Tag Archives: Stocks

Why 7million7years doesn't buy 'packaged' products …

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I left a somewhat tongue-in-cheek footnote to a recent post on the differences between Index Funds and ETFs (if you didn’t read it, I favor the former over the latter for neophyte investors, and neither for serious investors):

Important Note: 7million7dollars does NOT currently invest in any Index Funds, Mutual Funds, or other “Packaged Investment Products” … apparently, he is just a (rich) product of the Stone Age ;)

It seems to me that the wave of packaged products has increased over the past 20 years.

No longer do you tend to hear those stories of people like the reclusive and grumpy Old Man Miller who fell off a ladder and died leaving no heirs and a box of dusty old stock-certificates that now just happens to be worth $900,000 (not to mention a pile of gold just sitting under some lumber in the old wood-yard)!

It’s not just stocks … it seems that you can’t buy L’il Jon a toy without taking out your industrial grade laser to burn through 15 layers of impossible-to-open plastic ‘bubble’ packaging.

Think about the cost-differential between a typical consumer product at manufacture (the price it cost the guy who made it in: raw materials, labor, tooling, bulk packaging, and bulk shipping) and the eventual end consumer who buys it at retail: the price can inflate by 5 to 7 times … or even more.

The more hands, the more cost … simple.

Similarly, with ‘investment products’ …

… in my perhaps archaic way of looking at things, the further removed that I am from the investment, the less control I have, the more people who want to add cost (including their profit) into it, and less I like it.

That’s one of the reasons that businesses (my own) are my favorite form of investment … followed by direct investment in real-estate … followed by direct investments in company stock.

 Now, if you do decide to invest in a fund, why would you choose a Low Cost Index Fund over the typical well-diversified Mutual Fund?

Unless, you can guarantee to find me a Mutual Fund that will outperform the market over the next 10 years (considering that 85% of fund managers don’t beat the market, that’s an easy bet for me to take), I would choose the lower cost option, simply because of cost.

If the Index Fund charged you only 0.25% of your total investment amount to enter the fund and another 0.25% a year to manage it for you, but the mutual fund charged you 1.0% and 1.0% [BTW: in this example, the Index Fund fees are too high and the Mutual Fund fees are too low] …

… over just 10 years (assuming an average 8% return for each), you would have paid the Index Fund just over $43,000 in fees … but, the Mutual Fund $157,000.

Why so much?

Because, you also need to factor in the foregone earnings on the amount that you could have had invested, if those fees weren’t there …

On the other hand, if you invested directly in some stocks and just managed to meet the market, with little to no fees (it costs just $7 to buy, say, $25,000 of stock using an on-line broker) …

… now you know why I don’t like packaged products!

I encourage you to run some numbers for yourself …

[To be Continued]

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The ONLY three ways to invest in stocks … and, some ways NOT to …

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So you want to invest in stocks?

And, why not be a bit of a contrarian by getting in now … when the markets are all beat up, and there is doom and gloom around, that’s when most of the money in this world is made … so, if you do want to invest, how?

Well I covered a bit about this subject in a recent post, comparing Index Funds to ETF’s … but, I want to go into it just a little bit deeper:

First of all you need to understand what type of investor you are:

1. Are you a Speculator – living on the edge, trading stocks/options (i.e. gambling) type? Nothing wrong with that – you could be the next George Soros.

If you are, then sign up for some newsletters and courses, such as the Tycoon Report (has the added advantage of being free!)

2. Or, are you a Value Investor – buying cheap, holding for the long term type? Are you the next Warren Buffet? Obviously, nothing wrong with being the world’s richest man, either.

If you are the next WB, then buy yourself a copy of Rule # 1 Investing by Phil Town. It will tell you exactly HOW to value stocks (what measures to use) and WHEN to invest (what indicators to use).

3. If you don’t have the patience for the latter (2.), or the stomach for the former (1.), then buy yourself some units in a low cost Index Fund … keep buying … and, wait!

That’s it in a nutshell …

… but, wait you say … what about:

4. Mutual Funds – too expensive and 85% of fund managers don’t even beat the market

5. Growth Stocks – if you have no special skill or knowledge, what makes you think that you can beat the Fund managers in 4.? You can’t (unless, you are lucky … then you are really just back at 1.).

Did I miss anything?

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When is it best for you to invest?

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One of the better on-line resources for investing in stocks is the Tycoon Report … I enjoy seeing it in my In-Box daily (BTW: also check out Tickerhound!).

I was interested to see an article that talked about the three best times to invest; here’s what they said:

To outperform the market, you have to master all the factors that determine when a company’s shares are most likely to rise, not just some of them. It is the combination of indicators, each reinforcing the other, that gives us the most accurate barometer of when and where to invest our money.

One of the topics I cover in detail in the CRISS course is timing or seasonality — the best months and years to make investments in specific markets. Many investors are unaware of facts like these:

  • In the 4-year presidential election cycle, market strength is greatest in the pre-election year: the NASDAQ has posted an average 32% gain since 1971 in pre-election years — and the Dow hasn’t had a losing pre-election year since 1939.
  • Since 1991, October has been the strongest month for the Dow and the S&P 500.
  • For the NASDAQ, the best months are October through January, during which the NASDAQ has averaged 12% four-month returns for over a decade.

 Now, I don’t usually try and time the market according to these (or any other) ‘best time to be in the market’ strategies, because the one time that I do will be THE TIME that the strategy doesn’t work 😉

You know, the papers will say “Market Shock – Dow Jones Plummets in Election Year … first time in over 100 Years … Investor Loses Shirt”.

But, if I am planning to invest AND I have found a stock at a great price in a company that I believe in …

… then it is sure nice to know that the stars are (supposedly) aligned in my favor; but, I’ll probably invest eben if they aren’t.

What are your favorite times to be in the market?

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Making Money 201 – Going for Broke!

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If Making Money 101 could be drastically over-simplified as ‘saving’; then Making Money 201 is equally over-simplified as being about building your income.

If you were serious about getting your financial house in order quickly, then you probably already did some income building to help you pay debt off quickly while you were working your way through Making Money 101.

Unless you’re a CEO of a Fortune 500 company, or a top professional doctor / dentist / attorney / accountant, then you will need to think about starting a business.

And, to accelerate your business or professional income you may also decide to get into the business of active investing (renovating/flipping real estate, trading stocks and options, etc.).

This is the stage that you get to take RISKS (that’s why you need a solid foundation and plenty of runway … you WILL fail at least once, twice, three times …) because that is the only way to get the big financial REWARDS.

This stage is hard work!

But, it is where you actually sow the seeds that will eventually make you rich …

There are plenty of books and a few blogs around, but most of them are specific to just ONE WAY of making money … the author’s way; some are good and some are lousy.

By the end of this stage you will be earning more than 90% of the US population and will be accelerating rapidly down the runway to financial health … but, spending will also increase dramatically and you will struggle to hang on UNLESS you ALWAYS remember your Making Money 101 lessons about saving!

Paradoxically, you will be the ‘richest’ that you will ever be in your life during this stage IF to you, being ‘rich’ means being able to spend lots of money …

… the problem is that your ‘wealth’ is only based upon your income, therefore only lasts as long as your business or job does.

Also, many of the Making Money 101 rules now need to change, as do almost all of the tools ….

For example, dollar cost averaging and index funds are replaced with sensible investment and savings rules and strategies.

You are still far from ‘rich’ …

In fact, you are still Just Over Broke … but, starting to break free!

When is investing gambling?

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I was browsing a new finance forum the other day and came across a great question from a self-confessed ‘beginner investor’.

He asked:

“Where can I learn how to trade with a few thou for the short term (<3mo) with greater than 20% return. I’ve never invested anything. I know that long term investing seems much easier from what i’ve read ie. value investing with stock screens, but what is another good strategy? I am looking for a strategy, teacher, website, anything to start learning, but with a goal of putting money in the market. I’m not interested in funds or managers.”

That, my friends, is called ‘gambling’ not ‘investing’!

You see, when evaluating ANY so-called ‘investment strategy’ you have to consider the return that you can make against ‘market norms’ …

… which is a very simple way of saying “if I can do it … and I don’t have any SPECIAL INSIDER KNOWLEDGE that makes me SPECIAL … then why isn’t EVERYBODY doing it?”

The answer is, of course, is: it’s simply NOT possible … otherwise EVERYBODY would be doing it, already!

… unless you get extremely lucky (which is why what you want to achieve is called ‘speculating = gambling’).

A friend and I had a similar conversation the other day …

He is becoming a professional speaker and consultant; he has already made a great start by writing and self-publishing a book and already has some paid speaking engagements.

BUT, his target is to earn $200k next year … just from speaking/consulting, as a near-beginner!

So I asked him: “How many corporate executives, with expertise in your specific area [customer service] earn anything close to your $200k target right now?”

He said: “Not many … that’s a BIG corporate salary …”

Next, I asked him: “How many of them could write and speak about customer service?”

He answered: “Probably a lot more than you’d expect, especially if they knew that was $200k on the line …”

“Exactly!” I said, almost jumping out of my chair: “So, why would any of them work for somebody else, if they could simply write a book then earn $200k … with the added benefit of lots of travel, flexible hours, and no boss?”

“Hmmmm” he said, his brain obviously (finally) ticking over: “They wouldn’t!”

Which was exactly the point that I was trying to get across:

It simply CAN’T be DONE, by the average person … otherwise, they would all be doing it!

Of course, there are PLENTY of speakers and consultants earning $200k or way more – as there are plenty of people in all areas of ‘investment’ (stocks, options, currencies, futures, real-estate, business, etc, etc) earning outstanding returns even in a crappy market – but …

… they generally have SPECIAL INSIDER KNOWLEDGE that makes them SPECIAL … or, they work MUCH harder than anybody else and/or they get extremely LUCKY …

So, what would you tell our ‘Beginner Investor’?

I would say, when evaluating any opportunity or even your own investing goals and strategy consider:

1. Are you investing – in which case, you should expect ‘normal’ rates of return over the long haul, or

2. Are you really gambling – in which case, the sky is the limit … but, the ground could equally rush up to meet you …

depending upon how lucky you get.

BOTH have a place in your journey towards $7million in 7 years (or whatever target you set for yourself)  … it’s how I did it …

 

But, always be very clear on when and why you are investing and when and why you are gambling.

 

I’d like to hear your views …

The stock market pessimist

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I braved the market storm and bought some stocks on Friday (about $700k in Citibank, Coach, Blackberry); for some reason I got bounced out of  Blackberry (RIMM) this morning … I can’t tell, but maybe I accidentally set my trailing stop at 1% instead of 8%?

I must admit, I’m just playing at the moment (see my earlier post: http://7million7years.com/2008/01/27/when-to-bail-out-of-the-market/ ).

Generally, I admit that I am stock market pessimist … always have been … but not any more … maybe!

This is the point in the post where you say: “hang on … when the market was going UP you were a ‘stock market pessimist’ and now that it’s crashing DOWN you’re suddenly a ‘stock market optimist’? Whattup????!!!!”

Let me explain …

Everybody has ways of making (or losing) money that they are most comfortable with … mine happen to include: businesses, property (residential and commercial, buy and hold), and some other stuff that I will tell you about in upcoming posts.

Fortunately, these happen to be the preferred assets of the Very Rich … just dumb luck and good genes on my part … I suspected but didn’t know for certain that they were the preferred asset classes of the very rich (neither did anybody else) until the book that I told you about in a recent post came out (follow the link just under the chart  and read the book exerpt: http://7million7years.com/2008/01/25/how-much-does-it-take-to-be-rich/ ).

So, I was nervous about stocks in general,  until I came across Phil Town’s excellent book on stock market investing called Rule # 1 ( http://philtown.typepad.com/phil_towns_blog/aboutbook.html ). Get it and read it!

The book told me how guys like Warren Buffet find undervalued stocks … I just followed the methodology to find my own favorite stocks (I’ll write a post specifically on this) and played a bit in the market with them.

I only invested $1 mill into 4 or 5 stocks … promptly losing $100k … but, I had the opportunity to learn Phil’s process and put in my ‘tweaks’ (Note to self: delete ‘tweaks’ … sometimes it’s best to just follow the formula).

Some of this was learning, some of this was not following the system exactly, some of this (a lot) was bad timing … subprime just as I was fiddling.

This is not a post that says that you should be in the market now … but SOON (where ‘soon = 1 month => 1 year, see: http://7million7years.com/2008/01/27/when-to-bail-out-of-the-market/ ) … until YOU are sure, there’s nothing wrong with staying in cash (see Phil’s excellent post on this subject  http://www.philtown.com/phil_towns_blog/2008/01/cash-is-good-un.html ).

As Phil says: “Now, go play!” …

When to bail out of the market

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What to make of this?

The stock market went up and up – then CRASHED – then went up – then CRASHED … where to next?

Back up? Down more? Big Recession / Big Crash … hmmm, I don’t know … but, neither does anybody else.

Here’s what I do know:

Smart shoppers wait for the Thanksgiving Day sales to buy up the bargains … dumb shoppers buy with the crowds just before Christmas when the prices are marked up sky high.

Same with the stock market … we were leading up to a Stock Market Christmas and prices were sky high … they eventually had to drop, so I stayed in cash and waited …

 THAT was the time to bail out of the market … NOW, it’s Thanksgiving Day Sale time on the Stock Market ….  hurry, hurry, hurry … prices marked down 15% – 20% … even better bargains in finance stocks (remember the sub-prime write-offs?).

So, I am dipping my toes in again … maybe the market will go down again, maybe it will go up … I’m banking on it doing a bit of both with just a little of my money, to see what happens … when I am sure the recession is over (Hint: that will be BEFORE the newspapers publish the official reports, which can be months out of date!), I will be buying up those discounted, quality stocks like nobody’s business!

Want to know how to find ‘good quality’ stocks? Try this excellent book: http://philtown.typepad.com/phil_towns_blog/aboutbook.html )

Not convinced? Hear it from a professional at Friday’s post on the Wealth Tycoon Report blog (I don’t necessarily agree with everything these guys say, mainly because they are stock and trading experts, and I’m not, but this is a GREAT post): http://tycoonreport.tycoonresearch.com/articles/858884874/the-secret-to-investing-like-a-professional

 So, will I be dancing in the streets or crying? Well, I hate to cry, so I’ll only invest now what I can afford to lose (I’ll absolutely hate just dipping my toes in: if the market goes up, I’ll kick myself for investing so little … if it goes down, I’ll kick myself for investing anything at all … but, $$$-wise it won’t help or hurt greatly either way).

 Then, when I am SURE (maybe 1 month, maybe 6 months, maybe 2 years), I’ll grit my teeth and wheel in the big buckets of cash … by then, I’ll be educated, real-world tested (for better or worse!), and prepared!

 You should do the same …