Facebook's Latest "Status Update" is Troubling

The Facebook IPO was much anticipated, but it seems that the original price was overinflated. The original price was $38, but now it has fallen below $30 for the first time. Its original valuation was $104 billion. By comparison, amazon.com is valued at $98 billion. I think that Facebook is a phenomenon for now, but in the future I predict it will fade away just like My Space. It does not have the long term staying power of a company like Apple or Google in my estimation. Could this be the beginning of the end for Facebook? Stay tuned. Read more here: http://www.therepublic.com/view/story/bbe2ef5cbf84400e85316a6408425755/US-TEC--Facebook-Stock/

Taking a Hands Off Approach to Investing

Constantly monitoring investments can be challenging and depressing. When our investment goes down, we are discouraged. When it goes up, we feel good. But some recommend just letting the market go through its ups and downs and eventually corrections occur in your favor. Watching every rise and fall can lead us to "analysis paralysis" where we are over analyzing everything to death so we do nothing. Some mutual funds for instance are actively managed and some are passively managed. We pay more for those that are actively managed by professionals. Actively managed annuities and whole/variable/universal life insurance policies can often be poor choices for a portfolio due to high management fees that will eat into your return on investments. Many financial experts recommend buying a term life policy, then augmenting it with mutual funds, IRAs and/or a 401k. But, sometimes a basic index fund that mimics the performance of an index such as the S&P 500 can be a good choice. In 2011, investors would have done better with an index fund 84% of the time when compared to an actively managed fund. This statistic comes from this article by consumer advocate Clark Howard: http://www.clarkhoward.com/news/clark-howard/personal-finance-credit/investors-do-better-when-they-ride-along-market/nLY6h/

Facebook, Google, Amazon, Apple, which one does not belong?

Soon, Facebook will have its IPO (initial public offering) and its stock will "go public" so everyone can buy a piece of the social media juggernaut. Some may put it in the same category as Google, Amazon and Apple, but I would not. Facebook will not have the staying power of those companies. In attempts to take over much of the internet, many sites now want you to sign in via Facebook. It is hard to put a valuation number on Facebook, just like other social media companies since they usually lose steam over time and fade away (remember My Space?) It seems like the best time for Facebook to have gone public would have been about 5 years ago, when it was relatively unknown outside of a few college campuses. At that point, its meteoric growth was still ahead of it. This article has some good points about Facebook's valuation: http://www.thestreet.com/story/11510355/1/facebook-has-no-business-being-compared-to-apple-google-and-amazon.html

The Psychology of Investing

Buy low, sell high. We have all heard the mantra. But, what happens when you buy an investment, it goes down and down, and when do you sell it rather than continue to take losses? Well, you actually have not lost anything (or gained anything) until you sell. So, on paper a stock may be down 40%, but if you hold onto it, there is a chance it will bounce back. When the market overall is down, we don't seem to hear much about buying. When it is up, people often become enthusiastic about investing. But, in fact, that is just the opposite of what we should do. It makes me think of the Seinfeld episode where George Costanza made it his mission to do the opposite of everything he normally does. Did it work? Yes, to some degree, but of course that approach can be taken too far. Do you want to do the opposite of Warren Buffet or the complete opposite of everything that is recommended in Forbes, Kiplinger's or The Wall Street Journal? No, that would be foolish. Sometimes it is hard to admit we have made a mistake when watching an investment we have purchased, and we tend to hold on to bad investments, in hopes that they will bounce back. If a stock has strong fundamentals and it seems to be just a temporary slump, then hold onto it. Other times stocks will go down and keep going. I bought GM a few years ago, never dreaming it would go bankrupt, but it did and I rode the stock all the way down. Maybe selling at a 10% loss would have been better than dealing with a 100% loss. No doubt, it would have been better. My Toyota (TM) investment is down 35%, but I think it will come back eventually. The natural disaster in Japan and the recalls and lawsuits hurt the company dearly. But, it will come back (I hope). Say you have a stock that is up 20%, but you don't want to sell, hoping it will keep going up. Sometimes it is better to take your gains and get out. But, I can't make those decisions for others. Do your homework by checking out news articles about the company, look at the financial statements, examine the transactions by insiders such as corporate officers and see what the experts are recommending. It can be a bumpy ride, but if we ride out the ups and downs over the long haul, most people do well. Those who are against taking chances with their portfolio should probably stick to mutual funds, which will automatically diversify the investment decisions and lower the risk for you.

Investing Does Not Have to be Brain Surgery

So many people are intimidated when they hear the term investing. Many find it to be a complex subject, or even a boring one. It does not have to be complex or boring. If you have ever watched Jim Cramer's show on CNBC, you know that people can make it exciting. It is complex if you are looking to be a day trader and buy and sell throughout the day, tracking even the smallest movement of individual stocks. But most are not planning on doing that. Often times, over thinking our investment choices leads to "analysis paralysis". In that case, people get so overwhelmed that they fail to make any changes to their portfolio, fearing that they will do something wrong. We need to find a happy medium when it comes to monitoring our investments. Here are a few rules of thumb that I follow.

1. Decide your level of risk. If you want to play it safe with investments, that is fine. There are choices ranging from mutual funds, to exchange traded funds (ETFs), to certificates of deposit (CDs), to index funds, which will track the performance of a particular fund, such as the Dow Jones Industrial Average or the S&P 500. But, not every investment is created equal. All mutual funds are not winners. Track their average returns from the past few years and see how that fund has performed. Also look at the expenses and fees that are associated with that investment. If your local bank is selling CDs and they only will generate 1 or 2% per year, then that is not a wise investment. Playing it too safe means you will have a small return on your money, if you have any return at all. If inflation is at 3% per year and your investment is returning 3% per year, then you are not ahead of the game. Individual stocks can generate big gains, but they are risky. You could always have a portion of your portfolio set aside for individual stocks, but don't invest money here that you cannot afford to lose. Some tech stocks tend to be volatile, meaning they move up and down rapidly from day to day. These can be bought and sold for short term gains. The first rule of investing is to buy low and sell high. Maybe a stock could be bought for $10 per share, then sold a week later at $20 per share. That is good, but you have not actually doubled your money since you need to consider brokerage fees and tax implications that occur when you sell. So, think before you buy, and think again before you sell.

2. Are you investing for the short term or the long term? Investing for the long term is often accomplished through a 401k plan that includes an employer match. Many 401k plans will allow you to choose from several mutual funds that will comprise your retirement fund. A 401k plan will grow in a tax deferred environment, so that is a big advantage. A Roth IRA is a good choice too, since you pay taxes when it is bought, but then do not need to pay taxes when it is withdrawn, as long as you are past age 59.5. Young people can afford to take more risks than older people since young people can have time available to make back their losses. If you are investing for the short term, individual stocks will often not be a good choice, but they tend to do well over the long haul. Stocks that pay dividends can be a good choice. They are often paid by companies with a long track record of good, stable, financial performance, such as is the case with Procter and Gamble. Dividend stocks often do not have the rapid growth of a company like Google, but they do well over time, and re-investing dividends can add up to a lot of money.

3. Don't put all of your eggs in one basket. In other words, diversify. If you want to buy Apple stock, for example, that is fine, but don't put 100% of your investing funds into one stock. Maybe buy a tech stock and an auto stock and a retailer along with a pharmaceutical stock. Many financial experts recommend spreading around your investments so that each sector has no more than 20% of your money. Diversify your choice of investment vehicles as well as your individual choices. Those who are successful might invest in real estate, stocks, bonds, mutual funds, cash, savings bonds, treasury bills and an IRA. Don't overlook the international funds, since we are in a global economy and significant gains can be made by investing in overseas funds. We have experienced how the debt crisis in Europe has had a ripple effect on US markets.

4. Start early. How early? As early as possible. I wish that I had bought stocks as a teenager. If I did, I would have 25-30 years of growth behind me. Those who start investing early can build a bigger retirement nest egg to protect against financial hurdles that so many face during their golden years. People are living longer. If a person retires at age 65, they might live to 85, so they need 20 years of funds available. Don't assume that social security will still exist 15 or 20 years from now. It might, but don't assume that social security will be a part of your retirement income, since it might not be. It is best to err on the side of caution and save as if social security will not be there. If it is, great, you will do even better financially than you once thought. Also, if social security is solvent, there will be a higher payout if you retire at age 65 versus age 62, and even more of a payout if you can hold on until 70. Someone who starts investing at age 25 versus age 35 will make a lot more to go towards retirement. Time is the best friend of investing. Compounding interest multiplies faster than you think.$1 million dollars at retirement with 6% growth will give you $60,000 per year to live on without touching the principal. $60,000 is good now, but if retirement is 25 years away, the real spending power of that amount will be a lot less. Financial expert Suze Orman recommends taking out no more than 4% of the total value of your nest egg each year during retirement. At age 70.5, it is a requirement to start taking a minimum amount of money out of the 401k and/or traditional IRA. Otherwise, a 50% penalty plus normal income tax will be accrued.

5. Don't get sucked in by fads that you hear about through the media. An example of this is investing in gold. Recently when the commodity of gold reached an all time high, there were commercials and media pundits recommending that people invest a portion of their portfolio in gold. What is the cardinal rule of investing? Buy low, sell high. Why would one want to buy something when it is at an all time high? If you go to a department store and see a sweater that is normally $20, and it is marked up to $50, will you want to buy it? Of course not. Now, selling gold at an all time high would make sense, but not buying it. Financial experts will vary in their advice regarding commodities. Most will say that if you want to invest in commodities, make it a small percentage of your portfolio, maybe 5%. Then again, some suggest zero percent.

* Some information from The Money Class, by Suze Orman

An Emergency Fund will Help You be Ready for a Rainy Day

As a kid, many of us had parents who would recommend saving for a rainy day. That is good advice since rainy days will come and we don't know when. Financially speaking, every day is not sunny, where we have plenty of money to pay our bills and have money left over. In this economy, no one has a job that is rock solid secure. What do you do if your car breaks down and you need $750 to pay for repairs? If you don't have an emergency fund, many would pay for these repairs with a credit card. The problem with that is the interest charged by credit card companies, which can be as high as 25%. If an emergency fund is available, money can be used from that fund and you are charged zero interest. Therefore, the money needs to be liquid, meaning that we can have easy access to it with no penalties for withdrawals. Money that is tied up in stocks or a 401k or a certificate of deposit is not liquid. Cash in a safe or in a savings account is liquid. Emergency funds should be only used in emergencies, such as paying for medical bills, household repairs or car repairs. An emergency fund should not be used for a shopping spree at the mall or to pay for a vacation. Dave Ramsey recommends that $1000 is a good starting point for building an emergency fund. Over time it should grow bigger and bigger. Suze Orman recommends an emergency fund that is equal to eight months of a household's income. Emergency funds are important for households as well as businesses. I have heard about businesses that go under due to having a couple of months where the cash flow was less than normal. Businesses or households need to save when times are good, so that when money is tight, they have a reserve of cash. The key to financial fitness is being aware of the big picture, not just looking at making it day by day. Those who thrive are the ones who plan for the future. For example, contributing to a 401k with an employer match starting at age 25 versus age 35 can make a significant difference.

It's Not About What You Make, But What You Spend (or Don't Spend)

Life is all about choices. Good choices lead to good results. Bad choices lead to bad results. If we change our choices, we change the results. This is so true when it comes to money management. So many people are never satisfied when it comes to money. Many people say that if only they made x amount of dollars, they would be on easy street, with no worries about money. That is not always true. Often times, the more we make, the more we spend. How many times have we heard about famous athletes or celebrities that have made millions, only to end up broke due to poor money management? People need to think before they spend. I am convinced that debt is the number one thing that leads to financial ruin. Let's look at two scenarios:

scenario #1: an individual makes a gross yearly income of $30,000 per year
mortgage: $0
credit card debt: $0
car loan: $0
student loans: $0
other debts: $0

scenario #2: an individual makes a gross yearly income of $100,000 per year
mortgage: $300,000
credit card debt: $5,000
car loan: $25,000
student loans: $20,000
other debts: $15,000

Some people automatically assume that anyone who makes 6 figures has it made, with no money worries at all. The person in scenario #2 has a lot of their income eaten up be debts which require monthly payments where varying rates of interest are charged. I would rather be in scenario #1. The person in that situation has no debt obligations so they can put a large percentage of their pay towards retirement investments. That person may actually retire earlier than the person in scenario #2. The person in the first scenario may be able to put 15% of their income towards a 401k where the second person only can contribute 3% due to all of their debts. Person #1 may very well have more disposable income to spend on enjoyable activities. Now, these scenarios are extreme, and avoiding debt all together may not be realistic, but still it is food for thought. The term "rich" is relative. Someone can make one million dollars per year and be poor, and another person might make a modest salary and be rich in comparison when debt load is considered. So, next time you see someone driving a brand new Cadillac, they may not be rich at all. The person in the 10 year old car that has been paid off for years might be better off. You can't judge a book by its cover.

Apple will Pay a Dividend to its Shareholders

Apple (AAPL) has become the most valuable company in the world. It will start paying a dividend of $2.65 per share, each quarter, starting July 1. The yield will be about 1.8%, which is lower than dividend yields of Microsoft (MSFT) and Hewlett Packard (HPQ). Dividends are a nice way for shareholders to get some extra money out of an investment, but the dividend numbers are dwarfed by the percentage rise of the Apple stock. Apple's shares have rocketed upwards an amazing 45% this year. The 52 week range for Apple has been between $310 and $609, and the current price is $596. Ten years ago it was $12 per share. Five years ago it was $92. Owning this stock is a no-brainer, but at $600 per share, how many people will go and buy 10 shares? That scares a lot of people away. Microsoft seems more attainable for the masses, at $32 per share. I wonder if Apple would consider a stock split?

Earlier today, Apple's stock dropped 9% and the trading was stopped due to volatility circuit breaker regulations. It looks like the wild swing was due to a computerized trading error that affected stocks with symbols between A through BF. The BATS exchange issued the trades and they blamed it on a software error. More and more stock trades these days are executed via computer programs, which use logarithms to track the most minute moves in stock prices.

The key to Apple's success over the past 5 years or so have been its innovations, like the i-pod, i-pad and i-phone. But, with Steve Jobs gone, one has to wonder what else they have up their sleeve as far as new ideas.

* Some information from cnbc.com

A Way to Invest in the Smart Phone Craze

Smart phoes are all the rage right now. Many people use them for surfing the web, texting, and of course, talking to others. In his latest book, "Getting Back to Even", Jim Cramer recommends investing in smart phone technology. Originally he recommended investing in Qualcomm (QCOM) but has recently said that Broadcomm is a better bet (BRCM). These companies produce chips that are used in smart phones. Smart phones are still not widely used in developing countries, and this is an industry that will see major growth over time. Here are some specifications regarding the 2 companies:

BRCM price: $36.38 52 week range: $27-$41 P/E: 19.9 Dividend: 0.40/1.10%
QCOM price: $63.93 52 week range: $45-$64 P?E: 21.8 Dividend: 0.86/1.35%

Cramer's website, thestreet.com, gives a "buy" rating for both.

Three Years After, the Dow Has Gained Back its Losses

In March of 2009, things seemed grim for the stock market. From the last quarter of 2008 to March of 2009, the Dow was in a free fall, thanks in large part to the banking/housing crisis. On March 9 of 2009, the Dow was at 6,547. Today it is at 12,922, and it has gained back 97% of what it had lost. Many people were not in the buying mood in March of 2009 but that was a great time to buy. No doubt, many probably liquidated their 401k accounts, which is the worst thing they could have done. Kiplinger's magazine talks about 10 stocks that have surged since the 2009 bottom. The maker of the Sleep Number bed has been an amazing success story. Their stock (SCSS) has surged a staggering 12,000% in the past three years, going from 25 cents per share to $30. That company has been able to shed its debt load. Another success story is Pier One Imports (PIR). That stock has risen 11,000%, from 11 cents to $17.20.

For more success stories, check out the link:

http://kiplinger.com/columns/picks/archive/10-stocks-that-surged-since-the-market-bottomed.html

Gold Prices Fall

The price of gold has fallen by 5%, to below $1690 an ounce. Those investing in gold will not like this news, but it could be an economic indicator that precedes a rebound in the overall economy. A fall is the gold price is desireable for those who invested in an exchange traded fund which invests in the inverse of the gold price (DZZ). That fund was up an impressive 11.83% earlier today. The daily volume for that investment was double its normal amount, with 3.2 million shares trading hands. I think that DZZ will be a good investment to track, as the Dow climbs, the price of gold will fall. Barron's magazine predicts that Dow 15,000 may not be that far away. But, of course there are always different opinions out there. One asset manager predicts that gold may top $6000 per ounce, more than triple what it is now. For that article, here is the link:

http://www.cnbc.com/id/44373049

A Rebound in the Dow is a Positive Sign

Today the Dow Jones Industrial Average hit the 13,000 mark for the first time since May of 2008. Unemployment numbers are down, housing sales are up, so the Dow responded to positive economic signs. If things are cleared up in Europe concerning their financial woes, the Dow could go above its all time high of 14,164, and keep climbing. That all time high happened in 2007, before the housing/banking crisis crippled the economy. All of this is more proof that the market is resilient, but it just takes time to gain back what was lost. Most Americans have lost a good portion of their retirement accounts due to the blue chips' tumble the past few years, but things are headed in the right direction.

* Some information from CBS News.

Facebook IPO is Coming Soon

You have probably heard about the social media juggernaut Facebook "going public" and having an upcoming IPO or initial public offering. Is it worth it to invest in this company? Some will say yes, some will say no, but there are various factors to consider. We'll have to see how much the price per share is. A part of me thinks that Facebook's most significant growth is in the past. So, why invest in a stock if you think that growth has already happened? Good question. Past growth is great, but future growth is the main factor when evaluating stocks. Buying a stock is an investment in the future, not the past. If it has a dividend, that could entice investors, but many tech stocks do not offer dividends. Facebook is no doubt constantly thinking about how to re-invent the service to keep it fresh and to avoid becoming the next My Space.

Founded in 2004, Facebook has 845 million active users as of the end of 2011. 3200 people are employed by Facebook and it is available in over 70 languages. If Facebook would have started issuing stock in 2004 or even a couple years later, then investors could have witnessed meteoric growth. When it started, Facebook was not used by the public, it was only used by college students at select universities. At the end of 2004, they hit one million users. Growth from 1 million users to 845 million users in less than ten years is staggering.

Considering the amount of information that people put on Facebook, it's a dream site for companies seeking to target consumers. From a marketing standpoint, it is an amazing warehouse of information where people share their preferences when it comes to movies, music, TV shows, politics, current events and even what brands they like. Of course, the downside to having a site that is so popular is that it has become a frequent focus for hackers and identity thieves.

We'd all like to be part of the next Google (GOOG) type of IPO, where we buy a stock at $100 per share in 2004 and it rises to over $700 per share in three years, but every IPO is not like Google. Groupon (GRPN) had an IPO late last year and has ranged between $15 and $26 per share. Zynga (ZNGA), the company behind online games such as Facebook's Farmville has ranged between $8 and $13 per share. Facebook is hoping to launch under the symbol FB sometime in May. If it's less than $100 per share, it might be worth it to buy a few shares and see what happens, but I'm not going to bet the farm on it. Many Facebook employees will become instant millionaires since they have been acquiring shares at a low price. Founder Mark Zuckerberg owns nearly 534 million shares. The Facebook IPO will be the biggest internet IPO in history, raising $5 billion, surpassing Google by $3.1 billion. It might be a good short term investment, we'll have to gauge the volatility. But, then again, I have been wrong before. After all, I bought Toyota (TM) stock a few years ago when it was above $100 per share, and I am patiently waiting for it to rebound. It's been a long wait.

***Some information from http://newsroom.fb.com/default.aspx, www.google.com/finance and http://money.msn.com/business-news/article.aspx?feed=AP&date=20120201&id=14751191

The Stock Market's Resiliency

The housing/banking crisis of late 2007 to early 2009 was a devastating blow to the US economy. On October 1 of 2007 the Dow Jones Industrial Average ($INDU) was at 13,930. Then the free fall began, and by March 9, 2009, the Dow had plunged to 6,547, losing more than half of its value. But, little by little, the market recovered, taking us to today, where the Dow is 12,653, making back almost all of the ground it lost during the banking crisis. That is why experts put their faith in the power of stocks as investments. It takes time, but the market is resilient, and it does come back eventually. Many people saw their portfolios cut in half from 2007 to 2009. Those who are retired or close to retirement hopefully had a large percentage of their investments in something safer than stocks, like bonds. At the depths of the crisis of 2009, some probably got discouraged with the Dow and withdrew their investments. This is the worst thing that a person could have done. Just think about how many blue chip stocks were at bargain prices at that time. That would have been the time to buy like never before.

Since 1980, the growth of the Dow has been nothing short of amazing, when compared to the sluggish overall rise that happened during previous decades. From 1980 to today, the Dow has multiplied over 14 times! Consider these figures, showing the value of the Dow:

1-1-1930..... 267
2-1-1940..... 146
1-1-1950..... 201
1-1-1960..... 622
1-1-1970..... 744
1-1-1980..... 875
12-1-1989..... 2,753
11-1-1999..... 10,877
10-1-2007..... 13,930


How long before it hits 15,000? Stay tuned.

*Some information from money.msn.com.

Crisis for Carnival Corporation (CCL)

A couple weeks ago, on January 13, a ship wreck happened off the coast of Italy involving the Costa Concordia, a ship owned by Carnival Cruise Lines Corporation. Carnival is a large conglomerate that owns ships that sail under the brands of Carnival, Princess, Holland America Line, Cunard, and various European, Australian and Asian cruise lines. The company operates 98 ships and also owns many hotels, motorcoaches and domed rail cars. The next trading day after the accident was January 17. The volume for Carnival (CCL) is normally about 4 million shares. On January 17, it was almost ten times that amount. The stock lost about $5 per share, going from about $34 to $29. Lots of people sold CCL that day, no doubt with many people selling short, betting it would go down in the wake of the accident. On December 23rd of last year, one of the company's officers sold 124,000 shares, yielding $4.1 million. The 52 week range for this stock has been from $28 to $47. This is a public relations crisis for Carnival, and no doubt, many will be monitoring the situation to see what happens. It pays to follow the stories in the news. Smart investors not only pay attention to the news regarding stocks in their portfolio, but the news regarding various companies and the overall macroeconomic health of the world, as those factors can have an effect on investments. CCL is a cyclical stock. Taking a cruise is a luxury, not a necessity, so I'd expect this investment to do better as the world economy improves, and people have more disposable income. During 2009, at the height of the economic slow down, the stock was as low as $17 per share, so it has rebounded quite a bit since then. Carnival's key competitor is RCL, Royal Caribbean Cruise Line. Investors are paying 12.6 times earnings for CCL and 9.6 times earnings for RCL. Currently, RCL is $28 per share. Comparing the percentage of total assets to total liabilities, RCL has more debt than CCL. A better dividend yield can be had with Carnival (1.40% vs. 3.30%), but we still need to see how the recent accident will affect Carnival financially. The loss of one of their ships plus the negative press and pending lawsuits could be quite a blow.

*Some information from finance.yahoo.com

The Future of Best Buy

I recently took an international business class. We had to choose one company and one country, and determine if that company should expand into the country we chose. I chose Best Buy (BBY) and the country of Norway. I determined that Best Buy not only should avoid expansion into Norway, but they should cut costs in America, and maybe close down certain locations here. Best Buy faces fierce competition especially from amazon.com. Also retailers like Wal Mart and Target sell much of the same merchandise that Best Buy sells. I predict that eventually Best Buy will go the way of Circuit City, and cease to exist. In September of last year, one of the company's officers sold almost 11,000 shares. In April of last year, another officer sold 43,000 shares. Insider transactions can be accessed easily through finance.yahoo.com. Last year, Best Buy's share price fell by 27 percent. Their sales of televisions and computers has declined. Best Buy used to depend on sales of DVDs and CDs but many people do not buy these anymore, instead they buy mp3s and watch movies on demand or stream via Netflix. The percentage of physical media allocated to each store has been shrinking. The transition from physical media to digital media has hurt many brick and mortar book stores and CD stores. Amazon.com has an advantage since they have no physical retail outlets. Best Buy's total assets versus total liabilities as of February 26, 2011 is almost $18 billion in assets versus about $11 billion in liabilities. Retained earnings are over $6 billion. So, the company has breathing room financially, but still I wonder about the long term health of this company, and its cash flow.

* Some information from finance.yahoo.com and The Wall Street Journal

Sector Rotation Utilizing Cyclical and Secular Investments

Jim Cramer's book "Real Money" discusses rotating one's portfolio through different investments based on multiple (price to earnings ratio) contraction and expansion. He also talks about secular stocks versus cyclical stocks. I would recommend that everyone reads the book for some great tips. He even includes a chart to show when to get in and out of certain investments to maximize the growth of your portfolio. He says that the economy follows specific patterns that can be tracked. Cyclical stocks go along with the economy. When the economy is good, people will buy discretionary items or luxuries. Cadillac will probably sell more cars when the economy is strong and people have money. Secular stocks on the other hand, do well no matter what the economy is doing. People will buy soap and detergent even if the economy is poor. You can rotate investments between cyclical and secular booms. We will pay a higher multiple to earnings for the growth of a secular company than for the growth of a cyclical company. One can’t be deferred, one can. Many people like to invest in secular stocks such as Procter and Gamble (PG), Johnson and Johnson (JNJ) and Kimberly Clark (KMB) since they pay a good dividend and they are companies that sell products that are widely used by the average consumer. Sector rotations: Depending on the state of the economy, you should buy or sell certain stocks at certain times. These will be either cyclical or secular investments. You want to buy based on multiple expansion and sell based on multiple contraction. This is tied into E x M = P. Earnings x multiple (P/E ratio) = price per share

In a recession the stocks with the biggest multiple expansions are the secular investments, such as P&G. When P&G peaks, get into a cyclical stock. When the fed cuts interest rates, get into something discretionary. Purchase cyclicals when the M is highest. Sell non-cyclicals when the M is highest.

PG was $44 when market bottomed out in March 2009. 9 months later it was $62. Low price times higher multiple will equal same earnings.

When times are bad, buy something like PG which is non-cyclical. The earnings will be good even in bad times. The E will be good and the M will contract. As things turn around, the M will expand, making it more expensive. A higher multiple will be paid for secular or non-cyclical stocks.

Before times get good, get into something cyclical like MYG (Maytag) or Dow (DOW) (smokestack stocks), since lowering interest rates will raise their earnings and the multiple will expand since people will pay more for it. On the low end of the cycle, the cyclicals will be cheaper since the earnings will be smaller.

The above information is a summary of principles from Jim Cramer's "Real Money". Investing can be risky, so do your homework or hire a professional before trading securities.

A "Golden" Opportunity?

Lately we have been hearing a lot about investing in gold. It is ironic that when gold is at an all time high, people recommend investing. It seems like when it is low, that is the time to invest. Most experts recommend having just a small percentage of the portfolio in gold. Those who do not want to invest in physical gold can buy stock in gold mining companies. The price of gold is currently $1656 per ounce. Over the past 30 days the gold price has risen 2.28%. Over the past year the rise has been 20.75%. But, the serious gain would have come from investing 5 years ago. The gain from 2007 to 2012 has been an amazing 162.25%! The price of gold often goes the inverse direction of the Dow Jones Industrial Average since when the Dow is down, people are searching for an alternative investment. I found an exchange traded fund (ETF) that invests in the inverse of gold. When gold goes down, this investment will go up. It is symbol DZZ, Deutsche Bank AG DB Gold Double. It is currently at $4.78, with a 52 week range between $3.83 and $9.26. This fund has net assets of $107 million. It was founded in February of 2008. It's 3 year total return has been -39.73%, but when gold drops (and it will eventually), it will have a better performance. I looked at the performance of other ETFs, not necessarily those tied in to the price of gold. ETF symbol LBND has been a top performer, earning 117% over the last year. That ETF trades leveraged debt. The investment seeks to replicate, net of expenses, three times (300%) the performance of the DB Long U.S. Treasury Bond Futures index. The index measures the performance of a long investment in the CBOT Ultra T-Bond futures.

*Some information from finance.yahoo.com and http://www.goldprice.org/spot-gold.html

"Cheap" Stocks Versus "Expensive" Stocks

When I first started learning about stocks, I thought that a stock that sells for $50 per share was too expensive and I wanted to find a stock that sells for $25 per share. I learned that this view of stocks is overly simplistic and just plain wrong. Google (GOOG) is $623 per share. Jim Cramer has talked about how the movement of stock prices is tied generally to the basic economic theory of supply and demand. $623 is a lot of money for one share, but with a price to earnings ratio, or multiple, of 21, some would see it as a bargain. For comparison sake, Amazon (AMZN)sells for $179 per share, with a P/E ratio of 94. Google is in high demand since it is a company that has proven to be innovative and well managed. Apple is in the same category. In 2008, Google dropped as low as $260 dollars per share. Now it is over twice that amount. Smart investors would have bought Google in 2008 and sold it recently, turning a handsome profit. People will pay a premium for Google since the balance sheet shows that its total assets have almost doubled from the end of 2008 to the end of 2010, going from $31 billion to $57 billion. Total liabilities have gone from $3 billion to $11 billion over the same period. So, at the end of 2010, the total liabilities were only about 20% of the total assets, which is impressive in this day and age where many companies (and individuals) are carrying so much debt. The ratio of assets to liabilities for Amazon is over 50%. There are other valuation criteria for evaluating stocks other than P/E and the balance sheet analysis, but these are a couple of things to consider when picking investments. It makes sense to compare stocks in the same sector. So, if you want to buy a tech stock, you can compare Google to Apple, Microsoft, Amazon, E-Bay and others. Do your homework such as listening to conference calls, examining the balance sheet, following news about the company, analyzing the annual report, and other tasks. You can monitor trading of insiders who own large quantities of the stock, and look up historical prices/dividend yields by using sites like Yahoo Finance or MSN Money. Look at the 52 week high and 52 week low. Search for bargains, just like when you buy anything else. Buy low, sell high is the cardinal rule of investing. Past performance gives you an idea of the stock's track record and volatility, but future performance is more important. Look at the figures for revenue, earnings per share and growth rate. Google went public on August 19, 2004, selling for $100 per share. How many of us would like to take a time machine back to that day and load up on shares of Google? Ten shares bought for $1000 back then would be worth $6230 now.

Stock Selection Factors

So, you want to start buying stocks. What criteria should you follow to decide which investments are right for you? According to Kiplinger's magazine, here's what to consider.

1. Price versus earnings--- Look at the price to earnings ratio to decide.
2. Growth of the company--- Future growth is essential more than past growth.
3. Dividends--- Does it pay a dividend and has it been going up or down? Some of the highest dividend yields right now are paid out by Merck (MRK) at 4.4%, AT&T (T) at 5.9% and Verizon (VZ) at 5.2%.
4. Cash flow--- Does it have enough money coming in to pay dividends and debts?
5. Industry trends--- What does that industry or sector look like overall? Is it thriving or struggling?
6. Governance--- Is there a board governing what happens at the company?

Here's a link to the article:

http://kiplinger.com/columns/picks/archive/how-an-individual-investor-picks-stocks.html

Online Practice Stock Trading

Buying and selling securities involves risk, whether you are dealing with individual stocks, mutual funds, exchange traded funds (ETFs), certificates of deposit (CDs), an individual retirement account, (IRA), a 401k, bonds, precious metals like gold, or other investment vehicles. All of those acronyms can be confusing. You might wonder, how do I decide which stock to buy, or what are the advantages of an IRA versus a 401k? What is a Roth IRA? There are many sources to find answers to these questions, but it is possible to do some practice trading without spending any money. I found a virtual trading site where you can buy and sell, just like when you use online sites like www.etrade.com or www.scotttrade.com. The site is:


http://www.howthemarketworks.com/trading/index.php

You can choose how much money you start with, how often you trade, how much you buy, which stocks you choose, and more. This way, if you lose money, it is not real money, it's just virtual dollars. But, if you make a lot, you need to realize it's only virtual money, not real money in your account, so it's a double edged sword. I have had my account for about 18 months. In that time, my portfolio has risen 41.42%, whereas the rise of the S&P 500 stock index has been 21.48%. Too bad it is not real money. Some of my biggest winners have been Home Depot (HD), Procter and Gamble (PG), Google (GOOG) and Weyerhauser (WY). Biggest losers have been Bank of America (BAC) and Citigroup (C). Banks used to be conservative investments which were dependable and not volatile. But, since the housing collapse and the stock market crash of 2008-2009, these companies have struggled significantly.

One thing that helps with keeping a portfolio stable is diversification. Do not put all of your eggs in one basket. If you have a portfolio that contains shares of Google, Apple and Amazon, it is not diversified. Those are good stocks, but if the technology sector takes a hit, all 3 of these may take a hit. A diversified portfolio will have investments from different sectors. For example, you could have a retailer like Wal-Mart, a food company like Kellogg's, a tech company like Google, and a durable goods manufacturer like Whirlpool. If you don't want to buy individual stocks, a mutual fund can be purchased which does the diversifying for you. A mutual fund would be made up of several different stocks. Mutual funds or exchange traded funds are great ways to invest for people who want to take less risk, and they can be bought by those who do not want to monitor individual stocks. But, be aware that these investments sometimes come with hefty fees, so conduct research before buying. Often times an exchange traded fund has a significantly lower fee than a mutual fund, according to Kiplinger's magazine.

Investment Advice from the Pros

A few quotes from the book "The Best Investment Advice I Ever Received" compiled by Liz Claman.

"It is startling to know that a $23,000 investment at birth, invested at a 6 percent annual interest rate, would grow to $1,015,334.35 at age sixty-five. Time and compound interest are magic". From the foreword, by Paul O'Neill, former US Treasury Secretary

"Stay away from investments that you don't understand or that seem too good to be true. If an investment opportunity or a business has a strategy, a profit stream, or a financial structure that you can't figure out, or that doesn't seem sustainable, there is a very good chance you'll be disappointed over time". From Art Collins, Chairman and CEO, Medtronic, Inc.

"First, diversify your portfolio and minimize taxes and trading costs. Second, know your investment goals and choose your assets to achieve your goals. Third, invest regularly and avoid timing the market. Fourth, save as much as you can, and your investments will do better. Fifth, do not pick stocks unless you are following stocks regularly. Sixth, resist the temptation to sell stocks short". From John E. Core, Associate Professor of Accounting, Wharton School of Business

One can learn a lot from listening to the experts. Many years ago, I was a regular listener to the Bruce Williams radio show. I learned so many good lessons from that show that I still remember today. I don't even recall if he is still on the radio, but he has put out several books about business, money management and entrepreneurship. I also have learned a lot by reading magazines like Forbes and Kiplinger's. An international business class I had required all of us students to subscribe to the Wall Street Journal. In this day and age where it is hard to find a decent newspaper, the WSJ still is the ultimate source for Wall Street information. I guess I always had somewhat of an interest in business ever since my Dad talked about working as a stockbroker for Merrill Lynch in the 1960s. Back then, the company required all brokers to spend some time training on Wall Street. My interest in working in the television industry always surpassed my interest in business until the last couple of years.

The Perils of Credit Card Debt

Dave Ramsey wrote an article about credit card debt, and how the interest paid on these can be so high. In his example, the monthly interest payments added up to $306. The thing that people do not think about is the fact that money spent to cover that interest cannot be spent on anything else. Your debts hold you prisoner until they are paid off. If the $306 monthly was invested in a growth mutual fund over the period of 35 years, you would end up with $1,967,873! That is why Ramsey is so opposed to debt. It robs you of chances to build wealth. Money not spent to cover credit card debt, car payments, student loan payments, medical debts, and the like can be invested, securing your retirement nest egg. Plus, who says you need to retire at 65? Smart choices can move up that retirement date to 60 or 55, or even earlier, with the right decisions. Each Friday on Ramsey's radio show, he has people call and declare they are debt free. They tell him how much debt they had and how long it took them to pay it off. For the whole article on the credit card debt issue, check this out:

https://www.mytotalmoneymakeover.com/article/how-credit-card-debt-adds-up?ectid=bitlyified010420120952

Stocks to Hold on to Forever, and the Lessons of Toyota

A solid, dividend paying stock can be held for a long time, forever if you so desire. Super investor Warren Buffett has a portfolio that includes blue chip investments like Coca Cola, Exxon Mobil, Wal Mart, IBM and Intel. But, the stock market is unpredictable, and even a company that seems rock solid can have problems. Years ago, people saw GM and Chrysler as forever stocks, but they saw rough times and had to be bailed out. About five years ago I figured that Toyota (TM) would be a wise investment. The stock was over $100 per share, the balance sheet looked good, and it paid a decent dividend. Then came the recalls and the tarnished reputation of a company known for selling quality, worry-free vehicles. The company experienced supply chain challenges in the wake of Japan's typhoon. The stock is now at about $67 per share, about half the price at which I purchased it. But, Toyota has had ups and downs in the past, and I feel that things will turn around for the company. It is a good investment over the long term. Some would probably say that now is a time to buy, when it is low. It might be. Stock investing involves risk, and without a crystal ball, who knows what the future will hold. Buy low, sell high is the cardinal rule of investing, and if there is hope that a turnaround will happen, it's best to ride out the storm. Buy high, sell low would be a mistake. But, some may say if only a stop loss order was executed, the loss would not occur. I can see that argument, but on the other hand, a loss (or a gain) does not happen until a security is sold. The 52 week range for Toyota is between 60 and 93 dollars per share. So, at $68, it is closer to its bottom than its top. The dividend yield is still quite good, at 1.4%. But, this is down from its 5 year dividend average yield of 1.8%. Analysts on Yahoo finance rate it at a 2.7, which is neither a buy nor a sell recommendation. With the uncertainty in the European markets, things are unpredictable now for investors. When markets overseas hiccup, US markets do too. It's truly a global economy.

Individual Stocks: The Best Investment Over the Long Term

From the book “Stocks for the Long Run” by Jeremy J. Siegel---

Best performing S&P 500 firms, 1957-2006;

Altria (Philip Morris): return of 19%
Abbott Labs: return of 15%
Crane Co.: return of 15%
Merck: return of 15%
Bristol-Myers Squibb: return of 15%
PepsiCo: return of 15%
Tootsie Roll: return of 15%
Coca-Cola: return of 15%
Colgate-Palmolive: return of 14%
Others, all around 14% include; Heinz, Pfizer, Wrigley, P&G, Hershey, Kroger and CVS.

Short term, these may not move a lot, but holding them over the long haul can yield big results. These may not be the most "sexy" stocks, but long term they give great results. For these you need to take more of a buy and hold attitude, as embraced by Warren Buffett, as opposed to a buy and homework attitude, like Jim Cramer.

$1,000 in Philip Morris in 1957 would be worth $8.25 million in 2006. This is 50 times the accumulation in the S&P 500 index. The S&P is “safe” but you can make much more if you take risks. Individual stocks will pay more than index funds. I'd have some moral objections to investing in a company that makes cigarettes, but that is just my point of view.

Often times index funds, matching the return of the S&P 500 or the Wilshire 5000 will do better than mutual funds.

Historically, stocks have returned 6.8% after inflation over the last 200 years. The average P/E (price to earnings ratio, or multiple), is about 15. These returns will double the purchasing power of your portfolio every decade. With inflation at 2-3%, stock returns range between 9 and 10% per year. This doubles the value of your portfolio every 7 to 8 years.

It is a bull market if the economy is doing well, it's a bear market if the economy is struggling. Jim Cramer says: “Bulls make money, bears make money, but pigs get slaughtered.” In other words, you can make money if the market is going up or down, but do not get greedy.

Have cash as part of your portfolio, especially in a bear market. Buy stocks that pay dividends if you can (P&G pays a good dividend). It’s the dividends that make stocks outperform bonds. Stocks have yielded the best return over the long run. Bonds are less, gold is less than bonds. Precious metals prices will generally go in the inverse of the stock market. (Stock market low/metals high and vice versa).

Diversification means that no sector (a sector may be automotive stocks, or healthcare stocks, or bank stocks) is more than 20% of your portfolio. Don’t put all of your eggs in one basket. If one sector struggles, your whole portfolio will not go down the drain.

Estimating Your Retirement Nest Egg

Even if retirement is decades away, it is good to get an estimate of how much your nest egg will be worth. Time is the best friend of investing since saving for 40 years versus saving for 30 years can make a significant difference. One of the best retirement calculators I have found is located here:

http://www.dinkytown.net/java/Retire401k.html

Here is an example:

age:22
annual salary: $30,000
current 401k balance: $1,000
retirement age: 65
annual rate of return: 8%
expected annual salary increase: 3%
employer match: 50%
employer maximum for match: 6%

After 43 years of savings, your 401k would be worth $1,144,337!
If you wait 10 years and start investing at age 32, the amount would be $483,063.

Another great method for estimating is the "Rule of 72". This helps you to determine how long it will take for your money to double. If you make a return of 10% on your money, divide 72 by 10 and you get 7.2 years for your money to double. Let's say you have $10,000 invested at age 30 and you can get a 10% return on your money. It will double every 10 years, following this pattern:

age 30 $10,000
age 37.2 $20,000
age 44.4 $40,000
age 51.6 $80,000
age 58.8 $160,000
age 66 $320,000
age 73.2 $640,000

Clark Howard, Consumer Advocate

I have learned a lot from Dave Ramsey and Jim Cramer, as mentioned in my other posts. Another interesting person I have discovered is author, TV and radio host Clark Howard. He is the person to follow when it comes to personal finance. Recently I saw him on Anderson Cooper's show and he has lots of down to earth tips that can save a person a lot of money. One thing he said that is you go shoppng at a grocery store, the items to avoid buying are the non-food items such as health and beauty aids like toilet paper and toothpaste. He said that the stores have their largest markup on these items. It is a better bet to buy them at warehouse stores like Sam's Club, or even Wal Mart. He recommends buying a car online, rather than from a dealer. Buying a car is usually the second biggest purchase a person makes besides a home, so doing homework and researching different options makes sense.

Here is Clark's bio from his website:

Clark Howard is a nationally syndicated consumer expert who advises consumers how to save more, spend less and avoid getting ripped off. His radio show is heard every day on more than 200 radio stations throughout North America. His HLN show runs every Saturday and Sunday at 6am, noon and 4pm ET, and he is a frequent guest on many other talk, variety and news programs.

"Save more and spend less" is more than just a motto for Clark; it's a way of life. As a successful lifelong entrepreneur, media star and best-selling author, the Atlanta-based "consumer champion" is dedicated to helping Americans of all means get ahead in life.

Clark 's career included stints in both government and private sectors. He was a civilian employee working for the U.S. Air Force at the end of the Vietnam War. He launched a travel agency in 1981 that grew into a chain with locations across metro Atlanta. In 1987, he sold the company at 31 and retired.

Clark found his way into the public eye almost by accident. While enjoying life on the pristine beaches of Florida, he was asked to be a guest on a radio show about travel. The response was so positive that he was given his own program, The Clark Howard Show. The show originates from Atlanta's AM 750 and NOW 95.5 FM News/Talk WSB and is syndicated by Dial Global.

In early 2009, The Clark Howard Show was expanded to HLN (formerly the Headline News channel) in a weekend program. Viewers can watch the penny-pincher answer the best calls from his daily national radio show on Saturdays and Sundays at 6 a.m., noon and 4 p.m. ET. He also appears on HLN 16 times each day during the week with minute-long consumer tips.

He is also a TV reporter on Atlanta's ABC affiliate WSB-TV and writes a weekly column in The Atlanta Journal-Constituion that appears each Thursday in the Deal Spotter section.

The consumer champ's most recent book, 2011's Clark Howard's Living Large in Lean Times: 250+ Ways to Buy Smarter, Spend Smarter, and Save Money (due Aug. 2), covers everything from cell phones to student loans, coupon websites to mortgages, investing to saving on electric bills, and beyond.

Clark has published nine books in total -- with 2002's Get Clark Smart and 2003's Clark's Big Book of Bargains both charting on The New York Times' "Best Sellers" list (No. 6 and No. 7, respectively). Clark's books are available through GetClarkSmart.com.

As an Atlanta native, Clark has always been very involved in improving his community. He started several civic programs, including Atlanta Volunteer Action, Volunteer Action, Inc., The Big Buddy Program and Career Action. With the help of his listeners, he has built 43 homes over 16 years throughout metro Atlanta for Habitat for Humanity.

In 1993, he opened the Consumer Action Center as an extension of his radio show to provide free off-air advice on consumer issues. The CAC is now staffed by more than 140 volunteers.

He's also a member of the Georgia State Defense Force. Clark joined after the terrorist attacks of 2001 to do his part in helping to prepare and assist our military. He attends monthly training workshops around the state as part of his service, and has performed medical evacuation work in New Orleans following Hurricane Katrina.

Check out his website here:

http://www.clarkhoward.com/

Jim Cramer's Buy and Homework Strategy

CNBC stock market guru Jim Cramer is not a proponent of buy and hold. His strategy involves buy and homework. This method involves buying a stock and then doing your homework to track your investment, to determine when to sell it, buy more, or hold on to it. Homework involves many tactics which include following news stories about the stock, looking at analyst's recommendations, looking at the balance sheet and cash flow statement, listening to conference calls, keeping an eye on competitors, monitoring any changes in management, and seeing if management is buying or selling the stock, and other tasks. Homework takes some time, and Cramer recommends that those who cannot do the homework, should invest in something diversified, like a mutual fund. He recommends taking one hour per week for each stock owned. Mutual funds can be great, but they cannot offer the returns of individual stocks. So, one must determine their tolerance for risk (losing money). Younger investors can afford to take more chances than older investors, since money lost can be gained back over time. If you are in your 20s, take risks. If you are in your 60s, take risks at your own peril. Jim Cramer says to use limit orders, not market orders. That way you lock in a specific buying point for your investment. With a market order, the stock can be bought by the broker at any time during the market day. You might want to buy a stock at 18 and sell it when it goes to 24. A stop loss order can lock in a price where the stock will be sold if it goes too low. You might buy something at 10 and have a stop loss at 8. The only issue with this is, you may miss out on the gain if a stock goes down, then back up. What is you have a stop loss at 8 and then it goes to 12? You have missed out on the gain.

An important formula that Jim Cramer discusses in his books is E x M = P, where E is earning per share, M is the multiple, or price to earnings ratio, and P is the price per share. He talks about evaluating investments based on multiple contraction or expansion. If you know the multiple will go up or down, you can predict the fluctuation in price. His book, Jim Cramer's Real Money talks about rotating investments through different sectors based on anticipating the contraction or expansion of the multiple.

If you want to see the investments in Jim Cramer's charitable trust portfolio, check it out here:

http://www.jim-cramer-charitable-trust-stocks.com/

There are some large cap, blue chip stocks here such as American Express and Coca Cola, which are also owned by investing maven Warren Buffett. The buy and hold tactic is practiced by Buffett, and he has done OK for himself. He recommends buying stocks which pay a good dividend, such as Procter and Gamble, Kraft and Johnson and Johnson. View his portfolio here:

http://warren-buffett-portfolio.com/


The dividend component of stocks can add up to a significant amount of money over time. Especially in tough economic times like we have right now, many play it safe investment wise, turning to dividend paying stocks. Cramer is knowledgeable, but just like with any investment advice, take it with a grain of salt. He is not perfect. Any investor who is perfect is probably that way due to using inside information. I like him since he takes a subject that could be boring (stock picking) and he makes it interesting.