Are You Financially Smarter Than A 5th Grader?

Yes, I’m still an InvestorGeek! It might seem like only Jason and Christian are blogging lately, but I don’t mind being the guest that drops in once in a while. I’m sure many of you have watched or heard of the new Mark Burnett-produced game show called “Are You Smarter Than A 5th Grader“. If not, you can read a quick description here.

I was inspired after reading Canadian blogger, Tony Hung’s short diatribe on who’s really smarter – the kids or the adults? Tony, if you don’t know, is an editor at the prominent new media site, BlogHerald. I’ve had the privilege to meet him, and trust me, he’s one smart dude! But I digressed since the question remains, who ARE the smart ones? What does it mean to be smart? Is it just about random trivia or knowledge? After all, adults were able to create a show like that to make money! Aha…. now that money comes into play, that’s my lame segway to discussing financial smarts!

So, What Makes You Smart?
Sure, trivial knowledge can sometimes make you a millionaire… rarely. Ken Jennings was $2.52 million richer after inspiring the millions of the easy money / instant gratification generation with 74 consecutive wins on the ‘Jeopardy!’ game show. But is that what being smart is all about? Is the proficiency at regurgitating facts and information enough to call someone smart? I’ve previously written on Investorial that being successful in financial matters is not predicated on whether or not you have the knowledge. But it absolutely matters to be financially smart! What do I mean?

I humbly define “Smarts” to be a keen sense of awareness; and not just an awareness of facts. Alongside knowledge must come awareness of self, and a highly developed thought processes influenced by many factors – your life experience, your parents (a gimmick that Robert Kiyosaki exploited very well), your cultural influences and even your moral belief system.

Perhaps because of my Chinese ethnicity and the stereotypes attributed to me, I often rebel at the thought that you go to school for knowledge. It’s not that I don’t like those compliments of being a genius or math wiz, but going to school is not about learning 1 + 1 = 2! True awareness is achieved when you have a process in place that tells you how to find the answer should you not know what 1 + 1 equals. Whether it’s leveraging someone else’s know-how, or knowing how to look up the answer. Knowing the answer qualifies as knowledgeable, knowing how to achieve the same result without knowing the answer is displaying smarts and ingenuity! Truthfully, there are some “slackers” I admire more than geniuses. They are not working hard, but they are working smart!

Nobody is going to learn everything they need from textbooks. In fact, most people have not been thought how to manage their finances through any form of formal training. But even if you obtain knowledge, will it truly help? Knowledge that smoking causes cancer doesn’t deter smokers from taking a puff, so why would knowledge help a spendrift become frugal? How is it that someone is labeled “cheap”? Why do people have gambling problems? Why are some people so afraid of the stock market when people keeping telling them how to manage risk? These are personality traits deep rooted in your financial biography. There are certainly ways to overcome tendencies, but its usually through an epiphany, an awareness, a self-realization, rather than the consequence of gaining knowledge.

How Financially Smart Is A 5th Grader?
Does a 5th grader need to bother with finances? Even if they are taught the knowledge, they will lose it during their growth into adulthood. They might remember for one or two years, but it will be a vague memory when they truly need those information. The cramming /memorizing of knowledge is not learning! There is nothing at stake for the kids. They won’t be able to apply those strategies in their life. Those strategies are not being self-actualized into their being because there’s no application or relevancy to do so. Most kids cannot relate when you scold them about wasting money. Again, knowledge does not equate to smarts because the awareness was never achieved.

If that’s the excuse of a 5th grader, what’s the excuse for an adult who keeps falling into debt and having to declare bankruptcies throughout their life? If you’ve got a friend that falls into that category, I’m sure he/she has been told many times the different ways to get out of debt. Maybe he/she even called Suze Orman and got a tongue lashing from her about the subject too. So much knowledge is imparted but it doesn’t mean a thing if it doesn’t integrate with your thought processes. Contrast that to someone who is not knowledgeable, never got advice from any sources but simply has the will to stop splurging on meaningless items. Does being financially smart resonate with being critical to your financial life yet?

The next time you watch the game show. Give the contestants a break! Kids and adults can both be knowledgeable and/or smart in their own way. The truly smart thing to do is not to compare and work on yourself!

Next Time: Business / Career Smarts
If we are discussing your financial smarts, invariably we will need to touch on business / career smarts. Your finance is derivative of your income, which is sourced from your business / career, right? At least if you weren’t born with a silver spoon, there will be a phase in your life where this is relevant. I will actually leave this topic for a future blog post, so watch for it!

Year-End Thoughts: Don’t Lose Out On Free Money Next Year!

Investors come in every shape and size, as well as risk tolerance. That last quality can really vary depending on whom you’re discussing the subject of investing. So let’s approach today’s rant in a way that should appeal to you whether you’re ultra-conservative or a daredevil risk taker.

One of the things to do during this holiday season after you’ve completed your shopping, should be to plan out your finances for next year. Most people I know put more thought and time into planning for their vacation than they do for their retirement. I’m guessing the majority of IG readers hold down a job somewhere so the first place to look at planning are your company’s offering of retirement plans. And I’m also guessing that most of us will not be able to say we spent a larger portion of our life taking vacations vs. being in retirement.

Retirement Plans Are Not Built Equally!
Complaints about one’s own retirement plan from disgruntled friends and family are common. My reaction is to ask them how much time they spent studying the features of their company’s offering? Too many people have the misconception that all plans are built equally. Throw that out right now! Ask for your company’s retirement plan prospectus and scrutinize it. Don’t say it’s boring, because you’re just giving yourself an excuse to fail. And if you can’t accomplish such a simple task, you really have no one but YOURSELF to blame for your future.

What are some differences? For starters, most retirement plans vary in their funds / investments offering. You need to familiarize yourself about any type of company match / profit-sharing matches that may come your way. Some companies may have weird limits on how much can be deducted per paycheck. If you’re the type that is looking for flexibility beyond the normal mutual funds offered, you might be lucky enough to have an employer that offers a self-directed brokerage option in your plans; giving you the reigns on your investment selections.

Where’s The Free Money?
Most employers offer some sort of a match based on your participating contributions. What are you doing to maximize that match? This is essentially free money for you and it’s not uncommon to see companies match 50% or even 100% of you contribution up to a certain limit. Let’s say you maximize a 50% match. Even if all you’re doing is nothing but putting into a money-market fund (for the ultra-conservative), you’re still getting a 50% return on your money. I say 50% because that’s money you would not have gotten had you not participated. If you are a risk-taker, you now have more money to play with, so I hope you do have a good investment selection in your plan. At the very least, you should be able to fall back on some index funds. Start making a budget now, to ensure you’re able to pick up those matches through payroll deductions next year.

I’m not gonna ask you to jump into the pool without knowing how deep it might be. A major concern for not maximizing your contributions to the company match have to do with any vesting restrictions. I hope that you have a generous employer who believes in 100% vesting right from the start, but more likely you’ll be put on a graded / cliff vesting schedule. This is a valid concern for young professionals entering the work force. You might be considering jumping ship a few years down the road. In fact, down the road you might decide whether to jump ship based on how well your current and your potential new employer’s retirement plans are. Ask questions about vesting restrictions and find out those answers!

A New Ally – The Pension Protection Act of 2006 (PPA)
But a big reason why maximizing company match should be a major consideration for 2007 is because of a less publicized feature of the PPA. Under old rules, it did not make sense if your company matches were forced to be put into a investment such as company stock. The PPA has compelled retirement plans to quickly comply with changes, so that employees can immediately diversify their company matches out of employer stock. Regarding vesting, the PPA has also sped up the schedule as matches must now become vested 100% after three years of service or over a six-year vesting schedule at 20% each year, beginning in the second year. There is more consistency now that rules are put in place so that employers can no longer enjoy their own interpretation of those features.

To Roth Or Not To Roth?
Many retirement plans have started to allow Roth 401k contributions. Roth contributions are after-tax contributions that use up your contribution limits like normal pre-tax deferrals. The advantage is that qualified withdrawals are tax-free for both your invested principal and any investment gains. I have a rule of thumb when it comes to whether Roth contributions should be used. Over the long run, the taxation differences between Roth / Non-Roth contribution work out to be very minimal provided your tax-brackets remain stable. The advantages can be more significant if your tax brackets will be different from the time you’re contributing to the time you’re withdrawing the monies.

Generally, if you are going to potentially withdraw at a higher tax bracket than your contributions (such as a young professional withdrawing money for home purchase or kids’ college tution), you’re better off with Roth contributions. If you are in your mid-40s where arguably your tax brackets are near their peak, normal contributions make more sense because they help you current tax situation; provided that you are withdrawing the money for retirement purposes at a lower tax-bracket.

Saving For A Rainy Day
It’s never advisable to dip into your retirement cookie jar but the fact of the matter is sometimes you do need to invoke some usage of your retirement plan. BE VERY FAMILIAR with the rules and restrictions surrounding retirement plan loans or withdrawals. You might not need it but you should know it. For those reader who are interested in maximizing their retirement plan limits beyond just getting the company match. Do realize that contribution limits are increasing in 2007; though not by as much as the last 3 years.

2006 Normal deferral limit – $15,000
2006 Catch-up deferral limit – $5,000 (for participants over 50 years of age)

2007 Normal Deferral Limit – $15,500
2006 Catch-up deferral limit – $5,000 (unchanged)

For my fellow Canadians, some of the points covered here are still relevant. You can check out this page for Retirement Savings Plans (RSPs) contribution restrictions.

One Last Motivation
If you have not considered contributing or even maximizing your company match in the past, want know what will get those juices flowing? Calculate how much match you have missed out on from previous years, and calculate how much you will be missing out in the future. But don’t dwell too much on the past, action gets results, and it’s time to take action!

Motley Fool Caps Brings Fun Back To Social Stock Picking

It doesn’t have to get all hot and heavy and technical here on InvestorGeeks all the time! If you tell me an investor with good temperament needs a serious attitude every second, I’ll counter that by saying sometimes you really need to let loose and have fun! Even Warren Buffett gets crazy once in a while; even if his idea of crazy fun may be playing a ukelele, playing bridge or eating Dairy Queen ice-cream.

Investing should be an enjoyable experience, perhaps even fun for you! This is NOT the first time that InvestorGeeks have reviewed sites that try to bring to fun into stock picking with social websites. But I don’t believe my fellow InvestorGeeks have reviewed Motley Fools CAPS; which I believe is on the right track to injecting some fun into a mundane task.

If you’re an investing newbie, you might remember those days when you were not sure if you wanted to get started investing with real money. You only wanted to dip your toe in the lake and test the temperature. Stock pick sites are a perfect way for the amateur investor to test their analytical skills without really committing their hard-earned money. But be warned! Nothing can truly prepare you for the emotional rollercoaster that you’ll go through when something is really put on the line, and you’re exposed to real losses.

Why Motley Fool?
I’ve always compared InvestorGeeks as being the next Motley Fool community. Even if some people feel that value investing is passé, it’s still my preferred investing style. I’m able to find a lot more like-minded, analytical people who are drawn to the Fool community. I like the idea that these guys don’t easily commit to opening a position until they have come up with a good battle plan. Indeed, throughout the stock bubble and the stock crash, the Fool community has stayed very strong in its reputation.

And why not feed your narcissistic nature while you’re at it? Motley Fool CAPS is striving to be very Web 2.0 with their approach to social stock picking. There are a lot of AJAX interfaces that load without you leaving the page. The AJAX components work well, load fast, and are well designed in their layouts. But what really impresseed me is the concept of making it into a competition oriented site.

Social stock pick sites like SocialPicks, StockTickr don’t focus so much on helping you interact with other users. On those sites, if you want to add someone as a friend, great! If you don’t, you’ve merely signed up for another Web 2.0 account. Motley Fool CAPS succeeds in keeping you coming back because you want to find out how your picks rate against the market, and other investors — especially those reputable Motley Fool insiders!

My Experience (or How Did I Do?)
As of this writing, I’ve only been trying CAPS for 11 days and find myself visiting the site once a day after market close to see how I’ve fared against other investors. I’ve picked 8 stocks during this period. Some of which I’ve personally invested money, some of which were only selections from my watch list. Here’s how I’ve fared so far (as of this writing):

CAPS Ranking: 731 out of 10819
CAPS Rating: 93.25 out of 100.00
Accuracy: 100% (100% of my picks are beating the S&P 500)
Best Stock Pick’s Performance: AAV (22.08% vs S&P’s 1.29% same period)
Worst Stock Pick’s Performance: UTSI (2.26% vs S&P’s 0.33% same period)

I realize very well that I’m just been lucky. I’ve been able to enter into some good bottoms on my picks so far. I’m hoping I can climb higher in the rankings, but the competition gets really tough the closer we get to the top. Would you like to join me and have some fun as well?

Following Smart Money (Real Shareholders)

My recent “discussions” with fellow InvestorGeek, Steve, about “baseball cards” as a metaphor for stocks have prompted more thinking on my part. Isn’t that what you wanted, Steve? Actually, I’ve already known that trading stocks is very much like trading baseball cards. I’ve already blogged about the same metaphor many times.

Though Steve and I disagree on whether dividend paying stocks are more than just baseball cards, another point of mutual agreement is that fact that most investors cannot affect any changes with their meager number of voting shares. Whether you own 1,000 or 10,000, or 100,000 shares of a company (even penny stocks), your ownership is no more than a drop in the ocean. But there are investors who do affect positive change through shareholder activism. Notable names include Warren Buffett (Coca-Cola), Carl Icahn (Time Warner), Kirk Kerkorian (General Motors), Ed Lampert (Sears/K-Mart). What if you followed them instead?

Why shouldn’t you leverage their insight and know-how to turning meager companies around? Very often, the news of an activist investor entering the picture can cause a falling position to revive. Case in point with General Motors – if you had bought GM when Kirk Kerkorian announced his interest, you’d have done very well for yourself. How about when Warren Buffett first took a position in unloved Coca-Cola? Or as Ed Lampert is currently trying to turn Sears around? The jury’s still out on the Sears venture, but K-Mart investors caught a break from their falling stock prices.

On the Forbes list of 400 richest Americans, a good subset of these folks made their fortunes by investing. That subset includes Warren Buffett ($46 billion), Carl Icahn ($9.7 billion), and Jim Simons (worth $4 billion). What are some other investors that can be considered “smart money”? Similarly, short investors may be following ShareSleuth to find out which companies Mark Cuban is currently shorting. But how do you take advantage of these legendary investors’ track records?

Following The Legends
Sites like make it their mission to follow the trades of many of the notable gurus, investors and fund managers out there. The information on GuruFocus can become a very good starting point for an investor to setup their initial stocks watch-list. If you’re willing to be a swing trader, you might not catch the bottom of the stock, but you might be able to ride the upward momentum!

I also use to keep track of trade movement by some famous investors. Through PubSub, you can get alerts on keywords in SEC/EDGAR filings. When these investors move, they often have to disclose their actions, and if you know what to look for, you stand a chance of staying ahead of the majority of the market.

Are there any other tools out there that I have missed?

Blindly following anybody’s stock picks can potentially turn into a recipe for disaster. Smart money stock picks can offer a good starting point, but your own research and due dilligence cannot be replaced. How do you separate the true activist investors from the hedge funds looking to profit from arbitrage?

In the end, these investors are only looking to make profit for themselves. Please be sure you understand the rationale for these activist investors to buy a position in the first place. Check your own risk tolerance to see if you can stand the potential fluctuations like these investors can!

Averaging Down: Playing Chicken With Mr. Market

In case you doubt my membership in InvestorGeeks, I love movie trivia! What’s the highlight scene in James Dean’s 1950s cult movie, Rebel Without a Cause? You are right if your answer is the game called chicken, where Dean and his rival each drove a car towards a cliff. There are many variations of the chicken game, but in the movie, the game is won by jumping from the car later than the other player; but still in time to avert the cliff. For investors, it sometimes feels like your rival is Mr. Market daring you to jump out of your car first. The person who blinks first loses, but if you don’t blink, you might lose even more when you fly off the cliff! Sounds familiar?

I bet many investors out there have had the situation where you did all your homework before buying a stock and yet it still tanked 10%, 20% after you bought a position. It happens to the best of investors. What’s a person to do in this situation? Should you buy more? Should you get out early?

Stop-losses can certainly help, but it almost feels like you’re blinking first, letting Mr. Market win. But then again, you don’t suffer the “ultimate loss”. For most value / contrarian investors like myself, the decision to buy a position does not come easily. A lot of analysis was completed prior to pulling the trigger. What you thought was a good buffer, a good bottom with very little downside still manages to prove you wrong. It sometimes feels as if you should wait out Mr. Market to win the game. And for the average-joe investor, stop-loss may not be a common tool in their arsenal.

2 Different Schools Of Thought
Everyone can argue about what is the right answer. What if stop losses blind you from making an otherwise good decision to buy more? What if trying to out wait Mr. Market is the wrong choice?

I recently blogged a discussion between two fund managers whom I respect. They also had different thoughts on the concept of averaging down on a losing position; catching a falling knife so to speak. So the topic is not just debatable among us amateurs! Here are the 2 differing opinions:

  1. Never average down a losing position. Don’t throw good money out the window. If you’re going to do that, wait for a real wash-out. But don’t keep doing that, that’s a terrible way to invest.
  2. If we bought a stock at $10, and it goes to $8. We go back to the drawing board. And if the market is a little off-kilter, and we still think we’re right. I’ll buy more.

There Is No Right Answer Unless It Fits You!
I was tempted to write out my lists of when to average down, and when not to average down but realized that whatever answer I put up may not fit you because of one important quality – an investor’s temperament!

Whether you are a technical investor or an fundamentals investor, temperament is the single most important quality that you must possess. If you do not possess the temperament, discipline or analytical skills, consider implementing a system that you must follow (such as stop losses) to help remove the emotion from your decisions. You might blink first, but you won’t lose out!

You might have guessed that I belong to the camp where I need to re-evaluate my initial premises to see if I missed key information. I would average down if I still remain very comfortable with the re-analysis, but would probably wait for a stable entry point. And I would not hesitate to exit a position if the re-analysis showed something different. As I always say, “buy when it’s right, sell when it’s right”! I don’t like to play to lose, but I also realize that you can’t win it all!

Even though I did not write out my lists of knowing when averaging down is sane or insane, I know our InvestorGeeks readers are smart enough with their own triggers. Where do you stand on averaging down? I may be tempted to post more of my thoughts on the issue in the comments if the discussion gets good!

Where Are Vanguard Funds Going?

Note: This article was slightly modified from the original post, published at on 09/05/2006.

I know my writing often sounds like I’m preaching for everybody to be value investors. That’s simply not true! I only feel that some people can be value investors due to the temperament and the time needed to perform analysis. So what do I tell the general public who couldn’t care less about reading financial statements, or sitting in front of the computer day-trading?

Mutual funds are still the no-brainer solution for the average joe. Much “marketing” debate has been made about management fees. They’re not wrong to be critical but everything is really dependent on the “net” returns you’re able to achieve. My only concern is that consumers do the minimum work of researching the track-record of the fund and the fund manager. A long, consistent and positive tracking record is a must for active-managed funds.

But when John Bogle, founder of Vanguard, decided to balk the norms of the financial industry and aggressively market passive index funds, it was a strong indictment on the vast majority of managers who fail to beat their corresponding benchmark indexes. Vanguard’s promotion of this strategy still trumpets strongly, but there are signs of shifting towards actively managing their index funds, even if it’s just a little bit!

The Winds Of Change
The U.S. Senate recently passed the Pension Protection Act of 2006. Fellow InvestorGeek Kevin Hamrick had previously posted on the event. The new legislation makes it easier for retirement plan sponsors to offer investment advice to plan participants. Employers can implement auto-enrollment, and automatic increases in contributions; making employees opt-out rather than opt-in. There were also the obligatory updates to contribution limits.

What do all these changes mean? For starters, plan sponsors now feel more pressure than ever to take an active role in managing retirement accounts. All this time, we thought that the shifting to defined contribution plans, away from traditional defined benefit pension plans was to shift the responsibility back to investors. The “handcuffs” companies gave as excuses have now been released. With everything coming full-circle again, employers feeling helpless are looking to fund companies like Vanguard, Fidelity and T. Rowe Price for assistance.

Vanguard’s Target Retirement Funds – Active Management?
Many plans are making their first implementation by updating their “default” fund selection. Gone are the Stable Value and Money Market funds. In their place are life-cycle funds adhering to asset-allocation principles while correlating them to age and retirement years. The Vanguard Target Retirement (TR) funds (most not even 3 years old!) have been a popular adoption into many retirement plans as of late.

Essentially the Vanguard TR funds are a fund-of-funds that leverage Vanguard’s existing offerings of index funds. My eternal gripe with fund-of-funds are that they often include “under-performing” funds from the company’s offerings. These inclusions are not necessary by merit, but more of a business decision to boost a new unproven fund inception, or boost an unpopular / declining fund’s asset. But I admit that this concern seems different when index funds are being used.

Observers may argue that Vanguard is deviating from their guiding principle, by offering “active” management of these funds. I tend to agree partially since asset re-allocations and yearly adjustments are not insignificant passive actions! Critics of life-cycle funds note that investors may have different risk tolerance, different portfolio needs; even if they’re of the same age.

However, from my vantage point, Vanguard seems to be continuing their strategy of delivering a “one-size-fits-all” approach to retirement investing. They’re also continuing their ideology that indexes are beating the majority of fund managers by not including non-index funds.

The Brave New World of Retirement Plans
Vanguard already has a stable of actively managed funds, but they have never seen the spotlight. The TR funds however will see a major push with retirement plan sponsors and may mark the first meaningful active Vanguard management in its interaction with investors. With the right marketing, these index-mirroring life-cycle funds will further boost Vanguard’s popularity with retirement plans.

If your plan hasn’t yet adopted similar changes, you should be seeing them within the next five years. Yes, indexes have proven worthy of beating the majority of fund managers. But if I’m a smart shopper, why wouldn’t I be looking for those minority managers that beat their benchmarks consistently? I’m still an advocate for plan sponsors to find and offer proven actively managed funds such as Bill Mason’s Legg Mason Value Trust or Joel Tillinghast’s Fidelity Low-Priced Stock. The shift to life-cycle funds as default funds seems to be a better alternative to the traditional conservative choices.

The problem with the mutual fund industry is that there are too many choices, whether they are actively or passively managed, and only a handful of good ones. You may have differing opinions on which actively managed funds are worthy and I hope you’ll share with us. But keep in mind that I am Canadian and don’t monitor the U.S. mutual fund scene often!

For Canadians, I sincerely hope that governments take more interest than they have, into the employer retirement plans north of the border. However, if we can’t get any help to reform brokerage fees, unreasonably high mutual fund MERs compared to the true cost of operating a mutual fund (especially with the currency exchange where it is right now), there is little hope of any assistance from lazy bureaucrats.

Earnings Guidances: Stay Or Go?

Is it possible to predict the quarterly earnings for a business, or a giant multi-billion dollar conglomerate accurately down to a single/narrow cent-per-share figure? A large number of investment analysts out there sure think so! After all, who wants to be the sucker who can only give you a broad earnings range, when “I” can give you the exact figure, so “I” must be better. So pay “me”, and hire “me”! And may god strike it down if that company misses “my” estimate by even one cent! It’s not “my” estimation error, it’s their fault! (Returning back to normal) I’m sorry, I don’t know what came over me just now!

But can you hear the analysts tooting their own horns as they predict earnings? And when did companies think it was a good idea to help these overpaid statisticans along with corporate guidances? Is it a good idea? I’d love to hear from you, but I’ll first share my perpsective!

Why We Should Scrap Earnings Guidances
1. Guidances are for the not-so-competent investors. The serious investors with the know-how would rather rely on their own valuation methods. Earnings guidances are the equivalent of financial fast-food; they’re good to grab on-the-go, without regard and question about how it came to be. What’s in your earnings hot-dog?

2. Stock price A.D.D. Investors cannot pay attention for a long time. Earnings guidances are part of the problem as the market becomes unhealthily pre-occupied with short-term success. We should remember that the market is a voting machine for the short-term, and a weighing machine for the long-term. Earnings guidances are a rally-point for short-term investors who often extremely reward or punish companies that raise or lower their guidances. By the way, who remembers how they felt about earnings guidances 2 years ago for their current holdings?

3. Companies are preceived to have “lied” to us if they missed or lowered earnings guidances. There must be something drastically wrong, right? I want to know how many investors or analysts out there have ever been tasked to run multi-billion dollar businesses? Why do they have the chutzpah to criticize how a business has operated over the last 3 months? Heck, last year we had hurricane Katrina, this year we don’t… what about next year? Likewise, you can’t always predict business conditions. The market prefers to destroy stock prices at the ticker, rather than appreciating that companies are forthcoming with their problems; assuring that they are on top of things. I’d rather judge their actions, their results from those actions, and not their announcements.

4. In a recent Forbes article, Vahan Janjigian wrote that the CFA Institute, the Business Roundtable, the Chamber of Commerce, the National Investor Relations Institute, members of Congress and Securities & Exchange Commission Chairman Christopher Cox have all sounded the alarm bell against companies providing quarterly earnings guidance to Wall Street and shareholders. But Vahan would rather focus on a study done by the National Investor Relations Institute about earnings guidances. The study does fit Vahan’s sentiments on the subject matter written years ago.

Now, I’ll admit… besides the members of Congress who possess the sophistication of comparing internet to tubes, that’s still a pretty diverse, distinguished group advocating for the abolishment of corporate guidances! My problem with “studies” is that there are so many opportunities to study the wrong thing! For example, the article cited Krispy Kreme as a “great” example of how removing corporate guidances did not help. My argument is that corporate guidances are the reason that led to the implosion of Krispy Kreme in the first place… which leads to our next point.

5. Corporate Malfeasance. At some point in their career, CFOs and CEOs forget that they were hired to run the business and start auditioning for a full-time career in PR, stock manipulation and damage control. They sign extravagant contracts to be used as exit strategies. The obsession with pleasing the stock market, the hand that feeds them, eventually leads to promising outrageous numbers. If they can’t make those numbers, they’ll inflate what they have. But you see, the market getting an inch now wants a yard! CFOs have to keep up the charade, and keep cooking the books. If you are the type that wants to take advantage of such situations, perhaps this can also be a reason FOR earnings guidances. You might be interested with my book club challenge on short selling? But I’m just trying to look out for the average joes.

6. I’ll take one last stab at Vahan’s Forbes article (from point #4). The study looked at 76 companies from 2000 through 2004. Wow, that’s a big sample size and a long time frame! My second problem with studies is their variables – what is truly representative? Ask somebody in south-east Asia about the merits of spaghetti sauce and I’m not sure how representative your data can be. The number of companies that give guidances far outstrip those who don’t. I’m sure someone can easily find 55 (not even the same number!) out of the thousands giving guidances to be used as great counter-examples.

Vahan asserts that not releasing guidances has destroyed shareholder wealth while I suggest that it’s the “stopping” of guidances that has invited backlash. What happens when you cut off a drug addict cold turkey? The bigger issue was whether the confidence to put all that money into those same stocks was justified in the first place? That confidence and irrational exuberance is mostly due to previous “favorable” guidances! It’s hard to end a vicious cycle. Maybe that’s why God had to flood the earth and only spared Noah’s Ark.

Why We Should Keep Earnings Guidances
1. Transparency. Why shouldn’t CFOs provide as much information as possible, including quarterly and annual business projections? Isn’t this to the interest of better information for investors? Isn’t this part of the “perfect information” that markets (as opposed to individual investors) are often assumed to possess? [Oops, I’ll play devil’s advocate here again! Information are already disclosed through regulatory SEC filings. Whether they are perfect is debatable. But summarizing it with a range or a single number doesn’t give more information, or make it perfect. Guidances are merely a lazy, convenient “big-picture” method to making a decision. See my fast-food example above.]

2. Guidances assure the investors that CFOs have put some thought and work into it, and know what is going on with their business through quarterly reviews. If you hold down a job, I’m sure you’d appreciate if your manager sat down to review your performance quarterly, too bad they don’t often reveal the “number” you should be getting next quarter. But this process allows CFOs to examine controls and processes so that the ship does not veer too far off course.

3. Stock price A.D.D. Why is this a reason to both scrap AND keep guidances? Truthfully, I’m torn on this subject. I believe that the correct temperament towards earnings announcements gives me the edge I need to beat the herd. Over-reactions to guidance hits and misses provide for great opportunities to transfer wealth from the emotional market to the logical, rational crowd. It sounds morbid and exploitative but it’s a valid point when everybody is investing to make money, isn’t it?

Where Do You Stand?
You might be able to guess where I stand on this issue. But I’m by no means right. I have my opinions and you have to go by what you’ll decide. I would love to hear your views on it. Nobody has all the right answers, but if we compiled enough perspectives and take an objective view of the information, we can make a better educated decision.

Career Allocation … Asset’s Estranged Cousin

One of the reasons I really get into stock investing is that I like to live vicariously through my investments. Say what? Yes, I live vicariously through my stock holdings because I imagine that I’m the owner of the company — hard at work building it. I become an intimate stakeholder of the business by owning its stock; as opposed to investing via mutual funds. But how many investors out there feel that their miniscule ownership can actually affect changes like Warren Buffett or Carl Icahn?

Nevertheless, I’ve trained myself to evaluate businesses with an owner-like mentality as part of my investing habits. Deep down inside, I like to think entrepreneurially and want to run my own business. I am currently working on my own projects. Investing also helps me learn about what great companies are doing to drive their business and it’s less costly to learn from other people’s mistakes than it is to learn from your own. But for a lot of people out there, they’re simply content with being an employee, and there’s nothing wrong with that!

Career Allocation?
In the investing world, financial services companies advocate asset allocation. The basic premise of asset allocation is that there are 3 basic asset classes:

  1. Short-term investments
  2. Bonds / Debentures
  3. Equities

Investors always hear the gospel that they must to distribute their portfolio among these 3 classes. As you move from short-term investments to equities, the risk factor steps up but with more risk comes an increase in potential rewards as well.

But what if we thought about our careers with the same risk vs. rewards analysis? Would it look something like this?

  1. Employee
  2. Investor
  3. Entrepreneur

For the most part, being the employee is being Steady Eddy; except when you encounter corporate downsizing. This unknown factor means that there isn’t a perfect analogy on our list for short-term investments. However, provided that those incidents don’t happen to you, the role of the employee will serve adequately as the guaranteed income stream needed to fund your lifestyle.

And don’t delude yourself into thinking that you’re not making an investment as an employee! How else do you explain that paper degree hanging as decoration? What about those who feel that they need to persue a PhD or an MBA in order to advance in their career? You often need to invest in yourself should you have ambitions for that higher pay-grade.

I was tempted to make the Investor related to short-term investments since retirees’ can remain an investor and use that income stream. However, more and more people are working past retirement. As well, that income stream is really in jeapordy because of the lack of personal finance knowledge in the majority of the population. In fact, the general public often perceives more risks associated with being an investor. (An argument to be written in a future post!)

The investor role can also serve as the bridge between employee and entrepreneur. Some companies feel that empowering employees as owners via share ownership will help them be more aligned with the board of directors. Why they choose to do so with stock options rather than stock grants is another matter of debate.

I nod my heads to entrepreneurs everywhere. It’s not easy to forge your own trail. Many out there can attest to the countless sleepless nights, sweat and toil that went into building their business. Even fewer are able to form a business empire. But with all the risks can come rewards of the highest caliber. Indeed, only a handful on the Forbes list of billionaires made their fortune through investing. The vast majority of billionaires broke out because of their business ventures, and use investing as a means to diversify and maintain their riches.

For every entrepreneur that succeeds, hundereds have seen their ventures fail, ending in bankruptcies or sale of their operations. With these considerations, entreprenurs certainly deserve to be ranked alongside equities as the riskiest career choice that holds the keys to potential riches.

As well, I’d like to lump anybody who’s pursuing their passion in this category. Let’s say you’re an avid photographer, and you love travelling in pursuit of snapping shots everywhere. Well, you might not be monetarily compensated, but your soul thanks you for that! There is a benefit, and a potential business should you ever discover a way to combine your career with your passion. Do bloggers count?

Is There An Allocation Model?
I don’t think any individual who’s graduated from high school or college in the past ten years has not heard the rumblings that job security is a thing of the past; that staying with a company for ten and twenty years is no longer the way to go. Just look at these 2 recent Dilbert comic strips.

Dilbert's Job Hopper Dilbert's Job Hopper Quits

Besides the fact that pensions are going the way of the dinosaur, there is now a better reason for people to start thinking about other streams of income. Ramit Sethi (a personal finance blogger that I enjoy reading) reminded young people that “now” is the time for them to make better use of their time for potential side projects and potential entrepreneurial aspirations. In that regard, career allocation is similar to the promoted asset allocation principles where time is on the side for those people who wish to take on more risk for the potential rewards.

What Is Your Allocation?
I’ll be the first to admit that I don’t believe these characterizations are right for everyone. Whether you are young or old, your career allocation should have a bit of investor in them. That’s why you’re reading this post right? As for making that high-risk leap to being an entreprenur, you have to find that passion that will allow you to triumph over adversity. I’m curious to hear from other’s about what the allocation is. If I were to give a simple approximation of my allocation, it could be:

75% employee
15% investor
10% entrepreneur

I definitely intend to increase that investor/entrepreneur portion over time. Now it’s your turn!

Finding The ‘Boring’ In Attractive Stocks

The market has come a long way since its last major crash — an event that transferred much wealth from the ignorant to the informed. It almost feels like deja vu when you see VCs lining up again to fund startups, or companies commanding unreasonable stock price multiples based on little more than hope for the future. Don’t you wonder what we’re not knowing this time around? I don’t wish to convince everyone to be value investors, but what if there’s a way to play a popular trend, but also err on the safer side of risk to avoid the extreme volatilities?

There were a few survivors from the market crash. Some companies were made household names during the tech bubble, withstanding the first onslaught. Names like Amazon and eBay attracted investors like moths to a flame back in 1999, and those names haven’t lost their shine yet. There now exists more choices and competition, but most people still think of these companies first. But for every Amazon in 1999, there were many failed examples. Playing with these new emerging companies can yield huge rewards but can also become huge busts. Feeling lucky yet? If you do, you might tendencies towards a gambler rather than an investor.

Being the admitted value investor on the InvestorGeeks roster, technical charts all look greek to me. I also don’t often feel the lure of stocks boasting a huge following behind them. Contrarily, I prefer coming across an undervalued boring stock rather than an undervalued attractive stock. I’m not crazy, I’m only looking for predictability in those companies. It’s true that attractive stocks can also be predictable companies, but the analysts and investors who follow these popular stocks are seldom predictable or rational. Those irrational behaviour will carry along a degree of risk when buying the stock.

So by my own admission, I would not be interested in popular Amazon and eBay right? Even if you build a case that these 2 names are currently facing some hard times, it would not be enough to move me into a contrarian interest. Call me old fashioned, but where growth managers turned fad-value may find opportunities, I see competition risk, difficulties in evaluating the companies’ intrinsic values, and a mad dash to diversify business lines while they haven’t fully established a competitive moat in their core business. But behind every successful business, there are suppliers, service providers and business partners that have benefited from its growth. If we starting putting on the CEO hats ourselves and dig deeper into how a business operates, we may be able to discover more investment prospects.

Amazon (AMZ) eBay (EBAY)

Where To Look
“Plus ça change, plus c’est la même chose”. That’s French for “the more things change, the more they stay the same” (thanks to my high school education!). Just because the latest piping hot company comes along, doesn’t mean it won’t interact with old established businesses. For example, web commerce has been said to transform the way goods and services are transacted. But whether you order from an old fashioned Sears catalog or buying from an online website, you still need those things shipped to your doorstep, right?

More and more products are delivered from warehouses to homes, and from homes to other homes. This has placed an increased delivery demand on the changing commerce economy. In my Amazon and eBay example, the top names that are benefiting from increased web consumer spending are United Parcel Service (UPS), and Fedex (FDX). The courier industry is also more stable when compared to eCommerce. Whether Amazon’s business is operating smoothly or if it’s losing its shirt while offering free shipment, courier companies are still getting paid. The courier business has proven to be a safer (from a risk perspective), and more fundamental “old world” alternative to trendy eCommerce stocks.


Distribution Is King
Let’s take a look at distribution costs. In the product peddling game, this cost remains relatively constant throughout a product’s lifecycle. The products themselves usually experience a depreciation of their prices over time due to innovation and competition. Buying an HDTV now versus buying an HDTV 2 years from now will yield drastically different prices, but the shipping costs for such a purchase will not decrease. That’s why businesses place so much emphasis on managing distribution channel costs. If companies can master this aspect of their operations (example: Walmart), they will have a significant edge over their competitors.

There are concerns that rising fuel costs may eat into the margins of the shipping industry. But what choices will a consumer who just bought that HDTV have, if he/she wishes to enjoy that purchase as soon as possible? Shipping companies have been able to easily pass on the increased costs to the consumer who are essentially at their mercy.

It Doesn’t Stop There!
Finding a play on shipping companies through eCommerce stocks is merely illustrating an example of finding fundamentally sound but perhaps boring companies lurking behind a successful attractive prospect. Does this mean I recommend UPS or Fedex? This is where I wish to caution that even if a company is good, it doesn’t mean it’s good at any price. But next time, rather than listening to your neighbour, that janitor, or that cab driver about the latest “hot” stock, you might just do more research about the business operations itself. Who knows! By thinking more like the business owner, you might find some solid proven business partners that though boring are also benefiting from the trend.

There Are Still Bumps Along The Way!
Of course, just because these business partners are benefitting doesn’t mean that they are bullet-proof candidates. There are many caveats to look for when evaluating these coat-tail riding stocks. For example, is company A deriving the majority of their revenue from only one customer? I’m sure there are more caveats that you can think of. If you do, please share with us in the comments below!

An InvestorGeek’s Beginnings: Cards & Comics

Can you tell I’m happy and proud to be an InvestorGeek? Though I’m one of the new writers here, I have been blogging about investment and finance issues for a while now. Nevertheless, I am excited and looking forward to sharing with you some of my thoughts on investing. Why did I decided to join with the geeks? For that, let’s go back to Wikipedia’s defintion of a geek:

A geek (pronunciation /gi:k/ ) is a person who is fascinated, perhaps obsessively, by obscure or very specific areas of knowledge and imagination.

It’s hip to be geek nowadays! Just look at the varieties we have — music geeks, movie geeks, gaming geeks, singing geeks. Even when I was young, the foundation was being laid out for me to become the InvestorGeek that I am today.

Wait a minute! Most teenagers would not give a second thought to stocks and bonds and investing in securities, right? I agree that it would take a special person to develop that kind of interest so early in life. I was just like you — an average kid with simple dreams of enjoying my childhood. So how did I get started?

Kids Can Invest Too!
I earned money doing chores around the house during that restless summer. When I stepped through the doors of the convenience store next to my house, I could have blown it all away on candy and snacks. Perhaps I already knew enough about finance at that age? Or perhaps those dreams of being a pro hockey player were too strong? In the end, I decided on a packet of O-Pee-Chee Premier hockey cards.

At home, I quickly tore through the foil package. The elation from looking at, and reading about my favorite sport heroes was addicting for a young teen. I went back many more times that summer, and amassed a small collection. Thinking back, it was a smart decision since the pleasure certainly lasted more than candy would have! I was already investing in assets that could appreciate in value and there was no stopping me. My collection grew year after year until the habit finally stopped sometime during my high school years.

Collecting sports trading cards would be my first experience in investing. Even Mark Cuban said that

“when a stock doesn’t pay dividends, there really isn’t a whole lot of difference between a share of stock and a baseball card”

I didn’t stop with trading cards, but evolved to collecting comic books. I clutched copies of Beckett and Wizard hoping that one day those publications would tell me that my Spawn #1 or Jaromir Jagr rookie card had amazingly shot up in value.

Comics & Trading Cards vs. Stock & Bonds
Some people have made a fortune trading such collectibles. It is very rare for a good collection to not appreciate over time. However, you should be aware that collectible industry is also susceptible to cycles. The returns can often be multiples of what you originally paid. As well, the invested capital can range from very little to large amounts if you are looking to buy that ultra rare item. You have a huge influence over the value of your collection through maintaining its condition. Finally, remember that there isn’t a real way to valuate such investments beyond evaluating its condition criteria. The value is in the eyes of the beholders; in this case — the collectors’ eyes. One man’s trash can be another man’s treasure.

Has a stock ever brought you happiness? I don’t mean the delight that you feel when you see it increase by a dollar. I doubt many people can compare worrying about stocks to the enjoyment of reading your favorite comic book, or cataloguing your trading cards. I was a geek and I’m still proud of it! But I had developed the respect for appreciating assets. Extra care was always taken when handling my collection to keep tem in as good a condition as possible. Though I never deprived myself from enjoying them whenever the mood struck.

My friends and I would trade our unwanted comics or extra cards with others for those we coveted. It was our very own supply and demand marketplace, and our introduction to economics. As we grew up, the arenas changed. However, the more things changed, the more they stayed the same! When you are building you wealth, you might look into securities. When you become a millionaire, you will probably start collecting other appreciating assets such as antiques, artworks, cars, bikes, or even record-breaking baseballs like my comic book idol Todd McFarlane. (Remind me to tell you about the story of how I met him a couple of days before he bought Bond’s ball!)

Investing: The Next Generation
If you have kids, that time may come when your children want money to buy trading cards or comic books. You might crack a smile, and be happy that they didn’t want candy instead. Help them learn to respect their purchase and you could influence them down a path of investing for their future, to becoming an InvestorGeek!