In that pursuit, I have attempted to keep almost the entire site open and accessible, with the only shut-off portions representing powerpoint slides used by instructors (who use my books). Everything that I learn, do or write in the field of finance will be on this site sooner or later. I hope that you find the content useful and that you will share it with others. Good luck! "

If that doesn't sum up what the Internet is all about (free sharing of information), I don't know what does.

The Taj Mahal Does Not Want Your US Dollars Anymore

2007-11-18T22:16:00.001-05:00

Add Indian tourist sites to the list of places that won't accept dollars anymore. According to a recent ruling from the Indian Government, visitors will no longer be allowed to pay admission fees to places like the Taj Mahal in US Dollars. They must use Rupees instead. According to the BBC, "The ruling is aimed at safeguarding tourism revenues following the recent falls in the dollar."

The Taj Mahal joins the likes of model Gisele Bundchen and rapper Jay-Z as the latest object of public interest to snub the dollar.

Just tossing that out there.

By the way, im watching Bloomberg TV- Asian markets are open on Sunday nights in NYC. Did you know that the Pakistani government's 10-year bond is yielding 10.3% right now? I'm not sure how you could buy one of those and given the fact that the country is currently under emergency rule , I'm not sure you would want to buy one. How much do you trust a 10-year promise that Pakistan will pay you back? Actually, taking that a step further... why would you ever want to support such a government by loaning money to it?

Great Gifts for Finance Geeks - Part II

2007-11-17T21:52:00.000-05:00

As promised, here are some more ideas (in no particular order) I had that I'm sure the financial analyst/hedge fund manager/business school student or other finance geek in your life would appreciate this holiday season. Ok well if it's a hedge fund manager you're buying for, you might want to stick with the items in Part I. These are more inexpensive than the extravagant items I had in Part I.

1) A subscription to the Harvard Business Review - I don't have one myself, but I try to get to the library once every couple of months to check out the review and see if there's anything in it that interests me. For those of you who don't know what it is, the Harvard Business Review is a thick, glossy magazine that comes out once a month and costs $99 for a one year subscription (yes, that's north of $8 an issue). It has a bunch of articles written by people, primarily academics and consultants, about general business and managment issues. I consider reading the HBR as a form of "continuing education" for people who work in the business field.

2) A way to get more out of Microsoft Excel - most finance geeks know their way around an Excel spreadsheet very well. In fact, if they call the office their home away from home, Excel is probably their home away from home away from home. Despite being so familiar with the program, many don't know the powerful programming language called VBA (VisualBasic for Applications) that they can use to get Excel to perform mind-bending tricks that save huge amounts of time for finance geeks and their companies alike. John Walkenbach is my favorite authority on the subject, and presents it with rigor and enthusiasm. Depending on which version of Excel the person has, you might want to check out one of the following:

4)The Office DVDs:

I didn't catch on to this show until season 3, so it was a real treat to buy the first couple of seasons on DVD and catch up with them all over the course of a couple of weekends. Ok, so it's not particularly finance-based, but I figured I better put something fun on here in case you wouldn't feel comfortable giving someone what amounts to and Excel textbook as a gift :).

5) The best medium-duty shredder I could find.

This thing still works like a charm for me, and I am still really glad I paid close to $100 for a good one rather than getting one of those cheap ones that can only handle one sheet at a time. If you know someone who could use a shredder or an upgrade, this is highly recommended. What finance geek worth his/her salt doesn't know the threat of identity theft and the importance of destroying sensitive documents. The link above the picture is a pretty lengthy review I did on this shredder a while ago. This thing still eats unopened junk mail (complete with fake credit card) for breakfast.

6) Pretty much anything from KlearGear.com. This site doesn't cater to finance geeks in particular, but it has plenty of items for the wider "geek" audience, ranging from the utilitarian laptop bed desk to the whimsical computer-controlled USB Missile Launcher.

So there you have my $0.02 on what to get a finance geek this holiday season.

Good Gifts for Finance Geeks Part 1 - Big Ticket Items

2007-11-09T23:29:00.001-05:00

If you're shopping for an office worker, finance student, MBA, professor, or similar finance geek this holiday season, let me throw out a few suggestions. This first installment is going to be some more expensive gifts, and I'll follow with a list of cheaper items. My main criteria for these expensive gifts was that they had to be something a finance person would appreciate, and something that might be a collector's item or increase in value over time. I think I achieved this with everything except for the gold, which isn't super likely to increase in value substantially, but hey you never know.

1)Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. As the link shows, you can get this book for about $1,400, used. That's right, a $1,400 used book. I'm not going to go into the details of the book here because I haven't read it. But any value investor would be extremely happy to get a copy of this book for more reasons than one- in addition to supposedly having some great investing advice, it's also a collectors item and an investment in its own right. In fact, according to Business week, this out-of-print book was going for $700 a copy just about a year ago. Read the article and find out why former hedge fund manager Seth Klarman's book is in such high demand.

2) A framed one thousand dollar bill. That's right, a legal tender $1,000 federal reserve note. These things were never meant for circulation so the federal reserve retires them whenever it comes across one... which as you can imagine isn't too often. This thousand will set you back somewhere around $4,000, but hey, isn't it worth it? Well maybe not, but this is a gift-giving time of year.

3) Gold Coins. At somewhere around $850 a coin, five or ten of these make a great gift for the finance geek who might be starting to get sick of regular paper money backed by government promises. I recommend BlanchardOnline.com, which has great prices and service.

4) One share of Google. This will cost you like $1300, but it could be a great long-term purchase for a finance geek to hang on the wall.

The 4-Hour Workweek

2007-11-07T21:04:00.001-05:00

I finally got around to reading The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich, by Timothy Ferriss. I have to say it was an interesting read. The basic premise of the book was that there is a class of "new rich" who can do what millionaires do without having a million dollars. They do this by automating their work so that they don't need to be present in order for their businesses to run, and by taking advantages of currency differences.

Ferriss seems to strongly advocate owning your own business, in particular some kind of an internet-based business. In my opinion, this isn't practical for most people. If you're considering doing this, the book might be even more valuable to you.

I did think he had a few interesting ideas though. For one, he has a pretty good chapter called "E is for Elimination" where he focused on streamlining your work life and time managment. None of it is really new stuff (the 80/20 principle etc...), but it will definitely make you think twice about the things you spend your time on, which is something we all need to do from time to time.

He also suggests going on a "one week media fast" where you don't read any newspapers, magazines, websites, or watch any news shows for a week. I think this has both its pros and cons. The main pro is that I think we all waste too much time reading news that we can't use and can spend the time doing more productive things. The cons are that for some jobs, especially more creative, higher-level business jobs, it's important to stay current on the happenings in your field and sometimes the media is the best source of information.

The chapter that intrigued me the most, and the one that really pushed me towards recommending this book, is "Outsourcing Life." In this he suggests getting a "remote personal assistant" from a company in India or elsewhere. He mentions Brickwork and Your Man In India as two potential companies to use. He says you can get a well qualified assistant to do some of your work for you, freeing up your time to do other things. Best of all- they can do it fairly inexpensively and they can work while you sleep. I actually tried this out with pretty good success, and I will hopefully write a post about that sometime in the future.

For now though, I'd say if you're the kind of person who's always looking to improve the way you work, and can overlook the rather drastic premise of this book, I think this is definitely worth spending some of your time (and a little of your money) on.

Final thought- can you achieve the four hour workweek by reading this book? I'd say the odds are very slim. I do think it might help you cut a few hours out of your work week though.

The State of the Markets

2007-11-03T21:48:00.000-05:00

So what are the current key themes in the market? I'll tell you what I have my eye on lately:

1) The subprime mortgage fallout and its continued impact on the financial markets. Lately the big news is I-Bank writedowns. Merrill Lynch happened to report its earnings a little later than some of its peers, but I'm sure there are more Merrill-type announcements to come. Citigroup is getting rid of Chuck Prince, Merrill tossed Stan O'Neal (and paid him a ridiculous $160 million to leave), and there's more to come.

2) The decline of the dollar. I think it now costs about $1.05 to buy a Canadian Loonie (Canadian Dollar). It's still falling against the Euro and other major currencies as well.

3) The ridiculous performance of emerging markets. My emerging markets mutual fund is up over 50% this year, on top of gains in the 30% area for the past few years. These things are really overheating. China's stock market has also seen a tremendous rise and it really reminds me of NASDAQ 1999 (ie a bubble).

4) Commodity prices. Oil is somewhere around $95 a barrel now. It's gone up like a rocket in the past couple of years. Gold hit $810 an ounce this week, its highest level since 1980.

Financial stocks have been selling off lately. I don't recommend investing in individual stocks, but if you dabble in the market like I do, you might want to take a look at Moody's Corp. (NYSE: MCO), which has fallen to what I consider to be tantalizing levels in the low $40 per share range. For a long term investor, this might be one of those rare opportunities to pick up shares of a company that enjoys a unique, semi-monopoly position in its market. Of course, it has it's share of risks. Securities issuance has fallen dramatatically in certain segments of the market, and there's always a regulatory threat hanging over the company. I believe Warren Buffett's Berkshire Hathaway owns some MCO shares, based on some things I've read.

Where to park short-term cash?

2007-10-19T21:41:00.000-05:00

I've been shopping around for a new online bank account (savings or money market). It's been a while since I've done this and even though my goal has been to simplify my finances this year, it also makes sense for me to diversify banks now that I have more than $100,000 in deposits. FDIC insurance only covers deposits up to $100,000 so I figured I would start looking for another place preferably with a higher rate than ING Direct's current APY.

Sofar, I'm going crazy. There are so many banks out there looking for your cash these days that it's hard to figure out which one is the best place. What I'm looking for is the highest yield possible, but it seems like every account has certain restrictions and introductory rates and so forth. I guess they devise all of these schemes (limit 3 transactions a month without fees, no check writing, check writing, you must pay bills through our site etc...) to try to get and retain customers.

Over the next few days im going to try to find some quiet time to sort through the noise myself. You would think there would be one easy place to find this info, but this is not the case. Even the blogosphere can't keep up with all of the latest deals, twists, tricks and traps. ( And don't get me started on bankrate.com I like the site but I swear sometimes it panders too much to its advertisers and it seems like one big infomercial.)

If anyone has any advice, feel free to let me know.

Popular Fiction: The Worst Depreciating Asset of All Time

2007-10-14T20:25:00.001-05:00

So we've all heard the old line that a new car loses about 20% (this figure varies) of its value when you drive it off the lot. If you're like me, you think that's a terrible value proposition and you would never buy a new car. I have a used car that has been running very well for about 4 years now and I paid half of what I would have paid for a comparable new car.

If you think an item losing 20% of its value is bad, how about one that loses 99% of its value when you take it out of a store?

"WOW! What kind of an item is that?" you might be asking yourself.

Answer: a book, in particular a work of popular fiction.

Let's take an example. Check out the amazon page for Stephen King's Cujo.

Side note: Stephen King is on my short list of favorite authors.

If you were to buy Cujo new in a store, or on Amazon, it would cost you about $8. You take it home, devour it in two nights because it is that good, and then say to yourself "hey, what do I need this book laying around for? I hardly have enough room as it is. Let me try to sell it."

So you go online to determine what price you'd have to list it at in order to sell it. Look back on that amazon page I linked above. There are over 200 copies waiting to be sold by other people. The lowest price listed is ONE CENT, and there are dozens of copies listed for sale at that price (another side note, the way people make money off of those sales is on the shipping allowance amazon gives them. You'll pay them like $3.99 for shipping, but it might only cost them $2 to ship it to you so they can make like $1 profit if they got the book for free or paid very little for a batch of them. I think they also get a break on amazon's seller fee if they have an amazon store open).

So anyway, when you buy a book new, chances are as long as its not a new title, an out-of-print title, or something like that, it's going to lose 99% of its value when you leave the store with it.

You might argue that the value lies in the reading of the book, but I would argue back that you can get that value for free at the library. As much as I like Stephen King, I don't see the value in buying Cujo unless you have no other choice (for example, if you're stranded in an airport for a night with nothing to read). Just get it from your local library! Trust me, they have at least one copy of that book waiting there for you right now.

Some books don't face this effect, and therefore are probably worth buying. If you're really into a particular author or subject and you want to get a new release, chances are it won't be available in your library for a while and you might want to buy it. If it's some kind of a reference book that you plan to use for years, you might also want to buy it (I have some auto and home repair books like this). Finally, if it's going to be a family heirloom you might also want to buy it.

Otherwise, I highly recommend that you don't buy the worst depreciating asset of all time and instead just go to the library for your books. You won't regret it (unless the person who previously read your copy of cujo left some food on p. 83) and when moving day invariably comes, you will be thankful that you don't have to carry those two huge boxes of yellowing paperbacks that you haven't read in years.

The Cost of Market Timing

2007-10-14T20:06:00.001-05:00

I've come across a bunch of studies that show how costly it is to try to time the market by buying and selling stocks in the hopes of buying "low" and selling "high," and they've been very convincing. I've never come across such a clear example as what happened in my own 401(k) account not too long ago.

On September 17th of this year, the value of my 401(k) was $52,000. I had enjoyed an ok 6.6% return for the year, based on the strong performance of my international funds and the pretty good performance of my domestic equity index funds. The common stock index fund that represents 60% of my assets in that account was up 6.1% on the year.

Those of you who follow the Fed pretty closely will remember what happened on September 18th. Ben Bernanke cut the discount rate and the fed funds by 50 basis points, 25 more basis points than forecast, and the market ate it up. I posted briefly on it here.

When I checked my 401(k) balance at the end of the day on Sept. 18, it was worth about $53,330, a gain of $1,330. My return was now 10.3% on the year, as the equity index fund rose to a 10.4% return on the year (International stocks hadn't had a chance to respond to the cuts during the day so they underperformed, relatively speaking).

What a difference a day makes. If I hadn't been invested on the 18th, I would have been kicking myself. Of course, there will be days the market takes a big hit in the other direction and I would have been better off with my money in cash, but I believe the big long-term trend is higher and I'm willing to take some volatility along the way in order to build a big nest egg for my retirement. (And based on what's happening with social security, it looks like I will definitely need a big one.)

I guess the moral of the story is, yet again, don't try to time the market. You'll miss out on the big days.

Too Bad I'm Not A Sports Star

2007-10-01T19:01:00.001-05:00

I wish I was a sports star instead of a financial analyst, but not for the reasons you might think.

Sure the money and the fame and not working in an office all day long would be great, but there's another thing that sports fame can get you- an audience with Warren Buffett, the Oracle of Omaha.

I recently read a Bloomberg piece saying that Buffett extended an invitation to chat with Yankees sensation Joba "The Heat" Chamberlain. Buffett has also met with Lebron James and Alex Rodriguez. So cheer up, those of you who don't have $650,000 to spend on a lunch with Buffett... there's another way to meet him and learn his investing secrets firsthand- practice, practice, practice.

Pretty Good Paycheck Calculation Site

2007-09-30T16:25:00.001-05:00

I recently stumbled across www.paycheckcity.com, a nifty little site that lets you calculate your paycheck. It's good if you're trying to figure out what your take-home pay would be if your pay increased or declined. You can fill in state, city and local taxes, payroll deductions, etc... and it does the calculations for you. Just figured I would pass it along. Again: this is not a paid post, just something I've used!

Job Hunter Tip

2007-09-24T20:35:00.000-05:00

Let me make this very clear. You can never be too well prepared for an interview. You can never can know too much about the company and the position you're applying for. I am famous for overpreparing for interviews. Read every keyword in the job description and know what it means. The Internet is your friend. I'm going to assume you know how to do the basics, which include at the very least:

-look up the company on google

-find out what it sells

-read the 10-Ks and 10Qs if it is a public company

-understand how it makes money/where most of its profit comes from

-visit the company's websites and read as many press releases as you can

-look up the job function on google

-google every keyword in the job description

You can take this to the next level by doing things like:

-Looking up SEC filings on Edgar.

-looking up recent sell-side analyst reports on the company if it is a public company. I can't tell you how great these reports are as a resource. Most management teams read these things, and the reports usually address some of the most important issues facing that company.

-doing all of the above for every one of the company's competitors

-purchasing the company's product or service

But if you really want to go the extra distance, it will sometimes cost you money.

For example, let's say you get an interview at a well-known financial firm for a job that involves, among other things, working on fairness opinions. "What the heck is a fairness opinion?" you might ask. Well, the definition of fairness opinion is easy enough to find.

But what if you could find a fairness opinion written by the company you're looking to join? Wouldn't that give you a leg up?

That's where a company like The Consus Group comes in. Browsing through the site, you can find a fairness opinion written by a well-known financial firm (in this case, Sandler O'Neill Partners). It will cost you $42, but you have to ask yourself... is it worth it if it means coming off as more knowledgeable in an interview? If you have any shot at getting the job, the answer is most likely yes. There are a number of sites like this. I guess the moral of the story is don't be afraid to pay a little if it means giving you an advantage in a job interview.

ING Direct Lowers Rates

2007-09-23T11:18:00.001-05:00

I figured it would happen sometime after the Fed cut rates, but I wasn't sure when it actually did happen, but I happened to check the rates being credited to my ING Direct accounts this morning and they were lowered.

My 100k+ balance in my Electric Orange checking account is only getting 5% APY now, vs. the 5.30% I was getting previously. My savings account is now getting 4.30% APY vs the previous rate which gave me a 4.50% APY.

This is another reason why I'm not such a big fan of the rather large recent rate cut. Less interest income on my down payment savings.

I'll look around at options such as Certificates of Deposit and other potential alternatives as I decide where I should be keeping my money, but the difference isn't huge and chances are the alternative rates have declined as well so I probably won't do anything in response to the cut (except collect less interest every month).

On the positive side, the rate cut provided a pretty good boost to my 401(k) account, so at least "I got that going for me."

What if the doom and gloom scenarios come true?

2007-09-22T16:00:00.000-05:00

If you're an American and you've read the newspaper, or Web sites, or heard people talking lately, chances are you're aware of the major "doom and gloom" economic themes that have surfaced over the past couple of years, and in many cases, intensified over the past few months.

I would put them into three broad categories, which are all interrelated. The first is the housing market collapse, the second is turmoil in the credit markets affecting the international financial markets, and the third is the decline of the dollar (which many say is caused by the budget deficit).

As I was driving home from Dunkin Donuts on a cool Sunday morning in New York City, I passed a bank and recalled a story I'd read the previous Friday describing an old fashioned "run on the bank" that happened in England last week. I thought to myself "What if all of these dire predictions come true?"

I don't think everything is going to collapse like everyone says it will. The US economy has survived a huge number of similar scares in the past and over time our standard of living has increased, stocks have gone up, and people who have worked hard and had some luck have been able to become successful. I consider myself one of these people. For as much as I feel like I'm priced out of the home buying market, I am fortunate enough to have worked my way through college and grad school and into a relatively high paying job as compared to average salaries thorughout the country as a whole.

However, as a thought exercise, I wondered, if someone knew now that all of these things were going to come to fruition, what could they do in advance of the coming crash?

Problem: The declining value of the US dollar.

Fallout: USD paper money is nearly worthless. As confidence in the dollar declines, it will take more dollars to buy the same amount of goods and stores will raise prices to the extent that it would take a barrel full of them to buy a loaf of bread. The government will print up even more dollars and compound the problem. Your bank accounts and 401(k)s, which are denominated in dollars, are worth nothing. Banks fail and depositors lose their life savings.

What you can do now: Put half of your savings in non-USD denominated accounts and buy gold and other assets that will not depreciate along with the dollar. One place to open up an account denominated in a foreign currency is Everbank. Research the economies of different countries, but if I was going to put money into 3 currencies right now, I would probably pick the Canadian dollar, the Australian dollar, and Japanese yen, with other candidates being the Euro and the New Zealand dollar. Put another portion of your savings into gold. I did an entire post about buying gold that you might want to take a look at.

This Motley Fool article has another suggestion- buying stock in companies whose earnings are denominated in foreign currencies in order to squeeze more gains out of the weakening dollar.

Problem: The rising price of oil.

Fallout: It becomes prohibitively expensive to use oil. You won't be able to heat your house in the winter. You won't be able to afford to drive a car.

What you can do now: Investigate moving to a more temperate climate, such as the southern part of the country, where you won't need heating oil. Start riding your bike to work to strengthen your leg muscles and increase your aerobic capacity. Buy shares in an oil company, oil futures or oil HLDRS, so that when the price of the commodity increases, the value of your holdings also increases. Explore the use of solar power (which looks expensive now, but won't when oil doubles or triples). Maybe give one of these solar showers a shot.

Problem: Falling Housing Prices

Fallout: The value of your home drops. The value of your investment property drops. You don't want to live there anymore, and nobody wants to buy it from you. You can't sell it for enough money to pay off your mortgage.

What you can do now: First of all, let me just say that if you bought a house you couldn't afford, you're dumb. If you're fortunate enough to be able to keep up the payments and just live there, then don't worry about the value of your house declining. If you're not selling or buying something, you don't care about what its value is, you care about the cost of ownership. So, ignore the news about home prices if you like living there and can make your payments.

If you have to sell for some reason, I can't really think of anything special beyond the basic real estate ideas to increase your home's curb appeal and stage it etc...

The other thing you can do now is to carefully evaluate real estate prices and mortgage options BEFORE you buy a house. Don't pay the ridiculous prices. Don't get an adjustable-rate mortgage that can reset to a rate that will be unaffordable for you. Put simply: don't buy something you can't afford.

Those are just some brief thoughts I had. Of course you can also just go the direct route of shorting the dollar, buying oil and gold, buying credit default swaps (if you have enough money- these products are more for institutional investors), and shorting the stocks of home builders and mortgage lenders. I'm sure there are a ton of other options. If you think of any good ones, or disagree with the above feel add comments on this post.

Cut Your Grocery Bill

2007-09-22T09:37:00.000-05:00

I usually don't just pass along links, but sometimes I do, so here's a link from MSN Diet and Fitness about cheap eating. If you spend hundreds a month on groceries and you're looking to cut back, maybe you'll find some ideas in there.

Gold Rush!

2007-09-20T18:02:00.001-05:00

Have you noticed how gold prices have been moving this month? The chart on the left comes from kitco.com, my favorite web source for gold pricing. Gold responds to weakness in the dollar, and man has the dollar been getting weaker lately. (Aside: when people say the dollar is "getting weaker," they are talking about foreign exchange rates. A weaker dollar means it takes more dollars to buy one unit of another currency, such as the Canadian dollar or the Euro). This weakness sent the price of gold up from $670 an ounce on Sept 3 to about $740 an ounce today.

When I was a kid, we would always make fun of someone who got a Canadian dime as change from the store because, as the joke went, Canadian money was basically worthless as compared to American money.

Well, not anymore. Here's a five year chart (courtesy of yahoo finance) showing how many Canadian dollars you could buy with one American dollar. As you can see, as of today, the US Dollar and the Canadian dollar are basically at parity, meaning one US Dollar is worth as much as one Canadian dollar.

So... is this bad news? My answer is "I don't know." Even with all of my education and having read as much as I can on the topic, I still don't know if the current decline is such a bad thing. It's not like I'm buying groceries priced in Euros. I live within the dollar system. I'm paid in dollars and I buy things for dollars, and I haven't noticed much of an impact from this on my daily life.

For the broader economy, a weaker dollar makes American goods look more attractive to foreign buyers because now a Canadian can spend fewer Canadian dollars to buy a pair of American shoes than he spent last month. The American company didn't change the price of the shoes, but the exchange rate turned in the buyer's favor. This should in theory help our exporters be more competitive in global markets and help to reduce our nation's massive trade imbalance. However, if it persists in the long run, I think it is bad news. If the US is competing in the global economy only because our prices are low, our companies won't have as much incentive to innovate and create fantastic products and services. The reduction in competition will reduce our need to increase productivity, and American industry will get fat and bloated.

I'm not running for the hills, but the situation does not look very good.

If you're interested on reading more about the dollar's weakness, the big buzz on wall street today was the story about Saudi Arabia potentially ending its peg to the US Dollar. This was one of the main catalysts for what we saw happening in the currency and metals markets today.

Double Digit Housing Price Declines

2007-09-20T17:37:00.000-05:00

Seems like a lot of people have finally decided that it is possible for home prices to decline. Moody's economy.com says it sees a national average decline of 7.7%, as some areas see declines in the double-digit percentage range. Unfortunately, New York City is not one of those areas.

Congratulations to Young and Broke

2007-09-19T20:31:00.000-05:00

Congratulations to Amanda at Young and Broke... her blog recently turned 2. I only link to blogs I read, and hers is a good one so check it out if you get a chance. She aims her posts mainly at younger people just out of college.

Education Stats from the Economist and Personal Finance Carnival

2007-09-19T18:48:00.000-05:00

The Economist has an interesting chart comparing graduation rates for college students in different countries. I thought it was interesting that over 80% of young people in Australia entered school, with somewhere around 60% graduating. In the US, the number is something like 65% entering school and 35% graduating.

Also wanted to point out that one of my previous posts shows up in the carnival of personal finance over at The Tao Of Making Money, along with some other great posts to check out. I personally enjoyed this post at Ravi Vora's blog.

Fed Cuts Discount Rate

2007-09-18T18:24:00.000-05:00

The Federal reserve cut the discount rate by a surprising 50 basis points today (most people were only expecting 25 basis points). You can see more detail on bankrate.com's fedwatch page. I was sitting front of a live market feed when the announcement came out. I highly recommend this if you follow the market at all. It's one of the few things you're pretty sure will make stocks move, happens in the middle of the day, and you know well in advance that a rate decision (one way or another) is coming at that time. Stocks soared and volume took off.

I don't have strong feelings one way or another. I thought they might cut 50 basis points due to all of the doom and gloom financial stories that have been going around lately. I hoped they wouldn't lower the rate at all because it seems like people have this crazy expectation that investments they own shouldn't have to go down in value and that Fed rate cuts exist to protect them from losses.

Anyway, my advice doesn't change: keep contributing to your retirement accounts.

A Look at Salary Data (from an MBA perspective)

2007-08-31T19:57:00.000-05:00

The issue of pay is an extremely sensitive one. It's personal, it's private, and it's very important if you want to support yourself. You should periodically evaluate your salary and make sure you're being at least fairly compensated (or you can be like a friend of mine, whose goal is to be overcompensated).

One good tool I've found for current, prospective, and former MBA students to get a feel for what MBA holders (An aside: I don't like calling people "MBAs" because the term suggests a nonexistent homogeneity.) are being paid is a survey put out by the Graduate Management Admissions Council (GMAC).

Before I continue describing the survey and my take on the recent results, let me first issue a disclaimer. The GMAC is a not-for -profit "educational association" that administers the GMAT. Seeing as the GMAT is a computer-administered test that costs $250 a person to take I'm pretty sure that despite the fact that it's not the organization's goal, it manages to turn a profit anyway.

Most surveys are conducted by people with an agenda or some kind or another. In fact, any time I see a number or a presentation put in front of me, my first question is "Who put this together, and what is their agenda?" In this case, I assume the GMAC's agenda is to get people interested in going to business school to get an MBA. This will make the schools who run the GMAC happy, and it will bring the GMAC more of those hefty GMAT test-taking fees. I like to think of GMAC as basically a marketing tool to get people to want to go to business school. In fact, I think all of the MBA surveys you see (US News and World Report etc...) are mostly marketing tools used to get people attracted to MBA programs, and the data therein should be considered, but considered suspiciously.

That said, I still think this survey is useful. In fact, I am one of the survey participants myself, and have been filling out the survey every year since I got my own MBA. The results of the survey make sense to me, and I use this as a general data point when evaluating my own salary.

The entire survey is available here: April 2007 MBA Alumni Perspectives Survey (gmac.org) and I recommend taking a look at it.

The questions on the survey run the gamut from job functions to job satisfaction, to whether or not you are satisfied with your MBA degree, but I immediately zeroed in on two questions: Annual Base Salary and Weekly Work Hours. I find the other questions interesting, but I care the most about this hard data.

Flipping to page 38 of the survey, based on 2,577 respondents who graduated between 2000 and 2006, the mean annual average salary was $94,825, with a median of $90,000 and a 25th percentile of $70,000. This is a good general starting point, but these broad numbers are skewed by greater than average earnings in some industries such as consulting, and below average earnings in things like nonprofits. It's hard to place my salary (which is below the mean) within this group.

On the next page, salaries are broken out according to job function. Here we can see median earnings broken out by industry group. I'll show a few selected groups below:

Consulting: $100,000

Finance/Accounting (me): $93,000

Manufacturing: $90,000

Nonprofit/Government: $67,800

And broken out by job function:

Consulting: $100,300

Finance/Accounting (me): $87,000

General Management: $100,000

Human Resources: $84,760

IT/MIS: $87,000

And finally, by job level:

Entry Level: $60,000

Mid-Level (me): $86,000

Senior Level: $100,500

Executive Level: $120,000

There is also one other interesting piece of info that breaks out salaries by age. It shakes out this way:

27 and younger: $56,950

28 to 34 (me, just barely): $88,000

35 and older: $100,000

I just barely fall into that second group, so I'm going to unscientifically say that these numbers put people my age (28) somewhere between $70,000-$80,000 a year. My base is above $80,000.

One last piece of salary data I would have liked to have seen in there was a survey of salaries by job location. I know that people in NYC generally make higher salaries than those in Idaho, for example, but this wasn't in the report.

From the above data, this we can gather that senior level consultants make the highest base salary out of all MBA graduates. However, I happen to know a few consultants, and we need one more piece of data before we can be jealous of their cushy jobs and high salaries: hours worked.

Flipping ahead to page 33, we get to the "Weekly Work Hours" table. According to the 2,964 respondents, 4% worked fewer than 40 hours a week, 37% worked 40 to 49 hours a week, and 59% worked 50 hours or more each week. Unfortunately, I fall into that last category.

The first category of less than 40 hours a week is extremely tiny. I don't think people go to business school to work nine to five jobs. As a brief aside here, this category made me think of Timothy Ferriss and a book that I've heard a lot about lately, but have not gotten the chance to read - The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich. I'm not going to recommend it because I haven't read it yet, but I certainly plan to.

Getting to the information I was looking for, the table on the next page shows that the 411 respondents in the consulting industry worked an average of 51.8 hours a week, whereas those who worked for the "Nonprofit/Government" sectors worked an average of 44.6 hours a week. The difference of 7.2 hours doesn't seem like much upon first glance, but think about it for a second... this is an entire day's worth of work for most people. This seven hours represents the difference between coming home in time for dinner and eating cold leftovers or fast food every night. It represents the difference between leaving your office while the sun is still shining and getting home just in time to stumble into bed. It represents the difference between a Saturday morning in the office and a Saturday morning at the beach. It represents the difference between stressful, harried days fueled by caffeine and relaxed days fueled by conversation with your coworkers and a feeling that you're doing something good for the world. I think you get the picture here.

Doing a little math on those results, dividing the median consulting salary of $100,300 by 52 weeks in a year gives you $1,928.84 a week. Further dividing that by 51.8 working hours in a week gives you a consultant's "hourly salary" of $37.24.

The same computation for "Nonprofit/Government" would start with $67,800, divided by 52 weeks, which gives you $1303.84 a week. Further dividing that by 44.6 working hours in a week gives you a "Nonprofit/Government" "hourly salary" of $29.23 an hour.

Of course, one glaring omission from the math above is that it does not factor in bonuses, which can be rather large for private sector consultants and rather small for government and nonprofit entities. In fact, the survey also goes into additional compensation and shows on page 42 that 22% of Nonprofit/Government respondents reported getting no additional salary beyond their base salaries, as compared with only 6% of consultants. So consultants are rewarded even more handsomely than $37.24 an hour.

Even if you don't have an MBA, it's a good idea to periodically review salaries for your job function to be sure you're getting everything you should be. External sources for salary data are a huge negotiating point when you're talking with your boss/hr representative about a raise or starting salary. Salary.com is a great starting point for most areas, and I'm sure there are more specialized surveys out there on the internet if you dig around and look for them.

Market Turmoil

2007-08-16T07:29:00.001-05:00

I love the recent market turmoil. Yes, the value of my 401(k) has been going down, but I am not looking to access those funds for another 30 years or more, so I don't give a toss about these little intra-year selloffs. The DJIA broke through 14,000 a few weeks ago, and it closed under 13,000 yesterday for the first time in a while. People are flocking to invest their money in treasury bonds, causing yields to drop. There is also some speculation that if the market weakness keeps up, the Fed will lower interest rates at its next meeting.

I think that falling yields bring up an interesting scenario for someone with an ING Direct or an Emigrant Direct savings account. If the fed does lower rates, there's a good chance that these banks will lower the interest rates they credit on their savings accounts and the interest rates they offer on their CDs. If you think that this is going to happen, and you have some cash that you aren't going to need for a year or so, you might want to think about putting your money into a one-to-two year CD right now to lock in the higher rates.

I won't say that's definitely the move you should make right now because I don't even try to forecast the way interest rates will move in the next year given how impossible that stuff is to predict with any reliability. All I'm saying is this is something that could happen and you might want to consider doing with a portion of money that you're not going to need for the next year or two. I'm still debating doing it myself, but I don't think rates are going to fall dramatically.

Just wanted to mention one other thing. A stock that I wish I'd bought a long time ago, Moody's Corp (NYSE: MCO) has fallen on hard times lately. Moody's is basically a monopoly-type business, the kind of business that Warren Buffett loves (and he owns a good chunk of MCO stock as well). Investors have sort of been losing confidence in Moody's and other rating agencies lately due to percieved conflicts of interest and quality of ratings. (Do a search for "constant proportion debt obligations" and "moody's" to see an example of this.) It bears further investigation!

Anyway, don't worry about the market's decline. Just watch as you accumulate even more shares of your S&P Index fund.

Fast Money is one of the worst shows on TV

2007-08-13T19:18:00.001-05:00

I've posted about this before, but the show "Fast Money" with Dylan "The Rat" Ratigan is definitely still one of the worst shows on television.

I happened to be flipping by it tonight and the guys were laughing about the Chinese exec that hung himself due to high levels of lead paint in certain toys. The big bald headed guy made a comment along the lines of how 'those high product quality standards wouldn't fly in the US' or something like that. They were all chuckling.

I watch a few minutes of this show every now and then and all it is is a bunch of trumped-up sensationalism. At least Cramer knows what he's talking about. Dylan Ratigan is just a complete loser who knows absolutely nothing about investing. I don't know what kind of person would watch this show and bet on stocks because of it, but I'm guessing it might be the same kind of person that hangs out at the off track betting place all day.

I just had to rant here. This show is CNBC's blatant attempt at capturing ratings by making a show in the style of Jim Cramer's Mad Money, but it is just a big pile of crap. None of the guys really know what they're talking about, they don't give any real recommendations, they only talk about short-term things, and Dylan "The Rat" Ratigan is not only unlikeable, he's also ridiculously unqualified to be running a show like that.

Do yourself a favor- do not watch this show.

A slower paced show, but one that is much more worthy of your time because it actually discusses business issues and strategy, I happened by an episode of "Digital Age" this weekend where the host interviewed Mary Meeker on Google and the future of the Internet. If you have a few minutes, this episode is available on YouTube, and it's worth watching. The host sort of freaked me out a bit with his incredibly stiff face and delivery, but Meeker's insights are really great. You can access this episode of the show here.

Glad my down payment savings are in cash/Some current investment ideas

2007-08-11T09:14:00.000-05:00

The recent market turbulence has made me even happier that I keep the bulk of my down payment savings in an ING direct account. I currently have about $128,000 in deposits at ING Direct, the vast majority of which is in my Electric Orange account earning a 5.30% APY. Sure, this isn't a fantastic return, but this is money I am going to need within the next couple of years in order to make a down payment on a house, pay for moving expenses, new furniture, etc... When the market slides, I can be glad that no matter what, when I went to my account balance on August 11 (this morning), I would have about $180 in interest accrued to me. If I don't add to my balance, it goes up by about $500 a month due to interest earnings.

Of course, I do have a big chunk of my networth in the market, but this is mainly my retirement savings, which I think will do better in stocks over the next 30 years than it would do in a savings account or in fixed income instruments.

My thoughts on the recent market turmoil? I am not very worried. Markets fluctuate, sometimes dramatically. Don't turn into a lemming and follow the market off of the cliff (if that's where it ends up going). If you invest in individual stocks, however, let the gloom and doom work to your advantage. Get greedy when other people run scared. If you see a great company being unfairly punished, buy some stock or add to your position.

I think that over the next year or two, there is going to be a really good buying opportunity for some of the homebuilders such as Lennar, DR Horton, Pulte Homes etc... It could be right now, it could be next week, or it could be a year from now. I can't predict that with any certainty, however, I can definitely say that there is a considerable amount of uncertainty over these companies right now. I dipped my toe into the water by buying some long dated DR Horton options that are currently worth about 50% less than I paid for them a few months ago (allthough they do not expire for another couple of years, so they might turn out to be a smart purchase yet!) I was definitely early in buying those options, and as Bill Miller put it recently- being early is sometimes the same thing as being wrong.

If you're interested in looking into investing in homebuilders, I recommend you read this article about Bill Miller's early call on buying these stocks.

There are a few good quotes in there, notably:

Investing in an industry or company amid its worst performance in years or
decades can, though not always, prove quite profitable if the performance isn't
measured in days or months, Miller said.

"The headlines today are all about this being the worst housing market
since the early 1990s. Had you bought housing stocks during that previous period
of duress, you would have made many times your money and handily outperformed
the market over the subsequent decade," he said.

Another company I've had my eye on lately is Universal Technical Institute (NYSE:UTI), a small cap company (about $500m market cap) that runs automotive training schools and has a contract with NASCAR. The Motley Fool introduced me to this one. I haven't had a chance to look into it too much, but over the past week or so, the stock has taken a big hit that seems less related to the company's prospects than it does to the overall market decline. It's definitely worth further investigation.

Getting Motivated

2007-08-02T17:38:00.000-05:00

I occasionally read http://www.codinghorror.com/ which is a great blog written by programmer Jeff Atwood. I'm not a programmer, but I find a lot of interesting stuff in Jeff's posts. I felt like I had to share this one with you today. Sorry for the foul language, but sometimes this stuff crops up in life.

It is on the subject of motivation. Sometimes I feel a little guilty for neglecting this blog. However, it is usually because im off in the world of finance getting things done, which this post helps me feel a little better about.

I think we've all faced bouts of motivation and laziness in our lifetimes. There are a number of ways to get over them, but Jeff's post talks about probably the most basic one.

I'm going to file this under "increase your income," because if you follow the advice in there, you probably will increase your income in some way.

Investing In Gold Bullion

2007-08-01T20:18:00.000-05:00

One way to diversify your portfolio is by purchasing precious metals. I don't recommend putting a ton of your net worth in precious metals, but it can't hurt to buy a few gold coins when the price is right. A few years ago I bought five one-ounce South African Krugerrands with very low expectations. Allthough the five are currently worth somewhere around $3,300, I consider them more a form of "worst-case scenario" insurance, and collector's items than actual investments, which, to borrow from Ben Graham's definition in The Intelligent Investor, I would define as something promising "safety of principal and a satisfactory return."

If there is ever a period of rampant inflation in the United States, or other global market turmoil, the experts generally agree that the value of gold will increase. I can't say I reasonably expect such a thing, but I figured why not, over my lifetime, accumulate some gold coins.

Blanchard, one of the more reputable gold-selling firms, lists six reasons why someone might want to buy gold.

1) As a hedge against inflation
2) As a hedge against a declining dollar
3) As a safe haven in times of geopolitical and financial market instability
4) As a commodity, based on gold's supply and demand fundamentals
5) As a store of value
6) As a portfolio diversifier

Wikipedia also has a decent entry on investing in gold.

There is no shortage of gold discussion on the internet. My advice to you is if you have extra money, why not buy a few coins? At the very least, they would probably make an interesting gift someday.

There are a lot of people on an extreme end of the spectrum who suggest that if doomsday scenarios happen, you'll want to have gold coins because people won't accept worthless US Dollars. This page would be an example of that. I'm not going to say the situations this guy suggest can *never* happen, but I'm not holding my breath until they do.

Anyway, there are many different reasons for owning gold. If you want to buy large quantities, you're going to need to store them somewhere, preferably insured or protected from theft like a bank vault or a safe deposit box. I think this is where you run into a problem because it costs money to rent out a protected vault, so your gold would end up being a cash flow negative investment.

You can also buy shares of gold funds that own physical gold, but I'm not a big fan of buying a piece of paper that says someone else is holding gold for me. just a personal preference.

Just another option for your portfolio. As you can tell, I'm very lukewarm on the subject of gold. I don't think it is a "must-own" for every investor. It probably makes up 1% of my entire invested assets at the moment, and will probably remain at about that percentage. You're fine owning none. Stocks have appreciated much more over time, and some stocks even pay dividends!

If you do decide to buy a few gold coins, remember you are buying a $660 item (at today's prices anyway) that weighs only one oz., a potentially good theft target. I would recommend not telling people that you own gold coins (family and friends). I would also not recommend getting too tricky with your hiding places, because you will lose them, or someone will inadvertently throw them out. You can also (I believe) safely not own any gold coins and save yourself the hassle.

Bottled Water is Really Tap Water

2007-07-27T21:22:00.000-05:00

Apparently the news that Aquafina is going to start writing "P.W.S" on its bottles in order to indicate that the water in the bottle comes from a "public water source" (forbes.com) is big news to some people.

Um yes, they take in water from what amounts to a giant tap, filter it, and bottle it. You then pay a dollar or so a bottle. That's how much it costs to get a drink when you're out and about. I wouldn't care if they took the water from a dirty lake and then filtered it (as long as it is as pure as the stuff they have now), I still prefer it to soda. Yes I think it should be cheaper, especially at the movies where a bottle costs you about $2.50 in NYC, but it doesn't shock me. The alternative is unfiltered tap water, which i often get at restaurants anyway, but tastes pretty horrible sometimes. Have you tasted water out of some of these public water fountains lately?

Besides a little bit of syrup in every can, coke works the same way. Its mostly filtered (i assume) water. Would people be shocked to see a news story stating that coke is 95% public water? Sadly, they probably would.

What did you think Aquafina and Dasani were? Spring water?

Bill Gross of Pimco on The Markets

2007-07-25T18:15:00.001-05:00

I guess he has been writing these for a while, but I've only recently started reading Bill Gross's monthly investment outlook at pimco.com.

In this month's post, Bill spoke about a few issues near and dear to my heart, the first one being the gap between rich and poor, which I have written about before. He rails against this gap, saying that he's firmly in Warren Buffett's camp and thinks it's a travesty for the richest people in America to be paying 15% tax rates on average, while the middle class (their secretaries and assistants) end up paying almost 30%. He says this is one of the prime reasons why there is such a huge gap between the rich and the poor, where 5% of the national income goes to .01% of the families in the US. You read that right, "point zero-one" or "one basis point" take in 5% of the national income.

That whole discussion was spurred by a recent issue that has gotten a lot of attention in the financial press. Basically, the rich managers of private equity funds, whose annual income is measured in hundred millions or billions, have their income treated as capital gains, so it gets taxed at the much lower 15% rate instead of the 35% rate us mortals pay. This New York Times article does a good job of summing up the issue.

I agree with Buffett and Gross. If you made $100 million last year, you should be paying $35 million in taxes, not $15 million. This leaves you with $65 million for yourself. Meanwhile, your secretary (lets assume she's an executive secretary) made $100 thousand last year, and paid her full $35 thousand share. This left her with $65 thousand for herself. Why should she be paying a higher rate than you? If anything, she should be the one paying the lower rate. In fact, it could potentially change her life to have $15k extra in her pocket every year. What's an extra $15 million to someone who already has a billion in the bank?

Gross also spoke about the markets some more, in particular, talking about increasing credit spreads. He basically repeated the theme that easy money is drying up for the LBO funds and PE folks who have been using it for buyouts. In particular, he pointed to a financing that's in the works right now that may not be going so well...

"Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week. That more than anything else may wake them, shake them, and tell them that their world has suddenly changed."

Well according to some press coverage I've been reading, it turns out the lenders haven't been able to accept ANY terms to lend money to Chrysler finance, and the banks and the companies involved are going to fund the buyout themselves.

For those of you who don't follow the credit markets very closely, I'll try to sum up what has been going on (in my opinion). Over the past few years, buyout funds have been able to borrow large sums of money at very low rates and use that money to acquire companies. The lower the price they paid on the borrowed funds, the more money they could make off of these companies they bought. Think of it this way: if you can borrow a million dollars at 3%, you are paying $30,000 a year in interest to use that million dollars. If you use the million to buy a business that returns you 12%, the business will be throwing you $120,000 a year. Subtract out your interest payments, and you're getting $90,000 a year in profit for yourself. Not bad! You'll easily be able to make your interest payments, and in fact you'll probably go out looking for more of these great deals. That's exactly what buyout funds have been trying to do, except they have been buying businesses for much more than $1 million.

The credit markets were giddy with all of these deals. Lenders were willing to charge lower and lower interest rates, somehow believing that there was not much risk involved, even with companies on the shaky end of the spectrum. Credit spreads (basically the additional amount lenders charge for people with shakier credit, just as banks charge people with lower credit scores higher mortgage interest rates because they are more risky) got very narrow. This meant that even a shaky business (one with a low credit rating) could get a loan and pay a rate not much higher than an extremely solid business (one with a high credit rating). There was a small "spread" between the interest rates they were charged. This is referred to as "tight credit spreads" or "narrow credit spreads."

What Gross is saying is that this is now changing. With subprime borrowers defaulting on their mortgages in large numbers, the market got sort of a slap in the face that said "wake up! you've been ignoring some risks here! you need to charge higher interest rates, especially for buyout firms that are using money to buy companies with low credit ratings because these loans are a lot riskier than you used to think! In addition, the credit rating agencies (Standard and Poor's and Moody's, primarily) have been asleep at the wheel too and they aren't giving low ratings to companies that deserve them!"

In the past few weeks, companies with low credit ratings have had to pay higher interest rates to borrow money than they have in the recent past. Things are getting back to normal, but as they make their way back there, there could be a whole lot of pain for the lenders.

To Get Rich... Do Nothing?

2007-07-20T20:21:00.000-05:00

I came across this article on Yahoo finance today, courtesy of TheStreet.com. The link was yet another list of things to do to make yourself rich. The link I clicked on was entitled "Twelve Ways to Motivate Yourself For Wealth," which is a headline tailor made for today's personal finance-minded Internet audience.

As I went through the list, I found myself thinking how if a person wanted to make a lot of money and did a few Internet searches for how to do so, he or she would find probably 99% crap that will waste his or her time, and 1% interesting information.

The law of diminishing returns kicks in over time as you go through these lists and do all of these largely administrative things. Yes, set up your 401K right. Allthough, I'm sorry to say it's not going to make you rich if you only make $30k a year for the rest of your life. And spending an hour debating whether you should have 5% or 10% international stocks in your portfolio isn't going to make you rich either.

I think about a wealthy investment banker I know, and I try to imagine him keeping a daily financial journal, as thestreet.com's #5 way to stay financially motivated suggests. If this guy wasted his time keeping a journal, he wouldn't be out there studying new financial instruments, accounting pronouncements and marketplace trends that create opportunities for him to sell his services to deep-pocketed corporate clients. The scant free time he has is too precious to waste on a financial journal or playing credit card cash advance arbitrage.

Anyway, what I'm trying to say is to look at your job, your business, or whatever your income sources may be. Those are the things that are going to make you rich. Spend an hour getting to know your company's business better. Look at how the financials work, even if you aren't involved in the finance side of the business. Look at how you can do things better. Make yourself more valuable to your employer (or to yourself if you're self-employed). I admit this is easier said than done, but the amount of time poor and middle class people spend reading about these fluffy "wealth" topics is a huge waste for them.

I am guilty of sometimes passing these tips along, but I hope you know not to focus on these things too much while neglecting the most important part of your financial future, which is your income or your business.

Stocks Killed Today

2007-07-12T19:52:00.000-05:00

The market reached all time highs today. Most people cite strong retail sales.

I got to work at 7:15 am this morning. I got home at 8:30 pm. One of those days when it feels like all the salary in the world isn't worth it.

Postscript: by "killed" I mean they did well or "killed it." :)

An Idea for Locking in a good Mortgage Interest Rate

2007-07-11T19:18:00.001-05:00

I've been floating this idea around in my head on and off for a while now, and the recent slight dip in treasury yields (which form the basis for mortgage rates) pushed it back up to the front of my mind. It's not perfect, there's a chance it has been done already, and it may not even work in practice, but here goes...

So I want to buy a house. I am going to need (for example) $200,000 in addition to my cash on hand, which I will have to mortgage. Treasury yields have fallen a bit lately, so let's say that even though I dont have a house, I plan to buy one in the next couple of years, and I want to borrow my $200,000 at 6% now because I think rates are going up.

I envision a product sold by a financial institution that would let me borrow the $200k at 6% provided I invest the $200k, plus my $100k down payment, in a portfolio of high-grade bonds, for example AA corporates, until I take it out and use it to purchase a house. As of today, corporate bonds that mature in 2 years yield approximately 5.28%.

The quality of a diversified, highly-rated bond portfolio should be enough security for the bank to offer me the money at mortgage rates, especially given my high credit score. So anyway, I have my $300k locked away in a separate account where the yield on the bonds pays me a taxable $15,840 a year (.0528 x $300,000). The interest on the mortgage is $12,000 a year, which the bank can take comfort in the fact that I have $300k in assets earmarked in a separate account to generate that kind of income. Depending on how regulators and the IRS treat this $12,000, I would argue that it deserves tax-deductible treatment like any other mortgage. The excess between the $12,000 and the $15,840 would add to the account value.

When the time comes to purchase the house, I liquidate the portfolio and pay the cash to the seller.

Of course there's plenty of hair on this dog, but that's the bones of the idea.

I have no idea if this has already been done, or if there's something I'm missing. Just throwing that out there. Feel free to pick it apart, internet dwellers!

How Long Should I Keep My Bank Statements?

2007-07-09T19:25:00.000-05:00

I keep all of my files in labeled folders in one of those file box contraptions. If you have a job, you're in school, or you have some credit cards or similar accounts, I recommend getting yourself one of these to keep everything straight. I've had something like this for years now and i put all of my important papers in there. Right now I have folders for my car (title, bill of sale, maintenance records etc...), my wife's car, my auto insurance, my renter's insurance, my school records (transcripts etc...), a big file on my current job info, a smaller file with my previous job info (pay stubs, offer letters etc...), my last seven tax returns, my phone bill, my cable bill, my gas and electric bill, my wife's employment records, my retirement accounts, my bank accounts, and my investment account. Plus a few "misc" folders for random things. I also keep a big fat manilla envelope stuffed with reciepts for higher priced merchandise and manuals/warranty info.

I went to take the box out from under my desk the other day and realized that I could barely lift it. I realized that I needed to take two drastic steps. First, work out more, and second, clean out that box. I haven't been very good at getting rid of old stuff, so I reviewed Bankrate.com's list of what financial records to keep, and how long to keep them. I realized that I could shred a bunch of my old bank statements, phone bills, expired auto insurance policies and things like that, so I fired up one of my favorite machines, the Fellowes PowerShred I bought a few months ago and reviewed here.

By the way, this shredder is still cranking through papers like it's nobody's business. There are few things in life as satisfying as dropping a credit card offer (complete with immitation credit card inside) directly into the shredder without even bothering to open it.

So anyway, I spent a good half hour going through everything, and I ended up filling the entire seven gallon container with the shredded remains of my ageing and useless statements and financial records. February 2004 was a great period in my life, but I will never need my Chase WorkPlace Savings Account statement from back then ever again.

Yes it is good to keep records, but at a certain point it becomes overkill, and your March 2003 phone bill, while interesting, only makes it more difficult to get to the records you really need.

Keep those file boxes clean!

How I Got Through Graduate School Debt-Free

2007-07-04T11:43:00.001-05:00

I graduated from college with a BS in Business at the tender age of 20 years old. I'd taken advanced courses in highschool and that allowed me to lop a year off of the end of my undergrad experience. It wasn't an easy decision- I gave up on another year of fun living away from home with a bunch of friends (including my future wife), but I had a longer-term view in mind.

I remember my first year on my first job. It was a pretty big adjustment, and I was the youngest person in the office. I wasn't even old enough to legally drink at my first company Christmas party. However, I was also one of the most interested in what I did, interested in improving how I did my work, and my salary went from $33,000 to $50,000 in about a year and a half.

Did I buy a flashy car? Did I buy fancy clothes and go out drinking every night? No. I socked most of this money away. I had my fun every now and then, but I ate peanut butter and jelly sandwiches almost every day.

I really wanted to do more than my entry level job, so as soon as I got settled, I started planning for my MBA. I got as much information as I could on starting salaries, tuition and board costs, GMAT scores needed, attributes the admissions folks looked for, school rankings etc...

My commute home from work was about an hour, and I remember entire train rides spent looking at my savings balances, forecasting when I would have enough cash to be able to support myself through school, and determining how much I would need to save out of each paycheck to make it happen. I filled legal pads with plans and ideas.

I got really lucky in a few ways. My job was pretty well suited to my abilities, and it was something I was interested in, so I stood out as one of the better performers. I was able to live in my parents house, paying low rent. Most of my friends were still away in college for that first year, so I didn't have as many offers to go away for the weekend, or do other things like that. In short, I was able to focus, probably more than I ever have in my life.

My savings grew little by little. I discovered high-yielding online banks. I remember my first CD had a 7% yield. I opened a small "play money" Ameritrade account (it was Datek back then). I learned all I could about business and finance. I read books, I got to work early, I volunteered to do extra projects, and before I knew it, I had a pretty healthy amount in my savings account.

Then the company I worked for folded. It was a very difficult time for me in many respects but after some time, I regained my focus and I was still ahead of the game. I used my extra free time to study for the GMAT. I put a sign above my desk that said "~~1290~~690 or burst." I scored exactly ~~1290~~ 690 on the exam. I wrote my admissions essays, I got recommendations from former professors and coworkers, and I sent in my applications. I took a paycut, but found a new job where I worked for six months, at the end of which I found out I was accepted into graduate school. I had about $40,000 in my bank account at that point.

I went to a state school, I worked as a graduate assistant to earn some extra cash, as well as a reduced tuition rate. I lived in a modest apartment. I brought peanut butter and jelly sandwiches for lunch. I worked a paid internship during the summer between my first and second years of school. When I graduated, my savings account had just about $1,000 left in it. However, I had an MBA, and the starting salary at my next job was much higher than it was at my previous job. I think I came out ahead.

That was how I did it.

It seems like many people have resigned themselves to the mountains of debt they think they need to incur to go to graduate school. If you plan ahead and discipline yourself to do it, you can save enough money to either avoid debt alltogether, or at least keep it to a minimum.

I was inspired to write this after reading a Think Like the Rich post about about another strategy for avoiding debt in graduate school. A graduate degree is starting to seem like a prerequisite for getting some of the more interesting, higher-paying jobs out there right now. There are many approaches to getting one without going into a ton of debt.

Mid Year Review

2007-07-01T18:19:00.000-05:00

I like to sit back and reassess my savings and investment goals every now and then. Today being the first of July, I did my mid-year review of my house savings, retirement accounts etc...

Looking back at my year end review - the markets had extremely solid returns in 2006 (the S&P returned about 15.8% last year) and these returns have slowed just a little in 2007, although the year isn't over yet. The bulk of my retirement assets are in an S&P Index fund, which is up just a bit more than 9.3% on the year. Amazingly, my emerging markets fund is up 22% so far this year. This compares with a 30% return last year. If I had put all of my money in this fund (instead of only 5%), I would be a very happy man today. However, I stuck to what I consider to be a more prudent long-term allocation scheme, and I'm sitting around the same percentages as I was at year end.

Some people have asked me for some specific numbers...I do track them, but I don't publish them very regularly. I now have $50,000 in my 401(k) account, and I contribute 15% out of every paycheck (pretax) into the account.

I have also been saving for a home down payment, and that has been progressing nicely. Since we live off my wife's paycheck, I have been fortunate to be able to deposit my entire paycheck into a separate account we have earmarked for a home purchase. Currently we have about $125,000 in that account, which puts us very near our goal of $150,000. We plan on purchasing a home for $300-$400k, and in addition to a down payment, I want to have a good cash safety net, as well as some extra cash for incidentals such as furnishing and repair.

The news on the housing front has been very positive for me lately. Sales are down, foreclosures are up, and hopefully this will lead to a more meaningful price correction. Bad news for homeowners and sellers is usually good news for potential buyers. However, interest rates have been climbing lately, which almost cancels out price declines. I wrote a post about this recently.

I work in finance and I consider myself to be pretty good with numbers. If conditions don't seem favorable to me (home prices and mortgage interest rates), I am happy to sit on the sidelines until some normalcy returns to the market. I think this is beginning to happen, but I am not convinced yet.

My home savings are now in an ING Direct Electric Orange checking account earning 5.25% APY, or about $440 a month in interest. You might recall a previous article where I decided against opening up an electric orange account. However, given the favorable rate of 5.25% for balances above $100k, and the fact that I have been able to get my balance above $100k, I decided it was too good (and too liquid) to pass up. My previous objections mainly centered around a suspicion that the rates were just "teasers" that would go away quickly, however they have remained high for a while. Also, even though I have been trying to keep fewer accounts outstanding, the electric orange account integrates nicely into my ING Direct accounts page, so it is not much work to keep track of it. Finally, I'm only using my Electric Orange account as a savings account so I am keeping my Chase accounts to make bill payments and write checks out of.

So to sum it all up, I've been able to add about $15k to my down payment fund in the first six months of 2007, and $10k to my retirement accounts (these figures include both mine and my wife's accounts). I hope to be able to top this and add $20k and $15k over the remaining six months of the year. We had some large expenses in the first half of the year, including a large charitable donation, car repairs, a hefty tax bill and some generally wasteful spending. I hope to be able to cut down on these things over the rest of the year!

Markets Head South

2007-06-07T20:37:00.000-05:00

We haven't seen market declines like this since February. As I noted recently, interest rates are rising. This has pushed treasuries up to 5%, and as a result will or has already pushed up rates on everything else that is based off of treasuries (mortgages, car loans, personal loans etc...).

In theory, this makes people sit back and say to themselves "Self, the stock market has been going gangbusters for a while, maybe that guaranteed 5% yield is a good deal for now. I'm going to sell my stocks and buy me a bond instead."

Should you do this with your 401(k)?

My answer is no. If you have at least 5-10 years before you retire, you have a long term outlook and you should own some stocks. If you have only 5-10 years, you shouldnt be heavily weighted in stocks, but I don't see the current weakness as a reason to sell.

If you have like 30 years before you retire (like me), just keep your contributions pouring in. You won't regret it as your money compounds over the next 30 years.

Stock prices and bond yields both currently reflect a ton of optimism. A bit of pessimism every now and then is a healthy thing.

Tips for Buying a Car

2007-06-06T20:02:00.000-05:00

I read this a while back, but it was one of the best pieces of investigative journalism I've ever read so I feel the need to pass it along to you. If you have a few moments, I suggest you read this before buying your next car.

It's called "Confessions of a Car Salesman," and was written by a guy who went undercover as a car salesman in order to report back to Edmunds.com.

Enjoy!

Finance Bloggers - Stop Whining about Financial Education/Literacy

2007-06-05T19:14:00.000-05:00

Ok, occasionally I go off on a rant about hackneyed posts I see popping up again and again on financial blogs. I even created a "PF Blog Rants" tag for the explicit purpose of letting me vent. See this post on boring financial advice to get an idea of the kinds of things I hate, yet see repeated over and over again.

I need to add something else to this list. I need to add it now.

Financial Education.

Financial Education.

Financial Education.

Financial Literacy.

Teaching financial literacy in school.

Think I've repeated that enough? It doesn't compare to the number of times I've seen this theme repeated by two bit hack financial bloggers. Honestly these people write about finance, but they know practically nothing about the subject. They just repeat what they've read in three or four popular books (Rich Dad/Poor Dad, The Millionaire Mind and all of that other trash), they link to ideas put forth by other people and they agree with them. They have never had an original thought in their lives.

Yes, I don't post very frequently. Mea culpa. But at the very least, I try to be original. I try to avoid linking to something and saying it is a good idea. I try to avoid repeating all of the BORING FINANCIAL ADVICE we have been seeing everywhere for years. I try to assume that you can read these books on your own.

So anyway, sorry to go off on a rant, but to give you a concrete example (and you know how I hate calling out other bloggers), take a look at this post and this post by a financial blogger who shall remain nameless :)

Teaching financial literacy in schools is not your idea. Robert Kyosaki has been writing about this for years. So has everybody else. Unless you want to bore me, stop writing about it. Frankly, I'm sick of it.

Please, stop.

I feel the need to add another disclaimer here. It's not like I dislike any of the bloggers I call out here. In fact, I would need to actually read their blog in order to go off on a rant about it, so you can be sure I've read their blog if I mention them here. And if I've read their blog, that means there are some things on their blog that I've liked. However, there are also some things that drive me crazy, and I have no qualms about writing about them. If that makes me the Simon Cowell of the blog world, so be it.

Mortgage Rates Are Rising - How Will This Affect Home Prices?

2007-06-05T18:28:00.000-05:00

Check this out... back in 2002, the yield on the 10 year treasury was about 3.5%. Mortgage rates, which are based off of that rate, were in the neighborhood of 4.6%.

So your monthly payment if you took out a $200,000 mortgage in 2002 would have been something like $1025.29 per month.

Fast forward to today. The yield on the 10 year treasury is about 5% (bloomberg.com) and rising. Mortgage rates are about 6.1%. Your monthly payment for the same $200,000 mortgage would be $1,211.99 per month. $187 dollars more per month purely in interest. Thats $2,240 more every year, or $67,212 dollars over the life of the mortgage, just because of the change in interest rates.

Can you see why so many people bought so many houses back in 2002? The monthly payments were pretty darn cheap.

It's impossible to predict where rates will go but it is easier to see them going higher rather than lower over the next couple years. Rates are another factor that affects demand for buying houses.

As many of you know, I'm hoping to buy a house within the next few years. I'm also hoping that increases in interest rates hopefully lead to more housing price reductions, because fewer people will be able to afford those higher monthly payments.

Desktop Tower Defense

2007-05-29T20:32:00.000-05:00

Desktop Tower Defense is a great, ultra-addictive game that I'm almost sorry to tell you about because I am sure if you're anything like me you'll waste some time on this.

Just had to pass it along.

Does Marriage Make You Richer?

2007-05-24T18:33:00.001-05:00

Of course getting married won't make you rich in itself, but if you are married, and you grew up in a household with married parents, you're more likely to be in the upper end of the income spectrum. So says an article in The Economist, entitled "The frayed knot" in which the author argues that

"There is a widening gulf between how the best- and least-educated Americans approach marriage and child-rearing. Among the elite (excluding film stars), the nuclear family is holding up quite well. Only 4% of the children of mothers with college degrees are born out of wedlock. And the divorce rate among college-educated women has plummeted. Of those who first tied the knot between 1975 and 1979, 29% were divorced within ten years. Among those who first married between 1990 and 1994, only 16.5% were.

At the bottom of the education scale, the picture is reversed. Among high-school dropouts, the divorce rate rose from 38% for those who first married in 1975-79 to 46% for those who first married in 1990-94. Among those with a high school diploma but no college, it rose from 35% to 38%. And these figures are only part of the story. Many mothers avoid divorce by never marrying in the first place. The out-of-wedlock birth rate among women who drop out of high school is 15%. Among African-Americans, it is a staggering 67%."

So basically what they're saying is that lower-educated, poorer people are less likely to a) be products of two parent homes and b) create their own two-parent homes. This cycle continues with their own children.

I think the environment a person grows up in has a huge impact on how their life turns out. Rich or poor, loving families tend to create happy, well-adjusted children. These children probably go on to get better jobs and on average become more wealthy (emotionally and financially) than people who are products of broken homes.

I've written before about the gap between the rich and the poor, and this article speaks to some of the same issues. It's more food for thought than anything else, because I'm truly at a loss to suggest any good solutions to what seem to be some pretty big social problems.

Jordin Sparks Just Won American Idol

2007-05-22T21:02:00.000-05:00

It's not official yet, but in my mind Jordin just won the competition with the way she performed in tonight's show. She's a great singer and an emotional performer (it was very touching how she cried at the end of her finale), and I wish her the best.

Sorry for the off-topic post, but I just had to throw that out there. To tell you the truth Jordin didn't really impress me until late in the competition, but at this point she's my favorite. I'm curious to see if she wins tomorrow.

Hedging a Home Purchase?

2007-05-22T20:33:00.000-05:00

Using my play money in my play account, I recently purchased a few long-dated call options linked to D.R. Horton, America's biggest homebuilder. Call options are basically a leveraged bet that a stock is going to go up.

There wasn't a whole lot of news on the housing front in the past couple of weeks until today, when treasury secretary Henry Paulson went on CNBC and said that the housing slump is largely over.

As a result, DR Horton's stock (NYSE: DHI) was up about 4%. Being a leveraged bet, and due to a general lack of liquidity, the particular DHI options I own traded up about 25% today.

This got me to thinking... as a young couple looking to buy a house in the next few years, how could my wife and I protect ourselves from an increase in home prices? We have a chunk of money (approaching $100k) saved for a down payment, but how could we protect ourselves against an increase in prices? What if the housing slump doesn't last like we're hoping it does and prices jump next year or the year after?

One thing we could possibly do is to spend a portion of our savings (say $5-10k) buying call options on - you guessed it - homebuilder stocks. This way, if the housing market rebounds, the value of our options will increase, hopefully offsetting the increased prices of our target homes. If the prices on target homes go up by, say, $20,000, the value of our options would ideally be $20,000 or greater.

Of course, this is just a rough sketch of an idea that I haven't thought through fully, and homebuilder options in no way represent a perfect hedge on housing prices due to the fact that the homebuilder's stock price is not directly correlated to prices of homes in the areas we are targeting.

Anyway, that's just food for thought. It would be irresponsible for me not to insert another disclaimer here... that you should NEVER put the money you've saved for a house into an investment as risky as options unless you completely and fully understand each one of the myriad of risks that would be associated with such a strategy. I'm not going to actually do this, but I thought it was an interesting idea nonetheless.

Haynes Repair Manual

2007-05-19T13:37:00.000-05:00

Over the past few years, I have become more interested in doing minor auto maintenance jobs myself, rather than paying my mechanic exorbitant amounts for parts and labor. Oil changes, air filter changes, tuneups, etc... are all pretty easy to do and can save you a few dollars both now when you don't pay a mechanic and down the road, when your car has fewer unnecessary breakdowns due to neglect.

Hoping to learn a little bit more about my car, I recently purchased the Haynes Repair Manual covering my specific model. The book arrived a few days ago and as I've gone through it, I've been very impressed with the level of detail and the quality of the writing.

As someone who works in finance, I don't get much time to fool around with my car, nor do I find it necessary to do so. I could very easily use up all of my free time tuning, fixing, and upgrading my car, but I would rather spend that time with my family. However, I think that not knowing anything about a car puts the average car owner at a serious disadvantage. A mechanic could easily bilk you out of hundreds, even thousands of dollars of unnecessary or shoddy repair work, and if you don't know an alternator from a radiator, you would never know the difference.

The Haynes manual is a great addition to your library if you have a car and any interest in learning more about how it works. The books are based on a complete disassembly (or "teardown," as Haynes calls it) and reassembly (rebuild) of your specific model of car. It gives you a few hundred pages of photographs, repair tips, testing advice, and suggested procedures to do everything from changing wiper blades to overhauling an engine.

I've read some of the more basic "Vehicle Repair for Dummies" type books, but the Haynes manual is vastly superior since it actually shows work being done on your specific car, and it walks you through some more complicated procedures, rather than telling you in general terms what you might need to do, but that it varies by manufacturer and model.

I don't plan on doing much more to my car than the steps it suggests in chapter 1 - "Tune-up and routine maintenance." This chapter lays out a tune-up and maintenance schedule, and includes a bunch of things I think I will be able to do by myself without much prior experience. They include things like fluid checks, battery tests, spark plug replacement, fuel filter replacement, an ignition timing check etc...

Anyway, I wanted to pass this along as yet another good way to "Watch Your Wallet."

Catching Up - New Century Bankruptcy, Gina on American Idol, and Homebuilder Stock Values?

2007-04-04T20:57:00.000-05:00

I finally got some breathing room at work.

In non-finance news, I can't believe Gina got voted off American Idol! What a crock. I considered her one of my top 3.

Not the biggest shocker in the world here, but New Century filed for bankruptcy. I kind of had a feeling they would about a month ago. Hope you found that liquidation analysis pretty interesting.

I've recently become pretty interested in homebuilding stocks. Take a look at a company like DR Horton Inc. (NYSE: DHI). Selling at book value, a trailing P/E of 6.61, and sporting a 10% ROA and 17% ROE. These stats are enough to make any value investor salivate. However, the prospects for the company and the industry as a whole are currently extremely uncertain. Are rising subprime mortgage defaults a short-term problem? Is housing in for a major correction?

Anyway, I think there is some value there, but I haven't taken a hard enough look at any of these companies yet. I have gotten some copies of their 10-Ks and plan on working my way through them. The big question in my mind is... are these companies going out of business? If so, then they aren't worth buying. If not, and you have a long term outlook, you could be looking at some great bargains. As Warren Buffett would have you do... be greedy when others are fearful (but be greedy in a sensible way).

Finally, Sanjaya, you don't deserve Gina's spot on the show.

Hey

2007-03-29T20:24:00.000-05:00

My life lately: wake up at 6am, leave house 6:45am, work for a long time, return home at 9pm.

This has not been leaving me with any free time to blog. I promise to have something thoughtful up here soon. In the meantime, feel free to comment on anything I've written.

I'm also taking requests. If you have a financial question, please email it to me and I'll try to get to a few questions in a reader's mailbag.

You can reach me at moneymanblogger at yahoo dot com.

Thanks for your patience.

ServiceMaster To Be Acquired

2007-03-19T19:05:00.000-05:00

I haven't had much time to post with some big projects at work keeping me busy, but trust me, I have been following the financial markets. The story that really caught my eye today was the fact that Servicemaster is being acquired, which boosted the stock 12% today. Not to be confused with funeral services firm Service Corp. Intl, Servicemaster provides residential and commercial services in the US (notably, the company owns the Terminix termite-control brand, and the Merry Maids housekeeping service, among other businesses).

I thought it was interesting that the EBITDA multiple seemed pretty high on the business 11-12x vs last year's typical multiple of 8-9x. It shows that buyout firms are still going strong despite some of the recent volatility in the market. This is one of those franchise businesses I really like, especially since the company doesn't face much foreign competition (in order for someone to get termites out of your house, they probably need to be in the country first).

Anyway, this and some other news sparked a slight rally today.

Moving Expenses are Tax Deductable

2007-03-16T20:25:00.000-05:00

For some reason I've never taken this deduction, allthough I've moved around a few times for school within the past few years. However, I have just gotten started on my 2006 tax return and I noticed that there was a "moving expenses" deduction. My wife moved from out of state to marry me and take a new job in NYC this year, and I'm going to be sure to deduct some of the related expenses (we're filing jointly).

Her previous home is a few hundred miles away from here, and she took two trips that I would call "moving-related," one to specifically take a weekend apartment hunting with me, and another to move most of her stuff via her car. I am going to deduct mileage and tolls for these trips.

It ends up being a small deduction, but I think I'm already taxed at a ridiculously high rate, so I'm going to keep as much of my hard-earned money as i possibly can.

There are many sites on the internet that list "deductable" moving expenses, but I've found that many of these stretch the rules (for example, the IRS says that the cost of meals during a move is not deductable but some sites say that it is). Your best bet is to thoroughly read the most recent IRS publication 521 and keep good records during your move. I am not a believer in risky tax strategies, especially for the $100 or so of income my moving expense deduction is going to end up being.

Can't Short These Subprime Lenders

2007-03-13T22:06:00.000-05:00

Shhh! Don't tell anyone, but I've had a small trading account for about 8 years now. I use it as a way to make more speculative stock market bets. It is purely money that I can afford to lose, and I have considered it part of my financial education. (I opened it when I was 20 years old, but my first few stock trades were in my teenage years via my father's account). I make a clear distinction between that account and the accounts I use for investing.

Anyway, I decided I would try to short a subprime lender or two in this account today because I think there is more pain coming in this sector. However, when I tried to do so in Ameritrade, it told me that there was "no stock available to short" for the particular companies I tried.

Shorting is a way to bet on a stock going down, for those of you who are unfamiliar with it. It can be very dangerous, but I had some limits in mind in case the stocks bounced (hardly likely).

I guess shortable stock runs scarce when these companies implode. One of the companies I was going for in the morning was Accredited Home Lenders (LEND), it ended up dropping another 20-30% after I tried shorting it, telling me it would have been a good bet for a one-day gain.

Some of the stories I read today mentioned that around 13% of subprime loans were delinquent, or had payments 30 days past due. Some others mentioned the possibility of government aid to people who were missing payments on subprime loans. This made me extremely angry.

People who bit off more than they could chew in terms of mortgage payments do not deserve to be bailed out. They deserve to have the second homes, investment condos and other properties they bought hoping to flip (bidding up prices and pricing people such as me out of the market when they did it) taken from them. Foreclose on the homes that have mortgage payments people can't make. These homes will be sold to people who can make the payments, most likely at more reasonable prices, and the market will return to equilibrium where people who have saved and can afford houses will be the ones who own them, not people who are financially unqualified.

I have said it before and I'll say it again- I hope subprime foreclosures wipe out the real estate speculators and lead to a large correction in home prices in 2007.

2006 Berkshire Letter Review, Part 3: International Investing

2007-03-12T19:04:00.000-05:00

Warren Buffett is a big critic of the US Trade Deficit. In fact, he made a well-documented bet against the US Dollar in 2003 precisely because he thought our deficit spelled bad news for our currency.

According to oanda.com's currency converter, a dollar could buy about 1.14 Euros back on March 11, 2002. Today, a dollar only buys about .76 of a Euro, 33% less than it did back then. Buffett got it right. A dollar bought .7 of a British Pound on 3/11/02, where it only buys about .5 of a pound today. Again, he got it right, and the case holds up against most other currencies.

Buffett updated this bet in his current shareholder letter. He says that BRK has "come close to eliminating our direct foreign-exchange position..." which has earned the company about $2.2 billion since 2002. The largest portion of that, $839 million, came from betting on the Euro. The number 2 gainer was (of all things) the Canadian dollar, which earned the company $398.3 million since 2002.

He still thinks that there is a high probability that the US Dollar will continue to weaken over time due to its trade imbalance. As he says "I fervently believe in real trade - the more the better for both us and the world. We had about $1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year- imports for which we exchanged no goods or services.... Making these purchases that weren't reciprocated by sales, the US necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced."

However, he is not playing the US Dollar weakness via direct foreign currency ownership anymore. Why? Again, I quote: "When we first began making foreign exchange purchases, interest-rate differentials between the US and most foreign countries favored a direct currency position. But that spread turned negative in 2005. We therefore looked for other ways to gain foreign-currency exposure, such as the ownership of foreign equities or of US stocks with major earnings abroad. The currency factor, we should emphasize, is not dominant in our selection of equities, but is merely one of many considerations."

As a side note, Buffett says he doesn't think this is going to ruin America or Americans' standard of living every time soon, but he thinks that "at some point in the future, US workers and voters will find this annual "tribute" [ie paying a portion of their production to foreign countries we are indebted to] so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict- but to expect a "soft landing" seems like wishful thinking."

The final interesting point in this whole foreign currency discussion is Buffett's mention that all of the direct currency profits the company has made "have come from forward contracts, which are derivatives." He says they have also entered into other types of derivatives contracts as well.

When I read that, I thought it was very strange, since Buffett has gone out of his way to criticize the use of derivatives. Anticipating that thought, he went on to explain: "The answer is that derivatives, just like stocks and bonds, are sometimes wildly mispriced. For many years, accordingly, we have selectively written derivative contracts- few in number but sometimes for large dollar amounts. We currently have 62 contracts outstanding. I manage them personally, and they are producing tax-free profits in the hundreds of millions of dollars.... Though we will experience losses from time to time, we are likely to continue to earn- overall- significant profits from mispriced derivatives."

So what I got out of that section was that 1) Buffett expects the US Dollar to decline, but isn't making direct currency bets anymore 2) Buffett thinks there will be "a severe political backlash" against the trade deficit... and it will be ugly and 3) Derivatives aint so bad if you use them correctly.

I'm still very curious as to the exact derivatives Buffett has bets on at the moment, and how he valued them.

Attention Spreadsheet Users

2007-03-11T17:39:00.000-05:00

If you're like me, your life revolves around 5-10 excel spreadsheets a day. If you're not like me... consider yourself lucky.

If you're learning excel, or if you already know how to use it and want to know more (looking up a specific formula or a way to do something, for example), I highly recommend you head over to John Walkenbach's site. The Spreadsheet Page. He's the closest thing to an Excel guru that I know about, and there are some great tips on his site.

Some of the excel tasks I do at work everyday have grown to a point where I need to automate them, and to do so, I am writing a few macros with the help of one of my favorite Excel books:Microsoft® Excel 2000 Power Programming with VBA by Mr. Walkenbach himself.

Some of these macros go beyond what the macro recorder can do in Excel, and most of the stuff the macro recorder creates ends up being highly inefficient, so if you have the time, the need, and the inclination, you might want to brush up on your VBA (Visual Basic for Applications) programming skills.

A word to the wise- if you expect to be doing VBA programming after an hour's reading, you might want to temper your expectations. If you don't have any programming experience, it's quite a bit to wrap your head around. I'm by no means an expert, but I find that when I'm really motivated, I tend to pick things up pretty quickly. If I get this automation work done, I can save myself about a half hour a week that I would normally spend generating these reports, which would be a huge benefit over time. I can spend this time working on more visible projects that will hopefully bring me closer to a promotion and a pay raise.

Perhaps even more importantly, I'll save my company that time and I'll leave these timesavers behind me so that the person who takes over my job can build on them. This might make my company more productive, and make the American economy more efficient. In a tiny way, I am contributing to the future of my country. If you've seen the recent slate of presidential hopefuls, you'll know that I'm going to be giving help where help is needed!

For more on the topic of non-programmers like you and me getting into the software business, see Steven Smith's excellent blog post "When Non-Programmers Write Software."

The Beige Book

2007-03-07T21:20:00.000-05:00

The Federal Reserve published its latest edition of the Beige Book today. I usually like to get a copy of it from the Federal Reserve Website, print it out, and read it on my way home from work. You can take the easy route and read some of the news coverage on Reuters, Bloomberg, or MarketWatch, or you can check out a copy yourself.

The Fed's description of the book is "Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis."

I like how it's sort of an informal "ear to the ground" survey of different parts of the country. In particular, I think it's a good way to follow things like employment and housing.

I havent read today's version yet, but I just wanted to point it out as a good information source. As Peter Lynch might say, it's one of my "bedside thrillers."

401(k) Rollover Update

2007-03-07T18:33:00.000-05:00

It takes nerves of steel to get through the 401(k) rollover process. When we last visited my rollover, I had sent my paperwork out, along with my check, to get processed and deposited into my new account.

A week or 2 went by and I still didn't see the amount show up in my 401(k). So I emailed my plan sponsor.

They told me I left out one of the documents and that I should send this document to them soon, or else they will send my check back to me. The implication there was that they would be sending me back into my 401(k) rollover nightmare.

I know I sent them this particular document, because right before I sent them all of the documents, I photocopied every single one, in order.

I spoke with them on the phone, and they asked me to fax them the document. So I did, earlier this afternoon. I got so busy at work that I wasn't able to call and see if they received it. I am going to be sure to follow up with them tomorrow, though.

If all goes well, that should be the last piece of the puzzle and by this Friday or next Friday, I will have my rollover complete.

If the funds were deposited in my account last Friday as I expected them to be, it would have worked out extremely well for me because that was the end of a bad week for the market. My funds are up a percent or so since then.

My opinion is that this process is a lot more complex than it should be. I'm transferring money from one account of mine into another. It should not require multiple paper forms to be filled out for multiple parties, multiple phone calls, faxes, and it should happen in days, not months.

But I think it will be worth it because when it's all over, I will have one less account to worry about.

A lot of people will tell you about how great it is to do a direct rollover of an old 401(k) balance:

The Motley Fool
The ever-wacky Suze Orman

But they aren't writing from experience. They are writing to you about the theory behind the rollover. In theory it's a great thing. In practice, it is not fun (unless you like paperwork). I guess the difference between a blogger and a journalist/financial advice person like Suze Orman is that bloggers are more likely to do something, then write about it, whereas a journalist will just read about it, then write about it. There's a big difference!

How To Do A Liquidation Analysis of New Century Financial

2007-03-05T20:16:00.000-05:00

When I got to work at 7:30AM this morning, I fired up Yahoo! finance and grabbed a quote for New Century Financial (NYSE: NEW). It didn't look good. Premarket activity showed the stock trading down about 60%, around $6 per share from somewhere in the $14 neighborhood where it had closed on Friday. New Century is one of the subprime mortgage lenders I have blogged about in the past, and that have been making all the financial news headlines lately.

I fired up the bloomberg machine when the market opened at 9:30 to check on NEW's trading levels, and that guy was going ballistic. The volume was through the roof, and the stock was off 60%.

The company is now officially on the verge of bankruptcy. It's a casualty of the capitalist system, and its fate is no longer in the hands of management. It's no longer in the hands of the company's owners, the stockholders... Its fate is now in the hands of NEW's creditors. That's right, those boring people who loaned money to the company, and made it promise to return that money after a certain amount of time, with interest. Like the smart lenders they were, they have the whole thing in writing.

When a company borrows money from someone, it usually makes a few covenants with them. These are just promises. "I promise I won't lose money for two quarters in a row," is a covenant New Century made to 11 lenders. The company is now saying that the odds are that it already broke that promise, which is known in Wall Street Jargon as a breach of covenant. The good news is that six of the 11 lenders said "you know what, NEW, that's ok that you broke that promise. No biggie. I'm not going to sue you and make you pay me all of the money you owe me. I'd rather you keep on keepin on so you can get through this rough patch of business." This is known in Wall Street Jargon as a "waiver."

However, five of the other lenders have yet to make up their minds.

These lenders are thinking to themselves right now "Oh snap, this company is hitting the crapper. There's an SEC probe, there are civil lawsuits, subprime borrowers are defaulting left and right... I don't know if I'm going to be able to get my money back if this nastiness keeps up for long." This is known in Wall Street Jargon as "credit analysis."

If one of these lenders decides not to grant a waiver, that lender can force NEW into bankruptcy. Most likely what that means is that NEW will be is forced to sell all of its assets (which are mainly mortgage loans), a process known on Wall Street as "liquidation."

That's why you have all of the stock analysts doing liquidation scenarios, and that's what the market is pricing in to NEW's stock today. Basically, people are trying to figure out "If all of NEW's creditors get paid off, what's left over for equity holders?" The price NEW closed indicates that the general consensus of the market is "not a hell of a lot."

If you're curious, a quick back-of-the envelope calculation that gets you in the neighborhood of New Century Financial's Liquidation value might go something like this:

1) Go to www.ncen.com and click on the investor relations link. Click the link for financial information. Notice the funny disclaimer that pops up "In light of New Century Financial Corporation's February 7, 2007 news release (New Century Financial Corporation to Restate Financial Statements for the quarters Ended March 31, June 30 and September 30, 2006), the financial information related to the quarters ended March 31, June 30 and September 30, 2006 should not be relied upon and is included on this Web site for historical archive purposes only." Agree to that and go on to the company's financial statements. We're looking for a balance sheet, and we've found one here, New Century Financial's Most Current Balance Sheet, courtesy of its third quarter 10-Q filing. You can find it on page 8 of this document.

2) Value its assets.

The company lists all of its assets first, which is very standard for a balance sheet. Our goal is to guess how much it could get for all of these assets if it had to sell them for cash in a relatively short period of time. Once we have that amount, we assume the company uses all of the cash to pay off its debtors. Whatever is left over belongs to the stockholders. Sorry folks, but stockholders are on the end of line when it comes time to collect in a liquidation.

This is the part that takes time, so be patient, I promise we're getting to a point here.

Total assets were $25.059 billion as of September 30, 2006. Of course, the disclaimer noted above tells us that this number might be bogus, but it is the best we have for now. Some of these assets are already cash and they do not have to be sold. So we'll take $409 million and $572 million as a given. (I'm going to bold these numbers as we go along, so we can add them up easier. I'm also going to round them off to make it even easier. What's a few million among friends?)

Next we come to the meat of the company's balance sheet... the mortgage loans. You know how Robert Kiyosaki is always fond of saying "a mortgage is an asset on the bank's balance sheet, but a liability on yours?" Well, this is why. This is that asset on the bank's balance sheet, in the flesh. NEW has all of this money it lent to subprime people that it can expect to be paid back in the future, with interest. They are listed at $8.9 billion and $14 billion. We won't distinguish between mortgages held for sale or investment here. Let's just lump them together into one nice round $22.9 billion sum. And since subprime mortgages aren't exactly the hottest item flying off the shelves these days, lets assume that NEW would have to discount them by 5% if it wanted to sell them. I don't know if that's a good discount. It's just a guess but being in finance and knowing that these are basically fixed income securities with known default rates (that are rising as of late) and payment schedules, I'm going to assert my wisdom and say 5% is the discount. So lets say that NCEN can get $21.76 billion (22.9B x .95) for these mortgages.

An aside here, Wall Street calls the 5% a "haircut." So, vulture investors (those who swoop in to profit off of potential bankruptcies like these) might say they're "Assuming a 5% haircut" when they do this liquidation value of NEW. Discount, haircut, 5% off sale... call it whatever you want.

OK, continuing down the balance sheet... another aside: you might notice something else here. The less liquid something is (ie the less cash-like and easy to sell), the further down it is listed on the balance sheet, in general. So, if you were listing your assets, you would probably list that $20 bill your grandmother gave you at the top of the list, followed by your collection of state quarters, followed by your furniture, followed by your picture of dogs playing poker, followed by your house, followed by your "mojo." Notice how the things get progressively less easier to sell as you move down the list? The same thing happens on a company's balance sheet, and believe it or not, companies do list their "mojo," only they give it a fancy Wall Street name: "Goodwill" or "Intangibles." This means the big haircuts must be coming up fairly soon.

The next item is "mortgage servicing assets." I have an MBA in finance and I have no idea what the hell that means. So, I did a ctrl+f to search for that term in the document, to see if it is defined somewhere else. It is explained in the footnote on page 24: "The Company records mortgage servicing assets when it sells loans on a servicing-retained basis and when it sells loans through whole loan sales to an investor in the current period and sells the servicing rights to a third party in a subsequent period." This gets us into the nitty gritty of the mortgage world. If I wasn't just trying to do a back of the envelope, I'd look into this, swear to God. But to be honest nothing could possibly seem more boring to me at the moment. So lets just say this is a "loan type product" for the moment and lump it in under the 5% discount.

OK, who am I kidding? There is nothing in finance an idiot using 10% of his brain can't understand. Let's dive into servicing rights via this article on servicing rights that I found on the google.

"Servicing rights -- the right to bill for the loan and collect payments -- are worth about 1 percent of the total loan amount for a 30-year mortgage. But when interest rates go down, borrowers pre-pay their loans and the value of the rights evaporates.

Booking the rights as an asset removes a cushion many mortgage lenders use to soften rate-induced swings in their business. In slow times, when rates are relatively high, lenders like to sell rights garnered from originations done in low-rate, boom times, injecting some previously unrecognized earnings."

OK, so servicing rights seem to be something you can sell about as easily as you can sell a loan. I'm going to keep them in the 5% haircut camp. I'm probably wrong and it might be more than that, but I'm not doing any more work on this. 95% of $60 million is $57 million. Big freakin deal.

Real estate owned is $84 million dollars. The only way a mortgage company gets a hold of actual real estate is... you guessed it... foreclosures. Someone defaulted on a mortgage, and NEW got the deed to the property as a result. If you listen to the radio, you'll know that foreclosed properties can often be had for a steal. Im torn between a 15% and a 25% discount here, so Im going to guess NEW can sell these foreclosed properties for 80% of their current balance sheet value. I'm guessing these prices might make some radio listeners very happy. That $84 million becomes $67.2 million.

Next esoteric asset on the books is "accrued interest receivable," weighing in at $109.6 million dollars. I don't have much of that lying around my house, so I had to dive into the footnotes to figure out what it represents. My first guess was that this represents interest receivable on some kind of asset, such as a bond, that NEW owns. This is the same principle as when I check my ING direct account and see the "interest earned this month" at the top of my account screen, even though I haven't been paid that yet. I figured that was a slam dunk, money in the bank with no haircut... but then I thought to myself "why is this so far down on the list?"

So I did some more investigating and I found this letter from the Office of Thrift Supervision, which led me to believe this is a little riskier than I first thought. I've had my fair share of run-ins with the OTS when I used to work for a bank, so I know one of the things they do is keep tabs on the kinds of assets banks hold.

I'm not going to make this much clearer, but basically NEW sold off some kind of loans or something to a trust which packaged and sold them to investors in some manner, and interest gets paid back through the trust to NEW. However, this line in the OTS letter is what gave me pause "any of the accrued fees and finance charges that the institution collects generally must be transferred to the trust and will be used first by the trustee for the benefit of third-party investors. Only after trust expenses (such as servicing fees, investor-certificate interest, and investor-principal chargeoffs) have been paid will the trustee distribute any excess fee and finance-charge cash flow back to the seller, at which point the seller may or may not realize the full amount of its AIR asset."

So basically the letter is saying NEW might want to pull money out of this thing, but there are a few people in line who will want to get paid first, and NEW might not get the full value of that asset. Further on down the letter, it says that "The seller's right [ie: NEW's right] to the excess cash flows related to the AIR assets is similar to other residual interests in securitized assets in that it serves as a credit enhancement to protect third-party investors in the securitization from credit losses." Well I'll be danged. The AIR is used to protect third party investors from credit losses. And since New Century peddles sub-prime mortgages, it is likely that there will be some credit losses that the investors will need protection from. I hereby discount this asset by another 20%. This puts accrued interest receivable at 87.68%.

Next on the list is the Income Taxes, net. I did some of my best sleeping in accounting classes where professors tried to show me how to calculate these things. I vowed I would never learn how to calculate an income tax asset, but I understand the general point of them. They basically make up for the difference between taxable income that is reported to the government, and taxable income that is reported according to GAAP on the company's financial statements. If it's an asset, it will provide a future benefit to the company in that it will reduce taxes in future periods.

NEW won't have too many future periods if it enters the liquidation process. Big discount here....let's go with 60%. Drops this down to $32.2 million from $80.5 million.

Office property and equipment is easy... 87 million sells for 60% of that (based on the fact that im sitting on a former office chair that I bought for $10 from this place full of liquidated office furniture) so it's $52.2 million.

Now... Goodwill! The company's mojo! If NEW was Derek Jeter, Goodwill would be his ability to deliver a big hit in a tight spot. That's right, it's an intangible. Yet, in accounting, they have found a way to put a dollar value on intangibles. Technically, goodwill is the excess amount NEW paid when it bought another company for more than its book value. Let's assume the current New Century can sell its name, its web address and the right to use its trademarks for something. I'm a pessimist so I'm going to say that value is $20 million, a nice round number and roughly 80% of the book value of its goodwill.

Prepaid expenses are hard, but not impossible to recoup. Lets say NEW paid $500 at the beginning of the year to insure the company Yugo from Jan - June. It liquidates in May and is entitled to get back a refund for the month in which it did not need the insurance coverage (June). Same thing goes for other things like medical insurance, lighting, and whatever else the company might have paid up in advance. I'll call this another 80% discount because Im getting really bored, but I promise there's a point to all of this. $360/2 = $180 million.

So add up all of the numbers in bold, and you come up with $23.1496 billion dollars, which is what we think we could get for NEW's assets, based on the analysis above.

For those of you who think better in pictures, this works out to a pile of one dollar bills, each one .0043 inches thick, reaching about 1,600 miles into the sky.

Total liabilites are about $22.995 billion so when the liability holders get through with that stack of bills, there will be only about 155 million of them left for common stockholders.

The front cover of the 10-Q shows NEW as about 55.5 million outstanding shares. So these starving shareholders will divide the $155 million equally amongst themselves, leaving about $2.79 per share.

Compare this with NEW's $4.56 closing price and you can make a few conclusions:

1) I did this wrong because I know little about mortgage finance. I will grant you that.
2) The market thinks NEW will get more for its assets than we calculated above. I will grant thats a possibility. There are people out there who can compute almost exactly how much these haircuts will be. They have experience doing it, and they know the markets for the assets.
3) Some people think that NEW will be able to avoid bankruptcy somehow, so they bid the price up above liquidation value. This is again, a possibility.

Anyway, all I wanted to illustrate was a back of the envelope calculation but I got a bit too into it and this would have to be one HUGE envelope to fit this blog entry on. Hope you found this useful. This is exactly the analysis many professional investors went through today as they made decisions to buy and sell NEW.

Me, I'm just glad I don't own the thing, and this doomsday scenario makes me glad that I favor investing in companies without much debt, because things get ugly if a highly-leveraged business stumbles.

By the way it's too late to check all of my math above. It seems right to me but if you see any mistakes don't hesitate to point them out. It's all simple calculations...

2006 Berkshire Letter Review, Part 2: Newspapers Are No Longer Good Businesses

2007-03-04T13:34:00.000-05:00

One of the investments Buffett has long been known for is newspapers. He loved the business models of newspapers for a long time because they worked as mini-monopolies which served people their local news and made plenty of money from advertisements. One of his most successful investments was The Washington Post Company, which sold for about $150 a share in 1991 and recently topped out at about $1,000 a share in 2005.

According to Buffett (p. 11), "fundamentals are definitely eroding in the newspaper industry... The skid will almost certainly continue."

Buffett admits he first saw indications of the coming decline of the newspaper's monopoly-like business model back in 1991, when he said in his shareholder letter "the media businesses... will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago."

The reason for the decline of the newspaper is the availability of information through other channels, in particular cable TV, sattelite broadcasting and the Internet.

Buffett hopes that "some combination of print and online will ward off economic doomsday for newspapers," and said that Berkshire's Buffalo News unit will work to develop a sustainable business model, but ends his discussion conclusively, saying "... the days of lush profits from our newspaper are over."

A lot of books written about Buffett talk about how great the newspaper business is, and how much he loves it. That information is no longer correct, and if you're an investor looking to emulate Buffett's style, you might want to look elsewhere when picking stocks to invest in.

Of course, none of this is news to most people. There has been plenty of press around the troubles newspapers have been facing recently. The real significance is the fact that Buffett devoted a page to this Epitaph of the industry. To be clear- Buffett isn't selling the companies. He thinks they can continue to make money, but he no longer finds the industry fundamentals to be as favorable as they used to be.

Take a look at income statements for Dow Jones (DJ) the aforementioned Washington Post (WPO) or Gannett (GCI) to get a sense for how the industry has suffered from competition from other forms of media. Look at steps some of the companies have taken to try to adjust to the needs of their current audiences. It's clear that the party is over.

2006 Berkshire Letter Review, Part 1: Why Don't We Evaluate or Stock Portfolios Like Warren Buffett Does?

2007-03-03T13:02:00.000-05:00

Of all the topics discussed in Warren Buffett's 2006 annual letter to Berkshire Hathaway shareholders (warning: links to a .pdf document), the one that I think applies directly to most investors comes on page 15, under the section entitled "Investments." This is the section where Buffett talks about Berkshire's investment portfolio- the common stock investments that the company owns. You can compare this to your own investment portfolio, though I would be more than willing to bet you own many fewer shares of the companies than Berkshire does.

The letter breaks out the 17 different investments that Berkshire owns with a market value of more than $700 million. Buffett notes that there are 2 investments with market values over $700 million that were left off the list because Berkshire is still buying the shares and he doesn't want to tip the market off and drive up their share prices. Referring to these two mystery companies, he says "I could, of course, tell you their names. But then I would have to kill you."

Allthough the makeup of the portfolio is very interesting, (the usual suspects: American Express, Coke, Wal-Mart, Moodys, and some relative newcomers like PetroChina "H" shares and POSCO) that wasn't the part that interested me the most. What interested me most was the way Buffett described the performance of his portfolio, how it is fundamentally different than the way most people describe their own portfolios, and how much better off people would be if they took his approach. You'll see my point when you read what he had to say about his stock portfolio’s performance in 2006:

“We are delighted by the 2006 business performance of virtually all of our
investees. Last year, we told you that our expectation was that these companies,
in aggregate, would increase their earnings by 6% to 8% annually, a rate that
would double their earnings every ten years or so. in 2006 American Express,
Coca-Cola, Procter & Gamble and Wells Fargo, our largest holdings, increased
per-share earnings by 18%, 9%, 8% and 11%. These are stellar results, and we
thank their CEOs.”

Go back and read that again.

Did you find anything missing from that description?

What I found notably absent was a discussion of the price performance of the stocks Berkshire owns. The majority of investors would have talked about how their portfolio was up X% during 2006, with some stocks outperforming their peers or other benchmarks in terms of share price appreciation. Buffett, on the other hand, focuses on the performance of the underlying businesses, taking his world-famous business owner perspective on investing which I touched upon in my review of Mary Buffett’s book Buffettology (you can learn more about this perspective from that book).

Ninety percent of investors who own individual stocks take the wrong point of view when investing. They see stocks purely as pieces of paper or ticker symbols that fluctuate in value every day. Warren Buffett sees stocks for what they really are: pieces of ownership in the underlying business. He sees the earnings of the underlying business as being his, in proportion to the amount of shares he owns.

Because of this perspective, he evaluates the performance of the business underlying his investment, not the performance of the stock price. Buffett knows that stock prices will be subject to the whims of the markets, so they are not in themselves indications of how well his investment is performing.

If you own a portfolio of individual stocks, I challenge you to take this perspective. Set up a spreadsheet or make a paper listing a few key performance metrics for each of the companies you are invested in. It could be as simple as listing out revenues, net income, assets, liabilities, operating cash flow, and if you’re even more ambitious, free cash flow. Review the performance of your investments against these metrics once or twice a year. Think of yourself as an owner of the business, instead of as an owner of a ticker symbol that moves around with seemingly no rhyme or reason. Chances are you will start to see your portfolio in a whole different light.

Hopefully this exercise will at least shield you from using fluctuations in the market price of a stock as the only reason to buy or sell a stock. I am often amazed when I hear people saying they’re going to buy a stock “because the price keeps going up,” and using that as their sole criteria for making an investment. Or, deciding to sell a stock they own because “it is down 50% from where I bought it.” Don’t let the market tell you what to do. The market makes mistakes. People get fearful. People get greedy. In the short run, the market price will reflect the greed and fears of the day. In the long term, the market price will reflect the performance of the underlying business as indicated by the metrics I listed above, the most important one being the earnings of the business.

In a world of Jim Cramer’s Fast Money, all of the financial press, the talking heads on TV, the real-time stock quotes, heat maps, online trading, and all of the marketing dollars being thrown around in the investment world, investors often get caught up in the wrong things. They buy and sell stocks on whims, subjecting themselves to whipsaw, capital gains taxes, commissions, fees, penalties, and other investment performance killers that erode the value of their investments over the long term. If they took a step back, a deep breath, a long term outlook, and Warren Buffett’s business perspective of investing, they would do much better over the long run.

I’ll leave you with a final question. Pick any stock in your portfolio. Now without looking it up, can you tell me if its earnings were higher in 2006 than in 2005? If you can’t, I think you should be paying more attention to the companies you own.

Buffett - A Voice of Reason in the Midst of Market Madness

2007-03-03T12:59:00.000-05:00

This was an interesting week in the markets, dominated by the fact that it was the worst week for the US Stock market in four years. There was also some evidence that credit woes in the subprime market are starting to spread to other markets, some comments from Alan Greenspan, and a GDP revision that gave people some things to talk about.

I’m not a big believer in acting on the day to day, week to week, or even month to month fluctuations of the market, so even though I find this stuff interesting and I follow the news, it did not have any effect on how I’m currently allocating my investment dollars.

In the midst of all this market action this week, one newsworthy item in particular rose head and shoulders above the rest. I was able to find some time on a slow Friday afternoon at work to read a publication that comes out every year around this time- Warren Buffett’s annual letter to Berkshire Hathaway shareholders. This letter can be found on Berkshire’s website along with archived letters from previous years. If you want to go straight to the PDF document for 2006, just click here (direct link to the pdf document).

I read the letter twice, and I found a few interesting themes, which I’ve decided to cover over the next few posts.

There is a reason why I link to Buffett’s letters on the side panel of this site. It is because I think they are one of the best investment guides you could ever read. In fact, I’ve noted before that many people think a thorough study of Buffett’s letters over the years is akin to an MBA in investments. It is a free resource, it is a valuable resource, and I think anyone who is saving or investing money, or is even the least bit interested in the markets should read these letters every year when they come out.

This week in particular, Buffett's letter was just what the doctor ordered.

Delaying My Tax Filing

2007-02-28T21:06:00.000-05:00

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.

Stock Market Decline

2007-02-27T21:17:00.000-05:00

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.