*****Pride Before the Fall?
I hope everyone had a great holiday. There’s nothing like a few days off work to connect with friends and family and recharge the batteries. Next week, we all get back to a regular schedule. And there’s a lot of work to do as we look forward to 2009.
But before we get to that, here’s the next round of reader mail I promised you last week.
*****Laura E. writes: I have always wanted to know—how do you buy stock in a company and can you start small? If so, where do I start?
Probably the most popular way to buy stock directly from a company is through dividend re-investment plans, or DRIPS. When you enroll in DRIP you agree to receive you’re dividend payment in stock instead of cash. There a couple advantages.
When you receive more stock in lieu of cash, you’re profiting from a form of compounding because the size of your dividend payment increases as your stock holding increase. If you’re investing for the long-term, DRIPS are a great way to grow your investment money. And if you choose stocks with highly reliable revenue streams, like pipeline MLPs or utilities, you keep risk relatively low.
DRIPS also allow you to avoid transaction fees for stock purchases.
Many companies also offer direct purchases of stock. I’d suggest a simple Google search to find which companies offer direct stock purchase.
*****Here’s a letter from C. Douglas that exemplifies many of the letters I receive from Daily Profit readers: I have a 401K through my job and have lost about 60% of my investment YTD. I’m mostly invested in mutual funds. I’m now 55 and plan on retiring about 65. Should I keep putting money in my 401K Plan despite the continuously (sic) loss I see day after day? Most of my mutual funds are with Fidelity and T.R. Price. If you think I should keep investing, what are some of the funds with TR Price and Fidelity that you envision will do well in the future when the market picks up? I’m almost tempted to just pull all my money out, but I’ve already lost more than half of it — not sure what to do — most people are saying thing will get worse before they get better!!!!
As always, it hurts to hear about investors recent losses. But I also have to add that it’s encouraging to see so many Daily Profit readers who have not made knee-jerk decisions to sell everything out of anger or panic.
Ultimately, the decision to abandon ship is the captain’s. But even after taking on so much water, I don’t think the ship is going down. That’s because, while the challenges the US economy is facing are daunting, they’re not insurmountable.
Investing in US stocks is investing in America. We have the most dynamic economy in the world, and I believe the things that made us the wealthiest country in the world – independence, creativity, ambition and drive – will keep the US at the forefront of the global economy.
For instance, the US financial system has been shaken to its core. Investment banking has essentially ceased to exist. But is there any doubt in your mind that our banking system won’t resurrect itself and likely be stronger than before? Do you doubt that Americans will borrow again when the credit markets free up?
Especially given the current level of stock prices, I don’t think it’s time to cash out. But that doesn’t mean there’s no reason to examine your strategy.
As I’ve said in the past, the whole 401(k) retirement planning industry implicitly understates the periodic risk of stocks. In other words, buy and hold investing may not be the best way top go.
As a 55-year old, I would consider two things – self-directed 401(k)s and ETFs.
If you can roll your managed 401K into a self-directed one, you can be free of the limitations of investing only in mutual funds. When you buy a mid-cap fund, you buy a wide range of companies. Diversity like that seems safe, but you’re still totally exposed to the stock market in general. And when you’re looking at a stock market that’s likely to be rang-bound for the next year, broad-based exposure to stocks may not be the best tactic.
ETFs give you direct exposure to economic sectors. This can allow you to be more nimble and targeted. ETFs are also cheaper than mutual funds.
Now, I don’t want to get too far ahead of myself here, but I’ve seen a ton of letters just like this one, from investors who have accepted the buy and hold line from their financial planners and are now sitting on big losses. The consistent question these letters ask is "there must be a better way."
Well, I’ve started to feel a little guilty as I keep typing "yes, there’s a better way." I’m going to show you a better way. With my own money, in a completely transparent portfolio, I’m going to demonstrate what I believe to be the best way to invest for the long-term. You could say I’m going to put my money where my mouth is.
In fact, I’m putting $100,000 of my money where my mouth is.
I’ve been working with a financial planner, Richard Schwarzbard to design my own "Recovery Portfolio". And in the next few weeks, you’ll receive an invitation to attend a video seminar while I’ll put my $100,000 to work.
We’ll be using a range of investment products and strategies that will be easily accessible and useful to any investor looking to grow their wealth.
This will be a subscription service, but I’m committed to keeping the price very reasonable. I’ll keep you updated about the launch of my Recovery Portfolio.
*****J. Sesay writes: I am a new subscriber to the newsletter the Daily Profit. As of last yearIi have been really tuning in to whats going on with the economy andIi have made a commitment to myself that I will not be broke again a day in my life. I am a 23 year old college student with no kids, no serious bills as of now. I am currently owe a small debt, such as 20k for my education thus this far, and no more than 2k with misc bills. What would be a great way to start becoming financially independent?
Well, you’ve clearly off to a good start. Paying attention to the economy enough that you can form your own opinion as to what’s going on now and what’s likely to happen in the future is a great foundation for successful investing.
As a new investor thinking long-term, I’d look into DRIPs and self-directed 401(k)s and IRAs. I’d also learn about ETFs and how to read corporate balance sheets. That will help you translate your macro-economic beliefs into profitable investments.
*****From E. Edmonson: The old adage is to never assume malice when stupidity can account for circumstances but, has anyone thought to investigate the SEC executives to see if a little malice was committed with all of the problems they contributed to? Has Cox’s finances been investigated to see if he or any in his family profited from all of the short selling and/or other regulatory lapses?
I have never heard that phrase before, but I love it. And it’s very appropriate for what’s happened to Wall Street. I don’t think any of the CEOs, risk managers, lawmakers or regulators were deliberately trying to bring down the financial system.
I do know that the SEC has had its budget trimmed substantially over the last few years. They have fewer people that need to do more work. I believe that will change. I also think there will be investigations into the SEC. The simple fact that the SEC appears to have ignored several warnings about Madoff makes me think heads will roll.
*****P. Anderson wants to take it a step further: What is at the root? Greed. If there is anything that can be learned from this crisis it is that greed is at the root of man. Not a very pleasant conclusion, but sometimes knowing something at your core, allows you to go on and just accept, and learn to adapt and accommodate from here out…Best to know and remind yourself it is just a game, played by way more intelligent and powerful, and sinister people than myself. My job is to use their gigantic manipulations of the world to get a larger bit of profit than they will grant me as a depositor in their institutions, using my money to help them make even more money, while I keep up to inflation, if lucky. P. Anderson
So now we have to change the earlier phrase to "never assume malice when stupidity – or greed – can account for circumstances. It may sound a bit pessimistic, but this comment hits the bull’s eye, dead center.
In a very real sense, investing is a game. And individual investors are the equivalent of practice squad players in the NFL. The real "game" is played by people more powerful than any of us. Institutional investors (mutual, pension and hedge funds) account for close to 70% of the volume of stock trading on a daily basis.
While I don’t believe that the stock market is manipulated, P. Anderson’s point that we can still make money in stocks is absolutely correct. The key is to always be aware of the rules.
For me, that means doing solid macro-economic analysis to identify the important trends, solid fundamental analysis to find solid companies, and, finally, following the institutional money.
Because let’s face it – the pool of collective knowledge that’s focused on making money in the stock market is so great that no individual can stay on top of it. That’s why I engineered my TradeMaster system to follow the money.
Whether you use TradeMaster or not, it’s essential to follow the clues that institutional money leaves to keep yourself on the profitable side of investing.
Now, the idea that greed is part of man’s psychological make-up is very important. We are, as human beings, greedy. That doesn’t have to mean that we’d hoard food while people are starving. But no investor can say that greed doesn’t affect their investing.
Have you ever not taken profits because you thought a stock would keep going higher? That’s greed, and it can be a powerful force. The phrase "Know Thyself" was supposedly engraved on the door of the temple at Delphi. It’s great advice for investors, too.
*****Of course, Daily Profit readers sometimes have a bone to pick with me. N. Gravel writes: I am deeply offended at your reference To the "outright incompetence in Detroit for years". It is easy to blame when you don’t know the facts. No I am not an autoworker nor do I work in any industry related to them, however, I do believe it was the auto industry that grew this country to where it is today. Now, yes, the unions were somewhat greedy, however, to repeat a comment from many, that without the wages that were paid to the auto worker, there would not have been money available to buy all the fun stuff out there and the new homes that provided jobs for many. You are out of line on this issue. Merry Christmas and don’t forget all the people in Michigan who are suffering.
I haven’t forgotten the people who are suffering because of the problems in Detroit. In fact, that’s why I’ve said that some kind of assistance for the automakers is necessary. But let’s not lose sight of what brought the Big 3 to this point.
First of all, in a capitalist economy, past success is no guarantee of future results. Just because the auto industry played a big role in establishing America’s middle class does not lead to any sort of entitlement. Companies must adapt or die. In my opinion, the Big 3 have failed to adapt.
There are many reasons for this. And pension liabilities are a big one. Globalization has cut profit margins for many commoditized businesses, and the automakers are no exception. Sometimes, survival means making tough sacrifices. And if the unions can’t offer some concessions on existing pension obligations, they risk killing the golden goose. That’s clearly not the way to go.
I will also not back down on my belief that the Big 3 have failed to keep up with consumer trends. Just ask yourself, if you’re looking for quality, performance and fuel efficiency, would you buy domestic or foreign? I think the majority would say foreign. And the reason isn’t just marketing. It was cars like the Pinto and the Cavalier. It was SUVs and the Hummer.
The biggest tragedy for the auto industry is the speed at which the credit crisis has exposed their tenuous situation. Companies, as well as individuals, must have emergency funds available. The automakers don’t have it. And they’re paying for it now. In fact, we all are.
*****Hi, don’t you [realize] all this market turbulence is created by US and its citizens who spend in [a] frenzy without future outlook and their big bankers are creating havoc. Is it all the money power showing…but history has shown that big and mighty also fall so this time the developing world will grow and US will fall like its big companies. s.d.
I saved this comment for last for a reason. American investors are outraged at how Wall Street has taken down our financial system and helped bring on recession. But let’s not forget that we as citizens bear some responsibility, too.
After all, as a group, we’ve borrowed, leveraged and over-extended ourselves to a frightening degree. The savings rate has been unsustainably low for a long time while consumer debt has grown. We took hundreds of billions in equity out of our homes in refis and blew it in a massive orgy of spending.
I understand that’s not everyone, but there are still consequences.
Globalization is also a major factor. We are seeing the global economic playing field leveled. The rise in living standards in emerging economies has come directly at the expense of the US. And if we American citizens don’t make some changes, we could fall like some of our big companies.
But I’ll wager every cent I have and will ever make that that’s not how this chapter of American history will play out.
*****Finally, a couple more verses from our poet-in-residence, John…
We are flexible, thoughtful, and smart.
But it’s past time to make a fresh start.
Accept this harsh rule
If we fail to retool
We’ll continue this falling apart.
With our capital markets declining,
Amid countless smart pundits opining
We must fully employ
Not help to destroy
Our engine so ripe for streamlining.