Yeah, I’m posting, what’s it to ya?

Christian’s posts over the last few days and an article about Warren Buffett got me thinking and I think it’s time for a post to the good ol’ Investor Geeks. I think the morons on TV have gone on long enough and I think we Investor Geeks are on the same page, so listen up!

First of all, the days of lazy investing getting you 12% returns are over, done, finished, caput…shall I say….dead. (I’m The Undertrader! Get it? Dead? Free humor, only available here at IG!) As Mr. B said this week, for the 12% return to continue we’re looking at a 2,000,000 market in a few decades and that’s never going to happen. With that said, the key to getting those 12% returns is going to be active trading.

So, does that mean we should all become day traders? Absolutely not. What it does mean is that we need to manage our money more wisely. You should start today by never calling stock trading ‘investing’ again. You aren’t investing and it’s a bad way to think of the stock market. ‘Investing’ to me sounds like you throw money at it and hope and pray things go well until you need the money. Kind of like how buying a house isn’t really ‘Investing.’ Look how well that investment has worked out for a few million people. ‘Investing’ isn’t going to work. It’s time to start thinking about the market as what it really is….a business.

As soon as you send money to the broker, you’ve opened a business. The first goal is to get yourself some inventory, so you need to buy stocks (or ETF’s if you are risk shy.) Here’s the key to any business. You need to get as much inventory as you can for the lowest price possible, especially if the demand for that item is huge. So, when Disney was at $20, you should have gotten all you could of it. WWE at $10? Yes please! Apple at $60? Oh hell yeah! Fill up your inventory. It’s a business. When Disney got into the $34 range, you could sell half your shares and take that cash to buy up another down and out stock, increasing your inventory while retaining some of your Disney investment. Remember, you don’t have to sell ALL of your shares of a stock, you can sell some, take some profit and use it to buy something else that looks promising.

This is how trading is going to have to work going forward if you want a good return. Build up your inventory and then sell, getting more cash. Buying 100 shares of a stock and holding it won’t work and will never pay off. A key to stock trading is realizing the number of shares and the price you pay for those shares is the #1 most important thing, period. Don’t listen to those numbskulls on Wall Street and CNBC. Find a few great companies that are beaten down, buy as many shares as you can, ride the wave back up to get more cash, increase your inventory. Just like a business.

Invest in peace…

It’s time to make some decisions….

Yes, I’m still alive, thanks for caring.

We’re in the middle of November and this is the time every year when it’s time to start making some important decisions on your stocks. Things get really wonky this time of year for no good reason than other people trying to cover their asses, so let’s take a look at what factors cause these next few weeks to be important in your decision making.

1) All of the funds are going to stop buying. Yep, they’re done. They have huge, huge gains this year. You think they’re going to risk that 20% gain to get 21%? Hell no. They are going to take their profits now and sit on the cash until January 1st. This will allow them to print all sorts of snazzy little fliers that say, “We doubled the market!” The funds selling off shares to keep profit will drive the stocks down.

2) Recession is coming. If you don’t see this, you must live in a cave. Our dollar is worth nothing, foreclosures are through the roof and only increasing. There are 800 houses in Foreclosure in my zip code alone. Do you know how insane that is? No one will qualify for loans, no one will be able to pay for the $4 a gallon of gas that’s coming. Things are looking bleak for the future and the worst part is, the government knows it, but they keep lowering the rates to try to delay the implosion until after the elections. Lowering the rate will make things worse. Even the French government recently said that they needed to lower rates to hurt the value of their own currency. If the French know lowering rates are bad, we’re in trouble.

3) Taxes. Here’s what you usually have to think about in years where we don’t have huge gains. Do I sell now and how does that affect my taxes? Well, here’s something to think about. If you have some big gains to write off, now is probably a good time to sell off your loser stocks. You can get a little write off against the gains. Though, in the long run, if those loser stocks have good potential, it may be in your best interest to keep them long-term. That’s up to you.

The big benefit for traders who know what their doing this time of year is delayed taxes. What if I told you you could sell your stock and not pay taxes for 16 months on it? That’s what happens if you wait a bit and sell in January of 2008. You wouldn’t have to pay the taxes on that gain until April of 2009. If you sold in December, your taxes would be do in 4 months, April 2008.

I use the January strategy a lot for stocks with big gains. I can then use those gains for 16 months to create more income, rather than paying 15-30% in taxes with the gains right off the bat. Now, I must say, this is a bit risky because the taxes WILL come due and you’ll have to have the cash to pay them, so maybe take 30% of your gain and throw it in a dividend paying ETF Index (DVY or SPY or MDY are ones I use.) This should at least lower your risk with your tax money.

The other important thing is to have PLENTY of cash for the first week in January to buy the stocks that drop due to people taking their profits this way. I would say 60% of my stock purchases for the last 5 years have taken place in the first week of January taking advantage of the profit sell-offs. Be ready for that!

Otherwise, I’d start thinking about moving your cash to ETF’s, Index funds or something else less risky for awhile. Individual stocks are getting hammered and I think that will continue to happen, especially if stores come out with poor black Friday sales. If you’re in retail stocks, next Saturday could be a very bad day for you.

Invest in peace….

Undertrader

I’m back and still grumpy!

Two great posts to IG in the last few days have me back to make a counter-post to their great arguments.  Call me the devil of IG if you want, but that’s my job, right?

I don’t think you should sell off everything.  I believe that a large correction is coming sooner than later (and is necessary) but I still wouldn’t sell off everything.  Here’s a refresher of my strategy and why I am not dumping things wholesale, and then what I’m doing.

My strategy is simple.  Limit the stocks I watch to 50.  Those 50 stocks are name monopoly companies.  In other words, companies that you think of when you think of a specific sector.  Walmart, Apple, Microsoft, Ebay, Harley Davidson, Target, McDonalds, etc.

Then, I only buy these stocks when they are below their 50 AND 200 day moving averages.  It’s that simple.

Once I have a stock, I let the runners run, selling off only enough shares to secure some of my profit, which is what I’m starting to do now.  Are you up $1000 on a stock?  Sell off $1000 worth.  You’ll have your profit and a very, very tiny capital gains tax since it’s based on the growth of the shares you sold, not the dollar amount you cashed out.  (So if you sold 10 shares at $100 for $1000 cash and you had purchased those shares at $9, you’d pay taxes on the $1 gain per share, or taxes on $10 rather than $1000.)  Protect your profits!  That’s not to say sell everything everytime you’re up $1000 either, watch the stock.  I’ve let Apple run from $65 where I bought my first bunch of shares to the $138 or so it is now, only taking small amounts of profit out and using those profits to buy more shares on dips.  I didn’t even sell after the $8 drop, I actually bought more shares!

Here’s the deal, if you felt Apple was a good buy at $130 and it drops to $120, why would you sell?  Unless some really bad long term news came out, this is a buy trigger to me.  Not only does it lower the cost basis of your original purchase, but it increases your holdings at a price better than you thought was good before.  WWE is a good example for me.  I bought in at $12.50, it dropped to $10 and I doubled my investment in it and it popped up into the $16 range.  This took a couple years, but huge gain for me.  I did the same with Tim Hortons International.  Bought at $32 at the IPO, it dropped to $22 and I bought more there, more at $24 and more at $27 and now it’s back to $32.  My original investment I’m even on and I’m way up on my subsequent purchases.

If you’re buying stocks when they are low originally, drops shouldn’t affect you much.  Especially if you’re pulling out profits when your stocks are rising.  You should try to remain around 20% cash to buy on the drops.  Apple was a good opportunity when it dropped $8 on AT&T’s earnings report.  There was no reason for Apple to drop $8.  If you had bought it, you would have been up $2-3 a share in a day or two depending on when you got in.

The best companies won’t drop as far as the others either.  ETF’s and Index funds will drop some, sure, but if you have cashed out some of your profit from the big gains you should be able to pick up more shares at a premium price, which is a good thing.

Bottom line is, if you don’t need the money right now or in the next couple of years, there’s no need to panic when a pull back is coming because it’s really irrelevant in the big picture.  The goal, at least in my opinion, is to amass shares of great companies and you need the market to drop to do that.  Does Buffett dump Coke when it has a bad quarter?  No, he doubles down.  He knows he’s picked a great company and it will come back and when it does he’ll have a lot more shares that he bought with profits he got during the up period.  That’s the key to me.

Invest in peace…

3 Small Words in the Caribbean…

In January, my fiancee and I were lucky enough to go on a cruise to the Caribbean with the band “The Barenaked Ladies.”  It was actually my Christmas gift to her because it’s her favorite band.  Strangely, I received a great gift on that cruise that I wasn’t expecting.

One night we were up in the jacuzzi on deck and this older couple came and joined us.  We were all talking about how much fun the cruise was and how great the band was when the older man, probably in his late 60’s, singled me out and started talking to me.

He said, “You know, my friends always ask me how I can afford to leave my home in Canada every Winter.  I don’t have a great job.  I have a good job, but I’m not rich.  I always turn to them and say the exact same thing…”  And then the 3 small words came that were a real eye opener:  “I don’t smoke.”

He can afford these trips by not smoking.  Now, I don’t smoke and I never have, but I was in shock to hear this.  I asked him what he meant.  He said most people smoke a pack a day.  That’s $5-6 a day.  If a married couple both smoke that’s $10-12 a day.  Over the course of the year that’s $3650 to $4380.  About 5 times what the cruise cost us.

In looking at friends I’ve had in my life, I can see this.  People who smoke tend to be friends who are either so rich they don’t care or so poor that all they do is smoke (and complain about the lack of money they have.)

We won’t even go into the medical bills related to smoking or the need to purchase new clothes and furniture that don’t stink or replacing items that have browned from the smoke or having to repaint the house on a much more often basis than a non-smoker.  There are even hotels who give discounts to non-smokers.

“I don’t smoke” is probably the greatest answer I’ve heard in years.  That one little piece of advice earns this couple an extra $4000 a year to spend on anything they like, including a cruise to the Caribbean with the Barenaked Ladies.

I hope that those of you who do smoke read this little article and realize what you’re missing by doing so and maybe it’ll motivate you to stop before your chance for fun sails away.

Invest in peace…

P.S. – A massive amount of thanks goes out to the Geeks for donating to my bike ride for the Arthritis Foundation!  Extra thanks to Jason for keeping this going and Christian for pulling massive extra duty here while some of us geeks have been lazy, busy, bored, burned out, uninterested, ranting about other things.  Great job Christian, thanks.

P.P.S. – Mutual Funds still suck.

Thanks. :)

I just wanted to thank all of you readers for making IG an interesting place for discussions and arguments and rants about my favorite topics.

Happy Holidays and Merry Christmas,

Invest in peace…

How about a game of Risk?

When people talk about investments, they tend to leave out a missing value that everyone ignores when figuring out their investment strategy.  That little tidbit of information would be the massive elephant in the room called: risk.  I’ve created a rough draft table giving values between .1 and 1.0 for different investments and the amount of risk I believe they have.  Obviously, you may disagree with some of my values, that’s fine!  I encourage you to come up with your own values.  I think that if you use them in your math when debating an investment it will put a better perspective on what you’re actually risking.

Obviously, the only non-risk investment is putting money under your mattress.  We’ll give that a value of 1, so if you have $100 to risk and multiply it times the .1 risk value, you’re “risking” $110.  Simple, right?  Remember, this is just a theory, it’s not real money values.  We’re ‘adding’ in risk to evaluate an investment.

The next most risky thing on my list is a savings account.  We’ll give that a value of .2.  Really, the only thing that could happen is the bank could go bankrupt or your money could be stolen somehow, not much risk but a tiny bit more than under the mattress.  $100 x .2 = $120 of risk cost.

At level 3 we have money market accounts, there’s a bit of a fluctuation there where you could get worse returns on your money, we’ll give it a risk of .3.  $100 x .3 = $130 of risk cost.

At level 4 we have CD’s (Certificates of Deposit), Index Funds and ETFs (Exchange Traded Funds).  CD’s can be called early, Index Funds and ETFs can fall like rocks, but they are diversified more than a single stock.  We group all these together in risk level 4.  Note that I omitted Mutual Funds.  That is because Mutual Funds suck donkey nuts.  $100 x .4 = $140 of risk cost.

Which brings us to level 5 on my list, which I think will be the most controversial.  In this level of risk I put the best stocks like Coke, Disney and Microsoft, but I also lumped in Real Estate.  Why Real Estate?  Because a lot of problems can happen.  Bad market, no renters, earthquake, flood, typhoon, rats, termites, water damage, fire, rising interest rates, inability to sell when you need to get out.  If you were to hold a house for 80 years, yes you’d make money, but you would have all of these risks throughout the life of the property.  Some people will say, “That’s what insurance is for.”  True, but that increases the expense of your investment, which also makes this a level 5 risk to me.  $100 x .5 = $150 of risk cost.

Level 6 for me includes stocks like Target, Harley Davidson, Apple and Costco.  Good businesses now, but will they last forever as they are?  Don’t really know.  They are also lacking in intellectual property to lower their risks and aren’t diversified businesses.  $100 x .6 = $160 of risk cost.

Level 7 are stocks that are tech related that can change on a dime.  AMD, Intel, Dell, ATI.  All of these stocks are extremely dependent on the current technology trends.  Yes, computers will always be around, but will Intel put AMD out of business?  Vice-versa?  Will a new chipset come out?  Will Dell continue to rule the PC sales?  Will Apple affect Dell?  A lot of what-ifs.  $100 x .7 = $170 of risk cost.

At level 8 I put all of the stocks I wouldn’t touch with your 10 foot pole with the bulk of my money.  These are the highest risk stocks in my book.  Airlines, Drug companies (for the most part), Satellite Radio, Hotels, Car makers.  All of these companies live in such volatile markets where the fad of the day can turn them on a dime, where a single mistake can create lawsuits that destroy the company or recalls that could bankrupt them, or companies in a technology that haven’t been proven to be popular yet.  I must note that I did make my greatest gain ever in this level when I bet almost everything on Sirius on the day Howard Stern made his announcement.  Unbelievably great news will send these stocks up quickly, but then get out!  Only risk 10% of your money at most in this level.  $100 x .8 = $180 of risk cost.

Level 9 is sports betting.  You have a good idea of who will win, but it just comes down to a flip of the coin.  At least you can bet based upon who’s playing and previous track records.  (If you bet against the Kings to win the Stanley Cup this drops to a .1 risk) $100 x .9  = $190 of risk cost.

Level 10 is just throwing your cash away at Vegas.  It’s even worse than a flip of a coin.  For every $100 you are betting in Vegas (or any casino for that matter) you’re pretty much risking $200 when you factor in the risk.

Now, obviously, you are always risking $100 in the above scenarios, but I think it’s most important to manage your risk, especially across your entire portfolio, and this little study in mind manipulation factors in the ‘unknown’ that we avoid that is risk.  How many level 8 risk stocks do you have verses level 4 risk stocks?  Would you be willing to place .8% more cash into those investments?  Are they worth the amount you’re risking in them?  Could you move that cash into a .7 or .6 risk investment and feel better about the risk level and investment overall?  Is a majority of your money in level 7 or 8 investments?  You might want to move a majority of that money into something lower risk.

Obviously, we all want to hit the home run and to do that you usually have to play in the riskier investments, but try not to ignore the risk as part of your equation.  Factor the risk in and use it to your advantage to diversify the risk of your investments.

Invest in peace…

Let’s change our goals around…

I think most people create huge, out of reach goals like, “I need to have $1,000,000 in the bank by the time I’m 40.” A great goal, obviously, but I think that may be going about things the wrong way. What if we took that type of goal and switched it around? What if we first started by setting a goal we can control and achieve now? What if we make our goal to have the lowest possible bills every month?

My new goal is to have my monthly expenses under $2,000 a month. It’s that easy. Think of all of your current bills and expenses. Throw in all the money you spend at Starbucks, fast food, mortgage, insurance, car payment, taxes, yadda yadda. How much do you realistically spend a month?

Think about it, if I only spend $2,000 a month, that’s $24,000 a year. At 10% interest, I only need $240,000 to break even. If I worked a 40 hour a week job all year, I’d only have to be paid $8.67 an hour to break even. There are an awful lot of easy to get jobs that pay that much in my area. Wouldn’t it relieve a lot of stress from your life if you knew exactly what you would have to make a year to not have to worry? Everything above that amount being extra for investing or anything else you wanted to do?

The only way to do this is by paying off your debt. Get rid of that $1,500 a month house payment as soon as you can. Get rid of the $400 a month flease or car payment. Brew your coffee at home, get a job that has free coffee, or do like my friend did and get a part-time job at Starbucks so you can get your coffee for free, or at a discount, while getting paid! I turned off my way overpriced $70 a month DirecTV and signed up for the $10 Netflix deal. I get TV shows or movies in the mail almost every day and I have $60 a month being automatically deposited in my stock account. That’s $720 saved a year right there, not to mention the $40 PPV’s that I used to get.

Most people spend $2000 a month in car payments and mortgage alone. That’s insane. Concentrate on paying that stuff off! Get those bills out of your life and bring your monthly expenses down to where there is no need to worry or stress about affording to live. When we get old our medical bills will be as big as Cramer’s ego, so by saving now and creating a huge nest-egg, by lowering our monthly bills, we won’t worry how we’ll pay for those things in the future. We’ll have plenty of cash lying around.

Think long-term by addressing the short-term. Address something that you can change now, today. Make your goal budgeting a monthly spending limit that’s below what you currently make and do everything in your power to get to, and stay under, that goal. Pay off the credit cards, get rid of the car with the bling-bling that you use to show people how ‘rich’ you are while the bills stack up. Get what you need, pay if off and roll in the extra money you’ll have. Imagine if your only bills were your utilities, gas, food, clothes, insurance and property taxes. If I figure out what my bills would be without my house payment, I’m looking at about $1,200 a month, including my property taxes split across 12 months. I think I could make $1,200 a month for life collecting aluminum cans if I had to. Once you see your bills that low, it sure takes a load of stress off. Then, instead of worrying about bills, you can worry about your slice on the links. I think I’ll take the rest of the day off and go play golf, it’s in my budget.

Invest in peace…

Mutual Funds ARE for Losers!

Kimber made a post about why Mutual Funds Aren’t for Losers, which was a good article and I see her point of view, however, in this case, I thought I would show the other side of Mutual Funds, which, in my opinion, suck to the point where vacuums should be named after them, or maybe they could rename the Chicago Cubs the Chicago Mutual Funds.

First problem is, they are overly diversified, bringing your risk down, but also bringing down your profits. Hugely bringing down your profits. Bringing down your profits to the point where you have to wonder why you bought it in the first place. You’re essentially saying, “I don’t care what I get, as long as I get something. Sometime. Maybe.” According to the Christian Science Monitor:

The average US diversified equity fund grew 6.7 percent in 2005, the third upside year in a row, according to fund-tracker Lipper Inc. “

I’m sorry, but 6.7% returns, on average, just isn’t good, no matter what the freaks on CNBC say and if you consider beating a risk-free CD by a measly 2.2% an ‘upside’, that’s pretty sad.

Secondly, you can’t trade them when the market is open. I know this goes against my strategy of only trading on weekends, however, if the world is ending, I want to know I can get out. You can’t get out with Mutual Funds.

Thirdly, the mutual funds are stuck at a limited percentage each stock can be within their portfolio. Let’s say Amgen finds a cure for cancer tomorrow. Can the mutual fund capitalize on this? Barely. You’ll be screwed watching everyone buy Amgen and seeing it go through the roof while the mutual fund sits with approximately 20% of their assets in the rocket ship and the rest in sinking stocks and you can’t even sell your mutual fund shares until the market closes to get the cash to jump on the bandwagon.

Fourthly, you pay taxes on trades you don’t make. You’re still invested in the fund, yet you pay taxes on the trades! Heck, in a mutual fund you can lose money for the year and still pay taxes because the fund could have had positive trades for some stocks and losses for others. It depends what year they sell the stock. (IE: if they buy a stock in 2000 for $10, it goes to $30 in 2001 when you buy the mutual fund, and then drops to $25 in 2002 and they sell that stock, you pay capital gains on $15, even though your fund lost $5 since you bought into it.) Not a good plan and not a good unexpected bill you have to pay at the end of the year. I’d rather take profits from my stock trades, set aside 25% of the profit for capital gains and know it’s there, or just hold my stock and not pay taxes until I feel like it or, better still, sell my stocks in January and invest my tax money for 16 months before I have to pay the capital gains on the sale. In any of the scenarios, if I’m trading stocks or Exchange Traded Funds, my taxes come out of the profits I’ve made, not out of my cash at hand.

The fifth reason they suck are the fees. Fees here, fees there, tons of hidden fees, added fees and for what? To pay a guy a million dollars a year to not beat the market? A big waste of money.

The sixth reason why they suck is they rarely beat the market. To quote our good friends over at Motley Fool:

“On the whole, the average mutual fund returns approximately 2% less per year to its shareholders than does the stock market in general. ”

and on the Smith Business website, in an article saying how great Mutual Funds are, they quote Motley Fool too:

About three-fourths of all managed mutual funds underperform the stock market’s average return, according to investor-run Web site “The Motley Fool.”

That essentially means, you’re better off buying Diamonds (DIA) or Spyder (SPY) (disclosure, I have SPY and MDY, which is the mid-cap index, as my ‘safe money’ investments), than to buy a mutual fund.

92 Million people currently own mutual funds, but how many people do you know who are invested in mutual funds say anything overly positive about them? Sure, when the market booms, things look swell, but realistically, over time, mutual funds don’t make people extremely wealthy, if they did, we’d have about 92 million millionaires saying how great mutual funds are and that’s simply not the case, not to mention all of the top traders trade stocks, not mutual funds, and I can show you dozens of people I know who have watched their mutual funds sit and do nothing or next to nothing while active traders killed the market consistently. Way back in 2003 I wrote an article over at my Undertrader.com site about dollar cost saving and buying ETF’s instead of mutual funds. If you had purchased Spyder (SPY) on the day of that article you’d be up $28.22 a share or 25.7% in 3 years and if you had bought the Mid-Cap (MDY) that day you’d be up $38.94 or 37.2% in 3 years and that’s without anyone managing anything, just a straight index.

Sure, it’s pretty swell that you can get percentages of shares in Mutual Funds and sure it’s cool that you’re instantly diversified, (which I don’t think is necessarily a good thing), however, an ETF is so much better than Mutual Funds that it’s not even a competition. It’s like Carl Lewis racing Emmanuel Lewis and individual stocks are like Carl Lewis racing Jerry Lewis.

If you only have $25 a month to invest, which is great and I applaud the effort and it’s a great start, I would rather you buy individual stocks from Sharebuilder and pay the $4 fee than to buy a mutual fund. In the long run you’ll learn more, you’ll come to grow and understand at least one specific company and it’s stock, and you’ll be investing on your own instead of letting some millionaire schmuck in a suit do it for you.

Invest in peace…

How Much is Enough?

After reading Erin’s great post a few days ago and talking about it with one of my good friends, and after a conversation I had with my fiancee, the question came up, “When is enough, enough?”

Erin and Ken both quoted Trump and Rich Dad, Full of Shit Dad as saying you need to invest to win, how much do you really need? Do you need billions? Not really. Do you need Buffett or Gates money? No. If you got rich through frugality, like most people do I think, you aren’t really interested in those shiny new cars or mansions because you realize they are just a huge waste of money for show and aren’t really necessary.

(I’d just like to drop in a note that Rich Dad, Full of Shit Dad’s point that he and Trump have ‘good debt’ is a bunch of bullshit. No debt is good debt. I don’t care if it’s a student loan, a mortgage, a lease, a car payment or owing your Uncle Ned the $20 that you borrowed to get a haircut. We need to stop categorizing debt as good or bad, it all sucks and the sooner you get out of debt, the sooner all of this money making stuff becomes a hell of a lot easier. Now, back to our story.)

The thing most people don’t understand is that being rich isn’t the goal for most people with money. Buying things isn’t the goal. I think most people with money realize that money gives you the most important thing in life, which to me is opportunity. When you have enough money that you can do anything you could dream of and be okay, you are ‘rich.’ For some people, that could be $100,000, for some it’s $2,000,000.

I have had some great opportunities this year. I’ve gone on three, month-long trips to Canada, a trip to Yosemite, a trip to Catalina Island, two trips to Disneyland, a handful of NHL hockey games and I took an 8 day bicycle ride from San Francisco to Los Angeles. Having money allowed me the opportunity to do these things because I didn’t have to worry about paying bills or losing my job while I did them.

That’s all great for now, but long-term, thinking of retirement, how much should you have banked before you can retire and not worry? $1,000,000 debt free would pull you in about $100,000 a year at 10% ($70k after taxes or so.) Will that be enough 20-30 years from now? 30 years ago you could get a house for about $40,000 that is now worth $750,000 in my area. Cars were about $4,000 vs the $20,000 they are now. Will these huge increases continue? How far could you go with $70,000 a year in 20-30 years? Probably not too far. It seems to me that the lowest goal you could really bank on might be $2,000,000 in the bank before you are completely secure.

Which brings us all the way back to the original point, which is, how much is enough? Is there a point where you stop ‘investing to win’ because you just don’t need anymore money? Or, is there a place where you start investing to give to charities like Bill Gates does? Or, do you just keep going for more and more and more because that’s the ‘game’ and the person with the most money wins?

Personally, I’d rather risk while I’m young, get enough to where I never have to worry again and then put a majority of it in no-risk CD’s and go play golf all day and not worry about my money, not worry about renters or repairs, and not worry about stocks going crazy. What’s your long-term plan?

– Invest in peace….

Mathew Emmert: Fool of Crap

At Motley Fool, bad information and skewed research are the topic of the day.

Good ol’ Mathew Emmert over at Motley fool posted an article this week, which you can read here, that states that “dividend stocks beat the market.” Whoopdie freakin’ doo. We’ve all heard this before, even some people here at Investor Geeks believe in the dividend stocks, which is fine, however, let me explain why this article is full of crap.

He quotes Jeremy Seigel’s book, “The Future of Investors” to make his claim, which states that “Siegel found that an investment in the 100 highest-yielding S&P 500 stocks would have beaten the index by more than 3 percentage points per year, returning more than 14% annually from 1957 to 2003.” Ok, what’s wrong with this picture?

Before I start ripping this, I’ll just state here in it’s own tidy paragraph that there is nothing wrong with dividend stocks and, depending on the company, they could be good investments. Now that the dividend loving crowd is happy, let’s start ripping this article to shreds, shall we?

First of all, using this theory, you need to be invested in 100 different stocks to pull this return (I’m not sure if you have to be equally invested in each or if it was weighted). You also need to reinvest every penny of dividends into all 100 stocks to get this return. More importantly, Peter Lynch was pulling in returns in the 20-24% range in his mutual fund and I have pulled in over 20% a year for the last 5 years running! So, I guess I beat the 100 best dividend stocks by at least 6% a year. I must be a freakin’ genius since, as Mathew said, “Dividend Stocks Beat the Market.” Maybe he should write an article next week titled, “Steve beats Dividend Stocks and the Market.”

Well, of course they beat the market! The market is massively over-diversified. It’s taking massive losses in some stocks that kill the massive gains of others. The market isn’t a good indicator at all in my opinion. It’s nice as a target to be beaten, but the huge diversification ensures a poor return.

This research also assumes that you aren’t trading at all, but rather just sitting in the market, year over year, essentially owning an index fund of the market. If that’s your investment strategy, you need to read more or fire your investment advisor. That’s a horrible strategy.

Needless to say, I should hope the 100 best paying dividend stocks could beat the un-traded market. it would be pretty pathetic if it didn’t. All of this wonderful research never takes into account that if you TRADE and take profits all year long and reinvest those profits you take, you can easily pass 14% returns. That’s a little over 1% a month. Heck, right now I see on Scottrade that you can get a 5% CD for 6 months and pull in 5% from the stock market in 6 months to make yourself 10% a year nearly risk free without spreading your money across 100 stocks, which is a horrible strategy any way you slice it.

Think about it, the article is saying that gaining 1.17% a month is an incredible return! That’s a whopping 23 cent gain on a $20 stock a month. If you can’t find that, you aren’t trying.

The entire basis of the article is what almost all articles and research do when it comes to the market. They take apples and oranges and compare them and do it all using hind sight. I could come up with 100 stocks that kill dividend stocks year over year if I sat down and did it. It’s easy looking backwards. Don’t let articles like this fool you. While it’s interesting, it’s also very unrealistic.

When reading articles, even mine, think about what is being said and think about what it means. Do the math in your head and figure out if it’s realistic. Figure out if someone is looking back at history and using their knowledge of what happened to rewrite history to prove their point. Make up your own mind without someone shoving their view down your throat with these little tricks that they use in their books and articles. Grab a calculator and do the math! A 12% gain is simply 1% a month (it’s even less than 1% if you reinvest your profits, it’s a 0.87% gain per month.) Take bits and pieces of lots of peoples strategies and make your own, but never take an article like the one on Motley Fool this week as fact because it’s usually just a bunch of crap wrapped in a nice package.

Invest in peace…