Apr 11

Patience is a Virtue… and an Art

Patience, in most religions and philosophies, is a virtue.  One can develop great mental strength through the practice of patience.  Patience can get you through difficult times and bad situations by keeping you grounded in the present instead of being enveloped in thoughts of the future – good or bad.  It is necessary to visit the future for planning purposes, but you need to live in the present or you will miss out on life.  The irony about patience is that it takes patience to develop patience.  Patience is an art that needs to be developed over time and practiced regularly to master.

Patience photo by soccerkid29 via Motifake.com


The best method to develop the art of patience is to keep yourself grounded in the present but working towards the future.  When you see your neighbor’s new car or the diplomas hanging on your bosses wall, you need to remind yourself that those things take time and you are perfectly fine where you are right now.  You have to find solace in the present before you can truly start living and slowly moving towards your goals.

Completing your degree

Whatever degree you are currently pursuing, its value is derived partly in the difficulty it is to earn it.  If all you had to do was shell out a few grand and that allowed you to add a Master’s degree to your resume, the perceived value of that degree would be diminished by those decision-makers that reviewed it.  Graduating from college or graduate school is partly a function of ones intelligence, but maybe more so a function of their patience.  There are no short cuts.  A semester is a semester and you need to painstakingly attend class after class, semester after semester until all requirements are crossed off the list and you graduate.  Patience is a pre-requisite for all college degrees.

Getting out of debt

Though he rubs me the wrong way, Dave Ramsey has helped many many people get out of debt.  I also don’t agree with his “no credit cards EVER” approach to life.  Regardless, his program offers the discipline that many people need to get out and stay out of debt forever and I can appreciate that.  Dave Ramsey employs what is called the “debt snowball plan”.  His plan calls for making minimum payments across the board.  With any extra cash, you consistently put that extra on the smallest debt first.  Once the smallest debt is paid off, you apply all that cash to the next smallest and so on and so forth.  Its a simple plan, but it takes years.  Discipline is necessary, but so is patience.  You have to stay with the plan and be content with the slow roll of the snowball as it builds up through the years.

Growing Your Investments

When I was younger, I was always looking for the get rich quick investment.  What I was actually doing was gambling… and losing.  No I do extensive analysis and look for the biggest and most steady growers I can find.  In my opinion these investments are the closest thing to a sure thing outside of U.S. Government debt (which may be less of a sure thing in the future).  The most powerful investments take into account the slow accumulating magic of compounding – and those are the investments I put my money into now.  I can now calculate exactly when I will be rich instead of throwing my money in the hot idea.  There are a couple of caveats to my method though.  I need the patience to let the slow power of compounding work and I need the health to be around for that date when I calculated I will be rich!

Finding a Significant other

There is no easy way to meet the love of your life.  Its really just a numbers game.  The more people you meet the more you will date.  The more you date the better your chances of meeting the one.  You can do things to increase the number of people you meet.  This can be accomplished through sifting through vast online profiles of singles or these speed dating events.  Other than that you just need to have an endless supply of patience and learn to be happy right here and right now.

Keeping up with the Jones’

The Jones’ are my mortal enemies.  They live on every street in America and have the best toys.  Before I developed the art of patience, I would be upset each time one of the Jones’ brought home something really cool that I wanted.  Now I still like to check out their new purchases and might decide that I want to save up for something like that in the future, but I have at peace with my life and what I have.

Practice the art of being patient every day by living in the present and being content to do so.  Allow the feelings of being at peace with where you are and who you are to ensure that you are becoming more patient.  The next time you to the Jones’ as a patient person, you will feel good when you can enjoy other people’s successes with them and not harbor any feelings of resentment at the same time.  If you continue to work toward your goals, you will eventually get there.  Just value each day of your life the same whether you have reached your goal to become a millionaire or if you are falling short.

picture via picturesdepot.com


Mar 11

Getting Stock Tips From Your Bartender

The stock market moves cyclically.  The market rises and falls with the business cycles and cannot be simply timed by getting in or getting out by a calendar.  Business cycles can last anywhere from a few years to a decade or more.

Successful investors pay close attention to the cycles and adjust their holdings accordingly.  For example, when the business cycle is at a low point investors will start moving into industrial stocks as they will provide the most upside an a recovery.  Conversely, when the business cycle is flying high investors will start taking profits and will start building positions in more defensive stocks or even move out of the stock market and into bonds or cash.

Look around.  Where are we now?  This is not rocket science and is very obvious.  How is business doing?  How is the market?  It looks like business is slowly recovering here in early 2011, but the market as a whole has jumped up drastically since its lows of 2009.  I am making these observations by simply watching Squawk Box on CNBC every morning, reading a myriad of articles from The Wall Street Journal to CNN Money and all bloggers I can get my eyes on and a few earnings calls I listened in on with my largest holdings.  What is most important is knowing not just where we are, but where we are going from here.

When I am worried about a market that feels “toppy” (a very high-brow investing term), I go have a drink.  No, the cocktail doesn’t clear my mind so that I can see into the future.  I am actually doing investment research.  I am trying to see if the bartender will offer up any great stock tips.

Although they are wise, I know bartenders aren’t usually known for their investing prowess necessarily.  In fact they will not even know how valuable their stock tips are.  I want to know “who” is in interested in the market.  If bartenders, retail sales people, my barber or any other “retail investors” (non-professional investors) are excited enough about the market and I can see dollar signs protruding from their eyes as they run off a list of “sure thing” stocks – the bull market is dead.

After I gladly accept all the stock picks from my informant, I will check some economic indicators to see how much time I have.  Because the stock market and the business cycle don’t move at exactly the same time, I can watch for a hint of bad news to come out.  Then more bad news.  Then more bad than good.  All those retail investors will freak out and sell – starting the market on its inevitable bear run.

The stock market is a leading indicator of the business cycle.  In 2011 the stock market seems to be leading the business cycle greatly.  Even though the market may be over-valued as a whole, we are on the right side of the business cycle to be in stocks.  On a side note, with interest rates near zero and being on the recovery side of the business cycle, bonds are a bad place to be.  You have to pay attention to everything going on around you to invest successfully.  By the way, when I asked the bartender for his recommendations, he said he feels like I should put everything in a gin and tonic… so our portfolios are good.


Feb 11

Value and Share Price

The notion of using value to determine utility is commonplace for all people as they perform their normal daily activities. “I am not paying $6.00 for a cup of coffee” is actually a value-driven decision as much as it is a price-driven decision. I am sure if you dug deeply you could come up with $6.00 – even in a recession. However, you don’t see $6.00 of value in the coffee. In fact, value is the underlying element to all buy or don’t buy decisions we make. Do we find at least enough value in the product to pry our cash out of our hand for the utility derived from the product?


Value is most easily derived through a relative analysis. You might not see $6.00 of value in a cup of coffee at Starbucks, but then you next door to Caribou and the same cup of coffee is offered for $8.00. Now what? The value calculation in your brain is all out of whack. Through relative analysis, the $6.00 cup of coffee all of a sudden seems like it might be a good deal. You now “value” that cup of coffee at $6.00. Of course, this analysis only works when you are dealing with exactly the same product. Commodities are the perfect example of this. I am generalizing that all cups of coffee are exactly the same or a commodity in the example above – I know there are a lot of connoisseurs out there that will take offense.

Now we come to investing. Many times people will mistakenly value shares of stock based on a crude relative analysis using the prices of all shares in the universe. They assume a share of Borders Group is the same as a share of Apple. Borders Group is now trading at $.37/share and Apple is trading at $351.88/share. New investors will want to quickly discern that Borders Group is cheaper than Apple and conclude it to be a better deal. The conclusion could not be further from the truth. In reality, there are no two companies that are exactly the same. All shares are created differently.

As I write this, Borders Group is most likely preparing to file for Chapter 11 bankruptcy protection and being delisted by the New York Stock Exchange for non-compliance with listing standards. Anyone with a few business classes in college knows that there is a pecking order in a bankruptcy and the common shares are the last on that list. Even if Borders Group continues to operate the business the likelihood of an investor in common shares losing 100% of their investment is near 100%. Will Borders Group still be a good deal when you lose everything in the near future?


Apple is on the other end of the spectrum. They have a great product lineup with innovations unmatched in the industry. Apple has so much cash on their balance sheet that putting all that cash to work is very difficult and problematic – albeit a good problem to have! It is safe to assume that Apple is not going to go bankrupt anytime soon and probably not even in our lifetimes (though stranger things have happened.) There is a high probability that you will not lose all of your investment buying Apple shares. This is not to say that you won’t lose money based on the normal fluctuations in business cycles.

Using a relative analysis can still be used to determine relative worth, but price is only part of the equation – literally. The measure most commonly used to measure stocks is called the P/E ratio. The price per share is divided by the earnings per share yielding some number. The lower a stock’s P/E, the cheaper the stock is. There are many nuances that are also in play when comparing two companies based on P/E, but this is most commonly used ratio.   

Comparing companies by P/E within their own industry is most useful as many variables vary between industries. I have prepared a snapshot of the soft drink industry below. These numbers can be found directly in Yahoo! Finance.            

Based on earnings, Pepsi is currently the cheapest stock and should then provide the highest value. Notice that Pepsi is also the stock with the highest share price. This analysis is meant to show that share price is not a determinant of value for a stock. Only when used in concert with another measure, in this case earnings, can you attempt to draw a relationship between stocks in a similar industry.


Jan 11

Inflation Nation: How to Protect Your Purchasing Power

Let’s paint a new picture of America. Your pay is the same. However, when you go on your weekly trip to the grocery store you see that there are no prices on milk. A guy over the loudspeaker announces that milk is now $6 per gallon. Strangely, a guy bought milk at the same location 4 hours earlier for $5.50 per gallon. You notice that it’s not just milk, there are no prices listed on any item and the guy over the loudspeaker keeps announcing the new prices of certain items. Are you in a bad dream? Perhaps. Or perhaps America is now experiencing something called hyperinflation.

Inflation is the devaluation of a population’s purchasing power over time. All those stories from your grandparents about how they used to get a loaf of bread for a nickel are examples of inflation in action (and you didn’t even know your grandma was an economist.) Hyperinflation is an extreme situation in which inflation is out of control and could even exceed 10% per day! Can you imagine filling your tank up at the beginning of your week and all of a sudden you read that gas is now $8.00 per gallon for the cheap stuff? Hyperinflation causes a general unrest in society, chaos in the streets and eventually even the collapse of governments – imagine the Katrina aftermath in New Orleans occurring coast to coast.

Hyperinflation in Action

Take for example, the famous case of Argentina in 1989 which is summarized amazingly well in the article by John Mauldin titled Catching Argentinian Disease. Mauldin states that the hyperinflation was set off by years of budget deficits and borrowing to fund the government. In1989, no one would lend to Argentina Anymore. As the government still needed to pay its obligations somehow, they fell back on the printing press to keep the government going. As Argentina printed more money to fund itself, the value of the currency plummeted – more supply yields a lower price. Therefore the purchasing power of anyone using the Argentine Peso was demolished. This means that anyone with a savings account denominated in the Argentine Peso was also hurt and their savings were effectively cut down to a fraction of what they had been.

Hyperinflation is an extreme example of inflation, but it illustrates the effects of many years of inflation succinctly. I don’t think the United States is headed for hyperinflation or chaos in the streets necessarily. I do believe that the U.S. government might be expecting inflation to occure and even possibly welcoming it.

The White House Economists and A Hidden Agenda

Many of the White House economists hail from the University of Chicago. White House Chief Economist, Austan D. Goolsbee, has been a professor at UC since 1995. In my opinion, the University of Chicago is the best school for economics in the world and the faculty there is world class. So why is the White House position currently that they see no signs of inflation? Shouldn’t we take the word of the world’s best and brightest economists?

I believe that there is an agenda that the White House has yet to admit to. After all the bailouts which began with the Bush administration and continued with the Obama administration, our national debt has soared. I suspect that the only way to get that debt under control is to inflate it away.

You read above how bad inflation is for savings accounts and purchasing, but we didn’t discuss debt. Inflation works backwards and is actually a good thing for your debt load. Your 100k in credit card debt? Inflated away. Your school loans? Inflated away. The national debt? Inflated away. The amount of the debt doesn’t change (unless it’s indexed to inflation.) Could this be in the plans of the White House? Is this the reason Obama’s top economists don’t see inflation? No one can know for sure. It’s definitely an option.

What Do We Know?

I don’t believe in taking other people’s word for things. I don’t just accept as truths what top economists from the University of Chicago have to say about inflation. Often I get in over my head as the complexities of the many moving parts of some economic concepts are still beyond my understanding (though I will always work to understand them better.) Let’s look for some signs about inflation.

The Proctor & Gamble Quarterly Report

On January 27, 2010, Proctor & Gamble released their quarterly report. The results disappointed as the company indicated that rising commodity prices are squeezing the margins of the company. This means that they are paying more for the raw materials they buy to produce deodorant, detergent and everything else, but haven’t passed those costs on to the consumer. Thus their profit margins are lower.

I can tell you that P&G is a great company with competent and rational management. I can also tell you that competent and rational managers will find a way to eventually pass those input costs on to their consumer. The issue at P&G is that they are a premium brand company. They charge more for the perception that they offer a better product – bottom line is there are cheaper competitors. If P&G just raised their prices without a well thought out strategy, they would lose customers to the competitors. These higher prices will hit the customer eventually.

Research During Your Normal Routine

I noticed a few things just heading to Target and CVS for my day-to-day purchases. The price of my deodorant and hair products have all gone up. Sometimes these changes masquerade as a “multi-pack” or even smaller container at the usual price. Pay attention! Inflation is already here and you need to make moves to ensure your savings and your Investments are protected. Inflation risk is the largest current danger to your portfolio (unless you are that bad at picking stocks – then you might me the largest danger.)

Ways To Combat Inflation

Real Estate

Putting your cash in real estate is one way to combat inflation. The theory here is that real estate will increase in value and give you some protection against the eroding dollar. The rate for a 30 year mortgage is at near record lows and may be a good time to explore a vacation home or an investment home. Also, you need to have realistic expectations regarding your return and your holding period. Please refer to my article The Death of the Starter Home.


When you hear people say that you “should be in gold” they are referring to a proxy for gold and not a basement full of gold bars or coins from an infomercial. A good proxy for gold is the ETF “GLD.” The reason you don’t want to own the actual gold bars is that it may be impractical, there are security issues and they may be hard to sell or illiquid. Owning the ETF is very liquid as you can buy and sell them through your regular brokerage account.


Treasury Inflation Protected Securities or TIPS are bonds offered through the U.S. Treasury and are indexed to the official inflation rate. Therefore, over and above your normal return on the bond, these beauties actually adjust their price to keep up with inflation. Add tips to your portfolio with another ETF: “TIP.”

Commodities and Their Proxies and Other Common Stocks

Adding commodities to your portfolio will also help you keep up with inflation. I like to add proxies for commodities by buying common stocks whose business is energy, mining or farming. I don’t recommend buying or trading futures contracts for the actual commodities. I think a non-professional will get luckyor eaten alive playing that game. Common stocks in general are usually recommended in a portfolio to combat inflation. Though this method is often argued that the common stock is not effective here because companies cannot pass on their costs dollar for dollar to the consumer. I agree in the short-term, but in the long-term they will pass everything on and prices for the consumer will rise.

Inflation is real and it’s already here. Although we probably will not experience the chaos of hyperinflation like Argentina and many other countries across the globe, the erosion of your savings and your retirement accounts due to the inflation will occur. You will not be able to buy what you used to be able to buy for the same amount of money. It would be a shame to sacrifice and save your entire life just to watch your purchasing power evaporate right before your eyes. I am going to go buy more Proctor & Gamble now.


Jan 11

When You Should Sell Stocks

Every investor will wrestle with the notion of exactly when is the right time to sell shares of stock and every investor will have probably wished they had a few mulligans along the way. The simple answer to this question is that you sell them when they no longer meet your objectives. I know this is vague, but there are many reasons to sell and many reasons to hang on depending on those unique objectives.

Photo via http://www.techiewww.com

Trading vs. Investing

You need to first decide if you are a trader or an investor. Traders generally have a shorter expected holding period and may buy or sell based on expected events or technical analysis (the charts.) Investors usually rely on fundamental analysis and are less concerned with external events. Investors usually pick entry points based on the stock price and the price’s relationship to the intrinsic value the investor assigns to the stock. Most serious investors have been a trader and an investor at different times in their lives and for different objectives. Both methods are widely accepted and used to make money every day.

Technical Analysis vs. Fundamental Analysis

As I stated, technical analysis makes uses of a stock’s chart – a historical record of the stocks price over a certain time period. There is somewhat of a science and a serious art behind performing technical analysis. Traders look for particular patterns in the price action and use this information to predict where the price will go next. Technical analysis is concerned very little with the actual company and is concentrated on the shares. This method is actually trading the individuals and institutions buying and selling the shares more than it is trading the underlying company. The psychology of the masses invested in the shares plays a big part in whether a trader will buy or sell the shares. Admittedly, I use technical analysis on a very limited basis and am far from an authority on the method.

Fundamental analysis digs deep in the company’s financial numbers to make a decision on the future performance of the company. Fundamental analysis is not concerned with who is invested in the company and more concerned with the growth and profitability of the enterprise. Solid accounting knowledge and tools such as financial ratios are essential to the investor using fundamental analysis. An investor with a holding period of forever will most likely pick apart a company’s financial statements to paint a picture of viability investability of a particular company. The bottom line of a fundamental analysis is the stocks intrinsic value – the value an investor places on the shares. If the price of the shares is less than the intrinsic value, the shares are undervalued and should be bought, the opposite is also true.

So When Should You Sell?

Tradable Event

If you are a trader and trading based on a particular event or some other catalyst like the shape of the charts, you sell when either the event occurs or the charts change shape and indicates you take action due to impending price drop. An example of a tradable event may be the earnings press release or the announcement of a merger or acquisition.

An investor should have a holding period of forever. If you buy a stock based on the fundamentals and those fundamentals do not change, there should be no reason to sell. Enjoy the dividends or the growth of the share price derived from the growth of the company. Occasionally the fundamentals will change. Maybe a company announces that they are cutting their growth projections in half. Maybe the company announces some “accounting irregularities’- a term often used when a firm comes under investigation for their reported numbers or maybe worse.

A Shift in the Fundamentals

I owned British Petroleum for over five years when a “small fire” on an oil platform in the Gulf of Mexico was made public (I heard it first from a news agency not the company) in 2010. A few days later, the platform sunk and infamous 2010 oil leak began. I stuck with BP for about another month as they were paying dividends over 6.5% and I loved this nice income stream in my Roth IRA. Finally, I couldn’t take the pain anymore and I sold out. The price continued to drop, but I got out with a decent profit and peace of mind. I didn’t know how bad the incident was going to get and I didn’t know how much BP was going to be on the hook for. I bought BP for the strong balance sheet and that great dividend. I believed that divided would be cut (which it was) and I suspected that balance sheet would take a hit (which it did). There was no visibility in the fundamentals for me and I needed to get out. Granted the company was able to absorb the hit to the balance sheet better than I suspected, but it was time for me to move on. At that time I was moving all my free resources into natural gas – which has paid handsomely since.

Photo via http://www.fooyoh.com

A More Favorable Rate of Return

When performing your stock analysis, an integral part of the process is factoring in your required rate of return (RRR) or hurdle rate. This is the rate of return that you find acceptable for investments of a certain type. For example, you might have a hurdle rate for investments in your Roth IRA than a regular brokerage account because you don’t need to figure in your income tax expense in the Roth. Occasionally, an investment will fall below an investor’s RRR or an alternative investment will be discovered with a higher rate of return. In both of these cases an investor will be advised to sell the lower returning investment and purchase the higher returning stock.

To Bask in the Glory of Your Profits

Some investors feel the need to take profits when they have reached a certain return on the investment. This practice varies greatly from investor to investor. Warren Buffett has been known to sit on his profits for many many years instead of realize them. His logic is such that if it was a good investment 30 years ago, and the fundamentals of the company are unchanged, why realize the gain by selling and have to pay tax? Warren Buffett would not be able to sleep at night because he would be up calculating the lost profits in the future due to the amount he paid out in taxes.

Jim Cramer of CNBC is often heard yelling “bulls make money, bears make money, pigs get slaughtered.” Thus making a case for his belief that you should take the profits and enjoy paying the taxes as your reward for profits well earned. I tend to be somewhere in the middle. I have a trading account where I often take profits and have to pay the taxes. It seems counter-intuitive but, I have a few IRAs where I sell much less and there are no tax consequences to taking profits (at least not this year in my rollover IRA.)

I tend to invest more conservatively in my IRAs because having the benefit of not having to pay federal tax (on the Roth) and deferring tax (on the Rollover) is a benefit I want to hold on to. I don’t want to lose my money in those accounts and not be able to realize this tax advantage.

Deciding when to take profits or cut your losses in the stock market is one of the toughest decisions you, as an investor, will have to make. There are many reasons to sell, many reasons to hold and even many reasons to buy more (not covered here.) Buying is easy because every stock you buy will skyrocket the next day and make you rich beyond your wildest dreams or at least you tell yourself that. Like anything in the investing world it’s always prudent to err on the side of caution, know your objectives and act with conviction. One more hint, once you decide to sell, do not look back and calculate what would have happened if you had made the other decision. This is something investors do to reassure themselves. There is not looking back, only looking forward.