Bespoke Investment Group's Blog

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

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

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?

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?

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?

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

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

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

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

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

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

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

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

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?

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

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

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

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

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

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

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?

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

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!

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

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

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

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

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)

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

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

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

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

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

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

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

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?

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

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

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?

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

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 "1290690 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.