Scott On Money

In investing it is tempting to chase. Chasing is placing an emotional attachment on an investment that is declining in some way.

A recent experience on Prosper reminded me of this principle. A loan for a borrower with C credit came up and I thought the borrowers profile indicated an improving credit situation and the rate was quite attractive. The rate kept going lower and lower. It finally crossed the point at which some of the solid B loans I participated in were closing. It was clear there was some chasing going on in this loan. I know this feeling. When I first came across the loan it was a great deal with a lot o promise. I have a feeling a lot of people saw that and kept chasing the opportunity long after it stopped being a good opportunity.

The same thing happens in the stock market. We discover a great stock. We invest and feel great, but then something goes wrong. It could be anything: A change in the market, bad management, a butterfly in Japan flapping its wings. The story is different. Our original thinking is no longer valid. Unfortunately the stock is from $70 to $50 and it is such a great deal. Don’t do it. If the story has changed for the worse move on.

You want to put your money in good stories, not continue to invest more and more money I bad stories. Don’t chase.

Posted by Scott at 11:19 PM | Permalink | Comments (0) | TrackBacks (0) | Subscribe | Digg | del.icio.us | Technorati

Dividend yield is a simple way to measure dividends of different priced stocks on a level playing field.

The dividend of a stock is the cash that a company pays its shareholders (maybe you!). Dividends have no guarantee behind them; they can be raised, lowered or eliminated.

The dividend yield is one year of dividends divided by the stock price. This gives us a percentage that allows us to compare the dividends of two differently priced stocks. It is very similar to the rate of return you’d get on a savings account.

For a real world example Wells Fargo(WFC) closed at $35.57. It has dividends over the last 12 months were $1.12 per share. When we divide 1.12 by 35.57 we get 3.15%. Figuring the dividend yield is that easy. Most investing sites will calculate this for you, but it is important to understand what it means.

The dividend yields gives us a rough estimate of what amount of cash we would expect the company to pay us per dollar that we invest.

Dividends can be a very powerful and steady contribution to your overall portfolio performance. More details on this will follow.

Posted by Scott at 11:27 PM | Permalink | Comments (0) | TrackBacks (0) | Subscribe | Digg | del.icio.us | Technorati

Index funds are a valuable tool but they are not the be all, end all of investing. People like them for the low fees. Low fees are great. People enjoy the ease that they bring to investing. I like easy. People point out that many mutual funds don’t perform as well as the many index products (while charging fees). This is both true and shameful.

You should look at any investment by its returns less fees. If an investment has higher total returns that is a good indicator that it is a better investment (even this is not universal, you also need to factor in risk among other things).

Here is an example.

The Vanguard 500 fund (VFINX) is an S&P 500 index fund. It has pretty much matched the S&P with an 11.72% annualized return over the last three years. It has a 0.18% annual fee.

The Janus Contrarian fund (JSVAX) is a large cap fund that is managed. Its annual fee is 0.96%. It has an impressive 22.11% annual return.

As you can see over this time frame the Janus fund wallops the Vanguard fund with returns net of fees 21.15% versus 11.54%.

I don’t own either fund and I’m not recommending either of them. I would say you can clearly achieve better returns than an index fund.

I wish you great returns!

Posted by Scott at 10:54 PM | Permalink | Comments (1) | TrackBacks (0) | Subscribe | Digg | del.icio.us | Technorati

Brian Hunter’s.

I have had a few weeks in my life in which I lost a lot of money in the stock market. I have grudgingly accepted these occurrences as just part of the world of investing. For the first year or so that I was in the stock market every time I made an investment the stock fell precipitously the next day. It made my stomach twist. But one of those stocks was Amazon and it has played a role in my financial progress. Over the years I’ve learned to be light hearted on these days (mostly).

You can read this article to find out about a very bad week. Last week a trader, Brian Hunter, from Amaranth lost $5 billion. Yes, I wrote billion not million.

I’m not an expert on commodities (the loss was in natural gas) but it seems to me that there was likely a good deal of speculation involved. It would be interesting to know what percentage of the assets controlled were in natural gas.

In reading the Wall Street Journal article (subscription required) it appears that he may have been very leveraged, but the description is not yet detailed enough to tell.

One thing I’m sure of is when I come home to see all my stocks down badly for the day I’m glad I don’t have to face angry calls from investors and ominous calls to preserve my records and meet with regulators!

Posted by Scott at 05:07 PM | Permalink | Comments (0) | TrackBacks (4) | Subscribe | Digg | del.icio.us | Technorati

If you are just getting started investing you may want to look into index funds. Most mutual funds have advisors that are constantly monitoring the market and trying to make decisions that help the fund perform better. For a variety of reasons this is not often accomplished once the fees that the funds charge are accounted for.

Index funds don't rely on a manager to decide what stocks to own. Instead they simply try to match a market index like the S&P 500.

There are several advantages to this approach. This means that there is no money in research costs and expenses can be kept very low. The fund structure ensures your performance will closely track what the market does. You typically get a lot of diversity from the wide range of stocks own. It is also nice to hear on the news how your funds are doing (almost every news broadcast quotes what the Dow Jones and S&P 500 did every day).

There are disadvantages to consider. By spreading your funds over such a broad array of stocks you've increased your safety but you've limited your ability to achieve very large returns. If you are investing a significant amount of money you need to be sure to spread your purchases out over a period of time to avoid the risk you assume by investing all at the same time. If you are close to retirements, or whatever other investment goal you have, stock market risk may not be appropriate for you.

All things considered these funds are a good way to get used to the market while you decide what your philosophy looks like.

Posted by Scott at 02:32 PM | Permalink | Comments (0) | TrackBacks (0) | Subscribe | Digg | del.icio.us | Technorati

Diversification is critical to ensuring your financial security. After doing all your research and picking your investments there are still threats to your financial security. Executives lie, lawyers sue, the government regulates and disasters strike. There are many forces that you can't avoid with research. Diversification offers us a defense against the unexpected.

Diversification means distributing your funds among investments with different characteristics. How does this help? In the event that disaster strike diversification helps to limit your losses.

There are many different aspects of diversification you should consider.
Industry diversification - If I invest in Intel and AMD I've chosen two different stock but there are many cases where the stocks will react the same. In this case perhaps a totally new computer technology that renders both companies useless. I avoid having more than 20% of my funds in any one industry.

Investment class diversification - All too often people have a majority of their net worth in the equity of their home.

Job diversification – Be very careful investing in the company you work in. There are many good reasons to invest in the stock of your employer, but you need to strictly limit these investments. If your company experience problems you could lose your job and your investment.

Size diversification – There is a tendency (much less than for a stock's industry) for stock of the same size to trade together.

Diversification is not much more than common sense, "Don't put all your eggs in one basket." But you ignore this principle at your peril. If you aren't diversified a single unexpected event can wipe out all your hard work. Luckily it is both inexpensive and easy to diversify.

Good luck,
Scott

Posted by Scott at 08:52 PM | Permalink | Comments (0) | TrackBacks (0) | Subscribe | Digg | del.icio.us | Technorati

In 1999 everyone was a great investor. The NASDAQ zoomed through the roof. Yesterday everything was ugly. Today was great. Did I do a lousy job yesterday and a great one today? No.

When I first started investing in stocks I picked five companies. I didn't know nearly enough about investing or the companies I was investing in. I don't remember all the details this many years later but two of the five stocks I bought were Amazon and StorageTek. I bought Amazon because I used their service and it was great! I bought StorageTek because I was in the industry and saw the explosion coming in data management. I worked with StorageTek products and they were well built and technically solid products.

I made money, lots of money, in Amazon. I invested about $800 in each of the stocks and several years later I took out several thousand dollars to put a down payment on a house.

I was lucky. I work hard to earn my money. I put far less thought and effort into my decision to plop down $800 on Amazon than I did when I bought a $70 microwave.

Don't get me wrong, I'll take luck when it comes my way.

But spend some time researching your investments. You don't have to be a guru or a math wiz to get started. Try MSN's Research Wizard. It will guide you through much of what you need to know.

And above all, whether you make money or lose money, think about what went right and what went wrong. Just because you made a lot of money doesn't mean that you did the best you could. Just because you lost some money doesn't mean there wasn't merit in your work. Always be intellectually honest and examine why you ended up with a win or a loss.

Posted by Scott at 08:57 PM | Permalink | Comments (0) | TrackBacks (1) | Subscribe | Digg | del.icio.us | Technorati